<PAGE>
Rule 424(b)(4)
2,000,000 SHARES
LOGO
COMMON STOCK
---------------------
All of the shares of Common Stock offered hereby are being sold by TALX
Corporation ("TALX" or the "Company"). Prior to this offering, there has been
no public market for the Common Stock. See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price. The
Company's Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "TALX."
---------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. FOR A SUMMARY OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $9.00 $.63 $8.37
- -------------------------------------------------------------------------------------------
Total(2)(3)...................... $18,000,000 $1,260,000 $16,740,000
- -------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Does not reflect additional compensation to the Representatives of the
Underwriters by the Company in the form of warrants entitling the
Representatives to purchase up to 100,000 shares of Common Stock during
the four-year period commencing one year after the date of this Prospectus
at an exercise price equal to 120% of the initial public offering price
(the "Representatives Warrants") and a non-accountable expense allowance
of $100,000. The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at
$850,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 300,000 shares solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $20,700,000,
$1,449,000 and $19,251,000, respectively. See "Underwriting."
---------------------
The shares of Common Stock are offered by the several Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them, subject to the
right of the Underwriters to reject any order in whole or in part and certain
other conditions. It is expected that delivery of the certificates for such
shares will be made in Boston, Massachusetts on or about October 22, 1996.
FIRST ALBANY CORPORATION PRINCIPAL FINANCIAL SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS OCTOBER 16, 1996
<PAGE>
[Description of Art Work Contained in the Registration Statement]
Inside Front Cover
- ------------------
Heading caption is "TALX Corporation--Harnessing Technology for Enhanced
Interactive Access." The page contains text describing how three actual TALX
customers use The Work Number for Everyone(R) as well as the Company's customer
premises systems and outsourced services.
Left-Side and Right Side Fold-Out Page
- --------------------------------------
The heading caption is "Interactive Communication--Timely and Effective
Access to Enterprise Information." The page illustrations of a dial-up personal
computer, fax phone, intranet, internet, call center and information networks,
with arrows pointing to a list of TALXWare technologies.
----------------
The Company believes that these illustrations are representative of the nature
and range of products and services offered by the Company. No single customer of
the interactive communications business represented 10% or more of the Company's
revenues in fiscal 1994, 1995 or 1996, except that one customer, Kaiser
Permanente, represented approximately 14% in fiscal 1996. Accordingly, Kaiser
Permanente has utilized the Company for a broader range of products and services
than the average customer. GE Capital Services represented less than 10% of
outsourced services revenues in fiscal 1996.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
----------------
TALX(R), EasyScript(R) and The Work Number for Everyone(R) are registered
trademarks, tradenames or service marks of the Company. TALXWare is a trademark
of the Company. This Prospectus also includes references to trademarks and
tradenames of other companies.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Consolidated Financial
Statements, including the notes thereto, appearing elsewhere in this
Prospectus. See "Glossary" for definitions of certain terms used in this
Prospectus.
THE COMPANY
TALX Corporation ("TALX" or the "Company") designs and implements interactive
communications solutions, primarily for many Fortune 500 and other large
organizations other than telephone service providers, using computer telephony
("CT") to integrate technologies such as interactive voice response ("IVR"),
facsimile, e-mail, Internet and corporate Intranet. 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. 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' 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. Four out of the five largest mortgage
lenders in the U.S. (based on 1995 residential mortgage originations),
including Countrywide Home Loans, Inc., the country's leading independent
mortgage lender, currently utilize The Work Number to facilitate their
underwriting process. Verification of employment and salary history via The
Work Number is accepted by the Federal National Mortgage Association ("Fannie
Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") in
connection with the securitization and resale of residential mortgages, as well
as by the Department of Veteran's Affairs ("VA") and the Federal Housing
Administration ("FHA") for home loan guarantee purposes. As of June 30, 1996,
69 employers had contracted to provide approximately 5.7 million employment
records of current and former employees. Contracting employers include Hewlett
Packard Company, J.C. Penney Company, Inc., McDonnell Douglas Corporation,
Motorola, Inc., The Procter and Gamble Company and The Quaker Oats Company.
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 575 systems to approximately 350 customers during
the last five 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
burdens 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.
Acquiring an interactive communications capability on an outsourced basis is an
attractive alternative to many of the Company's existing and prospective
customers. For example, the human resources departments of many companies have
outsourced their annual benefits enrollment process to the Company.
The Company has established the broad utility of its interactive communications
solutions for complex business problems in a wide range 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,
3
<PAGE>
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 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). The Company has provided tailored interactive
communications solutions to customers such as Aetna, GE Capital Services,
Kaiser Permanente, Motorola, Inc., Putnam Investments, Inc. and Texaco, Inc.
TALX has implemented tailored interactive communications solutions since the
early 1980s. The Company's systems combine "best-of-class" technologies with
proprietary software called TALXWare. TALXWare's open architecture enables
popular interactive features such as voice recognition, text-to-speech,
facsimile, e-mail and client/server interfaces to be integrated to create
effective interactive communications solutions. In 1989, with the introduction
of EasyScript to its TALXWare software platform, the Company became the first
among its competitors to offer a powerful graphical user interface ("GUI")
application development environment. Subsequent releases of TALXWare have
included enhancements to EasyScript such as advanced editing capabilities and
self-documenting features. In 1992, EasyScript received Voice Processing
Magazine's Editors' Choice Award, and, in 1996, the most recent TALXWare
release received the Editors' Choice Award from Call Center Magazine.
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.
The Company was incorporated under Missouri law in 1973. Its principal
executive offices are located at 1850 Borman Court, St. Louis, Missouri 63146,
and its telephone number is (314) 434-0046.
RISK FACTORS
For a discussion of considerations relevant to an investment in the Common
Stock, see "Risk Factors."
4
<PAGE>
THE OFFERING
Except as otherwise noted, all information in this Prospectus (i) reflects the
1-for-3.5 reverse split of the Company's outstanding Common Stock, which became
effective on August 2, 1996 (the "Reverse Stock Split"), (ii) reflects the
conversion of all outstanding shares of Series A, B and C Convertible Preferred
Stock into an aggregate of 751,160 shares of Common Stock upon the closing of
this offering (the "Preferred Stock Conversions"), and (iii) assumes no
exercise of the Underwriters' over-allotment option. See "Description of
Capital Stock," "Underwriting" and Notes 10 and 15 of the Notes to Consolidated
Financial Statements. Throughout this Prospectus, the terms the "Company" and
"TALX" refer to TALX Corporation and its subsidiaries. See "Glossary" for
definitions of certain other terms used in this Prospectus.
<TABLE>
<S> <C>
Common Stock offered by the Com- 2,000,000 Shares
pany...........................
Common Stock to be outstanding
after the offering(1).......... 5,238,975 Shares
Proposed Nasdaq National Market
symbol......................... TALX
Use of proceeds................. For repayment of bank debt (approximately $3.7
million as of September 30, 1996) and $4.0
million of subordinated debt and for general
corporate purposes.
</TABLE>
- --------
(1) Assumes no exercise of outstanding stock options or warrants. As of the
date of this prospectus, there were outstanding options and warrants to
purchase 372,694 and 163,142 shares, respectively, of Common Stock at a
weighted average price of $4.57 and $1.08 per share, respectively. An
additional 320,114 shares of Common Stock are currently available for
future grants under the Company's employee benefit plans. See "Management--
Benefit Plans" and Note 10 of the Notes to Consolidated Financial
Statements.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31, JUNE 30,
---------------------------------------- -----------------
1992 1993 1994 1995 1996 1995 1996
------ ------ ------- ------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues
The Work Number........ $ -- $ -- $ -- $ 74 $ 453 $ 42 $ 251
Outsourced services.... -- 60 776 515 998 105 330
Customer premises
systems............... 5,273 6,868 8,497 6,957 9,442 2,125 2,844
Maintenance and
support............... 1,090 1,530 1,949 2,310 2,624 640 868
------ ------ ------- ------- --------- ------ ---------
Total revenues....... 6,363 8,458 11,222 9,856 13,517 2,912 4,293
------ ------ ------- ------- --------- ------ ---------
Cost of revenues
The Work Number........ -- -- -- 48 429 99 111
Outsourced services.... -- 22 190 260 493 106 128
Customer premises
systems............... 2,326 3,175 3,902 4,143 4,489 985 1,447
Maintenance and
support............... 360 558 767 793 619 166 237
------ ------ ------- ------- --------- ------ ---------
Total cost of
revenues............ 2,686 3,755 4,859 5,244 6,030 1,356 1,923
------ ------ ------- ------- --------- ------ ---------
Gross margin........... 3,677 4,703 6,363 4,612 7,487 1,556 2,370
------ ------ ------- ------- --------- ------ ---------
Operating expenses
Selling and marketing.. 1,877 2,332 2,700 2,854 4,084 884 1,369
General and
administrative........ 1,235 1,611 2,268 2,556 2,828 659 637
------ ------ ------- ------- --------- ------ ---------
Total operating
expenses............ 3,112 3,943 4,968 5,410 6,912 1,543 2,006
------ ------ ------- ------- --------- ------ ---------
Operating income
(loss)................ $ 565 $ 760 $ 1,395 $ (798) $ 575 $ 13 $ 364
====== ====== ======= ======= ========= ====== =========
Earnings (loss) from
continuing operations. $ 247 $ 385 $ 1,235 $ (754) $ 123 $ (45) $ 141
====== ====== ======= ======= ========= ====== =========
Earnings (loss) from
discontinued
operations............ $ 392 $ 575 $ 474 $ (410) $ (703) $ (38) $ (164)
====== ====== ======= ======= ========= ====== =========
Loss on disposal of
discontinued
operations............ $ -- $ -- $ -- $ -- $ -- $ -- $ (350)
====== ====== ======= ======= ========= ====== =========
Net earnings (loss).... $ 790 $1,421 $ 1,709 $(1,164) $ (580) $ (83) $ (373)
====== ====== ======= ======= ========= ====== =========
Pro forma net earnings
(loss) per share (1):
Earnings from
continuing
operations............ $ .04 $ .04
Loss from discontinued
operations............ (.21) (.15)
--------- ---------
Net loss............. $ (.17) $ (.11)
========= =========
Pro forma weighted
average number of
shares outstanding(1). 3,391,621 3,391,621
========= =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $ 186 $12,685
Net assets of businesses held for sale................. 2,505 2,505
Total assets........................................... 14,686 26,684
Notes payable to bank.................................. 2,396 --
Current installments of obligations under capital
leases and long-term debt............................. 533 33
Long-term debt(3)...................................... 69 27
Subordinated note payable (net of discount of $736).... 2,614 --
Stockholders' equity................................... 5,400 20,650(4)
</TABLE>
- --------
(1) Pro forma net 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 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 quarter of fiscal 1997.
(2) Reflects the sale of the 2,000,000 shares of Common Stock offered by the
Company hereby after deduction of the underwriting discount and estimated
offering expenses payable by the Company and after application of a portion
of the estimated net proceeds from the offering to retire indebtedness. See
"Use of Proceeds" and "Capitalization."
(3) Includes long-term debt and obligations under capital leases, less current
installments.
(4) Includes the loss of $640,000 on extinguishment of the Subordinated Note
(as hereinafter defined), net of income tax effect. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following factors
should be considered carefully by prospective investors in evaluating the
Company before purchasing the Common Stock offered hereby.
HISTORY OF NET LOSSES
The Company has incurred net losses in each of the last two fiscal years and
in the first quarter of fiscal 1997. 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 in the first quarter of fiscal
1997, the Company incurred losses only from discontinued operations of
$703,000 and $164,000, respectively. The Company's accumulated deficit as of
June 30, 1996 was $1,817,000. 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 and Document Services Businesses" and
"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. See"--Lengthy
Sales Cycle." 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
7
<PAGE>
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 June 30,
1996, 69 employers had contracted to provide approximately 5.7 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.
See "Business--Services and Products--The Work Number."
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 AND DOCUMENT
SERVICES BUSINESSES
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 has been recorded as of June 30, 1996 to reflect the anticipated loss
from operations until the time of disposal. The Company has estimated that the
proceeds from such divestiture will approximate the net assets held for sale
as of June 30, 1996. 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and 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
8
<PAGE>
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, Inc. The Company's interactive communications business is heavily
dependent on sales to the human resources departments of large organizations.
In fiscal 1996 and the first quarter of fiscal 1997, sales to human resources
departments represented 56.7% and 77.2%, respectively, 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 Coopers &
Lybrand LLP, 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 and document 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."
9
<PAGE>
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 the
International Business Machines Corporation ("IBM") 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, the Company has recently contracted with a
consulting firm, which specializes in software development, for contractual
rights to a base Windows NT product. Although such product will not
immediately offer customers the full range of features currently available for
the OS/2 operating system, the Company plans to direct development efforts
towards integrating additional features, including EasyScript, into such base
product in 1997 and commercial release of such base product is expected to
occur by the middle of that year; 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 both the OS/2 and Windows NT
operating systems. Thus, the Company is currently 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
10
<PAGE>
operations and business prospects. Further, when and if the Company markets a
Windows NT-based version of its TALXWare software, the Company will be
dependent upon the viability of that operating environment.
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 Natural
MicroSystems, Inc. standards-based computer telephony hardware boards and
software drivers. The Company believes that marketing this product as an
alternative to its proprietary computer telephony processor ("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 18 months 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 Natural MicroSystems 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 cancelled 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
11
<PAGE>
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 extent that significant sales occur earlier than expected,
operating results for subsequent quarters may be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 "Management--Directors and Executive Officers" and
"Management--Employment Agreements." 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 and document services businesses may become
more difficult as a result of the Company's determination to pursue the
divestiture of such businesses. 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. 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.
12
<PAGE>
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 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
alleges 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 complaint seeks unspecified damages.
The Company believes the lawsuit to be without merit and intends to defend
itself vigorously. The Company believes its products do not infringe upon any
of the claims of the patent relating to the action filed by Elk. Further, the
Company has filed an answer to Elk's complaint that also asserts that such
patent is invalid and that the claims are unenforceable. 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
13
<PAGE>
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. 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 operation. 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.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICES
Sales of substantial numbers of additional shares of Common Stock in the
public market could adversely affect the market price of the Common Stock and
make it more difficult for the Company to raise funds through future equity
offerings. Several of the Company's principal shareholders hold a significant
portion of the Company's outstanding Common Stock (see "Principal
Shareholders"), and a sale by one or more of these shareholders of their
shares could adversely affect the market price of the Common Stock.
Shareholders holding, in the aggregate, 3,226,209 of the 3,238,975 shares
outstanding on the date hereof (the "Previously Issued Shares") have entered
into lock-up agreements under which they have agreed, other than with the
consent of First Albany Corporation, not to sell such shares for a period of
180 days following the completion of the offering. At the expiration of such
lock-up period, the Previously Issued Shares will either (i) in the case of
1,663,054 "affiliate" shares held by officers, directors and other affiliates,
be eligible for sale, subject to the volume and other limitations of Rule 144,
(ii) in the case of shares issued less than three years prior but more than
two years prior and held by non-affiliates, be eligible for sale, but also
subject to such volume and other limitations, and (iii) in the case of shares
issued more than three years prior, be eligible for sale without restriction.
See "Shares Available for Future Sale." Following effectiveness of the
registration statement covering the shares offered hereby, the Company will
register on Form S-8 under the Securities Act 678,322 shares of Common Stock
issuable under employee stock option and purchase plans, which registrations
are expected to become effective upon filing. There are options to purchase
372,694 shares of Common Stock outstanding on the date hereof, of
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<PAGE>
which 175,517 are currently exercisable, and warrants to purchase 163,142
shares of Common Stock outstanding on the date hereof, none of which are
currently exercisable. Certain holders of shares of Common Stock are entitled
to have their shares registered for sale under the Securities Act by the
Company under certain circumstances. The exercise of these rights and the sale
of such shares could have a material adverse effect on the market price for
the Common Stock. See "Management--Benefit Plans," "Description of Capital
Stock" and "Shares Eligible for Future Sale."
SIGNIFICANT SHARE OWNERSHIP; CERTAIN ANTI-TAKEOVER PROVISIONS
Upon completion of this offering, the Company's directors, officers and
principal (5% or more) shareholders, taken as a group, will beneficially own
in the aggregate approximately 32.9% of the Company's outstanding Common Stock
(31.1% if the Underwriters' over-allotment option is exercised in full), based
on their holdings as of October 7, 1996. 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 ("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. See "Principal
Shareholders," "Description of Capital Stock" and "Certain Charter and Bylaw
Provisions."
NO PRIOR MARKET FOR COMMON STOCK
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market will
develop or be sustained after this offering or that investors will be able to
sell the Common Stock should they desire to do so. The initial public offering
price was determined by negotiations between the Company and the
representatives of the Underwriters and may bear no relationship to the price
at which the Common Stock will trade upon completion of this offering. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price.
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 company. 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.
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 "Dividend Policy."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$15.9 million (after deducting the underwriting discount and estimated
offering expenses payable by the Company).
The Company will use the net proceeds to repay outstanding indebtedness
represented by (i) the Subordinated Note in the aggregate principal amount of
$4.0 million as of August 15, 1996, which is due and payable in July 2001 and
accrues interest at an annual rate of 13.25%, with an effective interest rate
of 19.25% (see "Certain Relationships and Related Transactions"), (ii) a
promissory note in the principal amount of approximately $417,000 as of
September 30, 1996, and which is due and payable through August 1997 and
accrues interest at the bank's prime rate (8.25% as of September 30, 1996)
plus 0.75%, and (iii) a demand note representing borrowings under a revolving
line of credit (approximately $3.3 million as of September 30, 1996) which
accrues interest at the bank's prime rate (8.25% as of September 30, 1996)
plus 0.875%. The $4.0 million Subordinated Note was incurred to reduce
outstanding bank debt. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Relationships and Related
Transactions."
The Company anticipates that the balance of the net proceeds of this offering
will be used for general corporate purposes. The Company's business strategy
contemplates that it will seek to complement internal growth with strategic
investments and acquisitions. Accordingly, a portion of the net proceeds may
also be used for acquiring related businesses, licensing technology or
investing in strategic or collaborative relationships. The Company has no
present understandings, agreements or commitments with respect to any such
acquisition, and no assurance can be given that any such acquisition will take
place. Pending application to the uses described above, the Company intends to
invest the net proceeds of this offering in short-term, investment-grade,
interest-bearing securities.
DIVIDEND POLICY
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.
An existing loan agreement prohibits the payment of cash dividends; however,
such agreement will terminate upon the closing of this offering. See "Use of
Proceeds."
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CAPITALIZATION
The following table sets forth the total debt and capitalization of the
Company on an actual basis as of June 30, 1996 and as adjusted to give effect
to (i) the sale by the Company of 2,000,000 shares of Common Stock, (ii) the
payment by the Company of the underwriting discount and other estimated
expenses of this offering, and (iii) the anticipated application of a portion
of the net proceeds to retire certain indebtedness of the Company. See "Use of
Proceeds." 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 related notes
included elsewhere herein.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (including current portion of long-term
debt and
capital lease obligations)(1).......................... $ 2,929 $ 33
Long-term debt, less current installments(1)............ 42 --
Obligations under capital leases, less current
installments........................................... 27 27
Subordinated note payable, gross proceeds of $3,350 net
of discount of $736;
does not reflect subsequent additional gross proceeds
of $650 with
a related net discount of $143(1)...................... 2,614 --
------- -------
Total debt.......................................... 5,612 60
------- -------
Stockholders' equity (2):
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; none outstanding ......................... -- --
Series A convertible preferred stock, $.01 par value,
2,373,000 shares authorized; 1,776,441 shares
outstanding (none outstanding as adjusted)............ 18 --
Series B convertible preferred stock, $.01 par value,
327,000 shares authorized; 236,873 shares outstanding
(none outstanding as adjusted)........................ 2 --
Series C convertible preferred stock, $.01 par value,
6,000,000 shares authorized; 615,745 shares
outstanding (none outstanding as adjusted)............ 6 --
Common Stock, $.01 par value, 30,000,000 shares
authorized; 2,478,070 shares outstanding (5,229,230
outstanding as adjusted)(3)........................... 25 52
Additional paid-in capital............................. 7,166 23,055
Retained earnings (accumulated deficit)................ (1,817) (2,457)(4)
------- -------
Total stockholders' equity.......................... 5,400 20,650
------- -------
Total capitalization................................ $11,012 $20,710
======= =======
</TABLE>
- --------
(1) After consummation of this offering, the Company will use a portion of the
proceeds from such offering to repay all amounts outstanding as Short-term
debt (including current portion of long-term debt and excluding capital
lease obligations), Long-term debt, less current installments and
Subordinated note payable (net of discount), which amounts as of June 30,
1996 were $2,896,000, $42,000 and $2,614,000, respectively, and as of
September 30, 1996 were $3,717,000, $0 and $3,163,000, respectively. See
"Use of Proceeds."
(2) Gives effect to the Reverse Stock Split and to changes in the Company's
authorized capital effected in August 1996. Upon the closing of this
offering, all issued and outstanding shares of Convertible Preferred Stock
will be converted into an aggregate of 751,160 shares of Common Stock and
the Company intends to file an amendment to its Articles to eliminate the
Series A, B and C Convertible Preferred Stock. See "Description of Capital
Stock."
(3) Assumes no exercise of outstanding stock options or warrants. As of the
date of this Prospectus, there were outstanding options and warrants to
purchase 372,694 and 163,142 shares, respectively, of Common Stock at a
weighted average price of $4.57 and $1.08 per share, respectively. An
additional 320,114 shares are currently available for future grants under
the Company's employee benefit plans. See "Management--Benefit Plans" and
Note 10 of the Notes to Consolidated Financial Statements.
(4) Includes the loss of $640,000 on extinguishment of the Subordinated Note,
net of income tax effect. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
17
<PAGE>
DILUTION
The net tangible book value of the Company at June 30, 1996 was $2,538,000 or
$0.79 per share. Net tangible book value per share is determined by dividing
the total tangible net worth of the Company (total tangible assets less total
liabilities) by the number of shares of Common Stock outstanding. Without
taking into account any changes in such net tangible book value after June 30,
1996, other than to give effect to this offering and the receipt by the
Company of the estimated net proceeds therefrom, the net tangible book value
of the Company at June 30, 1996 would have been $17,788,000 or $3.40 per
share. This represents an immediate increase in net tangible book value of
$2.61 per share to existing shareholders and an immediate dilution of $5.60
per share to purchasers of Common Stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $9.00
Net tangible book value per share before this offering....... $0.79
Increase attributable to new investors....................... 2.61
-----
Net tangible book value per share after this offering........ 3.40
-----
Dilution per share to new investors.......................... $5.60
=====
</TABLE>
The following table summarizes, at June 30, 1996, the difference between
existing shareholders and new investors with respect to the number of shares
of Common Stock purchased from the Company, the approximate total
consideration paid, and the average price paid per share by existing holders
of Common Stock and by the investors purchasing shares of Common Stock in this
offering before deduction of the underwriting discount and estimated offering
expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 3,229,181 61.8% $ 6,481,784 26.5% $2.01
New investors........... 2,000,000 38.2 18,000,000 73.5 9.00
--------- ----- ----------- -----
Total................. 5,229,181 100.0% $24,481,784 100.0%
========= ===== =========== =====
</TABLE>
The above computations assume no exercise of outstanding stock options or
warrants. As of date of this Prospectus, there were outstanding options and
warrants to purchase 372,694 and 163,142 shares, respectively, of Common Stock
at a weighted average exercise price of $4.57 and $1.08 per share,
respectively. An additional 320,114 shares are currently reserved for future
grants under the Company's employee benefit plans. To the extent these options
and warrants are exercised, there will be further dilution to new investors.
See "Management--Benefit Plans" and Note 10 of the Notes to Consolidated
Financial Statements.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus. The data for, and as of the end of,
each of the years in the five-year period ended March 31, 1996 are derived
from the financial statements of the Company, which financial statements have
been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The financial statements as of March 31, 1995 and 1996, and for
each of the years in the three-year period ended March 31, 1996, and the
report thereon, are included elsewhere in this Prospectus. The selected
financial data presented below for the years ended March 31, 1992 and 1993 and
as of March 31, 1992, 1993 and 1994 are derived from audited financial
statements not included in this Prospectus. The selected financial data
presented below for the three months ended June 30, 1995 and 1996 and as of
June 30, 1995 and 1996 are unaudited but have been prepared on the same basis
as the audited financial statements and, in the opinion of management, reflect
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the results of operations for such periods. The
results of operations for the three months ended June 30, 1996 are not
necessarily indicative of results to be expected for any future period. The
information set forth below reflects the classification of the database and
document services businesses as discontinued operations and 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 included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31, JUNE 30,
---------------------------------------- ------------------
1992 1993 1994 1995 1996 1995 1996
------ ------ ------- ------- --------- ------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues
The Work Number........ $ -- $ -- $ -- $ 74 $ 453 $ 42 $ 251
Outsourced services.... -- 60 776 515 998 105 330
Customer premises
systems............... 5,273 6,868 8,497 6,957 9,442 2,125 2,844
Maintenance and
support............... 1,090 1,530 1,949 2,310 2,624 640 868
------ ------ ------- ------- --------- ------- ---------
Total revenues....... 6,363 8,458 11,222 9,856 13,517 2,912 4,293
------ ------ ------- ------- --------- ------- ---------
Cost of revenues
The Work Number........ -- -- -- 48 429 99 111
Outsourced services.... -- 22 190 260 493 106 128
Customer premises
systems............... 2,326 3,175 3,902 4,143 4,489 985 1,447
Maintenance and
support............... 360 558 767 793 619 166 237
------ ------ ------- ------- --------- ------- ---------
Total cost of
revenues............ 2,686 3,755 4,859 5,244 6,030 1,356 1,923
------ ------ ------- ------- --------- ------- ---------
Gross margin........... 3,677 4,703 6,363 4,612 7,487 1,556 2,370
------ ------ ------- ------- --------- ------- ---------
Operating expenses
Selling and marketing.. 1,877 2,332 2,700 2,854 4,084 884 1,369
General and
administrative........ 1,235 1,611 2,268 2,556 2,828 659 637
------ ------ ------- ------- --------- ------- ---------
Total operating
expenses............ 3,112 3,943 4,968 5,410 6,912 1,543 2,006
------ ------ ------- ------- --------- ------- ---------
Operating income
(loss)................ 565 760 1,395 (798) 575 13 364
Other expense, net..... 167 140 153 284 395 88 140
Income tax expense
(benefit)............. 151 235 7 (328) 57 (30) 83
------ ------ ------- ------- --------- ------- ---------
Earnings (loss) from
continuing operations. 247 385 1,235 (754) 123 (45) 141
------ ------ ------- ------- --------- ------- ---------
Discontinued
operations:
Earnings (loss) from
operations of
discontinued
operations, net....... 392 575 474 (410) (703) ( 38) (164)
Loss on disposal of
discontinued
operations, net....... -- -- -- -- -- -- (350)
------ ------ ------- ------- --------- ------- ---------
Earnings (loss) from
discontinued
operations, net....... 392 575 474 (410) (703) (38) (514)
------ ------ ------- ------- --------- ------- ---------
Earnings (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. 639 960 1,709 (1,164) (580) (83) (373)
Extraordinary item..... 151 -- -- -- -- -- --
------ ------ ------- ------- --------- ------- ---------
Net earnings (loss)
before cumulative
effect of change in
accounting principle.. 790 960 1,709 (1,164) (580) (83) (373)
Cumulative effect of
change in accounting
principle............. -- 461 -- -- -- -- --
------ ------ ------- ------- --------- ------- ---------
Net earnings (loss).... $ 790 $1,421 $ 1,709 $(1,164) $ (580) $ (83) $ (373)
====== ====== ======= ======= ========= ======= =========
Pro forma net earnings
(loss) per share (1):
Earnings from
continuing
operations............ $ .04 .04
Loss from discontinued
operations............ (.21) (.15)
--------- ---------
Net loss............. $ (.17) (.11)
========= =========
Pro forma weighted
average number of
shares outstanding
(1)................... 3,391,621 3,391,621
========= =========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF JUNE 30,
-------------------------------------- ----------------
1992 1993 1994 1995 1996 1995 1996
------ ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................... $ 156 $ 258 $ 145 $ 27 $ 56 $ 160 $ 287
Working capital........ 24 1,582 2,449 183 (1,261) (172) 186
Net assets of
businesses held for
sale.................. -- -- -- -- -- -- 2,505
Total assets........... 6,927 10,103 12,824 14,476 15,844 14,566 14,686
Notes payable to bank.. 1,572 757 1,100 2,654 4,243 3,309 2,396
Current installments of
long-term debt and
obligations under
capital leases........ 281 499 602 722 726 711 533
Long-term debt and
obligations under
capital leases, less
current installments.. 199 750 620 1,318 630 1,149 69
Subordinated note
payable, net of
discount.............. -- -- -- -- -- -- 2,614
Due to stockholders.... 105 -- -- -- -- -- --
Stockholders' equity... 2,069 4,365 6,774 5,610 5,038 5,528 5,400
</TABLE>
- --------
(1) Pro forma net 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 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 quarter of fiscal
1997.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues are derived from interactive communications, which
consists 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 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 primarily 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 ongoing fees from verifications will be a greater source of
revenues than conversion fees. 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. See "Risk Factors--Certain Risks Associated with The
Work Number" and "Risks Related to Use of Confidential Information with The
Work Number."
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 IVR, 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
$75,000. 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. The Company offers
database services, including sales leads and pre-press services for directory
publishers, and document services, including 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.
21
<PAGE>
In connection with the issuance of a $4.0 million subordinated promissory note
(the "Subordinated Note") which bears interest at 13.25% (with an effective
interest rate of 19.25%), of which $3.35 million was funded as of June 30,
1996 and the balance of which was committed as of that date and funded on
August 15, 1996, the Company issued to Petra Capital, LLC (the "Lender") and
other participants warrants for the purchase of Common Stock at $.01 per
share. See "Certain Relationships and Related Transactions." For financial
reporting purposes, the warrants have been valued based on a $7.00 per share
value of the underlying Common Stock on the date the Subordinated Note was
issued. The $736,000 difference between the $3.35 million funded in connection
with the Subordinated Note at June 30, 1996 and the amount reflected in the
financial statements as of that date represents the value of the warrants
issued to the Lender and other participants in connection with such
Subordinated Note and such amount has been treated as a discount on the
Subordinated Note. This discount and costs associated with the issuance of the
Subordinated Note and warrants amount to approximately $1.0 million. Upon
repayment of this Subordinated Note, the Company will expense the unamortized
discount and deferred costs associated with the issuance of the Subordinated
Note and warrants. This amount, net of income tax effect, will be
approximately $640,000 and will be treated as an extraordinary item.
This discussion and analysis contains certain statements that may be
considered forward looking statements ("Forward Looking Statements") within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those projected in the Forward Looking Statements
as a result of, among other things, the factors set forth in the section
entitled "Risk Factors." In particular, note the Risk Factors captioned
"Operating Losses," "Potential Fluctuations in Operating Results," "Certain
Risks Associated with The Work Number," "Risks Related to Use of Confidential
Information With The Work Number," "Certain Risks Associated with Divestiture
of the Database and Document Services Businesses," "Intense Competition,"
"Dependence on Strategic Marketing Alliances," "Risks Associated with
Technological Change," "Lengthy Sales Cycle" and "Limited Intellectual
Property Protection" as well as "Business--Proprietary Rights" and "Business--
Legal Proceedings."
22
<PAGE>
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.
<TABLE>
<CAPTION>
PERCENTAGE INCREASE (DECREASE)
------------------------------------
THREE
MONTHS FIRST
FISCAL YEAR ENDED ENDED JUNE THREE MONTHS
MARCH 31, 30, FISCAL 1995 FISCAL 1996 FISCAL 1997
-------------------- ------------- OVER OVER OVER
1994 1995 1996 1995 1996 FISCAL 1994 FISCAL 1995 FISCAL 1996
----- ----- ----- ----- ----- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues
The Work Number........ - % 0.8% 3.3% 1.4% 5.9% * 518.9% 504.1%
Outsourced services.... 6.9 5.2 7.4 3.6 7.7 (33.8) 93.9 213.0
Customer premises
systems............... 75.7 70.6 69.9 73.0 66.2 (18.1) 35.7 33.8
Maintenance and
support............... 17.4 23.4 19.4 22.0 20.2 18.6 13.6 35.7
----- ----- ----- ----- -----
Total revenues....... 100.0 100.0 100.0 100.0 100.0 (12.2) 37.2 47.4
----- ----- ----- ----- -----
Cost of revenues
The Work Number........ - 0.5 3.2 3.4 2.6 * 796.5 12.1
Outsourced services.... 1.7 2.6 3.6 3.7 3.0 36.2 89.5 20.7
Customer premises
systems............... 34.8 42.0 33.2 33.8 33.7 6.2 8.4 47.0
Maintenance and
support............... 6.8 8.1 4.6 5.7 5.5 3.3 (22.0) 42.5
----- ----- ----- ----- -----
Total cost of
revenues............ 43.3 53.2 44.6 46.6 44.8 7.9 15.0 41.8
----- ----- ----- ----- -----
Gross margin........... 56.7 46.8 55.4 53.4 55.2 (27.5) 62.4 52.3
----- ----- ----- ----- -----
Operating expenses
Selling and marketing.. 24.1 29.0 30.2 30.4 31.9 5.7 43.1 54.9
General and
administrative........ 20.2 25.9 20.9 22.6 14.8 12.7 10.6 (3.3)
----- ----- ----- ----- -----
Total operating
expenses............ 44.3 54.9 51.1 53.0 46.7 8.9 27.8 30.0
----- ----- ----- ----- -----
Operating income
(loss)................ 12.4 (8.1) 4.3 0.4 8.5 (157.2) * 2,595.4
Other expense, net..... 1.3 2.9 2.9 3.0 3.3 86.0 38.9 59.0
----- ----- ----- ----- -----
Earnings (loss) from
continuing operations
before income tax
expense (benefit)..... 11.1 (11.0) 1.4 (2.6) 5.2 (187.2) * *
Income tax expense
(benefit)............. 0.1 (3.3) 0.5 (1.0) 1.9 * * *
----- ----- ----- ----- -----
Earnings (loss) from
continuing operations. 11.0 (7.7) 0.9 (1.6) 3.3 (161.1) * *
Discontinued
operations, net....... 4.2 (4.1) (5.2) (1.3) (12.0) (186.4) * *
----- ----- ----- ----- -----
Net earnings (loss).... 15.2% (11.8)% (4.3)% (2.9)% (8.7)% (168.1)% * *
===== ===== ===== ===== =====
</TABLE>
- --------
*Not meaningful.
Three Months Ended June 30, 1995 and 1996
Revenues. Total revenues increased by 47.4%, from $2.9 million for the three
months ended June 30, 1995 to $4.3 million for the three months ended June 30,
1996. Revenues from The Work Number increased from $42,000 for the three
months ended June 30, 1995 to $251,000 for the three months ended June 30,
1996, due to the completion of the pilot phase during fiscal 1996 and
commencement of marketing on a nationwide basis. However, in the first quarter
of fiscal year 1997, notwithstanding the continued increase in verification
revenues, the focusing of the sales force from The Work Number to customer
premises systems sales resulted in a lower rate of new employer contracts for
The Work Number and a modest decline in total revenues from The Work Number
compared with the fourth quarter of fiscal year 1996. The Company has
commenced, and is continuing, the process of hiring and establishing a sales
force dedicated to The Work Number. Revenues from outsourced services
increased from $105,000 for the three months ended June 30, 1995 to $330,000
for the three months ended June 30, 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 33.8%, from $2.1 million for the
three months ended June 30, 1995 to $2.8 million for the three months ended
June 30, 1996. This revenue growth is due to increases in sales and marketing
resources effected in prior periods and continuing in the current period,
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
23
<PAGE>
premises systems increased by 35.7%, from $640,000 for the three months ended
June 30, 1995 to $868,000 for the three months ended June 30, 1996, reflecting
the support provided to an increased installed base of customer premises
systems.
Cost of Revenues. Total cost of revenues increased by 41.8%, from $1.4 million
for the three months ended June 30, 1995 to $1.9 million for the three months
ended June 30, 1996. Cost of revenues from The Work Number increased from
$99,000 for the three months ended June 30, 1995 to $111,000 for the three
months ended June 30, 1996, due to increased costs incurred with respect to
this service as it moved from the pilot phase to a national service, offset by
a reduction in start-up costs. 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 20.7%,
from $106,000 for the three months ended June 30, 1995 to $128,000 for the
three months ended June 30, 1996. This increase in cost is attributable to the
revenue growth described above. Cost of revenues from outsourced services as a
percentage of revenues from outsourced services decreased from 100.6% for the
three months ended June 30, 1995, to 38.8% for the three months ended June 30,
1996, reflecting the better utilization of the fixed personnel and equipment
costs incurred starting in 1995. Cost of revenues from customer premises
systems increased by 47.0%, from $1.0 million for the three months ended June
30, 1995 to $1.4 million for the three months ended June 30, 1996. This
increase is due to the increase in customer premises systems revenue.
Additionally, cost of revenues for customer premises systems as a percentage
of customer premises system revenue increased from 46.3% for the three months
ended June 30, 1995 to 50.9% for the three months ended June 30, 1996. 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 42.5%, from $166,000 for the three months ended June 30, 1995 to
$237,000 for the three months ended June 30, 1996, principally due to an
increase in personnel costs to provide a higher level of customer service.
Selling and Marketing Expenses. Selling and marketing expenses increased 54.9%
from $884,000 for the three months ended June 30, 1995 to $1.4 million for the
three months ended June 30, 1996. As a percentage of revenues, such expenses
increased from 30.4% for the three months ended June 30, 1995 to 31.9% for the
three months ended June 30, 1996. The increase reflects continuing expansion
of the Company's sales and marketing efforts, including development of
distribution channels both in domestic and international markets. The Company
anticipates that selling and marketing expenses will continue to increase in
dollar amount as the Company expands its sales and marketing efforts.
General and Administrative Expenses. General and administrative expenses
decreased 3.3% from $659,000 for the three months ended June 30, 1995 to
$637,000 for the three months ended June 30, 1996. As a percentage of
revenues, such expenses decreased from 22.6% for the three months ended June
30, 1995 to 14.8% for the three months ended June 30, 1996. The decrease
reflects the cost control efforts implemented by the Company throughout fiscal
1996. The Company does not anticipate that general and administrative expenses
will decrease in dollar amount in future years.
Other Expense. Interest expense, which is the primary component of other
expense, net, increased from $71,000 for the three months ended June 30, 1995
to $116,000 for the three months ended June 30, 1996. This increase is due
principally to a higher level of borrowings caused by the net loss incurred
during fiscal 1996. As the Company intends to repay most of its outstanding
borrowings with the proceeds of this offering, it expects interest expense
will decrease substantially in future periods.
Income Tax Expense. The Company's effective income tax rate was 40.0% for the
three months ended June 30, 1995 and 37.1% for the three months ended June 30,
1996.
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
24
<PAGE>
completion 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. 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 Expense. Interest expense, which is the primary component of other
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.
Fiscal Years Ended March 31, 1995 and 1994
Revenues. Total revenues decreased by 12.2%, from $11.2 million in fiscal 1994
to $9.9 million in fiscal 1995, due primarily to a significant decline in
revenues from customer premises systems. Initial revenues from The Work Number
were $74,000 in fiscal 1995, as the Company began the pilot phase of this
service. Revenues from outsourced services decreased by 33.8%, from $776,000
in fiscal 1994 to $515,000 in fiscal 1995. This decrease was due to the loss
of a significant account. Revenues from customer premises systems decreased by
18.1%, from $8.5 million in fiscal 1994 to $7.0 million in fiscal 1995. The
decrease was principally due to the departure
25
<PAGE>
of a regional sales manager and associated staff in one of the Company's key
sales territories during the second half of the fiscal year. Revenues from
maintenance and support related to the customer premises systems sales
increased by 18.6%, from $1.9 million in fiscal 1994 to $2.3 million in fiscal
1995. This growth is reflective of the increased installed base of customer
premises systems.
Cost of Revenues. Total cost of revenues increased by 7.9%, from $4.9 million
in fiscal 1994 to $5.2 million in fiscal 1995. Cost of revenues from The Work
Number were $48,000 in fiscal 1995, as the Company began the pilot phase of
this service. Cost of revenues from outsourced services increased by 36.2%,
from $190,000 in fiscal 1994 to $260,000 in fiscal 1995, due to increasing
costs to support the Company's objective of higher revenues. Cost of revenues
from customer premises systems increased by 6.2%, from $3.9 million in fiscal
1994 to $4.1 million in fiscal 1995. This increase was due to the Company
staffing for anticipated increased levels of customer premises systems
revenue. However, cost of revenues for customer premises systems as a
percentage of customer premises systems revenue increased from 45.9% in fiscal
1994 to 59.6% in fiscal 1995. This is principally due to the unexpected
decrease in revenues during the second half of fiscal 1995, coupled with a
relatively fixed labor cost. Cost of revenues from maintenance and support
related to the customer premises systems increased by 3.3%, from $767,000 in
fiscal 1995 to $793,000 in fiscal 1996. However, this represents a declining
percentage of maintenance and support revenues, as the Company better
leveraged its labor costs.
Selling and Marketing Expenses. Selling and marketing expenses increased 5.7%
from $2.7 million in fiscal 1994 to $2.9 million in fiscal 1995. As a
percentage of revenues, such expenses increased from 24.1% in fiscal 1994 to
29.0% in fiscal 1995. The increase reflects continuing expansion of the
Company's sales and marketing efforts offset by decreased incentive
compensation due to a lower level of sales volume.
General and Administrative Expenses. General and administrative expenses
increased 12.7% from $2.3 million in fiscal 1994 to $2.6 million in fiscal
1995. As a percentage of revenues, such expenses increased from 20.2% in
fiscal 1994 to 25.9% in fiscal 1995. The increase in dollar amount reflects
the expansion of the Company's infrastructure to respond to an anticipated
increase in the level of revenues. The increase as a percentage of revenues
was due to the unanticipated decrease in sales during the second half of the
fiscal year.
Other Expense. Interest expense, which is the primary component of other
expense, net, increased from $131,000 in fiscal 1994 to $212,000 in fiscal
1995. This increase is due principally to a higher average level of borrowings
caused by financing the net loss in fiscal 1995 with additional bank
borrowings.
Income Tax Expense. The Company's effective income tax rate was 0.5% in fiscal
1994 and 30.3% in fiscal 1995. The rate in fiscal 1994 reflects a change in
the valuation allowance for deferred tax assets. 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 operations of such businesses as discontinued operations. While no
specific transaction has been approved, the Company has contacted several
strategic buyers and received several unsolicited inquiries, which management
is evaluating, and anticipates divestiture will occur within 12 months. Any
divestiture of the assets of such businesses would require the approval of the
Company's lenders and certain equipment lessors who have been informed of
management's intention and preliminary plan of divestiture. The net proceeds
of this offering will repay outstanding indebtedness to such lenders,
resulting in the elimination of the requirements for approval of the
divestiture of assets from such lenders. A provision of $350,000 has been made
as of June 30, 1996 to reflect the anticipated loss from operations until the
time of disposal. The Company has estimated that the proceeds from divestiture
will approximate the net assets held for sale as of June 30, 1996. 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 Note 2 of the Notes to Consolidated Financial
Statements.
26
<PAGE>
The following table sets forth, for the periods indicated, a summary statement
of operations of the database and documents services business:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE
YEAR ENDED MARCH 31, 30,
------------------------ --------------
1994 1995 1996 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues............................. $12,282 $12,010 $11,149 $3,084 $2,316
Cost of revenues..................... 7,496 9,061 9,110 2,404 1,956
------- ------- ------- ------ ------
Gross margin......................... 4,786 2,949 2,039 680 360
------- ------- ------- ------ ------
Operating expenses
Selling and marketing............... 1,843 1,474 1,277 316 278
General and administrative.......... 2,022 2,116 1,741 379 320
------- ------- ------- ------ ------
Total operating expenses......... 3,865 3,590 3,018 695 598
------- ------- ------- ------ ------
Operating income (loss).............. 921 (641) (979) (15) (238)
Other expense, net................... 139 40 73 48 22
------- ------- ------- ------ ------
Earnings (loss) from operations...... 782 (681) (1,052) (63) (260)
Income tax expense (benefit)......... 308 (271) (349) (25) (96)
------- ------- ------- ------ ------
Net earnings (loss) from operations. 474 (410) (703) (38) (164)
------- ------- ------- ------ ------
Loss on disposal..................... -- -- -- -- (500)
Income tax benefit................... -- -- -- -- (150)
------- ------- ------- ------ ------
Loss on disposal, net................ -- -- -- -- (350)
------- ------- ------- ------ ------
Net earnings (loss).................. $ 474 $ (410) $ (703) $ (38) $ (514)
======= ======= ======= ====== ======
</TABLE>
Revenues. Database and document services revenues decreased by 24.9%, from
$3.1 million for the three months ended June 30, 1995 to $2.3 million for the
three months ended June 30, 1996. The decrease was attributable primarily to
the loss of AT&T 800 Directories as a customer in the third quarter of fiscal
1996. Database and document services revenues decreased by 7.2%, from $12.0
million in fiscal 1995 to $11.1 million in fiscal 1996. The decrease was
attributable to the loss of AT&T 800 Directories as a customer during the
third quarter of fiscal 1996, which more than offset increases in revenues due
to market penetration. Revenues from AT&T 800 Directories amounted to
approximately $930,000 in fiscal 1996 and $2.0 million in fiscal 1995.
Database and document services revenues decreased by 2.2%, from $12.3 million
in fiscal 1994 to $12.0 million in fiscal 1995. The decrease was attributable
primarily to the decrease in business from AT&T 800 Directories. The Company
believes the loss of AT&T 800 Directories was a result of its desire to
consolidate its directory suppliers in a single, larger vendor. Although the
Company has subsequently taken steps to rebuild the revenue base of the
database and document businesses, it believes that its management and
financial resources are better allocated towards continued expansion of its
interactive communications business.
Cost of Revenues. Database and document services cost of revenues decreased
18.6%, from $2.4 million for the three months ended June 30, 1995 to $2.0
million for the three months ended June 30, 1996. Total cost of revenues for
database and document services increased as a percentage of database and
document services revenues from 78.0% for the three months ended June 30, 1995
to 84.5% for the three months ended June 30, 1996. This is due principally to
the loss of AT&T 800 Directories as noted above, which had a higher than
average profitability coupled with relatively fixed labor costs. Database and
document services cost of revenues remained substantially unchanged at $9.1
million in both fiscal 1995 and fiscal 1996. Total cost of revenues for
database and document services increased as a percentage of database and
document services revenues from 75.4% in fiscal 1995 to 81.7% in fiscal 1996.
The fluctuations are due principally to the loss of AT&T 800 Directories noted
above, which had a higher than average profitability, offset by cost
efficiency gains within database and document services. Database and document
services cost of revenues increased 20.9%, from $7.5 million in fiscal 1994 to
$9.1 million in fiscal 1995. Total cost of revenues for database and document
services increased as a percentage of database and document services revenues
from 61.0% in fiscal 1994 to 75.4% in fiscal 1995. This is principally due to
the decline in business from several significant customers, which had higher
than average margins, coupled with a relatively high level of fixed costs.
27
<PAGE>
Selling and Marketing Expenses. Selling and marketing expenses decreased 12.0%
from $316,000 for the three months ended June 30, 1995 to $278,000 for the
three months ended June 30, 1996. As a percentage of revenues, such expenses
increased from 10.2% for the three months ended June 30, 1995 to 12.0% for the
three months ended June 30, 1996. Selling and marketing expense decreased
13.4% from $1.5 million in fiscal 1995 to $1.3 million in fiscal 1996. As a
percentage of revenues, such expenses decreased from 12.3% in fiscal 1995 to
11.5% in fiscal 1996. Selling and marketing expenses decreased 20.0% from $1.8
million in fiscal 1994 to $1.5 million in fiscal 1995. As a percentage of
revenues, such expenses decreased from 15.0% in fiscal 1994 to 12.3% in fiscal
1995. The decrease in dollar amount for all periods reflects a reduced level
of incentive compensation due to a lower level of revenues, as well as a
reduction of discretionary expenditures as revenue levels declined.
General and Administrative Expenses. General and administrative expenses
decreased 15.5% from $379,000 for the three months ended June 30, 1995 to
$320,000 for the three months ended June 30, 1996. As a percentage of
revenues, such expenses increased from 12.3% for the three months ended June
30, 1995 to 13.8% for the three months ended June 30, 1996. General and
administrative expenses decreased 17.7% from $2.1 million in fiscal 1995 to
$1.7 million in fiscal 1996. As a percentage of revenues, such expenses
decreased from 17.6% in fiscal 1995 to 15.6% in fiscal 1996. General and
administrative expenses increased 4.6% from $2.0 million in fiscal 1994 to
$2.1 million in fiscal 1995. The fluctuations in dollar amounts reflect cost
control efforts implemented by the Company as revenue levels declined.
28
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited statement of operations data
for each of the four quarters in fiscal 1995 and 1996 and the first quarter of
fiscal 1997, as well as the percentage of the Company's total revenues
represented by each item. The unaudited financial statements have been
prepared on the same basis as the audited financial statements contained
herein and include all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of
such information when read in conjunction with the Company's financial
statements and notes thereto appearing elsewhere in this Prospectus. The
Company believes that quarter-to-quarter comparisons of its financial results
are not necessarily meaningful and should not be relied upon as an indication
of future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1994 1994 1994 1995 1995 1995 1995 1996 1996
-------- --------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues
The Work Number........ $ 6 $ 15 $ 21 $ 32 $ 42 $ 51 $ 75 $ 285 $ 251
Outsourced services.... 90 121 220 84 105 254 419 220 330
Customer premises
systems............... 2,461 2,293 1,687 516 2,125 2,637 2,086 2,594 2,844
Maintenance and
support............... 588 505 582 635 640 634 653 697 868
------- ------ ------ ------- ------ ------ ------ ------ ------
Total revenues....... 3,145 2,934 2,510 1,267 2,912 3,576 3,233 3,796 4,293
------- ------ ------ ------- ------ ------ ------ ------ ------
Cost of revenues
The Work Number........ 4 9 14 21 99 104 122 104 111
Outsourced services.... 53 54 61 92 106 121 180 86 128
Customer premises
systems............... 1,222 1,084 894 943 984 1,173 966 1,366 1,447
Maintenance and
support............... 185 167 182 259 166 144 176 133 237
------- ------ ------ ------- ------ ------ ------ ------ ------
Total cost of
revenues............ 1,464 1,314 1,151 1,315 1,355 1,542 1,444 1,689 1,923
------- ------ ------ ------- ------ ------ ------ ------ ------
Gross margin........... 1,681 1,620 1,359 (48) 1,557 2,034 1,789 2,107 2,370
------- ------ ------ ------- ------ ------ ------ ------ ------
Operating expenses
Selling and marketing.. 683 802 773 596 884 937 1,010 1,253 1,369
General and
administrative........ 720 646 688 502 659 821 735 613 637
------- ------ ------ ------- ------ ------ ------ ------ ------
Total operating
expenses............ 1,403 1,448 1,461 1,098 1,543 1,758 1,745 1,866 2,006
------- ------ ------ ------- ------ ------ ------ ------ ------
Operating income
(loss)................ 278 172 (102) (1,146) 14 276 44 241 364
======= ====== ====== ======= ====== ====== ====== ====== ======
Earnings (loss) from
discontinued
operations, net....... 230 142 (114) (668) (38) 55 (538) (182) (514)
======= ====== ====== ======= ====== ====== ====== ====== ======
Net earnings (loss).... $ 360 $ 215 $ (227) $(1,512) $ (83) $ 164 $ (582) $ (79) $ (373)
======= ====== ====== ======= ====== ====== ====== ====== ======
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1994 1994 1994 1995 1995 1995 1995 1996 1996
-------- --------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues
The Work Number........ 0.2% 0.5% 0.8% 2.5% 1.4% 1.4% 2.3% 7.5% 5.8%
Outsourced services.... 2.8 4.1 8.8 6.6 3.6 7.1 13.0 5.8 7.7
Customer premises
systems............... 78.3 78.2 67.2 40.7 73.0 73.8 64.5 68.3 66.3
Maintenance and
support............... 18.7 17.2 23.2 50.2 22.0 17.7 20.2 18.4 20.2
----- ----- ----- ------ ----- ----- ----- ----- -----
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ------ ----- ----- ----- ----- -----
Cost of revenues
The Work Number........ 0.1 0.3 0.5 1.6 3.4 2.9 3.8 2.7 2.6
Outsourced services.... 1.7 1.9 2.4 7.3 3.7 3.4 5.6 2.3 3.0
Customer premises
systems............... 38.9 36.9 35.7 74.4 33.8 32.8 29.9 36.0 33.7
Maintenance and
support............... 5.9 5.7 7.2 20.5 5.7 4.0 5.4 3.5 5.5
----- ----- ----- ------ ----- ----- ----- ----- -----
Total cost of
revenues............ 46.6 44.8 45.8 103.8 46.6 43.1 44.7 44.5 44.8
----- ----- ----- ------ ----- ----- ----- ----- -----
Gross margin........... 53.4 55.2 54.2 (3.8) 53.4 56.9 55.3 55.5 55.2
----- ----- ----- ------ ----- ----- ----- ----- -----
Operating expenses
Selling and marketing.. 21.7 27.3 30.8 47.0 30.4 26.2 31.2 33.0 31.9
General and
administrative........ 22.9 22.0 27.4 39.6 22.6 23.0 22.7 16.1 14.8
----- ----- ----- ------ ----- ----- ----- ----- -----
Total operating
expenses............ 44.6 49.3 58.2 86.6 53.0 49.2 53.9 49.1 46.7
----- ----- ----- ------ ----- ----- ----- ----- -----
Operating income
(loss)................ 8.8 5.9 (4.0) (90.4) 0.4 7.7 1.4 6.4 8.5
===== ===== ===== ====== ===== ===== ===== ===== =====
Earnings (loss) from
discontinued
operations, net....... 7.3 4.8 (4.5) (52.7) (1.3) 1.5 (16.6) (4.8) (12.0)
===== ===== ===== ====== ===== ===== ===== ===== =====
Net earnings (loss).... 11.4% 7.3% (9.0)% (119.4)% (2.9)% 4.6% (18.0)% (2.1)% (8.7)%
===== ===== ===== ====== ===== ===== ===== ===== =====
</TABLE>
Revenues from The Work Number have increased as the service has moved from the
pilot phase to a national service. However, as noted above, this service is
early in its life cycle and the relatively large percentage of conversion fees
recognized early in the service's life cycle, particularly in the fourth
quarter of fiscal 1996, compared to fees from verifications can distort normal
quarter to quarter revenue comparisons. Revenues from outsourced services are
seasonally higher during the second and third quarters of the Company's fiscal
year due to the nature of the services being provided. The revenues have
increased on a quarter by quarter comparison in fiscal 1996 over fiscal 1995
due to the Company capitalizing on an increased trend by some corporations to
outsource these services. Revenues from customer premises systems decreased
during the third and fourth quarters of fiscal 1995 due to the departure of a
regional sales manager and associated staff in one of the Company's key sales
territories. Additional sales and marketing resources were added during the
fourth quarter of fiscal 1995 and the first two quarters of fiscal 1996, and
revenues increased accordingly during fiscal 1996. Revenues from maintenance
and support have generally increased over time due to such services being
provided to an increasing installed customer premises systems base. Revenues
from customer premises systems decreased during the third quarter of fiscal
1996 due to the Company's sales force committing a large part of its effort to
establishing initial sales of The Work Number, a number of which sales
resulted in a large number of one-time conversion fees in the fourth quarter
of fiscal year 1996. Similarly, in the first quarter of 1997, notwithstanding
the continued increase in verification revenues, the focusing of the sales
force to customer premises systems sales resulted in a lower rate of new
employer contracts for The Work Number and a modest decline in total revenues
from The Work Number. The Company has commenced, and is continuing, the
process of hiring and establishing a sales force dedicated to The Work Number.
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
30
<PAGE>
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. The size and timing of the Company's customer
premises systems transactions have historically varied substantially from
quarter to quarter, and the Company expects such variations to continue in
future periods. The Company is typically able to deliver a customer premises
system within several months of when the order is received and, therefore,
does not customarily have a significant long-term backlog. Because a
significant portion of the Company's overhead is fixed in the short-term, the
Company's results of operations may be adversely affected if revenues fall
below the Company's expectations.
LIQUIDITY AND CAPITAL RESOURCES
Prior to this offering, the Company has had limited liquidity, due in part to
net losses in the prior two fiscal years. The Company has financed its
operations primarily through cash flow from operations, private placements of
equity and debt securities and bank lines of credit. The Company had a current
ratio of 1.02 to 1, 0.87 to 1, and 1.03 to 1 at March 31, 1995, March 31, 1996
and June 30, 1996, respectively. The Company's working capital was $183,000,
$(1,261,000) and $186,000 at March 31, 1995, March 31, 1996 and June 30, 1996,
respectively. Working capital at June 30, 1996 reflects the reclassification
of the working capital of the discontinued operations to net assets of
businesses held for sale. Total working capital decreased in fiscal 1996
principally due to current year operating losses and discontinued operations.
Working capital increased during the three months ended June 30, 1996, due to
the issuance of a long-term subordinated note payable.
The Company currently maintains bank lines of credit of up to $4,000,000 for
working capital purposes. Amounts outstanding under available lines of credit,
which mature in December 1996, were $2,396,000 and $4,243,000 at June 30, 1996
and March 31, 1996, respectively. The decrease is principally the result of
the issuance in June 1996 of a subordinated note payable and the application
of the proceeds therefrom to repay a portion of the outstanding lines of
credit. See "Use of Proceeds" and "Certain Relationships and Related
Transactions."
The Company's accounts receivable increased from $5,022,000 at March 31, 1995
to $5,918,000 at March 31, 1996. The increase is due principally to total
revenues in the fourth quarter of fiscal 1996, including revenues from
discontinued operations, being $2,370,000 greater than revenues in the fourth
quarter of fiscal 1995, offset by improved collections of accounts receivable.
As a percentage of the Company's total revenues for the fourth quarter of each
fiscal year, including revenues from discontinued operations, the accounts
receivable at fiscal year-end decreased from 127% at March 31, 1995 to 94% at
March 31, 1996. At June 30, 1996, accounts receivable decreased to $4,938,000
which represented 115% of revenues for the quarter then ended. This decrease
is attributable principally due to the reclassification of the working capital
of the discontinued operations to net assets of businesses held for sale.
The Company's capital expenditures were $852,000 in fiscal 1996. The Company
currently has no specific commitments with regard to capital expenditures, but
anticipates spending approximately $1,500,000 in fiscal 1997 for capital
requirements, including expansion of the Company's computer room facilities,
acquisition of additional computer equipment, installation of leasehold
improvements, and establishment of a disaster recovery facility.
The Company's net increase to capitalized software development costs was
$528,000 in fiscal 1996. See Notes 1 and 5 of Notes to Consolidated Financial
Statements. The Company intends to continue to make investments in software
solutions at comparable or increasing levels in fiscal 1997.
The Company will use the net proceeds of this offering to repay its
outstanding indebtedness represented by (i) the Subordinated Note in the
aggregate principal amount of $4.0 million as of August 15, 1996, which is due
and payable in July 2001 and accrues interest at an annual rate of 13.25%,
with an effective interest rate of 19.25% (see "Certain Relationships and
Related Transactions"), (ii) a promissory note in the principal amount of
approximately $417,000 as of September 30, 1996, and which is due and payable
through August 1997 and
31
<PAGE>
accrues interest at the bank's prime rate (8.25% as of September 30, 1996)
plus 0.75%, and (iii) a demand note representing borrowings under a revolving
line of credit (approximately $3.3 million as of September 30, 1996) which
accrues interest at the bank's prime rate (8.25% as of September 30, 1996)
plus 0.875%. See "Use of Proceeds."
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value based method for financial
accounting and reporting for stock-based employee compensation plans. However,
the new standard allows compensation to continue to be measured by using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, but requires
expanded disclosures. SFAS No. 123 is effective in fiscal 1997.
While the Company does not know precisely the impact that will result from
adopting SFAS No. 123, the Company does not expect the adoption of SFAS No.
123 to have a material effect on the Company's consolidated financial position
or results of operations.
32
<PAGE>
BUSINESS
GENERAL
TALX designs and implements interactive communications solutions, primarily
for many Fortune 500 and other large organizations other than telephone
service providers, using computer telephony (previously defined as "CT") to
integrate technologies such as interactive voice response (previously defined
as "IVR"), facsimile, e-mail, Internet and corporate Intranet. The Company's
interactive communications solutions enable an organization's employees,
customers, vendors and business partners (previously defined as "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. 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) (previously defined as "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 575 systems to approximately 350 customers during
the last five 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
burdens 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.
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 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. These operations have
recently been 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. See "Certain Relationships and
Related Transactions."
INDUSTRY BACKGROUND
Businesses and government entities have traditionally used trained service
representatives to administer the flow of information to and from Users.
Service representatives perform multiple functions, including receiving
33
<PAGE>
inquiries, processing transaction requests and using enterprise software
applications to extract relevant information. However, managing labor costs
and maintaining the quality of service become more difficult as an entity
grows in size and complexity.
In recent years, organizations have strived to reengineer their business
processes to further reduce costs and increase service levels. One of the key
technologies critical to this reengineering process is client/server
architecture, which is becoming major corporations' architecture of choice for
business applications. Client/server architecture has facilitated the movement
of information from mainframes accessed by terminals to relational databases
accessed through personal computers ("PCs"). As a result, vital business
information is more readily accessible for integration with interactive
communications technologies, allowing Users to benefit more fully from the
reengineered business process.
Driven by demand for higher levels of service at lower costs and enabled by
the proliferation of client/server architecture, businesses are increasingly
relying on interactive communications technology to allow Users to serve
themselves through automated applications providing direct and interactive
access to enterprise-wide information and services. Without human
intervention, interactive communications solutions capture information given
by a User, retrieve and/or update selected database information, and respond
with selected information. Interactive communications solutions enable
companies to contain labor costs through increased productivity while
simultaneously improving the level of service by providing Users with quick
and convenient access to needed information 24 hours a day, seven days a week.
Traditional IVR systems, which enable routine information retrieval and
transactions via the touch-tone telephone, have made significant strides in
reducing costs, increasing productivity and improving customer satisfaction.
Since its widespread acceptance, the market for IVR systems has grown
substantially. In 1996, Dataquest Incorporated, a leading consultant to the
voice processing industry, estimated that the total U.S. market for IVR
products was approximately $1 billion in 1995 and is expected to grow at a
rate of over 20% per year through the year 2000.
IVR has laid a strong foundation for the progression of interactive
communications solutions. Today's interactive solutions are using a broader
mix of access devices and technologies and allowing for an increase in the
amount of information that can be retrieved or exchanged. For example, with
voice recognition technology, information that was difficult to enter into an
IVR system can now be spoken by the User and reliably recognized. Facsimile
and e-mail capabilities enable Users to receive confirmations of transactions
or copies of requested information. PC-based self-service access, including
through the Internet and corporate Intranets, offers Users improved access to
information over traditional IVR systems, since Users can now receive
graphical, text and audio information in addition to other information.
The dramatic increase in use of computer telephony, facsimile, e-mail,
Internet, corporate Intranet and other interactive communications technologies
to exchange information has resulted in substantial growth in the use of
interactive communications solutions. These solutions enable organizations to
automate the exchange of information cost-effectively and provide a gateway to
new and enhanced customer services.
STRATEGY
TALX's objective is to be a leader in several targeted markets of interactive
communications solutions that enable Users to access, input and update
information and perform other self-service transactions without human
assistance. The Company believes that the following strategies are significant
elements to the successful implementation of this objective:
Establish a Dominant Position in the Market for Automated Employment
Verification
The Company believes that, to meet the demand for electronic, timely, accurate
and secure employment verifications, it must establish a dedicated sales force
focused on rapidly adding employers to The Work Number for Everyone(R). The
Company expects increasing numbers of employers and mortgage lenders and other
verifiers to utilize interactive communications to provide and receive
employment information regarding current and
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former employees. The Company's objective is to aggressively expand its
existing database of employment records by marketing to the approximately 860
private sector employers with 10,000 or more employees (based on Hunt-
Scanlon's Select Guide to Human Resource Executives 1995). These employers
have an aggregate of over 30 million current employees (representing an
estimated 50 million total employment records including those of former
employees). Four out of the five largest mortgage lenders in the U.S. (based
on 1995 residential mortgage originations), currently utilize The Work Number
to facilitate their underwriting process. The Company plans to follow a dual
strategy and aggressively market The Work Number to subscribing lenders and
other verifiers, in order to encourage such lenders and verifiers to promote
increased enrollment by employers, as well as to lenders and verifiers not yet
utilizing The Work Number. Through these efforts, the Company intends to
establish a market for a national employment verification service and seek to
become the market leader.
Identify Additional Markets for Automated Verification and Create Related
Branded Services
The Company believes that opportunities may exist to utilize its technology
and experience with The Work Number to create additional "branded" national
services. The Company has identified several new users and areas that could
potentially benefit from a similar national service, based on their need for
timely information and utilization of multiple entity databases. The Company
believes that users other than mortgage lenders could potentially benefit from
access to the employment and salary information already contained in the
database used for The Work Number. The Company also believes there may be new
areas where a new national database (containing information other than
employment and salary information) would be desirable for which the Company
could provide users access for a fee. The Company plans to explore the
feasibility and market potential for these additional opportunities.
Capitalize on Existing Strategic Marketing Alliances With Client/Server Market
Leaders
The Company has established a strategic marketing alliance with PeopleSoft, a
leading provider of enterprise-wide client/server business application
software. Pursuant to this alliance, the Company has developed interactive
communications software suites that tie directly to PeopleSoft's human
resource applications. The Company plans to introduce financial and
distribution suites to complement PeopleSoft's recently introduced products in
those areas. The Company believes that this relationship results in increased
customer referrals and introductions, increased market exposure and reduced
delivery time and costs. The Company has recently established similar
alliances with Oracle and SAP, also leading providers of client/server
business application software. The Company intends to develop software suites
which complement their products.
Provide "Best-of-Class" Integration in Windows NT, Open Systems, Standards-
based Environments
The Company realizes that in order to fully capitalize on the market potential
offered by the scope and quality of TALX systems, it must provide these
capabilities in non-proprietary systems. To achieve this objective, the
Company has chosen to develop a version of TALXWare based on the standards
being established by Microsoft, specifically the Windows NT operating system
and ActiveX OLE controls environment. This development effort is being
undertaken so that TALXWare can provide the proven, powerful front-end
development environment of EasyScript to generate, at the developer's option,
software in languages such as Visual Basic, Power Builder, Visual C++ or
Delphi. Such software will be designed to run on either TALX VP/2000 or the
NMS platforms.
Expand International Sales
The Company believes a significant opportunity exists to expand sales in
international markets. Since PeopleSoft, Oracle and SAP have already
established a significant international presence, the Company believes it will
receive customer referrals and introductions in these international markets
from these alliances. The Company intends to establish a direct sales force to
complement its relationship with these companies.
Target Middle Market Customers Through New Strategic Marketing Alliances
The Company has identified several leading providers of client/server business
application software for middle market customers. The Company plans to
approach these providers with a view to establishing strategic marketing
alliances. The Company believes these additional relationships, if
established, and the availability of
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its new lower cost NMS-based product would provide the Company with the
opportunity to increase its business with these middle market customers.
No assurance can be given that the Company's objectives or strategies will be
achieved. See "Risk Factors."
SERVICES AND PRODUCTS
The Work Number
In early 1995, the Company introduced a "branded" service, The Work Number for
Everyone(R) (previously defined as "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.
[Description of Art Work Contained in the Registration Statement]
In "Business--Services Products--The Work Number" Section
- ---------------------------------------------------------
Schematic diagram captioned "Fast and Accurate Employment Certification."
The diagram illustrates schematically how employers, employees and verifiers
(reference check, mortgage lender, property manager, credit manager) use the
TALX Multi-Employer Database. The diagram states the three levels of
verification: Basic (Dates of Employment), Basic Plus (Basic & Base Pay) and
Full (Basic Plus & salary history).
------------------------
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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. Four
out of the five largest mortgage lenders in the U.S. (based on 1995
residential mortgage originations), including Countrywide Home Loans, Inc.,
the country's leading independent mortgage lender, currently utilize The Work
Number to facilitate their underwriting process. Verification of employment
and salary history via The Work Number is accepted by Fannie Mae and Freddie
Mac for the securitization and resale of residential mortgages, as well as by
the VA and FHA for home loan guarantee purposes.
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 June 30, 1996, 69 employers had contracted for specified terms,
generally three years, to provide approximately 5.7 million employment records
of current and former employees. Contracting employers include Hewlett Packard
Company, J.C. Penney Company, Inc., McDonnell Douglas Corporation, Motorola,
Inc., The Procter and Gamble Company and The Quaker Oats Company. The
Company's objective is to aggressively expand its existing database of
employment records by marketing to the approximately 860 private sector
employers with 10,000 or more employees (based on Hunt-Scanlon's Select Guide
to Human Resource Executives 1995). These employers have an 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.
<TABLE>
<CAPTION>
TOTAL NUMBER OF
EMPLOYMENT RECORDS(1)
(000'S)
------------------------
TOTAL
NUMBER OF
FISCAL QUARTER EMPLOYERS ON-LINE BACKLOG(2)
-------------- --------- ---------- ------------
<S> <C> <C> <C>
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
</TABLE>
- --------
(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.
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Tailored Solutions
Tailored solutions are offered by TALX to its customers, primarily Fortune 500
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 in 1993. More recently, it has entered into similar alliances with
Oracle and 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
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
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 transaction-based fees.
Examples of the applications provided by the outsourced services business, and
representative customers of such applications, include: benefit plan
enrollment (BJC Health Systems), receipt and validation of voting with respect
to employee benefit plan amendments (Motorola, Inc.), job posting and self-
nomination process (GE Capital Services) and collection of time, attendance
and labor data (a major regional HMO).
Customer Premises Systems. The Company has provided tailored interactive
communications solutions for installation at customers' premises since the
early 1980s, and has shipped over 575 systems to approximately 350 customers
during the last five 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 IBM's OS/2
operating system. The software supports both Natural MicroSystems and TALX
processing hardware. See "--Technology and Product Development."
CASE STUDIES
Set forth below are descriptions of applications of the Company's interactive
communication solutions for selected customers:
Kaiser Permanente
Kaiser Permanente ("Kaiser") is one of the country's largest health
maintenance organizations. As a longtime TALX client, Kaiser has purchased
over 30 customer premises systems and implemented interactive solutions across
its operations by employing a variety of TALX technologies.
The first application implemented by Kaiser completely automated prescription
refill requests. Members call the TALX interactive solution and are guided
through entering an identification code and the desired prescription number
for refill. All entries are validated and the order is automatically passed to
a Kaiser prescription processing system. This enables Kaiser to reduce the
costs of handling routine refill requests and provide better service to its
members.
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Kaiser's medical offices also receive calls throughout the day from members
canceling appointments. Previously, members were asked to leave voice mail
messages to cancel appointments during the evening hours, weekends, and busy
times of the day. Often messages could not be reviewed and acted upon in a
timely fashion. As a result, doctors were unaware of a cancellation and lost
time while walk-ins or same-day appointments were turned away because the
cancellation was not registered. Several Kaiser medical offices have
incorporated full-featured call center services through the TALX interactive
communications solution. Members are greeted by the TALX system, prompted for
a language preference and then transferred to the appropriate agent. When the
medical office is closed, callers can leave a message to cancel an
appointment, be transferred to an emergency room or receive directions to any
Kaiser office. In the future, members needing a same-day appointment can
immediately be scheduled for the opening. Members will also be able to rebook
their appointment for another time or call any time to schedule a new
appointment.
Expanding the use of TALX interactive solutions to its finance and accounting
functions, Kaiser has put in place a vendor information line. Kaiser vendors
can inquire into invoice status and learn when an invoice will be paid or
receive the details of the invoices covered by a Kaiser check. Kaiser also
uses the TALX interactive solution to collect employee time and attendance
information, which eliminates time card handling. Instead of using a
traditional time clock, Kaiser employees call a TALX System from designated
locations to "clock in" and "clock out".
Kaiser uses a variety of computer telephony integration (CTI) features
provided by TALX, including dialed number identification services (DNIS) to
route incoming calls automatically to the desired application. Further,
applications which require the routing of a call to a customer service agent
utilize advanced call transfer (screen pop) capabilities which can reduce
Kaiser's costs and improve the service to their members.
Motorola
Motorola, Inc. ("Motorola") is one of the world's leading providers of
wireless communications, semiconductors and advanced electronic systems,
components and services. To improve service and reduce costs, Motorola
consolidated and centralized its benefits processing in Scottsdale, Arizona.
At this center, Motorola administers its 401(k) plan, handles employee
inquiries and supports a network of health care providers with up-to-date
employee eligibility and basic health plan information. Subsequently, Motorola
began incorporating TALX interactive solutions when it faced a critical need
to accommodate an increase in annual benefits enrollments from 3,000 to over
57,000. Using a TALX interactive benefits enrollment solution, Motorola was
able to handle the surge of enrollments with no increase in staff.
Motorola extended the use of interactive communications by implementing a
defined contribution application that gave all eligible employees direct self-
service access to up-to-date plan and employee specific account information.
The TALX interactive solution quickly handled routine employee inquiries and
simple transactions, thus eliminating the need for a benefit specialist to
become involved in those instances. The TALX interactive solution was enhanced
to handle health care provider inquiries for employee eligibility
automatically, and is scheduled to be expanded to answer employee requests for
claim status.
When changes to the profit-sharing plan required an employee vote, Motorola
utilized TALX outsourced services to receive and validate employee votes.
Employees were able to use telephone input, voice recognition or a telephone
device for the deaf ("TDD") to cast their votes.
In addition, Motorola has also contracted to participate in The Work Number
and has added approximately 68,000 employment records to The Work Number
database.
GE Capital Services
With 28 business units worldwide, GE Capital Services selected TALX outsourced
services to make its job postings widely available to employees. Using the
newly designed process, managers worldwide post job openings to a central
database. As jobs are posted, they are forwarded to an 800 fax on demand
system operated by TALX outsourced services for access by any domestic GE
Capital Services employee.
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Employees calling a TALX 1-800 number specify jobs of interest by functional
category or job location. The TALX system then accepts the employee's fax
number and immediately faxes a list of job opportunities that match the
criteria given by the employee. After reviewing the job list, interested
employees can call the TALX system back and use the job number to request
additional information on the specific job opportunities.
PeopleSoft
In addition to entering into a strategic marketing alliance with TALX (see "--
Strategic Marketing Alliances"), PeopleSoft has implemented several TALX
interactive solutions internally to improve its own workflow. For example,
PeopleSoft employees make their annual benefits selections using a TALX
solution. As employee enrollments are received and validated, the TALX
interactive solution automatically sends a Lotus Notes electronic mail message
back to the employee confirming the successful enrollment. Other TALX employee
self-service applications include employee stock purchase and job posting.
PeopleSoft has expanded the TALX self-service concept to PeopleSoft vendors
who can now access a TALX interactive application to determine invoice status
and detailed payment information.
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 most recent TALXWare release received the Editors' Choice Award
from Call Center Magazine in 1996. The Company's interactive communications
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 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. With the introduction of EasyScript
to its TALXWare software platform in 1989, the Company became the first among
its competitors to offer a powerful graphical user interface ("GUI")
application development environment to simplify and expedite the development
of tailored interactive solutions. In 1992, EasyScript received Voice
Processing Magazine's Editors' Choice Award. 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, 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
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Runtime software include the management of interactive communications
applications, physical resources and network connections, 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 Natural MicroSystems ("NMS") and TALX
proprietary CT processing hardware (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
("ports") in a single system and being networked to support over 240 ports.
The NMS hardware is capable of supporting 24 ports 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 an
extended scope for the Company's TALX Online feature to include a full-
featured Internet and corporate Intranet capability and the addition of voice
print recognition algorithms for enhanced security in interactive
transactions. For the markets served by the Company's strategic marketing
allies who offer enterprise-wide client/server applications, the Company plans
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 is currently developing financial applications (e.g., accounts
payable, accounts receivable and billing) and intends to develop
distribution/logistic applications (e.g., order entry, order status and
product information). The Company intends to develop similar offerings for
distribution to Oracle and SAP customers. Further, the Company is expanding
its product line for the human resources, benefits and payroll horizontal
market with a complete call center solution that combines the Company's
interactive solutions with a comprehensive desktop call tracking and software
system. There can be no assurance that these new enhancements or products will
progress beyond their current state of development or be successfully
marketed. See "Risk Factors--Risks Associated with Technological Change" and
"Risk Factors--Risks of Product Defects; Product Liability."
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 (previously defined as "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. See "Risk Factors--Risks Associated with
Technological Change" for additional risks associated with the Supplier
Agreements.
Product development costs incurred were $1.2 million in fiscal 1994, $1.5
million in fiscal 1995, $1.9 million in fiscal 1996 and $415,000 in the first
quarter of fiscal 1997. The total product development staff consisted of 18
full-time employees as of June 30, 1996. The Company believes that significant
investments in product development are required to remain competitive.
MARKETING
The Company's marketing strategy is to focus on targeted markets through a
direct sales force in conjunction with strategic marketing alliances. See "--
Strategy." The Company's direct sales force is based in St. Louis
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with representatives also located in Atlanta, Chicago, Massachusetts, New
Jersey and Phoenix, and is organized into two sales regions. The sales force
for each region is comprised of account managers who are supported by sales
engineers, client service representatives and sales representatives. The
direct sales force is responsible for selling all of the Company's interactive
communications product lines. 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 a significant opportunity exists to expand sales and
marketing efforts in certain international markets. 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. Recently the Company has entered
into similar relationships with Oracle and SAP.
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 as well as vertical solutions
for health care, federal government, public sector and higher education.
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 plans to introduce a financial and
distribution suite for implementation at PeopleSoft clients.
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.
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.
TALX has also established strategic marketing alliances with certain companies
that provide software products for specific horizontal or vertical markets. An
example is the Company's relationship with Automatic Data Processing, Inc.
("ADP"), which provides computerized transaction processing, data
communications and information services worldwide. ADP's services that are
applicable to the Company's marketing alliance include: payroll, payroll tax
and human resource information management including client/server human
resources, benefits and payroll software product.
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Future customer premises systems revenues will be dependent to a significant
extent on the market success of companies 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 575 systems for approximately 350
customers, many of which are Fortune 500 firms. No single customer of the
interactive communications business represented 10% or more of the Company's
revenues in fiscal 1994, 1995 or 1996, except that one customer, Kaiser
Permanente, represented approximately 14% in fiscal 1996. The following table
sets forth certain of the customers for whom the Company has provided services
or installed customer premises systems.
- -------------------------------------------------------------------------------
THE WORK NUMBER FOR EVERYONE(R)
- -------------------------------------------------------------------------------
Boatmen's National Bank of St. Louis Motorola, Inc.
Circuit City Stores, Inc. Norfolk Southern Railroad Company
Hewlett Packard Company Pathmark Stores, Inc.
Huntington Bancshares, Incorporated The Procter and Gamble Company
J.C. Penney Company, Inc. The Quaker Oats Company
Kmart Corporation Sears, Roebuck and Co.
Monsanto Company Walgreen Company
McDonnell Douglas Corporation Wisconsin Electric Power Co.
- -------------------------------------------------------------------------------
OUTSOURCED SERVICES
- -------------------------------------------------------------------------------
Aetna G.E. Capital Services
AT&T Capital Corp. Motorola, Inc.
BJC Health System Ryder System, Inc.
- -------------------------------------------------------------------------------
CUSTOMER PREMISES SYSTEMS
- -------------------------------------------------------------------------------
Aetna Kmart Corporation
Barnett Bank Kwasha Lipton, L.L.C.
Boatmen's National Bank of St. Louis Mercantile Bank
Bridgestone/Firestone, Inc. Mid-America Federal Savings Bank
Burlington Northern Santa Fe Monsanto Company
CareMark International, Inc. Motorola, Inc.
Case Corporation Occidental Petroleum Corporation
The Chicago Trust Company PeopleSoft, Incorporated
EDS, in support of Saturn The Principal Financial Group
G.E. Aircraft Engines Putnam Investments, Inc.
Harris Savings Bank Sears, Roebuck and Co.
Huntington Bancshares, Incorporated Texaco, Inc.
ICMA Retirement Corp. TransWorld Airlines, Inc.
Johnson & Higgins/Kirk-Van Orsdel, Inc. Webster Bank
Kaiser Permanente W.F. Corroon
The Kansas City Southern Railway Company Wisconsin Electric Power Co.
43
<PAGE>
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 1996 and the first quarter of fiscal 1997, sales to
human resources departments represented 56.7% and 77.2%, respectively, 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 Coopers & Lybrand LLP, 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 services, including automated access services.
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
44
<PAGE>
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 filed an action in the United States District Court for the Southern
District of Florida against the Company. The action alleges 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 complaint seeks unspecified damages. The Company
believes the lawsuit to be without merit and intends to defend itself
vigorously. The Company believes its products do not infringe upon any of the
claims of the patent relating to the action filed by Elk. Further, the Company
has filed an answer to Elk's complaint that also asserts that such patent is
invalid and that the claims are unenforceable. 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 Company regards its trademarks, as well as its other
intellectual property, as having significant value and being an important
factor in the development and marketing of its products.
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 "--Facilities."
45
<PAGE>
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
Company has contacted several strategic buyers and received several
unsolicited inquiries, which management is evaluating. The Company has no
present understandings, agreements or commitments with respect to any such
transaction. One of the factors the Company considered in making its decision
was the operating losses incurred subsequent to the discontinuation of the
relationship with a large telephone directory customer (AT&T 800 Directories),
which began in fiscal 1991 and ended in November 1995. Services provided to
such customer represented approximately $3.5 million, $2.0 million and
$930,000 in fiscal years 1994, 1995 and 1996, respectively. Although the
Company has subsequently begun to rebuild the revenue base of the database and
document services businesses, it believes its resources are better allocated
towards the continued expansion of its core interactive communications
business. The operating losses resulting from the loss of AT&T 800 Directories
was one of the factors the Company considered in making its divestiture
decision. The primary reason was to enable the Company to focus its management
and financial resources towards its core interactive communications business.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--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. 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 document services business offers a "database to
mailbox" service that produces and prepares for mailing invoices, statements,
benefit confirmation letters, direct mail letters and enclosures, benefit
enrollment worksheets, response letters and voter registration forms. The
document services business maintains the CASS Certification, which is the
United States Postal Services' accreditation of the software and databases
used in document preparation and mailing.
The database and document services businesses operate in highly competitive
markets and any of their competitors could use its superior financial
resources, market power and installed base of customers to compete effectively
against them. Further, competition for the customers of the database and
document services businesses may increase as a result of the Company's
determination to pursue the divestiture of such businesses. There can be no
assurance that the database and document services businesses can maintain
their 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 their 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.
FACILITIES
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 Massachusetts, Chicago, Atlanta, New
Jersey and Phoenix 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.
46
<PAGE>
The Company's database and document services businesses currently occupy
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.
In connection with the divestiture of such businesses, the Company may desire
to sublease its rights and obligations under the Des Peres Lease. Although the
Company believes it will not be difficult to enter into a favorable sublease
with respect to the Des Peres Lease, 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.
EMPLOYEES
As of June 30, 1996, the Company employed 123 full-time and 10 part-time
employees in addition to the 111 full-time and 59 part-time employees which
are employed by the database and document services businesses. 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.
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
"Risk Factors--Limited Intellectual Property Protection" and "Business--
Proprietary Rights."
47
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
William W. Canfield............ 57 Chairman, President, Chief Executive Officer
and Director
John E. Tubbesing.............. 44 Executive Vice President
Michael E. Smith............... 52 Vice President
Craig N. Cohen................. 38 Chief Financial Officer
Richard F. Ford................ 60 Director
Craig E. LaBarge............... 45 Director
Eugene M. Toombs............... 53 Director
M. Steve Yoakum................ 43 Director
</TABLE>
Following is certain additional information concerning each director and
executive officer of the Company. Each such individual has served in his
present capacity as his principal occupation for the last five years, unless
otherwise indicated.
MR. CANFIELD has been President and Chief Executive Officer and director of
the Company since 1986 and has been Chairman of the Board of Directors since
1988. He had earlier become Chairman of the Board of EKI, which was acquired
by the Company in fiscal 1994. See "Certain Relationships and Related
Transactions." For approximately 10 years, Mr. Canfield was President of
Intech Group, until its acquisition by the Company in 1996 (see "Certain
Relationships and Related Transactions") and from 1985 through 1989, Mr.
Canfield was Chairman, and a principal shareholder of Noetic Technologies
Corp., an engineering software company which was purchased by MacNeal-
Schwendler Corporation in 1989. Prior to that, Mr. Canfield was one of two
founders of Financial Data Systems, Inc. which was started in 1968. In 1980,
the company, which provided services and turnkey systems to savings banks, was
purchased by Citicorp. Mr. Canfield is a director of Jefferson Savings
Bancorp, Inc. Mr. Canfield holds a Bachelor of Science degree in Electrical
Engineering from Purdue University and an MBA degree from Washington
University.
MR. TUBBESING has been a Vice President of the Company since 1988 and the
Executive Vice President of the Company since 1992 and is currently
responsible for all Sales and Marketing. His experience prior to joining the
Company in 1988 was as Vice President, Marketing for LDXNet, a predecessor to
Wiltel, a national fiber optic-based telecommunications carrier, and as a
Sales Manager for McDonnell Douglas Corporation's computer company, a major
worldwide supplier of information systems to the manufacturing and
telecommunications industries. Mr. Tubbesing holds a Bachelor of Science
degree in Marketing and an MBA degree from the University of Missouri--
Columbia.
MR. SMITH has been Vice President of Business Development of the Company since
1994, and Mr. Smith's primary responsibility is managing the Company's
relationships with its strategic marketing alliances. Previously, from 1989 to
1994, Mr. Smith had product responsibility for the Company's minicomputer-
based voice response system. Before joining the Company, Mr. Smith served six
years with Monsanto Company's MIS Systems corporate department and two years
with the Digital Systems Group at General Motors' AC Electronics. Mr. Smith
holds a Bachelor of Science degree in Mathematics from Southeast Missouri
State University.
MR. COHEN has been Chief Financial Officer of the Company since 1994. Prior to
that, Mr. Cohen spent twelve years with KPMG Peat Marwick LLP in a variety of
positions, most recently as a Senior Manager in the Audit Department. Mr.
Cohen also managed the information systems consulting practice of KPMG Peat
Marwick LLP's St. Louis office. Mr. Cohen holds a Bachelor of Science in
Accountancy and a Masters of Accountancy from the University of Missouri--
Columbia.
48
<PAGE>
MR. FORD has served as a director of the Company since 1987. He is Managing
General Partner of Gateway Associates L.P., a venture capital management firm
he formed in 1984. From 1976-1983, he was President and Chief Operating
Officer of Centerre Bancorporation (now Boatmen's Bancshares, Inc.). He joined
the lead bank of Centerre Bancorporation in 1971 as Vice President of
Corporate Lending before becoming President. Mr. Ford has served as Chairman
of the American Bankers Association Commercial Lending Division and is a
director of CompuCom Systems, Inc., D&K Wholesale Drug, Inc. and Stifel
Financial Corp. Mr. Ford holds a Bachelor of Arts degree in Economics from
Princeton University.
MR. LABARGE has served as a director of the Company since 1994. He is Chief
Executive Officer and President and a director of LaBarge, Inc., a publicly
held company which is listed on the American Stock Exchange. LaBarge, Inc. is
engaged in the contract engineering and manufacture of sophisticated
electronic systems and devices and complex interconnect systems. Mr. LaBarge
has held the position of Chief Executive Officer and President since 1991.
Prior to that, Mr. LaBarge held the position of Chief Operating Officer and
President from 1986-1991 and President of the Electronics Division from 1979-
1986. Mr. LaBarge holds a Bachelor of Science degree from St. Louis
University.
MR. TOOMBS has served as a director of the Company since 1994. He is President
and Chief Executive Officer and a director of MiTek, Inc. ("MiTek"), a wholly
owned subsidiary of Rexam PLC. MiTek is an international building components
corporation with operations in eighteen countries around the world. Mr. Toombs
has held the position of Chief Executive Officer since January 1, 1993. Prior
to that, Mr. Toombs was President and Chief Operating Officer since 1991 and a
Corporate Vice President from 1989 when he joined MiTek. Other professional
services includes five years with Sonoco Products Co. as a Vice President and
President of a joint-venture company and thirteen years at Boise Cascade
Corporation where he held a variety of general management positions, including
the presidency of a joint-venture packaging company. Mr. Toombs holds a
Bachelor of Science Degree from Fairleigh Dickinson University and an
Executive Education Degree from Harvard Business School.
MR. YOAKUM has served as a director of the Company since 1991. He is Executive
Director of The Public School Retirement System of Missouri, a position held
since 1994. Prior to his role at Public School, Mr. Yoakum held the position
of Executive Director of the Missouri State Employee's Retirement System
("MOSERS") from 1987 to 1994. Additionally, Mr. Yoakum served two years as
Executive Director of the Joint Committee on Public Employee Retirement
Systems ("JCPERS") and eight years as Assistant Executive Director of the
Missouri Local Government Employees' Retirement System. Mr. Yoakum holds a
Bachelor of Science degree in Public Administration from the University of
Missouri--Columbia.
All of the current directors were elected at the 1996 annual meeting and have
been divided into three classes with terms expiring, respectively, at the
annual meetings of shareholders in 1997 (Messrs. Toombs and Yoakum), 1998 (Mr.
LaBarge), and 1999 (Messrs. Canfield and Ford). Commencing with the next
annual meeting of shareholders in 1997, directors then standing for election
will be elected for three-year terms, with one class of directors being
elected at each annual meeting of shareholders. See "Certain Charter and Bylaw
Provisions." Officers are elected annually and serve at the discretion of the
Board of Directors, subject to the terms of applicable employment agreements.
See "--Employment Agreements."
DIRECTORS' COMPENSATION
The Board pays each director a $500 fee for each Board meeting attended and a
$250 fee for each Committee meeting attended, plus expenses. Officers of the
Company do not receive any additional compensation for serving the Company as
members of the Board of Directors or any of its Committees.
Pursuant to the Company's Outside Directors' Stock Option Plan (the "Outside
Directors' Plan"), adopted in July 1996, each non-employee director will
receive on April 1 each year an option to purchase 1,500 shares of Common
Stock at an exercise price equal to the fair market value of the Common Stock
on the grant date. The options have a term of six years and become exercisable
one year after date of grant, provided, that no option
49
<PAGE>
may be exercised at any time unless the participant is then an outside
director and has been so continuously since the granting of the option (except
as described below), and provided further that upon a Change in Control (as
defined in the Outside Directors' Plan), the options will become immediately
exercisable. Unexercised options will expire upon the termination of a
participant's service as a director of the Company, unless such termination
was by reason of death or disability or subsequent to a Change in Control, in
which case the personal representative of the participant may exercise any or
all of the participant's unexercised unexpired options (provided such exercise
occurs within 12 months of the date of the participants' death or termination)
or, in the case of a Change in Control, the participant may exercise any or
all of the participant's unexercised unexpired options but not after the term
of such options. A total of 80,000 shares of Common Stock have been authorized
for issuance under the Outside Directors' Plan. Unless earlier terminated by
the Board of Directors, the Plan will terminate on July 15, 2006.
EXECUTIVE COMPENSATION
Compensation Summary. The following table sets forth the compensation paid to
the Chief Executive Officer and the three other executive officers whose
annual salary and bonus exceeded $100,000 for services rendered in all
capacities to the Company and its subsidiaries for fiscal year 1996.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING
PRINCIPAL FISCAL SALARY BONUS COMPENSATION OPTIONS ALL OTHER
POSITION YEAR ($) ($) (1) (#SHS) COMPENSATION(3)
--------- ------ -------- ------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
William W. Canfield..... 1996 $200,000 $5,000 -- -- $20,072
President and Chief
Executive Officer
John E. Tubbesing....... 1996 129,433 33,927 -- -- 2,979
Executive Vice
President
Michael E. Smith........ 1996 92,500 29,777(2) -- -- 2,325
Vice President
Craig N. Cohen.......... 1996 82,913 18,504 -- -- 1,715
Chief Financial Officer
</TABLE>
- --------
(1) Does not exceed 10% of combined salary and bonus.
(2) Includes $19,777 of commissions.
(3) Represents Company 401(k) plan contributions and $16,284 for Mr.
Canfield's premiums paid by the Company on his life insurance policies.
Stock Option Awards. The following table shows information regarding the
number and value of unexercised options held by the named executive officers
at the end of fiscal 1996. The value of unexercised options is based on a
value of $9.00 for the Company's Common Stock. No stock options were awarded
to or exercised by the named executives in fiscal 1996.
50
<PAGE>
AGGREGATED OPTION AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(1) AT FISCAL YEAR-END(2)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
NAME
- ----
<S> <C> <C> <C> <C>
William W. Canfield......... -- -- -- --
John E. Tubbesing........... 39,714 23,143 $206,779 $119,186
Michael E. Smith............ 15,143 8,571 78,036 44,143
Craig N. Cohen.............. 10,000 8,571 49,250 44,143
</TABLE>
- --------
(1) Adjusted to reflect the Reverse Stock Split.
(2) Represents the estimated fair value of the shares of Common Stock subject
to outstanding options, based on the initial offering price, less the
aggregate exercise price of the options.
BENEFIT PLANS
1988 Stock Option Plan. In 1988, the Company adopted a stock option plan (the
"1988 Stock Option Plan"). Under the 1988 Stock Option Plan, the Board of
Directors may from time to time grant stock options to purchase up to 187,109
shares of Common Stock to various key employees who may be designated by the
Executive Committee in its discretion; 98,787 shares are available for future
grants under this plan, although the Board of Directors has determined that no
future grants will be made pursuant to this plan. The purchase price for
options granted pursuant to the 1988 Stock Option Plan are not less than the
fair market value of the Common Stock at the time of the award. The term of
the options granted under the plan is not more than six years.
1994 Stock Option Plan. On August 31, 1994, the Company adopted an incentive
stock option plan which was amended and restated in July 1996 (the "1994 Stock
Option Plan"). Under the 1994 Stock Option Plan, the Board of Directors may
from time to time grant options to purchase up to 430,000 shares of Common
Stock to certain key employees, who will be designated by a committee selected
to administer the Plan; 160,114 shares are available for future grants. The
purchase price of stock options will not be less than fair market value (110%
of fair market value in the case of 10% shareholders), in the case of
incentive stock options, or as determined by the committee in the case of non-
qualified stock options. The purchase price may be paid in cash or, in the
discretion of the committee, shares of Common Stock. Option terms will not be
more than ten years (five years in the case of incentive stock options awarded
to 10% shareholders). Options vest ratably over five years from the date of
grant; provided, that except in the case of death, disability or termination
of employment, no option may be exercised at any time unless the optionee is
then an employee or an officer or director of the Company or a subsidiary and
has been so continuously since the granting of the option. Notwithstanding the
foregoing limitations, in the event of a Change in Control (as defined in the
1994 Stock Option Plan), options will become immediately exercisable and
remain exercisable during the term thereof, notwithstanding a subsequent
termination within twelve months of the date of the Change in Control. Unless
earlier terminated by the Board, the 1994 Stock Option Plan will terminate on
July 15, 2006.
1996 Employee Stock Purchase Plan. In July 1996, the Company established the
1996 Employee Stock Purchase Plan (the "1996 Employee Stock Purchase Plan" or
"ESPP") to provide employees of the Company with an opportunity to purchase
Common Stock through payroll deductions through periodic offerings to be made
during the period from the later of January 1, 1997 or the beginning of the
fiscal quarter after completion of this offering and end of December 31, 2001.
Under the ESPP, a total of 80,000 shares of Common Stock have been reserved
for issuance. The ESPP is intended to qualify as an employee stock purchase
plan within the meaning of Section 423 of the Internal Revenue Code.
The Company will make one or more periodic offerings, each offering to last
three months, provided that a committee of the Board of Directors will have
the power to change the duration without shareholder approval, to
51
<PAGE>
participating employees to purchase stock under the ESPP. Employees will
participate in the ESPP through authorized payroll deductions, which may not
exceed 15% of the compensation such employee receives during each offering
period, but not more than $25,000 in value of stock per year. Amounts withheld
from payroll are applied at the end of each offering period to purchase shares
of Common Stock. Participants may withdraw their contributions at any time
before stock is purchased, and in the event of withdrawal such contributions
will be returned to the participants without interest. The purchase price of
the Common Stock is equal to 85% of the lower of (i) the market price of
Common Stock at the beginning of the applicable offering period or (ii) the
market price of Common Stock at the end of each offering period. All expenses
incurred in connection with the implementation and administration of the ESPP
will be paid by the Company.
In addition, the Company has established a stock option plan for its outside
directors. See "--Directors' Compensation."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with William W. Canfield
(36 months; $215,000 per year), John E. Tubbesing (12 months; $146,500 per
year), Michael E. Smith (12 months; $100,000 per year) and Craig N. Cohen (12
months; $93,000 per year). The term of each agreement as well as each
individual's initial annual base salary, is as noted in parenthesis next to
each individual's name. Additionally, each employment agreement will
automatically be extended annually for an additional one year period unless
prior written notice is delivered to the employee or the Company by the other
90 days prior to the anniversary date of such employment agreement. Such
employees are also eligible for a performance bonus based on a formula
recommended by a committee of the Board of Directors and approved by the Board
of Directors. Each employment agreement contains confidentiality provisions
that extend indefinitely after termination of employment as well as non-
solicitation and non-competition provisions that extend for one year after
termination of employment. If the employment agreement is terminated by the
Company without "cause" (as defined in the agreement, but including, without
limitation, breach by the employee of the employment agreement) or by the
employee for "good reason" (as defined in the agreement, but including,
without limitation, breach of the employment agreement by the Company, the
reduction of salary, benefits or other perquisites provided to employee under
the agreement and failure by the Company to agree to an extension of such
employee's employment agreement), the Company would be obligated to pay the
employee his annual base salary plus a bonus (based on their estimated bonus
for the year of termination) over the period (the "Continuation Period") which
is equal to the original term of his agreement and which period commences on
the date of early termination of such employee, and such amount shall be
payable ratably over such Continuation Period, as well as to continue his
employee benefits over such Continuation Period; however, if his employment
agreement is terminated otherwise, the employee is only entitled to be paid
through the date of his early termination. Further, if within 12 months of a
"Change of Control" of the Company the employee, under certain circumstances,
is terminated or resigns, (a) in the case of Mr. Canfield, he will be entitled
to (i) a lump-sum cash payment equal to $1 less than three times an amount
equal to the average annual compensation received by Mr. Canfield from the
Company reported on his Form W-2 for the five calendar years preceding the
calendar year of the Change of Control and (ii) the continuation of certain
health insurance benefits for a three-year period and (b) in the case of Mr.
Tubbesing, Mr. Smith and Mr. Cohen, each will be entitled to (i) a lump-sum
cash payment equal to 100% of their respective annual base salaries plus, (ii)
a lump sum cash payment equal to their anticipated annual bonus (based on
their estimated bonus for the year of termination), (iii) the continuation of
certain health insurance and other employee benefits for a one-year period and
(iv) payment for certain outplacement services. Additionally, the Company has
agreed to make certain "gross-up" payments in the event any excise taxes are
imposed pursuant to Section 4999 of the Internal Revenue Code of 1986, as
amended or replaced, related to the employment agreements. The term "Change of
Control" shall mean (i) a change of control of a nature that would be required
to be reported in response to Item 1(a) of the Current Report on Form 8-K, as
in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, or any comparable successor provisions.
Without limiting the foregoing, a "Change of Control" shall also include,
without limitation, (i) the purchase or other acquisition by any person or
group of beneficial ownership of 25% or more of either the then
52
<PAGE>
outstanding shares of common stock or the combined voting power of the
Company's then outstanding voting securities entitled to vote in the election
of directors, (ii) when individuals who, as of the date of the employment
agreement, constitute the Board of Directors of the Company cease for any
reason to constitute at least two-thirds of the Board of Directors, provided
that generally persons who are approved by the incumbent Board will be deemed
a member thereof, and (iii) approval by the shareholders of the Company of a
reorganization, merger, or consolidation, in each case, with respect to which
persons who were the shareholders of the Company immediately prior to such
reorganization, merger or consolidation do not, immediately thereafter, own
more than 50% of the combined power entitled to vote generally in the election
of directors of the reorganized, merged or consolidated company's then
outstanding voting securities, or a liquidation or dissolution of the Company
or of the sale of all or substantially all of the assets of the Company. All
four employment agreements contain an arbitration provision.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors are
Messrs. Canfield, Ford and Toombs. See "Certain Relationships and Related
Transactions" for a description of certain transactions involving Messrs.
Canfield, Ford and Toombs.
INDEMNIFICATION
As permitted by The General and Business Corporation Law of Missouri (the
"GBCL"), the Articles of Incorporation of the Company provide (i) that the
Company is required to indemnify its directors and officers to the fullest
extent permitted by Missouri law, (ii) the Company is permitted to indemnify
employees or agents as set forth in the GBCL, (iii) to the fullest extent
permitted by the GBCL, the Company is required to advance expenses, as
incurred, to its directors and officers in connection with a legal proceeding
(subject to certain exceptions), (iv) the rights conferred in the GBCL are not
exclusive, and (v) the Company is authorized to enter into indemnification
agreements with its directors, officers, employees and agents.
53
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Recent Financing. In June through August 1996, Petra Capital, LLC (as
previously defined, "Lender") made a loan to the Company in an amount of $4.0
million (the "Loan"), $100,000 of which was purchased by Eugene M. Toombs, a
director of the Company, $250,000 by the William W. Canfield Revocable Trust,
an affiliate of William W. Canfield, Chairman, President and Chief Executive
Officer of the Company, and $650,000 of which was acquired by Gateway
Partners, L.P., an affiliate of Richard F. Ford, a director of the Company
("Participants"). The Loan, which is due and payable on July 1, 2001 and bears
interest at 13.25% per annum, is evidenced by a $4.0 million Subordinated
Promissory Note (as previously defined, the "Subordinated Note") and a Loan
and Security Agreement (the "Loan Agreement"). Pursuant to the Loan Agreement,
the Company has agreed to substantial operating restrictions. The Company will
repay the Loan upon the closing of this offering. See "Use of Proceeds."
In connection with the Loan, the Company (i) has issued to the Lender and the
Participants warrants (the "Initial Warrants") which are exercisable for
125,584 shares (representing 3.5% of the total shares) of TALX Common Stock
outstanding on the date of issuance of such Initial Warrants, calculated on a
fully-diluted basis (which was 3,588,101 shares); and (ii) as payment for
financial advisory services rendered by an unaffiliated financial advisor (the
"Advisor") to the Company in connection with the Loan, (1) has issued a
warrant to the Advisor (the "Advisor Warrant," collectively with the Initial
Warrants, the "Warrants") exercisable for 12,558 shares of TALX Common Stock
(representing 10% of the total shares to be issued upon exercise of the
Initial Warrants) and (2) has paid the Advisor $207,500. The Warrants are each
outstanding for a ten-year period from the date of the issuance of such
Warrants and are exercisable for an exercise price of $0.01 per share (the
"Exercise Price") at any time during the period beginning as of the date 18
months following the effective date of the Company's initial public offering
and ending on June 28, 2006. Additionally, the Company is required to grant to
the Lender and the Participants (collectively, the "Syndicate Holders"), as
well as to the Advisor, additional warrants to purchase shares of Common Stock
if any debt evidenced by the Subordinated Note is outstanding on specified
future dates. Since the Company intends to repay the Loan using the proceeds
of this offering, no additional warrants will be issued pursuant to the Loan
Agreement.
The Warrants are governed by certain Stock Purchase Warrant agreements which
set forth a number of rights and restrictions related to the Warrants. The
number of shares issuable upon exercise of the Warrants are subject to certain
anti-dilution provisions upon the occurrence of certain events. Additionally,
the holders of the Warrants are entitled to the same dividends (other than
dividends of the Company's capital stock) and rights to purchase securities of
the Company which are given to holders of TALX Common Stock that they would
have received if they had exercised their Warrants for TALX Common Stock prior
to the distribution of such dividends or rights. Further, the holders of the
Warrants are entitled to certain registration rights. The holders of the
Warrants may, but not earlier than eighteen months after the Company's initial
public offering, demand registration of the shares of TALX Common Stock issued
or issuable upon exercise of the Warrants, provided, however, that the Company
is required to effectuate only one such registration. Additionally, the
holders of the Warrants have the right to be included in any secondary
offering of shares of TALX Common Stock by the Company, provided that such
holders must request to be included in such secondary offering at least 30
days prior to the related registration statement filing. Also, William W.
Canfield and The William W. Canfield Revocable Trust (the "Selling
Shareholders") have agreed that they will not sell any of their TALX Common
Stock, now or hereafter owned, unless prior to such sale the Selling
Shareholders give notice of the terms of such sale to the holders of the
Warrants and such holders will then have the opportunity to participate in
such sale on a pro rata basis.
Transactions with Intech Group and Intech Partners. The Company has been
involved in a series of transactions involving Intech Group, Intech Partners
and EKI, a company which was formerly owned by Intech Group and Intech
Partners. William W. Canfield, the President, Chief Executive Officer and a
director of the Company, was the President and a director and a principal
shareholder of Intech Group and Managing General Partner of Intech Partners. A
former officer of the Company was a limited partner of Intech Partners and
President and a director of EKI. Walter L. Metcalfe, Jr., a partner of Bryan
Cave LLP and a direct and indirect 6.2% shareholder of the
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<PAGE>
Company, was a director and principal shareholder of Intech Group and a
general partner of Intech Partners. Derick L. Driemeyer and Dr. Roger L. Mell,
greater-than-5% shareholders of the Company, were shareholders of Intech Group
and partners of Intech Partners. Several principal shareholders, directors and
executive officers of the Company were directors and executive officers of
EKI.
Initially, TALX was a party to a Management Services Agreement dated September
1, 1986 with Intech Group. Under the agreement, Intech Group provided
management and related services to the Company. Compensation under the
agreement was $118,000 in fiscal 1994. The parties terminated the agreement
effective as of January 1, 1994, and all former employees of Intech Group
became employed by the Company. Additionally, pursuant to such termination,
TALX paid Intech Group the sum of $29,500, representing the charge for ninety
days of management services. Effective March 1994, the Company acquired TALX
Information Services Corporation, formerly known as EKI, pursuant to a tax-
free merger (the "EKI Merger"). EKI was engaged in the business of providing
database and document services. As a result of the EKI Merger, EKI became a
wholly owned subsidiary of the Company resulting in the Company entering into
the database and document services businesses. In connection with the EKI
Merger, Intech Group and Intech Partners (the holders of EKI Class A Common
Stock) received 1,493,039 shares of TALX Common Stock (as adjusted to reflect
the Reverse Stock Split) in exchange for their shares of EKI Class A Common
Stock. See "Shares Available for Future Sale" for a description of
registration rights granted in connection with the EKI Merger. Prior to the
EKI Merger, EKI paid Intech Partners $60,000 in fiscal 1994 in return for
certain services and, pursuant to a Management Services Agreement, paid Intech
Group $160,000 in fiscal 1994 in return for management and related services.
As a result of the EKI Merger, EKI terminated the Management Services
Agreement effective as of March 31, 1994 and paid to Intech Group the sum of
$39,900. Finally, in July 1996, the Company acquired Intech Group pursuant to
a tax-free merger (the "Intech Merger"). At the time of the Intech Merger, the
assets of Intech Group consisted exclusively of 1,015,812 shares of Common
Stock of the Company (including shares of Class A, B and C Preferred Stock
automatically convertible into Common Stock effective as of the closing of
this offering). As a result of the Intech Merger, each outstanding share of
common stock of Intech Group was converted into a proportionate number of
shares of TALX Common Stock (and TALX convertible preferred stock) plus cash
in lieu of fractional shares. The effect of the Intech Merger was a tax-free
distribution of TALX Common Stock (and TALX convertible preferred stock) to
the shareholders of Intech Group. Immediately prior to the Intech Merger,
Intech Group owned approximately 31.46% of the outstanding TALX capital stock.
Building Lease. Since 1990, the Company has occupied office facilities at 1850
Borman Court in St. Louis County, which currently encompass 38,000 square
feet. The Company made rental payments of $270,000, $391,000 and $423,000 in
fiscal 1994, 1995 and 1996, respectively, which amounts the Board of
Directors, independent of Mr. Canfield, determined to be its fair rental value
at the time of execution of the lease. The space was leased until March 1996
from a limited partnership in which William W. Canfield was one of two general
partners. On March 28, 1996, the facilities were sold by the partnership to an
unrelated party.
Issue of Warrants to Mr. Canfield. Mr. Canfield has provided certain
collateral and guarantees under financing agreements with the Company's
principal bank. During 1993, warrants to purchase 54,000 shares of Common
Stock were awarded to Mr. Canfield in respect of collateral and personal
guarantees. The exercise price of such warrants was $1.90 per share,
representing the highest price at which third party investors had most
recently purchased Common Stock at any time within the previous five years.
Such warrants expired unexercised during 1995. Commencing on November 1, 1993,
the Company ceased this arrangement and instead determined that, rather than
warrants, Mr. Canfield would receive a cash payment for each six-month period
that the collateral is pledged and personal guarantees were given representing
1% of the guaranteed amount for each six-month period. Guarantee fees related
to this arrangement of $7,500, $27,666 and $46,834 were expensed in fiscal
1994, 1995 and 1996, respectively.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of October 7, 1996 giving effect to the
Reverse Stock Split and the Preferred Stock Conversions, and as adjusted to
reflect the sale of shares offered hereby, for (i) each person known to the
Company to own beneficially 5% or more of the outstanding shares of Common
Stock, (ii) the Company's directors and named executive officers and (iii) all
the Company's directors and executive officers as a group. Except as otherwise
noted in the footnotes to this table, the named beneficial owner has sole
voting and investment power. As of October 7, 1996, there were approximately
48 shareholders of record.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING OFFERING(1)
----------------- -----------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
------------------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
Gateway Venture Partners II, L.P.(2)....... 660,824 20.5 660,824 12.6
MiTek, Inc.(3)............................. 471,629 14.6 471,629 9.0
William W. Canfield(4)..................... 533,387 16.4 533,387 10.2
Craig N. Cohen(5).......................... 10,000 * 10,000 *
Derick L. Driemeyer(6)..................... 205,572 6.4 205,572 3.9
Richard F. Ford(7)......................... 681,231 20.9 681,231 13.0
Craig E. LaBarge........................... -- -- -- --
Roger L. Mell, M.D.(8)..................... 178,526 5.5 178,526 3.4
Walter L. Metcalfe, Jr.(9)................. 199,987 6.2 199,987 3.8
Michael E. Smith(10)....................... 15,872 * 15,872 *
Eugene M. Toombs(11)....................... 474,768 14.7 474,768 9.1
John E. Tubbesing(12)...................... 38,905 1.2 38,905 *
M. Steve Yoakum............................ -- -- -- --
All directors and executive officers as a
group(13)................................. 1,754,163 52.7 1,754,163 32.9
</TABLE>
- -------
* Less than 1%
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) The address of Gateway Venture Partners II, L.P. is 8000 Maryland Avenue,
St. Louis, MO 63105. Mr. Ford is managing general partner of Gateway
Associates, which is the manager of Gateway Venture Partners II, L.P.
(3) The address of MiTek, Inc. is 14515 N. Outer Forty Rd., St. Louis, MO
63017. Mr. Toombs is President and Chief Executive Officer and a director
of MiTek, Inc.
(4) Mr. Canfield's address is c/o TALX Corporation, 1850 Borman Court, St.
Louis, MO 63146. Includes 63,209 shares held in trust for Mr. Canfield's
children for which Mr. Canfield's spouse is trustee, and 7,849 shares
which Mr. Canfield may acquire upon the exercise of common stock purchase
warrants.
(5) Represents shares which Mr. Cohen may acquire upon exercise of options
within 60 days after October 7, 1996.
(6) The address of Mr. Driemeyer is 524 High Hampton Road, St. Louis, MO
63124.
(7) The address of Mr. Ford is 8000 Maryland Avenue, St. Louis, MO 63105.
Includes 660,824 shares beneficially owned by Gateway Venture Partners
II, L.P., the manager of which is Gateway Associates, of which Mr. Ford
is the managing general partner, and 20,407 shares which Gateway
Partners, L.P. (of which Mr. Ford is the managing general partner), may
acquire upon exercise of common stock purchase warrants.
(8) The address of Dr. Mell is 27 Log Cabin Dr., St. Louis, MO 63124.
(9) The address of Mr. Metcalfe is 211 North Broadway, Suite 3600, St. Louis,
MO 63102. Includes 98,536 shares owned by his spouse. Mr. Metcalfe is a
partner with Bryan Cave llp.
(10) Includes 12,857 shares which Mr. Smith may acquire upon the exercise of
options within 60 days after October 7, 1996.
(11) The address of Mr. Toombs is 14515 N. Outer Forty Rd., St. Louis, MO
63017. Includes 471,629 shares owned by MiTek, Inc. of which Mr. Toombs
is President and Chief Executive Officer and a director, and 3,139 shares
which Mr. Toombs may acquire upon the exercise of common stock purchase
warrants.
(12) Includes 36,857 shares which Mr. Tubbesing may acquire upon the exercise
of options within 60 days after August 15, 1996.
(13) Includes 91,109 shares which may be acquired upon exercise of options or
warrants within 60 days after October 7, 1996.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Restriction on Sales. Upon completion of this offering and assuming no
exercise of outstanding warrants and options, the Company will have
outstanding 5,238,975 shares of Common Stock (5,538,975 shares if the
Underwriters' over allotment option is exercised in full). Of these shares,
the 2,000,000 shares sold in the offering will be immediately eligible for
resale in the public market without restriction under the Securities Act,
except for any shares purchased by an "Affiliate" (as that term is defined
under the Securities Act) of the Company, which will be subject to the resale
limitations of Rule 144 under the Securities Act. The remaining 3,238,975
shares outstanding following this offering (the "Previously Issued Shares")
were issued by the Company in private transactions not involving a public
offering and are thus treated as "restricted securities" within the meaning of
Rule 144 under the Securities Act. Of these shares, 2,913 will be available
under Rule 144(k) for immediate sale in the public market without restriction
following this offering, and an additional 454,130 shares will be eligible for
sale under Rule 144(k) without restriction but will be subject to the Lock-up
Agreements described below. Subject to the Lock-up Agreements described below,
the remaining Previously Issued Shares may be sold in the public market only
if registered or pursuant to an exemption from registration such as those
afforded by Rules 144, 144A, 701 and Regulation S under the Securities Act.
Officers, directors and other shareholders holding in the aggregate 3,226,209
of the 3,238,975 Previously Issued Shares of Common Stock have entered into
agreements with the Company ("Lock-up Agreements") pursuant to which they have
agreed that, during the 180-day period after the date of this prospectus, they
will not, except with the prior consent of First Albany Corporation or in
certain limited circumstances, offer, sell, contract to sell or grant an
option to purchase any of such 3,226,209 Previously Issued Shares. In
addition, the Company has agreed that during such period it will not, without
the prior consent of First Albany Corporation or in certain limited
circumstances, offer, sell, contract to sell or grant an option to purchase
any shares of Common Stock. See "Underwriting." At the expiration of such
lock-up period, the Previously Issued Shares will either (i) in the case of
1,663,054 "affiliate" shares held by officers, directors and other affiliates,
be eligible for sale, subject to the volume and other limitations of Rule 144,
(ii) in the case of shares issued less than three years prior but more than
two years prior and held by non-affiliates, be eligible for sale, but also
subject to such volume and other limitations, and (iii) in the case of shares
issued more than three years prior, be eligible for sale without restriction.
Outstanding options to purchase 175,517 shares of Common Stock are currently
exercisable. Upon completion of the offering, certain shareholders of the
Company have the right to require the Company in certain circumstances to
register shares of Common Stock for sale under the Securities Act. See "--
Registration Rights" below and "Certain Relationships and Related
Transactions."
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this Prospectus, an Affiliate of the Company or other person (or
persons whose shares are aggregated) who has beneficially owned Previously
Issued Shares for at least two years, will be entitled to sell in any three-
month period a number of shares that does not exceed the greater of (i) 1% of
the then outstanding shares of the Company's Common Stock (approximately
55,390 shares immediately after the offering, if the Underwriters' over-
allotment option is exercised in full) or (ii) the average weekly trading
volume of the Company's Common Stock on the Nasdaq National Market during the
four calendar weeks immediately preceding the date on which notice of the sale
is filed with the Securities and Exchange Commission. Sales pursuant to Rule
144 are subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an
Affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned Restricted Shares for at least three
years is entitled to sell such shares pursuant to Rule 144(k) without regard
to the limitations described above.
Previously Issued Shares may also be resold (1) to a person whom the seller
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act purchasing for its own account or for the
account of a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A and (2) in an off-shore transaction complying with
Rules 903 or 904 of Regulation S under the Securities Act.
57
<PAGE>
An employee of the Company who purchased shares or was awarded options to
purchase shares pursuant to a written compensatory plan or contract meeting
the requirements of Rule 701 under the Securities Act is entitled to rely on
the resale provisions of Rule 701 under the Securities Act which permits
Affiliates and non-Affiliates to sell their Rule 701 shares without having to
comply with the holding period restrictions of Rule 144, in each case
commencing 90 days after the date of this Prospectus. In addition, non-
Affiliates may sell Rule 701 shares without complying with the public
information, volume and notice provisions of Rule 144.
Following the effectiveness of the registration statement covering the shares
of Common Stock offered hereby, the Company will register under the Securities
Act the shares of Common Stock reserved for issuance under the Company's 1988
Stock Option Plan, the 1994 Stock Option Plan, the 1996 Employee Stock
Purchase Plan and the Outside Directors' Plan, covering 187,109 shares,
430,000 shares, 80,000 shares and 80,000 shares, respectively. The Company
expects that these registrations will automatically become effective upon
filing. Accordingly, shares registered under such registration statements and
acquired pursuant to such Plans will be available for sale in the open market
upon the expiration of the public sale restrictions described below (see
"Underwriting"), subject to Rule 144 volume limitations applicable to
Affiliates, except to the extent such shares are subject to vesting
restrictions with the Company.
Registration Rights. Pursuant to rights granted in connection with a number of
financing and other agreements, including the acquisition of EKI and the
Intech Merger, following this offering the holders of 2,717,335 shares of
Common Stock, and the holders of warrants to purchase 163,142 shares of Common
Stock with respect to the shares issuable upon the exercise of such warrants,
will have certain rights to have those shares (the "Registrable Shares")
registered for sale under the Securities Act. Such holders will, subject to
certain conditions, have the right (a "Demand Right") to demand the
registration of all or a portion of the Registrable Shares, and the right (a
"Piggy-Back Right") to demand that all or a portion of the Registrable Shares
be included in a registration statement filed by the Company with respect to
the sale of shares by it. In addition to such rights, certain of such holders
have the right to require the Company, subject to certain conditions, to
register all or a portion of the Registrable Shares on Form S-3 under the
Securities Act when such form becomes available to TALX. The Demand Rights
generally cannot be exercised during the six month period following the
effective date of a registration statement pertaining to an underwritten
public offering of securities for the account of the Company (such as the
registration statement of which this prospectus is a part). The Piggy-Back
Rights can generally be limited at the discretion of the underwriter in the
case of an underwritten offering of securities by the Company. Generally, all
registration expenses incurred in connection with a registration will be borne
by TALX, except for underwriting discounts and commissions and costs of
counsel for the selling shareholders, which will be borne ratably by the
holders of Registrable Shares participating in such registration.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. Sales of substantial amounts of Common Stock of the Company in the
public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Under the Company's Restated Articles of Incorporation (the "Articles"), the
Company's authorized capital stock consists of 30,000,000 shares of Common
Stock, par value $.01 per share, and 13,700,000 shares of preferred stock, par
value $.01 per share. Upon the closing of this offering, the Company intends
to file an amendment to its Articles to reduce the number of authorized shares
of preferred stock to 5,000,000. The Company will have outstanding,
immediately prior to the issuance and sale of shares of Common Stock pursuant
to the offering and after giving effect to the Reverse Stock Split and the
Preferred Stock Conversions, 3,238,975 shares of Common Stock. Upon the
closing of this offering, assuming no exercise of the Underwriters' over-
allotment option and no exercise of outstanding stock options or warrants, the
Company will have outstanding 5,238,975 shares of Common Stock and no shares
of Preferred Stock.
58
<PAGE>
COMMON STOCK
All of the outstanding shares of Common Stock are, and the shares offered
hereby will be, fully paid and nonassessable. Subject to the prior rights of
the holders of any shares of preferred stock which subsequently may be issued
and outstanding, the holders of Common Stock are entitled to receive dividends
as and when declared by the Board of Directors out of funds legally available
therefor, and, in the event of liquidation, dissolution, or winding up of the
Company, to share ratably in all assets remaining after payment of
liabilities. Each holder of Common Stock is entitled to one vote for each
share held of record on all matters presented to a vote of shareholders,
including the election of directors. Holders of Common Stock do not have
cumulative voting rights in the election of directors or preemptive rights to
purchase or subscribe for any stock or other securities and there are no
conversion rights or redemption or sinking fund provisions with respect to
such stock. Additional shares of authorized Common Stock may be issued without
shareholder approval.
PREFERRED STOCK
As of June 30, 1996, there were outstanding 1,776,441 shares of Series A
Convertible Preferred Stock, 236,873 shares of Series B Convertible Preferred
Stock, and 615,745 shares of Series C Convertible Preferred Stock. Upon the
closing of this offering, all issued and outstanding shares of Convertible
Preferred Stock will be converted into an aggregate of 751,160 shares of
Common Stock and the Company intends to file an amendment to its Articles to
eliminate the Series A, B and C Convertible Preferred Stock.
Following the closing of this offering, the Board will have the authority to
issue up to an aggregate of 5,000,000 shares of preferred stock from time to
time in one or more series without shareholder approval. The Board of
Directors has the authority to prescribe for each series of preferred stock it
establishes the number of shares in that series, the dividend rate, and the
voting rights, conversion privileges, redemption and liquidation rights, if
any, and any other rights, preferences and limitations of the particular
series. Depending upon the rights of such preferred stock, the issuance of
preferred stock could have an adverse effect on the holders of Common Stock by
delaying or preventing a change of control of the Company, making removal of
the present management of the Company more difficult, or resulting in
restrictions upon the payment of dividends and other distributions to the
holders of Common Stock. The Company has no plans to issue any preferred
stock.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Upon the completion of this offering, there will be 24,225,189 shares of
Common Stock and 5,000,000 shares of preferred stock available for future
issuance without shareholder approval, taking into consideration the 535,836
shares of Common Stock reserved for issuance upon exercise of outstanding
options and warrants. These additional shares may be issued for a variety of
proper corporate purposes, including raising additional capital, corporate
acquisitions, and employee benefit plans. Except as contemplated by the 1994
Stock Option Plan, the 1996 Employee Stock Purchase Plan, the Outside
Directors' Plan and other possible employee benefit or stock purchase plans,
the Company does not currently have any plans to issue additional shares of
Common Stock or preferred stock.
One of the effects of the existence of unissued and unreserved Common Stock
and preferred stock may be to enable the Board of Directors to issue shares to
persons friendly to current management, which could render more difficult or
discourage an attempt to obtain control of the Company by means of a merger,
tender offer, proxy contest, or otherwise, and thereby protect the continuity
of the Company's management and possibly deprive the shareholders of
opportunities to sell their shares of Common Stock at prices higher than the
prevailing market prices. Such additional shares also could be used to dilute
the stock ownership of persons seeking to obtain control of the Company
pursuant to the operation of the 1994 Stock Option Plan, the 1996 Employee
Stock Purchase Plan, the Outside Directors' Plan, or otherwise. See also
"Certain Charter and Bylaw Provisions."
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Boatmen's Trust
Company, St. Louis, Missouri.
59
<PAGE>
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Articles and Bylaws provide for a classified Board of Directors,
limit the right of shareholders to remove directors or change the size of the
Board of Directors, to fill vacancies on the Board of Directors, to act by
written consent and to call a special meeting of shareholders, and require a
higher percentage of shareholders than would otherwise be required to amend,
alter, change, or repeal the provisions of the Articles and Bylaws discussed
in this section, as well as those described under "Management--
Indemnification." The Articles also provide that the Bylaws may be amended
only by the majority vote of the Board of Directors; thus shareholders will
not be able to amend the Bylaws without first amending the Articles. These
provisions, which are summarized below, may have the effect of discouraging
certain types of transactions that involve an actual or threatened change of
control of the Company. Reference is made to the full text of the Articles and
Bylaws, which are included as exhibits to the Registration Statement of which
this Prospectus is a part. The following summary is qualified in its entirety
by such reference.
SIZE OF BOARD, ELECTION OF DIRECTORS, CLASSIFIED BOARD, REMOVAL OF DIRECTORS
AND FILLING VACANCIES
The Articles provide that the number of directors to constitute the board of
directors shall be five and thereafter the number of directors shall be fixed
from time to time as provided in the Bylaws. The Bylaws provide for a Board of
Directors of five directors, but in no event less than three, and permit the
Board of Directors to change the number of Directors with a majority vote. The
Articles further provide that the Bylaws may be amended only by majority vote
of the Board of Directors.
In order for a shareholder to nominate a candidate for director, the Bylaws
require that timely notice be given to the Company in advance of the meeting.
Ordinarily, such notice must be given not less than 60 days nor more than 90
days before the first anniversary of the preceding year's annual meeting, or
not less than 60 days nor more than 90 days before August 20, 1997, in the
case of the next annual meeting; provided, however, that if the date of the
annual meeting is advanced by more than 30 days or delayed by more than 60
days from such anniversary date, then the shareholder must give such notice
not earlier than 90 days nor later than 60 days prior to such meeting or 10
days after notice of the meeting is mailed or other public disclosure of the
meeting is made. In certain cases, notice may be delivered later if the number
of directors to be elected is increased. The shareholder filing the notice of
nomination must describe various matters regarding the nominee, including,
without limitation, such information as name, address, occupation, and shares
held. The Articles do not permit cumulative voting in the election of
directors, and the Bylaws provide that the majority of the votes cast in the
election of directors shall elect those directors. Accordingly, the holders of
a majority of the then outstanding shares of voting stock can elect all the
directors then being elected at that meeting of shareholders.
The Articles and Bylaws provide that the Board shall be divided into three
classes, with the classes to be as nearly equal in number as possible, and
that one class shall be elected each year and serve for a three-year term.
Missouri law provides that, unless a corporation's articles of incorporation
provide otherwise, the holders of a majority of the corporation's voting stock
may remove any director from office. The Articles provide that, except as
described below, a director may be removed by shareholders only "for cause"
and with the approval of the holders of 85% of the Company's voting stock.
Missouri law further provides that, unless a corporation's articles of
incorporation or bylaws provide otherwise, all vacancies on a corporation's
board of directors, including any vacancies resulting from an increase in the
number of directors, may be filled by the vote of a majority of the remaining
directors even if that number is less than a quorum. The Articles provide
that, subject to the rights, if any, of the holders of any class of preferred
stock then outstanding and except as described below, vacancies may be filled
only by the vote of a majority of the remaining directors.
The classification of directors, the inability to vote shares cumulatively,
the advance notice requirements for nominations, and the provisions in the
Articles that limit the ability of shareholders to increase the size of the
60
<PAGE>
Board or to remove directors and that permit the remaining directors to fill
any vacancies on the Board will have the effect of making it more difficult
for shareholders to change the composition of the Board. As a result, at least
two annual meetings of shareholders may be required for the shareholders to
change a majority of the directors, whether or not a change in the Board would
be beneficial to the Company and its shareholders and whether or not a
majority of the Company's shareholders believes that such change would be
desirable.
LIMITATIONS ON SHAREHOLDER ACTION BY WRITTEN CONSENT; LIMITATIONS ON CALLING
SHAREHOLDER MEETINGS
As required by Missouri law, the Bylaws provide that any action by written
consent of shareholders in lieu of a meeting must be unanimous. Under the
Bylaws, except as described below, shareholders are not permitted to call
special meetings of shareholders or to require the Board to call a special
meeting of shareholders and a special meeting of shareholders may be called
only by a majority of the entire Board of Directors, the Chairman of the
Board, or the President. In order for a shareholder to bring a proposal before
a shareholder meeting, the Bylaws require that timely notice be given to the
Company in advance of the meeting. Ordinarily, such notice must be given not
less than 60 days nor more than 90 days before the first anniversary of the
preceding year's annual meeting, or not less than 60 days nor more than 90
days before August 20, 1997 in the case of the next annual meeting; provided,
however, that if the date of the annual meeting is advanced by more than 30
days or delayed by more than 60 days from such anniversary date, then the
shareholder must give such notice not earlier than 90 days nor later than 60
days prior to such meeting or 10 days after notice of the meeting is mailed or
other public disclosure of the meeting is made. Such notice must include a
description of the proposal, the reasons therefor, and other specified
matters. The Board may reject any such proposals that are not made in
accordance with these procedures or that are not a proper subject for
shareholder action in accordance with the provisions of applicable law.
The provision of the Bylaws requiring unanimity for shareholder action by
written consent gives all the shareholders of the Company entitled to vote on
a proposed action the opportunity to participate in such action and will
prevent the holders of a majority of the voting power of the Company from
using the written consent procedure to take shareholder action. Moreover, a
shareholder cannot force a shareholder consideration of a proposal over the
opposition of the Board of Directors by calling a special meeting of
shareholders or forcing consideration of such a proposal.
These provisions are designed in part to make it more difficult and time-
consuming to obtain majority control of the Board of Directors of the Company
or otherwise bring a matter before shareholders without the Board's consent,
and thus reduce the vulnerability of the Company to an unsolicited takeover
proposal. These provisions are designed to enable the Company to develop its
business in a manner which will foster its long-term growth, with the threat
of a takeover not deemed by the Board to be in the best interests of the
Company and its shareholders and the potential disruption entailed by such a
threat reduced to the extent practicable. On the other hand, these provisions
may have an adverse effect on the ability of shareholders to influence the
governance of the Company and the possibility of shareholders receiving a
premium above market price for their securities from a potential acquiror who
is unfriendly to management.
The General and Business Corporation Law of Missouri also contains certain
provisions which may have such an effect, including control share acquisition
and business combination statutes.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS
The following is a general discussion of certain United States Federal tax
consequences of the purchase, ownership and disposition of TALX Common Stock
by a holder that, for United States Federal income tax purposes, is not a
"United States person" (a "Non-United States Holder"). For purposes of this
discussion, a "United States person" means a citizen or resident of the United
States; a corporation, partnership, or other entity created or organized in
the United States or under the laws of the United States or of any political
61
<PAGE>
subdivision thereof; or an estate or trust whose income is includible in gross
income for United States Federal income tax purposes regardless of its source.
This discussion does not purport to be a complete analysis of the purchase,
ownership and disposition of the TALX Common Stock, and does not address all
of the tax considerations that may be relevant to particular investors in
light of their individual circumstances or to holders subject to special
treatment under United States Federal income tax laws, including financial
institutions, tax-exempt organizations and insurance companies. In addition,
this discussion does not address the application or effect of any state,
local, foreign or other tax laws. This discussion is based upon the United
States Federal income tax law now in effect, all of which is subject to
change, possibly with retroactive effect. PROSPECTIVE INVESTORS SHOULD CONSULT
THEIR TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE TALX COMMON
STOCK.
Dividends. Dividends, if any, paid on the TALX Common Stock to a Non-United
States Holder will generally be subject to withholding of United States
Federal income tax at the rate of 30% unless the dividend is effectively
connected with the conduct of a trade or business within the United States by
the Non-United States Holder, in which case the dividend will be subject to
the United States Federal income tax on net income that applies to United
States persons generally (and, with respect to corporate holders and under
certain circumstances, the branch profits tax). Non-United States Holders
should consult any applicable income tax treaties, which may provide for a
lower rate of withholding or other rules different from those described above.
A Non-United States Holder may be required to satisfy certain certification
requirements in order to claim treaty benefits or otherwise claim a reduction
of, or exemption from, the withholding obligations pursuant to the above
described rules.
Gain on Disposition. A Non-United States Holder will generally not be subject
to the United States Federal income tax on gain recognized on a sale or other
disposition of TALX Common Stock unless (i) the gain is effectively connected
with the conduct of a trade or business within the United States by the Non-
United States Holder or (ii) in the case of a Non-United States Holder who is
a nonresident alien individual and holds the TALX Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year and certain other requirements are met. Gain that is effectively
connected with the conduct of a trade or business within the United States by
the Non-United States Holder will be subject to the United States Federal
income tax on net income that applies to United States persons generally (and,
with respect to corporate holders and under certain circumstances, the branch
profits tax) but will not be subject to withholding. Non-United States Holders
should consult applicable treaties, which may provide for different rules.
Federal Estate Taxes. TALX Common Stock owned or treated as owned by an
individual who is not a citizen or resident (as specially defined for United
States Federal estate tax purposes) of the United States at the date of death
will be included in such individual's estate for United States Federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding. Under temporary United States
Treasury regulations, United States information reporting requirements and
backup withholding tax will generally not apply to dividends paid on the TALX
Common Stock to a Non-United States Holder at an address outside the United
States. Payments by a United States office of a broker of the proceeds of a
sale of the TALX Common Stock are subject to both backup withholding at a rate
of 31% and information reporting unless the holder certifies its Non-United
States Holder status under penalties of perjury or otherwise establishes an
exemption. Information reporting requirements (but not backup withholding)
will also apply to payments of the proceeds of sales of the TALX Common Stock
by foreign offices of United States brokers, or foreign brokers with certain
types of relationships to the United States, unless the broker has documentary
evidence in its records that the holder is a Non-United States Holder and
certain other conditions are met, or the holder otherwise establishes an
exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States Federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
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<PAGE>
UNDERWRITING
The underwriters of this offering of Common Stock (the "Underwriters"), for
whom First Albany Corporation ("First Albany") and Principal Financial
Securities, Inc. are serving as representatives (the "Representatives"), have
agreed, subject to the terms and conditions of the Underwriting Agreement (the
form of which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part) to purchase, and the Company has agreed to sell to
them severally, the number of shares of Common Stock set forth opposite their
respective names below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
First Albany Corporation........................................ 475,000
Principal Financial Securities, Inc............................. 475,000
Alex. Brown & Sons Incorporated................................. 70,000
A.G. Edwards & Sons, Inc........................................ 70,000
Hambrecht & Quist LLC........................................... 70,000
Montgomery Securities........................................... 70,000
Oppenheimer & Co., Inc.......................................... 70,000
Robertson, Stephens & Company LLC............................... 70,000
Adams, Harkness & Hill, Inc..................................... 35,000
Advest Inc...................................................... 35,000
Cowen & Company................................................. 35,000
Fahnestock & Co. Inc............................................ 35,000
First Analysis Securities Corporation........................... 35,000
Gerard Klauer Mattison & Co., LLC............................... 35,000
Gruntal & Co., Incorporated..................................... 35,000
Interstate/Johnson Lane Corporation............................. 35,000
Janney Montgomery Scott Inc..................................... 35,000
Ladenburg, Thalmann & Co. Inc................................... 35,000
Legg Mason Wood Walker, Incorporated............................ 35,000
Needham & Company, Inc.......................................... 35,000
Punk, Ziegel & Knoell L. P...................................... 35,000
The Robinson-Humphrey Company, Inc.............................. 35,000
Soundview Financial Group, Inc.................................. 35,000
Stifel, Nicolaus & Company, Incorporated........................ 35,000
Unterberg Harris................................................ 35,000
Wheat First Butcher Singer...................................... 35,000
---------
Total....................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase shares of Common Stock are subject to certain conditions, and that
if any of the shares of Common Stock are purchased by the Underwriters
pursuant to the Underwriting Agreement, all shares of Common Stock agreed to
be purchased by the Underwriters pursuant to the Underwriting Agreement must
be so purchased.
The Company has been advised that the Underwriters propose to offer the shares
of Common Stock directly to the public initially at the public offering price
set forth on the cover page of this Prospectus, and to certain selected
dealers (who may include the Underwriters) at such public offering price less
a concession not in excess of $.35 per share. The Underwriters may allow, and
the selected dealers may reallow, a concession not in excess of $.10 per share
to certain other brokers and dealers. After the public offering, the public
offering price, the concession to selected dealers and the reallowance to
other dealers may be changed by the Underwriters.
63
<PAGE>
The Company has granted to the Underwriters an option to purchase up to an
additional 300,000 shares of Common Stock, at the public offering price, less
the underwriting discounts and commissions shown on the cover page of this
Prospectus, solely to cover over-allotments, if any, made in connection with
this offering. The option may be exercised at any time up to 30 days after the
date of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment.
The Company has agreed to reimburse the Representatives for non-accountable
expenses incurred by them in connection with this offering up to a maximum of
$100,000.
On the closing of the offering, the Company will sell to the Representatives,
individually and not as representatives of the Underwriters, for nominal
consideration, the Representatives Warrants entitling the Representatives to
purchase an aggregate of 100,000 shares of Common Stock at an initial exercise
price per share equal to 120% of the initial public offering price hereunder.
The Representatives Warrants will be exercisable for a period of four years
commencing one year after the date of this Prospectus and will contain certain
demand and "piggyback" registration rights relating to the underlying Common
Stock. The Representatives Warrants cannot be transferred, assigned or
hypothecated, in whole or in part, for a period of twelve months from the date
of their issuance, except that they may be assigned to any officer or partner
of either of the Representatives. The Representatives Warrants will contain
anti-dilution provisions providing for appropriate adjustment of the exercise
price and the number of shares issuable upon exercise thereof upon the
occurrence of certain events.
For the life of the Representatives Warrants, their holders have, at nominal
cost, the opportunity to profit from a rise in the market price for the Common
Stock without assuming the risk of ownership, with a resulting dilution in the
interest of other security holders. As long as the Representatives Warrants
remain unexercised, the terms under which the Company could obtain additional
capital may be adversely affected. Moreover, the holders of the
Representatives Warrants might be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital by a
new offering of its securities on terms more favorable than those provided by
the Representatives Warrants. Additionally, if the Representatives should
exercise their registration rights to effect a distribution of the underlying
shares of Common Stock, the Representatives, prior to and during such
distribution, would be unable to make a market in the Common Stock. If the
Representatives must cease making a market, the market and market price for
the Common Stock may be adversely affected and holders of the Common Stock may
be unable to sell the Common Stock.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments that the Underwriters may be required to make in
respect thereof.
All of the executive officers and directors of the Company have agreed not to
offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of any shares of Common Stock during the period of 180 days after the
date of this Prospectus without the prior written consent of First Albany,
except in certain non-public transactions in which the acquiror or acquirors
of such shares agree(s) to such restrictions. The Company has also agreed not
to offer, sell, contract to sell or otherwise dispose of any share of Common
Stock or any securities convertible into or exchangeable for Common Stock or
any rights to acquire Common Stock (except in certain cases, pursuant to the
exercise of outstanding options or other rights to acquire Common Stock or
with respect to options granted under or shares acquired pursuant to the
Company's employee benefit plans or options or shares issued in acquisitions
in which the acquiror or acquirors of such shares agree(s) to such
restrictions) for a period of 180 days after the date of this Prospectus
without the prior written consent of First Albany.
The Underwriters have informed the Company that the Underwriters do not intend
to confirm sales to any accounts over which they exercise discretionary
authority.
The Underwriters have reserved approximately 100,000 shares of Common Stock
for sale, at the initial public offering price, to employees of the Company.
The number of shares available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same basis as the other shares offered hereby.
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<PAGE>
Prior to the offering, there has been no public market for the Company's
Common Stock. The initial public offering price for the Common Stock was
determined by negotiation among the Company and the Representatives of the
Underwriters and does not necessarily bear any direct relationship to the
Company's assets, current earnings or book value or to any other established
criteria of value, although these factors were considered in establishing the
initial public offering price. Among the other factors considered in
determining the initial public offering price were prevailing market
conditions, the industry in which the Company operates, an assessment of the
Company's management, its operating results, its capital structure, the
business potential of the Company and the demand for similar securities of
comparable companies.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby has been passed upon
for the Company by Bryan Cave LLP, St. Louis, Missouri. As of the date of this
Prospectus, Walter L. Metcalfe, Jr., a partner of Bryan Cave LLP, beneficially
owns 199,987 shares of Common Stock and is Assistant Secretary of the Company
and its subsidiaries. Certain legal matters will be passed upon for the
Underwriters by Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
EXPERTS
The Consolidated Financial Statements and related schedules of the Company at
March 31, 1995 and 1996, and for each of the three years in the period ended
March 31, 1996, appearing in this Prospectus and elsewhere in the Registration
Statement have been included herein and elsewhere in the Registration
Statement in reliance on the report of KPMG Peat Marwick LLP, independent
certified public accountants, and the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, Washington,
D.C. (the "Commission"), a Registration Statement (the "Registration
Statement") on Form S-1 under the Securities Act, with respect to the Common
Stock offered hereby. This Prospectus, which constitutes part of the
Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits and schedules thereto on file with the
Commission pursuant to the Act and the rules and regulations of the Commission
thereunder. The Registration Statement, including exhibits and schedules
thereto, may be inspected at the principal offices of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices at
Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661,
and at Seven World Trade Center, Suite 1300, New York, New York 10048, and
copies may be obtained at the prescribed rates from the Public Reference
Section of the Commission at its principal office in Washington, D.C. The
Commission maintains an Internet Web site (http://www.sec.gov.) that contains
such documents filed electronically by the Company with the Commission through
its Electronic Data Gathering, Analysis and Retrieval System (EDGAR) filing
system. Statements contained in this Prospectus as to the contents of any
contract, agreement or other document referred to herein are not necessarily
complete and in each instance reference is made to the copy of such contract,
agreement or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
65
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of March 31, 1995 and 1996 and June 30,
1996 (unaudited)......................................................... F-3
Consolidated Statements of Operations for the years ended March 31, 1994,
1995 and 1996 and the three months ended June 30, 1995 (unaudited) and
1996 (unaudited)......................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended March
31, 1994, 1995 and 1996 and the three months ended June 30, 1996
(unaudited).............................................................. F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1994,
1995 and 1996 and the three months ended June 30, 1995 (unaudited) and
1996 (unaudited)......................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
TALX Corporation:
We have audited the accompanying consolidated balance sheets of TALX
Corporation and subsidiaries as of March 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended March 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TALX
Corporation and subsidiaries as of March 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
St. Louis, Missouri
May 17, 1996, except for Note 2 and Note 15
which are as of August 20, 1996
F-2
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995 AND 1996 AND
JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, 1996
---------------- ------------------
1995 1996 ACTUAL PRO FORMA
------- ------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 27 $ 56 $ 287 $ 287
Trade receivables, net................... 5,022 5,918 4,938 4,938
Inventories.............................. 1,204 1,389 1,200 1,200
Work in progress, less progress billings. 547 761 - -
Prepaid expenses and other current
assets.................................. 445 306 231 231
Income tax refund receivable............. 293 260 - -
Deferred tax assets, net................. 193 225 133 133
------- ------- ------- -------
Total current assets.................. 7,731 8,915 6,789 6,789
Property and equipment, net............... 3,944 3,579 1,870 1,870
Capitalized software development costs,
net of amortization of $2,776 in 1995,
$3,817 in 1996, and $4,053 at June 30,
1996..................................... 2,093 2,621 2,716 2,716
Net assets of business held for sale...... - - 2,505 2,505
Deferred tax assets, net.................. 459 466 414 414
Other assets.............................. 249 263 392 392
------- ------- ------- -------
$14,476 $15,844 $14,686 $14,686
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank.................... $ 2,655 $ 4,243 $ 2,396 $ 2,396
Current installments of obligations under
capital leases.......................... 222 226 33 33
Current installments of long-term debt... 500 500 500 500
Accounts payable......................... 1,958 2,250 1,698 1,698
Accrued expenses and other liabilities... 1,401 1,742 1,250 1,250
Progress billings in excess of work in
progress................................ 138 226 138 138
Deferred maintenance revenue............. 674 989 588 588
------- ------- ------- -------
Total current liabilities............. 7,548 10,176 6,603 6,603
Obligations under capital leases, less
current installments..................... 651 463 27 27
Long-term debt, less current installments. 667 167 42 42
Subordinated note payable, net of
discount................................. - - 2,614 2,614
------- ------- ------- -------
Total liabilities..................... 8,866 10,806 9,286 9,286
------- ------- ------- -------
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock,
$.01 par value; authorized 2,373,000
shares, issued and outstanding 1,776,479
at March 31, 1995 and 1996, and
1,776,441 shares at June 30, 1996 (pro
forma none)............................. 18 18 18 --
Series B convertible preferred stock,
$.01 par value; authorized 327,000
shares, issued and outstanding 236,873
shares (pro forma none)................. 2 2 2 --
Series C convertible preferred stock,
$.01 par value; authorized 6,000,000
shares, issued and outstanding 615,745
shares (pro forma none)................. 6 6 6 --
Common stock, $.01 par value; authorized
30,000,000 shares, issued and
outstanding 2,476,500 at March 31, 1995,
2,478,214 at March 31, 1996, and
2,478,070 shares at June 30, 1996 (pro
forma 3,229,230 shares)................. 25 25 25 32
Additional paid-in capital............... 6,423 6,431 7,166 7,185
Accumulated deficit...................... (864) (1,444) (1,817) (1,817)
------- ------- ------- -------
Total stockholders' equity............ 5,610 5,038 5,400 5,400
------- ------- ------- -------
$14,476 $15,844 $14,686 $14,686
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1994, 1995, AND 1996
AND THREE-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
----------------------- ------------
1994 1995 1996 1995 1996
------ ------- ------ ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
The Work Number........................ $ - $ 74 $ 453 $ 42 $ 251
Outsourced services.................... 776 515 998 105 330
Customer premises systems.............. 8,497 6,957 9,442 2,125 2,844
Maintenance and support................ 1,949 2,310 2,624 640 868
------ ------- ------ ----- -----
Total revenues...................... 11,222 9,856 13,517 2,912 4,293
------ ------- ------ ----- -----
Cost of revenues:
The Work Number........................ - 48 429 99 111
Outsourced services.................... 190 260 493 106 128
Customer premises systems.............. 3,902 4,143 4,489 985 1,447
Maintenance and support................ 767 793 619 166 237
------ ------- ------ ----- -----
Total cost of revenues.............. 4,859 5,244 6,030 1,356 1,923
------ ------- ------ ----- -----
Gross margin........................ 6,363 4,612 7,487 1,556 2,370
------ ------- ------ ----- -----
Operating expenses:
Selling and marketing.................. 2,700 2,854 4,084 884 1,369
General and administrative............. 2,268 2,556 2,828 659 637
------ ------- ------ ----- -----
Total operating expenses............ 4,968 5,410 6,912 1,543 2,006
------ ------- ------ ----- -----
Operating income (loss)............. 1,395 (798) 575 13 364
------ ------- ------ ----- -----
Other income (expense):
Interest income........................ 1 5 - - -
Interest expense....................... (131) (212) (343) (71) (116)
Other, net............................. (23) (77) (52) (17) (24)
------ ------- ------ ----- -----
Total other expense................. (153) (284) (395) (88) (140)
------ ------- ------ ----- -----
Earnings (loss) from continuing
operations before income tax
expense (benefit).................. 1,242 (1,082) 180 (75) 224
Income tax expense (benefit)............ 7 (328) 57 (30) 83
------ ------- ------ ----- -----
Earnings (loss) from continuing
operations......................... 1,235 (754) 123 (45) 141
------ ------- ------ ----- -----
Discontinued operations:
Earnings (loss) from operations of
discontinued operations, net of income
taxes................................. 474 (410) (703) (38) (164)
Loss on disposal of discontinued
operations, net of income taxes....... - - - - (350)
------ ------- ------ ----- -----
Earnings (loss) from discontinued
operations, net of income taxes.... 474 (410) (703) (38) (514)
------ ------- ------ ----- -----
Net earnings (loss)................. $1,709 $(1,164) $ (580) $ (83) $(373)
====== ======= ====== ===== =====
Pro forma net earnings (loss) per share:
Earnings from continuing operations.... $ .04 $ .04
Loss from discontinued operations...... (.21) (.15)
------ -----
Net loss............................ $ (.17) $(.11)
====== =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1994, 1995, AND 1996
AND THREE-MONTH PERIOD ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED RETAINED
STOCK ADDITIONAL EARNINGS TOTAL
-------------------------- COMMON PAID-IN (ACCUMULATED STOCKHOLDERS'
SERIES A SERIES B SERIES C STOCK CAPITAL DEFICIT) EQUITY
-------- -------- -------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1993................... $20 $ 2 $28 $17 $5,707 $(1,409) $ 4,365
Conversion of 207,948
shares of Series A
convertible preferred
stock to common stock.. (2) -- -- 1 1 -- --
Conversion of 2,721,879
shares of Series C
convertible preferred
stock to common stock.. -- -- (27) 7 20 -- --
Issuance of 237 shares
of Series A preferred
stock upon exercise of
stock warrants......... -- -- -- -- 1 -- 1
Issuance of 559,184
shares of Series C
preferred stock upon
exercise of stock
warrants............... -- -- 5 -- 694 -- 699
Net earnings............ -- -- -- -- -- 1,709 1,709
--- --- --- --- ------ ------- -------
Balance at March 31,
1994................... 18 2 6 25 6,423 300 6,774
Net loss................ -- -- -- -- -- (1,164) (1,164)
--- --- --- --- ------ ------- -------
Balance at March 31,
1995................... 18 2 6 25 6,423 (864) 5,610
Issuance of 1,714 shares
of common stock upon
exercise of stock
options................ -- -- -- -- 8 -- 8
Net loss................ -- -- -- -- -- (580) (580)
--- --- --- --- ------ ------- -------
Balance at March 31,
1996................... 18 2 6 25 6,431 (1,444) 5,038
Repurchase and
retirement of 144
shares of common stock
and 38 shares of Series
A preferred stock
(unaudited)............ -- -- -- -- (1) -- (1)
Issuance of common stock
warrants (unaudited)... -- -- -- -- 736 -- 736
Net loss (unaudited).... -- -- -- -- -- (373) (373)
--- --- --- --- ------ ------- -------
Balance at June 30, 1996
(unaudited)............ $18 $ 2 $ 6 $25 $7,166 $(1,817) $ 5,400
=== === === === ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1994, 1995, AND 1996
AND THREE-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
----------------------- ------------
1994 1995 1996 1995 1996
------ ------- ------ ---- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................... $1,709 $(1,164) $ (580) $(83) $ (373)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization......... 1,430 1,979 2,449 551 568
Loss on disposal of discontinued
operations, net...................... - - - - 350
Loss (gain) on sale of assets......... 12 3 (7) - -
Gain on sale of marketable securities. - - (106) - -
Deferred taxes........................ (28) (306) (39) (54) (13)
Change in assets and liabilities:
Trade receivables.................... (1,848) 863 (896) (94) (558)
Inventories.......................... 197 (182) (185) 95 120
Work in progress, less progress
billings, net....................... (14) (287) (126) (16) (178)
Prepaid expenses and other current
assets.............................. (156) 4 59 24 (57)
Income tax refund receivable......... - (293) 33 - -
Other assets......................... (107) 119 (14) 9 (293)
Accounts payable..................... 247 (16) 293 333 134
Accrued expenses and other
liabilities......................... 279 (118) 341 (170) 266
Deferred maintenance revenue......... - 674 315 (328) (401)
Income taxes payable................. (67) (68) - - -
------ ------- ------ ---- ------
Net cash provided by (used in)
operating activities............... 1,654 1,208 1,537 267 (435)
------ ------- ------ ---- ------
Cash flows from investing activities:
Proceeds from sale of property and
equipment............................. 29 - 9 - -
Additions to property and equipment.... (1,402) (1,701) (852) (206) (146)
Capitalized software development costs. (810) (1,429) (1,712) (403) (477)
Proceeds from sale of marketable
securities............................ - - 187 - -
Other.................................. (109) - - - -
------ ------- ------ ---- ------
Net cash used in investing
activities......................... (2,292) (3,130) (2,368) (609) (623)
------ ------- ------ ---- ------
Cash flows from financing activities:
Change in notes payable to bank........ 343 1,554 1,588 655 (1,847)
Borrowings of long-term debt........... - 1,500 - - -
Borrowings of subordinated notes
payable and issuance of warrants...... - - - - 3,350
Repayments on long-term debt........... (380) (1,042) (500) (125) (125)
Payments on capitalized lease
obligations........................... (138) (208) (235) (55) (57)
Issuance of preferred stock............ 700 - - - -
Issuance of common stock............... - - 7 - -
Repurchase of common and preferred
stock................................. - - - - (1)
------ ------- ------ ---- ------
Net cash provided by financing
activities......................... 525 1,804 860 475 1,320
------ ------- ------ ---- ------
Net increase (decrease) in cash and
cash equivalents................... (113) (118) 29 133 262
Cash and cash equivalents at beginning
of year................................ 258 145 27 27 56
------ ------- ------ ---- ------
Cash and cash equivalents at end of
year................................... $ 145 $ 27 $ 56 $160 $ 318
====== ======= ====== ==== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995 AND 1996 AND JUNE 30, 1996
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
TALX Corporation and its subsidiaries ("the Company") design and implement
interactive communications solutions using technology such as interactive
voice response, primarily for Fortune 500 organizations. 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 that employ computer telephony technology,
as well as facsimile, e-mail, Internet/Intranet, and other interactive
communications technologies.
In early 1995, the Company introduced The Work Number for Everyone(R) ("The
Work Number"). The Work Number, which is a national service providing
automated access to information from multiple organizations, provides
automated responses to requests by mortgage lenders or other verifiers for
confirmation of employment information about a participating employer's
current and former employees.
The Company also designs and implements tailored interactive communications
solutions and either sells a system for installation on a customer's premises
or provides access to a system on an outsourced services basis. The Company
has provided tailored interactive communications systems for installation at
customers' premises since the early 1980s. 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 burden of operating a system. For outsourced services
customers, the Company maintains the customer's database on a system at the
Company's facilities, where incoming requests are received for access to the
information.
In addition to providing interactive communications systems, the Company has
historically provided database and document services. Database services
include providing sales leads and prepress services for directory publishers.
Document services include the preparation and mailing of invoices, statements,
and confirmation letters for organizations with high-volume requirements. See
note 2.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of TALX Corporation
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash and cash equivalents.
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist primarily of hardware, spare parts, and printing supplies.
F-7
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(e) Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation and
amortization. Depreciation is computed using straight-line and accelerated
methods over the estimated useful lives of the assets. Amortization of
leasehold improvements and assets recorded under capital leases is computed
using the straight-line method over the lesser of the useful life of the asset
or lease term.
(f) Product Development and Capitalized Software Development Costs
Product development costs are charged to operations as incurred. Software
development costs are expensed as incurred until technological feasibility is
achieved, after which they are capitalized on a product-by-product basis.
Amortization of capitalized software development costs is the greater of the
amount computed using (i) the ratio that current gross revenues for a product
bear to the total of current and anticipated future gross revenues for that
product or (ii) straight-line method over the remaining estimated economic
life of the product. Amortization of capitalized software development costs
starts when the product is available for general release to customers.
(g) Revenue Recognition, Work in Progress, and Progress Billings
Revenues from The Work Number are recognized from fees charged to Users for
verifications of employment history and salary and from employer conversion
and maintenance fees. Customer premises systems revenue is generally
recognized upon shipment of the system. The Company sells customer premises
systems through certain strategic alliance relationships. In these instances,
revenues are recognized at the time of shipment to the strategic alliance's
customer, however, the Company does not have any future obligations related to
these types of sales. Outsourced services revenue is recognized as the
services are provided. Revenue from maintenance contracts is deferred and
recognized ratably over the maintenance period. Deferred maintenance revenue
represents the unearned portion of maintenance fees.
Work in progress represents accumulated project costs and related earnings,
less progress billings for certain database and document services customers.
Progress billings in excess of accumulated project costs are shown as a
current liability. These customers' contracts generally cover periods from one
to six months. Progress billings are made in accordance with individual
customer contract terms.
(h) Concentration of Credit Risk
The Company sells its interactive communications services in a variety of
industries. No single customer represented 10% or more of the Company's
revenues in fiscal 1994, 1995 or 1996, except that one customer represented
approximately 14% in fiscal 1996. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral; however, it maintains a security interest in hardware
until payment is received. Credit losses from customers have been within
management's expectations, and management believes the allowance for doubtful
accounts adequately provides for any expected losses.
(i) Income Taxes
The Company records income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(j) Fair Value of Financial Instruments
The Company discloses estimated fair values for its financial instruments. A
financial instrument is defined as cash or a contract that both imposes on one
entity a contractual obligation to deliver cash or another financial
F-8
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
instrument to a second entity and conveys to that second entity a contractual
right to receive cash or another financial instrument from the first entity.
(k) Management's Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
(l) Effect of New Accounting Standards
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-based Compensation, which establishes a fair value-based method for
financial accounting and reporting for stock-based employee compensation
plans. However, the new standard allows compensation to continue to be
measured by using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board No. 25, Accounting for Stock Issued to Employees,
but requires expanded disclosure. SFAS No. 123 is effective in fiscal year
1997.
While the Company does not know precisely the impact that will result from
adopting SFAS No. 123, the Company does not expect the adoption to have a
material effect on the Company's consolidated financial position or results of
operations.
(m) Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the current year presentation.
(n) Pro Forma Net Earnings (Loss) Per Share
Pro forma net earnings (loss) per share has been computed using the number of
shares of common stock and common stock equivalents outstanding, assuming
conversion of all outstanding preferred stock to 751,160 shares of common
stock. The number of shares used in computing pro forma loss per share was
3,391,621. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, shares issued and stock options and warrants granted at
prices below the initial public offering price of $9 per share during the 12-
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 they were
outstanding for all of 1996 and the first quarter of 1997.
(o) Interim Financial Statements
The accompanying unaudited consolidated financial statements as of and for the
three months ended June 30, 1995 and 1996 have been prepared on substantially
the same basis as the audited consolidated financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the consolidated
financial information set forth therein. The results for the three months
ended June 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending March 31, 1997.
F-9
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(p) Unaudited Interim Pro Forma Financial Information
The unaudited interim pro forma financial information as of June 30, 1996
gives effect to the conversion of all outstanding preferred stock into 751,160
shares of common stock.
(2) DISCONTINUED OPERATIONS
In August 1996, the Company determined to pursue the divestiture of the
database and document services businesses. It is anticipated that the
divestiture will be by a sale of assets within the next year. A provision of
$350,000 has been made to reflect the estimated losses from operations until
the time of disposal net of income tax benefits of $150,000. Management
anticipates the proceeds from the sale will approximate the value of net
assets held for sale.
The Company has classified the database and document services businesses as a
discontinued operation and has reclassified the prior periods financial
statements to reflect this change.
The database and document services businesses had one customer which accounted
for $3,500,000, $2,000,000, and $930,000 of net revenues for the years ended
March 31, 1994, 1995, and 1996, respectively. The customer ceased business
with the Company in November 1995.
Summary balance sheet data as of June 30, 1996 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current assets............................................. $2,972
Property and equipment, net................................ 1,523
Other assets............................................... 376
------
Total assets........................................... 4,871
------
Current liabilities........................................ 1,989
Noncurrent liabilities..................................... 377
------
Total liabilities...................................... 2,366
------
Net assets of business held for sale................... $2,505
======
</TABLE>
The results of operations for the discontinued businesses for the years ended
March 31, 1994, 1995, and 1996 and the three-month periods ended June 30, 1995
and 1996 were as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
------------------------ --------------
1994 1995 1996 1995 1996
------- ------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................. $12,282 $12,010 $11,149 $3,084 $2,316
======= ======= ======= ====== ======
Earnings (loss) from discontinued
operations.......................... 782 (681) (1,052) (63) (260)
Income tax expense (benefit)......... 308 (271) (349) (25) (96)
------- ------- ------- ------ ------
Earnings (loss) from operations of
discontinued operations............ 474 (410) (703) (38) (164)
------- ------- ------- ------ ------
Loss on disposal..................... - - - - (500)
Income tax benefit................... - - - - (150)
------- ------- ------- ------ ------
Loss on disposal, net............... - - - - (350)
------- ------- ------- ------ ------
Net earnings (loss).................. $ 474 $ (410) $ (703) $ (38) $ (514)
======= ======= ======= ====== ======
</TABLE>
F-10
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) TRADE RECEIVABLES
Trade receivables consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------- JUNE 30,
1995 1996 1996
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Billed receivables................................. $4,385 $5,211 $3,632
Unbilled receivables............................... 808 951 1,328
------ ------ ------
5,193 6,162 4,960
Less allowance for doubtful accounts............... 171 244 22
------ ------ ------
$5,022 $5,918 $4,938
====== ====== ======
</TABLE>
All amounts are due within one year. Billings to customers are made in
accordance with the terms of the individual contracts.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
RANGE OF ESTIMATED MARCH 31,
USEFUL LIVES ------------- JUNE 30,
(IN YEARS) 1995 1996 1996
------------------ ------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Computer equipment................... 3-5 $6,551 $7,092 $3,113
Office furniture and equipment....... 5-7 1,384 1,552 592
Leasehold improvements............... 3-10 567 665 585
Automobile........................... 3 8 8 -
==== ------ ------ ------
8,510 9,317 4,290
Less accumulated depreciation and
amortization........................ 4,566 5,738 2,420
------ ------ ------
$3,944 $3,579 $1,870
====== ====== ======
</TABLE>
(5) PRODUCT DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Product development and capitalized software development costs for the years
ended March 31, 1994, 1995, and 1996 and three months ended June 30, 1995 and
1996 were as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
------------------------ ------------
1994 1995 1996 1995 1996
------ ------- ------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Product development costs incurred..... $1,178 $ 1,477 $ 1,894 $ 473 $ 415
Additions to capitalized software
development costs..................... (810) (1,429) (1,712) (404) (385)
------ ------- ------- ----- -----
Product development costs charged to
general and administrative expenses... $ 368 $ 48 $ 182 $ 69 $ 30
====== ======= ======= ===== =====
Amortization of capitalized software
development costs..................... $ 639 $ 876 $ 1,184 $ 235 $ 236
====== ======= ======= ===== =====
</TABLE>
F-11
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities for the years ended March 31, 1995 and
1996 and three months ended June 30, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------- JUNE 30,
1995 1996 1996
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued compensation and benefits.................. $ 815 $ 855 $ 618
Other.............................................. 586 887 632
------ ------ ------
$1,401 $1,742 $1,250
====== ====== ======
</TABLE>
(7) BANK FINANCING ARRANGEMENTS
Notes payable to bank represent the amounts outstanding under five financing
agreements with a bank. The agreements allowed borrowings up to $4,500,000,
with interest ranging from 0.5% to 1.25% over the prime rate (prime at March
31, 1996 was 8.25%). The agreements were scheduled to expire on June 1, 1996.
On May 1, 1996, the Company negotiated a restructuring and extension of the
financing agreements through December 31, 1996. Under the restructured and
extended financing agreements, the Company has a $4,000,000 line of credit
bearing interest at 0.875% over the prime rate. Additionally, a $1,500,000
line of credit was established bearing interest at 12% through August 31, 1996
and 16% from September 1, 1996 through December 31, 1996 (see Note 15).
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------- JUNE 30,
1995 1996 1996
------ ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable to bank, payable in monthly principal
installments of $41,667, maturing August 1997,
bearing interest at a variable rate of prime
(8.25% at March 31, 1996) plus 0.75%............. $1,167 $667 $542
Less current installments......................... 500 500 500
------ ---- ----
$ 667 $167 $ 42
====== ==== ====
</TABLE>
These agreements are secured by accounts receivable, inventory, office
furniture and equipment, an insurance policy on the president of the Company,
and limited personal guarantees of the president of the Company.
(8) LEASES
The Company is obligated for certain equipment under capital leases which
expire in 1995 through 2000. Assets capitalized under capital lease
obligations and included in property and equipment at March 31, 1995 and 1996
and June 30, 1996 are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------- JUNE 30,
1995 1996 1996
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer equipment................................. $1,170 $1,163 $168
Less accumulated amortization...................... 248 567 99
------ ------ ----
$ 922 $ 596 $ 69
====== ====== ====
</TABLE>
F-12
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has noncancellable operating leases, primarily for office space
and computer equipment, that expire over the next eight years and provide for
purchase or renewal options. During 1991, a partnership, which includes the
president of the Company, acquired the building where the Company's
headquarters are housed.
Rent paid to the partnership amounted to $270,073, $391,484, and $422,600 in
1994, 1995, and 1996, respectively. The partnership sold the building to an
unrelated party in March 1996.
Total rent expense for operating leases, including contingent rentals, was
$276,000 in 1994, $520,000 in 1995, and $595,000 in 1996.
Future minimum lease payments under capital leases and noncancellable
operating leases as of March 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Year ending March 31:
1997.................................................. $302 $1,128
1998.................................................. 295 1,016
1999.................................................. 171 981
2000.................................................. 70 967
2001.................................................. - 986
Thereafter............................................ - 1,241
---- ------
Total minimum lease payments....................... 838 $6,319
======
Less amount representing interest...................... 149
----
Present value of net minimum capital lease
payments.......................................... 689
Less current installments of obligations under capital
leases................................................ 226
----
Obligations under capital leases, less current
installments...................................... $463
====
</TABLE>
(9) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1994 1995 1996
---- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current--federal..................................... $ 14 $ - $ -
Deferred:
Federal............................................. (4) (283) 52
State and local..................................... (3) (45) 5
---- ----- -----
Income tax expense (benefit) before discontinued
operations...................................... 7 (328) 57
Discontinued operations.............................. 308 (271) (349)
---- ----- -----
Total income tax expense (benefit)............... $315 $(599) $(292)
==== ===== =====
</TABLE>
F-13
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense (benefit) differed from the amounts computed by applying
the federal income tax rate of 34% to earnings (loss) from continuing
operations before income tax expense (benefit) as a result of the following:
<TABLE>
<CAPTION>
MARCH 31, 1994
------------------
1994 1995 1996
----- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)............. $ 422 $(389) $61
Increase in income taxes resulting from:
Change in the valuation allowance for deferred tax
assets.............................................. (461) - -
Alternative minimum tax.............................. 14 - -
State and local income taxes, net of federal income
tax benefit......................................... (2) (30) 3
Other, net........................................... 34 91 (7)
----- ----- ---
$ 7 $(328) $57
===== ===== ===
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31,
1995 and 1996 are presented below:
<TABLE>
<CAPTION>
MARCH 31,
-------------
1995 1996
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts.............................. $ 64 $ 90
Valuation allowance on inventory............................. 51 44
Accrual for compensated absences............................. 52 61
Differences in revenue recognition methods................... 43 -
Differences in depreciation.................................. 46 91
Differences in expense recognition methods................... - 85
Net operating loss and tax credit carryforwards.............. 1,214 1,374
------ ------
Total deferred tax assets................................. 1,470 1,745
------ ------
Deferred tax liabilities:
Differences in capitalized software development cost methods. 717 905
Differences in revenue recognition methods................... 9 9
Differences in depreciation and amortization................. 92 140
------ ------
Total deferred tax liabilities............................ 818 1,054
------ ------
Net deferred tax assets................................... $ 652 $ 691
====== ======
</TABLE>
During 1994, the Company reduced its valuation allowance from $461,000 to
zero, resulting in a deferred tax benefit. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. TALX Corporation (TALX) and its
subsidiaries carry separate tax histories and, as a result, certain net
operating loss carryforwards are available to offset future taxable income of
TALX. In order to fully realize the deferred tax assets, TALX will need to
generate future taxable income of approximately $3,700,000 prior to the
expiration of the net operating loss carryforwards in 2011. Taxable income
(loss) of TALX for the years ended March 31, 1994, 1995, and 1996 was
$1,034,000, $(1,914,000), and $(1,076,000), respectively. Based upon the level
of historical taxable income
F-14
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences at March 31,
1996.
At March 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of $3,470,000, which are available to offset
future federal taxable income, if any, through 2011. In addition, the Company
has alternative minimum tax credit carryforwards of approximately $18,000,
which are available to reduce future federal regular income taxes, if any,
over an indefinite period.
(10) STOCKHOLDERS' EQUITY
All series of convertible preferred stock are convertible into shares of
common stock as follows:
-At the option of the stockholder, at any time after the date of issuance of
the shares, the stockholder may convert each such share into one fully paid
and non-assessable share of common stock, adjusted for any stock splits (see
Note 15), stock dividends, or similar adjustments in the Company's capital
stock.
-Each share of preferred stock shall automatically be converted into one
share of common stock in the event the Company completes a firm commitment
underwritten public offering covering the offer and sale of common stock
with proceeds to the Company of not less than $5,000,000. Each share of
preferred stock shall also automatically be converted into one share of
common stock upon the approval of 66 2/3% of all outstanding shares of
preferred stock.
All series of convertible preferred stock have the same voting rights as their
convertible equivalent common stock units. The priority ranking of the classes
of stock from highest to lowest seniority is Series C preferred, Series B
preferred, Series A preferred, and common. No dividends were declared in 1994,
1995, or 1996.
TALX has adopted two incentive stock option plans for employees which provide
for the issuance of a maximum of 384,857 shares of common stock. Options are
granted by the Board of Directors at prices not less than fair market value as
of the date of the grant. Certain options are 100% vested upon grant. The
remaining options vest 20% per year and expire six years after the date of the
grant. Total shares exercisable at March 31, 1996 were 125,543. Activity under
the plan for the three years ended March 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES PRICE
------- ---------
<S> <C> <C>
Outstanding at March 31, 1993......................... 35,571 $.88-4.38
Granted--1994......................................... 83,429 4.38
-------
Outstanding at March 31, 1994......................... 119,000 .88-4.38
Granted--1995......................................... 210,429 3.85
Cancelled--1995....................................... (6,715) .88-4.38
-------
Outstanding at March 31, 1995......................... 322,714 .88-4.38
Cancelled--1996....................................... (22,714) .88-4.38
Exercised--1996....................................... (1,714) 4.38
-------
Outstanding at March 31, 1996......................... 298,286 .88-4.38
Granted............................................... 88,171 7.00
Cancelled--1996....................................... (1,714) 3.85
-------
Outstanding at June 30, 1996.......................... 384,743 $.88-7.00
======= =========
</TABLE>
(11) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for the Company's cash and cash equivalents, trade
receivables, income tax refund receivable, accounts payable and accrued
expenses approximate fair value because of the short-term maturity of these
instruments.
F-15
<PAGE>
TALX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The carrying amounts of notes payable to bank, long-term debt, and capital
lease obligations approximate fair value because the interest rates vary with
or approximate market rates.
(12) EMPLOYEE BENEFIT PLANS
The Company sponsors profit-sharing/401(k) plans. The plans cover
substantially all of the Company's employees. The Company makes contributions
to the plans, subject to ERISA limitations, up to 2% of employees' earnings.
Total expense under the plans for the years ended March 31, 1994, 1995, and
1996 was $69,710, $81,558, and $90,960, respectively.
(13) COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation matters arising in the normal
course of business. In the opinion of Company management, these matters will
not have a material adverse effect on the accompanying consolidated financial
statements.
(14) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest totaled $197,795, $319,868, and
$503,109 for the years ended March 31, 1994, 1995, and 1996, respectively.
Cash paid during the year for income taxes totaled $395,479, $53,050, and $279
for the years ended March 31, 1994, 1995, and 1996, respectively.
Additions to assets recorded under capital leases for the years ended March
31, 1994, 1995, and 1996 were $461,035, $568,367, and $51,000, respectively.
(15) EVENT SUBSEQUENT TO INDEPENDENT AUDITORS' REPORT
Subsequent to year-end, the Company entered into a loan agreement to secure
additional debt of $4,000,000, $3,350,000 of which was funded as of June 30,
1996 and $650,000 of which was funded August 15, 1996. The loan, which is due
and payable on July 1, 2001, bears interest at 13.25% (with an effective
interest rate of 19.25%) and required the granting of a security interest in
the Company's tangible and intangible assets. In connection with this loan,
the Company has issued warrants as of June 30, 1996 for 115,694 shares of
common stock, exercisable at $.01 per share, for which approximately $736,000
of value was ascribed. In addition, the Company has issued warrants for an
additional 22,448 shares of common stock, exercisable at $.01 per share, as of
August 15, 1996 for which $143,000 of value was ascribed. In connection with
this transaction, the $1,500,000 line of credit with a bank (see Note 7) was
terminated.
Also subsequent to year-end, the Company's Board of Directors authorized and
amended the Company's articles of incorporation to effect a 1-for-3.5 reverse
stock split for each share of common stock and adjusted all outstanding common
stock option and warrants accordingly. The Board of Directors has also
authorized and amended the Company's articles of incorporation to effect a
reduction in all series of preferred stock and common stock par value to $.01.
All share data presented within the March 31, 1996 consolidated financial
statements have been revised to effect for the reverse stock split and changes
in par value.
Also subsequent to year-end, the Company amended its articles of incorporation
to provide that the aggregate number of shares of common stock the Company
shall have the authority to issue shall be 30,000,000 shares of Common Stock,
par value $.01 per share, and 13,700,000 shares of preferred stock, par value
$.01 per share, 8,700,000 shares of which represent the previously designated
Series A, B and C convertible preferred stock.
F-16
<PAGE>
GLOSSARY
ACTIVEX/OLE CONTROLS ENVIRONMENT--Software conforming to Microsoft standards
that extends the functionality of software tools supporting such extensions to
develop application software for the Microsoft Windows operating system.
ActiveX is the Internet name for OLE Controls (OCX). With various software
development tools, one can write an ActiveX control. An ActiveX control gives
one the ability to have any Web-browsing client actively execute one's
application as it visits the Website.
"BEST OF CLASS" TECHNOLOGIES--Technologies that generally offer superior
performance, feature functionality and quality than most other competitive
products.
CLIENT/SERVER INTERFACES--Technology that allows a computer to access and
update data stored in relational databases attached to a computer network.
COMPUTER TELEPHONY HARDWARE BOARDS--Computer hardware that permits computer
software to communicate with a user device over a telephone line.
CONNECTIVITY HARDWARE--Computer hardware that allows computer software to
communicate with other computers.
CORPORATE INTRANET--A company's computer network which allows users to access,
share and update information using an Internet server and Internet browser
software on the user's computer.
CT (COMPUTER TELEPHONY)--Computer telephony applies computer intelligence to
telecommunications devices with the basic goals of improving customer service
and enhancing corporate productivity.
CTI (COMPUTER TELEPHONY INTEGRATION)--The connection of a computer and a
telephone system to allow information from the telephone system to be passed
to the computer system and for the computer system to control the telephone
system.
DELPHI--An object-oriented software development tool that supports Microsoft's
ActiveX/OLE Controls for creating applications for Microsoft's Windows
operating system.
DIAL-UP BROWSER SOFTWARE--Internet software normally used to communicate over
the Internet's World Wide Web with enhancements to allow the software to
substitute a telephone line for an Internet/Intranet connection to a TALXWare
server.
DIAL-UP ACCESS--The use of a computer, a telephone line and a modem to dial
another computer system for the purpose of establishing a connection between
the two computers.
DNIS (DIALED NUMBER IDENTIFICATION SERVICES)--The telephone number dialed by a
caller.
DSP (DIGITAL SIGNAL PROCESSORS)--A computer chip designed for processing
digital information such as audio, video, and computer communications.
E-MAIL--ELECTRONIC MAIL--The capability of sending and receiving written
communications through a computer network.
EASYSCRIPT--The TALX developed object-oriented visual development environment
used by TALX and its licensed customers to create, modify and maintain
interactive communications applications.
EDI (ELECTRONIC DATA INTERCHANGE) TRANSACTION--Computer to computer
communications which complete transactions using pre-defined formats.
GUI (GRAPHICAL USER INTERFACE)--Software that allows users to control
computers by using a mouse to select the desired function from a three-
dimensional image shown on the computer screen.
G-1
<PAGE>
IBM OS/2 OPERATING SYSTEM--IBM's graphical multi-tasking software that
controls the basic functions of a personal computer.
INTERACTIVE COMMUNICATIONS--The use of technologies that allow users realtime
access to information stored in databases from a variety of devices such as
telephones, computers and fax machines.
INTERNET--a world-wide computer network.
IVR (INTERACTIVE VOICE RESPONSE)--A computer system that enables routine
information retrieval and transactions via the touch-tone telephone.
LOTUS NOTES--A groupware software product that allows computer users to share
information.
MICROSOFT WINDOWS NT OPERATING SYSTEM--Microsoft's graphical multi-tasking
software that controls the basic functions of a personal computer.
NMS PLATFORM--Computer telephone hardware installed by Natural Micro Systems
that when installed in a computer enables software on the computer to accept
touch-tone inputs and play pre-recorded messages over telephone lines.
OLE (OBJECT LINKING AND EMBEDDING)--A unified environment of object-based
services with the capability of both customizing those services and extending
the architecture through custom services, with the overall purpose of enabling
integration between components.
POWERBUILDER--A software development tool that supports Microsoft's
ActiveX/OLE Controls for creating applications for Microsoft's Windows
operating system.
SOFTWARE DRIVERS--Computer programs that control the functions of computer
hardware, other than the main CPU (central processing unit).
SOFTWARE SUITES--A collection of integrated software applications that
automate a number of tasks for the user.
TALXWARE RUNTIME--System software that enables a user to interact with an
application.
TALX VP/2000 PLATFORM--TALX computer telephony hardware that enables computer
software to accept touch-tone inputs, play pre-recorded messages and interact
with users using a variety of optional interactive communications technologies
with a telephone line.
TALXWARE--The complete set of TALX interactive communications system software.
TDD (TELEPHONE DEVICE FOR THE DEAF)--A specialized device that allows deaf
users to communicate using the public telephone network.
TEXT-TO-SPEECH--Technology that allows a computer to convert electronically
stored documents into computer generated voice.
THE WORK NUMBER FOR EVERYONE--A TALX national service providing automated
employment and salary verification to mortgage lenders and other verifiers.
VISUAL BASIC--A software development tool that supports Microsoft's
ActiveX/OLE Controls for creating applications for Microsoft's Windows
operating system.
VISUAL C++--A software development tool that supports Microsoft's ActiveX/OLE
Controls for creating applications for Microsoft's Windows operating system.
VOICE RECOGNITION--Technology that allows a user to control a computer using
spoken commands and inputs.
WORLD WIDE WEB--A feature of the Internet that allows users to access text,
graphics, audio and visual information using standards-based software called
browsers.
G-2
<PAGE>
[Description of Art Work Contained in the Registration Statement]
Inside Back Cover
- -----------------
This page has illustrations of the development environment and run time
environment of TALXWare. In the left and right hand margins are lists of Easy
Script Features, Database Connectivity, Telephone Interfaces, Operating Systems
and Platforms.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SO-
LICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION WHERE, OR TO
ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Consolidated Financial Data...................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 33
Management................................................................ 48
Certain Relationships and Related Transactions............................ 54
Principal Shareholders.................................................... 56
Shares Eligible for Future Sale........................................... 57
Description of Capital Stock.............................................. 58
Certain Charter and Bylaw Provisions...................................... 60
Certain United States Federal Income Tax Considerations for Non-U.S.
Holders.................................................................. 61
Underwriting.............................................................. 63
Legal Matters............................................................. 65
Experts................................................................... 65
Additional Information.................................................... 65
Index to Consolidated Financial Statements................................ F-1
Glossary.................................................................. G-1
</TABLE>
--------------
UNTIL NOVEMBER 10, 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 SHARES
LOGO
COMMON STOCK
-------------
PROSPECTUS
-------------
FIRST ALBANY CORPORATION
PRINCIPAL FINANCIAL SECURITIES, INC.
----------------
OCTOBER 16, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
