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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21533
TEAM AMERICA, INC.
(Exact Name of Registrant As Specified In Its Charter)
OHIO 31-1209872
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 EAST WILSON BRIDGE ROAD
WORTHINGTON, OH 43085
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(614) 848-3995
(Former Name: TEAM Mucho, Inc., Former Address and Former Fiscal year, If
Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
THE INTERIM FINANCIAL STATEMENTS INCLUDED IN THIS QUARTERLY REPORT WERE PREPARED
BY THE COMPANY AND HAVE NOT BEEN REVIEWED BY AN INDEPENDENT PUBLIC ACCOUNTANT AS
REQUIRED BY RULE 10-01(d) OF REGULATION S-X.
THE NUMBER OF SHARES OF REGISTRANT'S ONLY CLASS OF COMMON STOCK OUTSTANDING ON
AUGUST 16, 2002 WAS 8,215,628.
EXPLANATORY NOTE
On April 17, 2002, the Company terminated its former independent public
accountant, Arthur Andersen LLP, and engaged as its new independent public
accountant, Ernst & Young LLP. Subsequent to engaging Ernst & Young LLP, the
Company determined that its prior accounting treatment of its December 29, 2000
issuance of 100,000 Series A Preferred Shares with detachable warrants to
purchase 1,481,481 common shares and 600,000 common shares did not comply with
generally accepted accounting principles. As a result, the Company has
reclassified certain accounts and restated its fiscal 2000 and 2001 consolidated
balance sheets and statements of changes in shareholders' equity, its fiscal
2000 consolidated statement of operations and corresponding disclosures. For
more information, please see the Company's Amendment No. 1 to Annual Report on
Form 10-K/A filed with the SEC on August 13, 2002, whereby the Company amended
and restated in its entirety each item affected by the restatement set forth in
its Annual Report on Form 10-K for the year ended December 29, 2001 originally
filed with the SEC on March 28, 2002. The Company also filed Amendment No. 1 to
Quarterly Report on Form 10-Q/A for the period ended March 30, 2002 on August
13, 2002 to reflect the restatement and reclassifications in its first quarter
interim financial statements.
As a result of timing and the restatement, the interim financial statements
included in this filing have not been reviewed by an independent public
accountant as required by Rule 10-01(d) of Regulation S-X. The Company is
working diligently with its new independent public accountant, Ernst & Young
LLP, to have its interim financial statements reviewed.
If upon completion of the review by Ernst & Young LLP there is a change in our
financial statements included herein, we will promptly file an amendment to this
quarterly report.
In conclusion, no auditor has opined that these unaudited financial statements
present fairly, in all material respects, the financial position, the results of
operations, cash flows and the changes in shareholders' equity for the periods
reported in accordance with generally accepted accounting principles.
2
TEAM AMERICA, INC. AND SUBSIDIARIES
JUNE 29, 2002
INDEX
PART I. FINANCIAL INFORMATION
PAGE
NO.
---
Item 1. Financial Statements:
Explanatory Note........................................................................................... 2
Condensed Consolidated Balance Sheets - June 29, 2002 (unaudited)
and December 29, 2001 (unaudited) ......................................................................... 4
Condensed Consolidated Statements of Operations - Three and six-month periods
ended June 29, 2002 (unaudited) and June 30, 2001 (unaudited).............................................. 6
Condensed Consolidated Statements of Cash Flows - Six-month periods
ended June 29, 2002 (unaudited) and June 30, 2001 (unaudited).............................................. 7
Condensed Consolidated Statement of Changes in Shareholders' Equity - Six-month
period ended June 29, 2002 (unaudited)..................................................................... 9
Notes to Condensed Consolidated Financial Statements....................................................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 14
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities..................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................................................. 23
Item 6. Exhibits and Reports on Form 8-K.................................................................... 24
Signatures.................................................................................................... 24
Note: Item 3 of Part I and Items 1 through 3, and Item 5 of Part II are omitted
because they are not applicable.
3
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 29, 2002 AND DECEMBER 29, 2001
(000's omitted except share amounts)
JUNE 29, DECEMBER 29,
2002 2001
------- -------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ - $ 1,447
Receivables:
Trade, net of allowance for doubtful accounts of $277 and $392, respectively 2,203 1,036
Unbilled revenues 11,010 9,893
Other receivables 675 1,404
------- -------
Total Receivables 13,888 12,333
------- -------
Prepaid expenses 766 600
Workers' compensation deposits - current 1,016 1,283
Deferred income tax asset 1,497 1,497
------- -------
Total Current Assets 17,167 17,160
------- -------
PROPERTY AND EQUIPMENT, NET 2,241 2,580
------- -------
OTHER ASSETS:
Goodwill, net 35,833 35,238
Other intangible assets, net 1,102 150
Cash surrender value of life insurance policies 437 521
Deferred income tax asset 784 784
Workers' compensation deposits - non current 2,612 1,515
Other 871 896
------- -------
Total Other Assets 41,639 39,104
------- -------
Total Assets $61,047 $58,844
======= =======
Continued on next page
4
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 29, 2002 AND DECEMBER 29, 2001
(000's omitted except share amounts)
JUNE 29, DECEMBER 29,
2002 2001
-------- --------
(UNAUDITED) (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 2,383 $ 2,325
Checks drawn in excess of bank balances 2,563 -
Debt 9,106 1,250
Note payable - related party 1,500 -
Capital lease obligations 309 296
Accrued compensation 9,892 10,338
Accrued payroll taxes and insurance 6,830 6,475
Accrued workers' compensation liability 1,454 1,750
Other accrued expenses 3,462 2,948
-------- --------
Total Current Liabilities 37,499 25,382
-------- --------
LONG-TERM LIABILITIES:
Debt, less current portion - 7,799
Capital lease obligations, less current portion 406 547
Accrued workers' compensation liability, less current portion 2,307 2,879
Client deposits 816 575
Deferred compensation 438 521
Other 621 723
-------- --------
Total Liabilities 42,087 38,426
-------- --------
CONVERTIBLE PREFERRED STOCK, FACE AMOUNT OF $11,000 8,926 8,354
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 45,000,000 shares authorized, 10,955,410 and 10,788,743
issued at June 29, 2002 and December 29, 2001, respectively 44,552 43,947
Deferred compensation (15) (20)
Accumulated deficit (19,727) (17,087)
-------- --------
24,810 26,840
Less - Treasury stock, 2,739,782 shares, at cost (14,776) (14,776)
-------- --------
Total Shareholders' Equity 10,034 12,064
-------- --------
Total Liabilities and Shareholders' Equity $ 61,047 $ 58,844
======== ========
See Notes to Condensed Consolidated Financial Statements.
5
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 29, 2002 AND JUNE 30, 2001
(000'S OMITTED EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2002 2001 2002 2001
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES $ 119,208 $ 123,130 $ 238,325 $ 224,925
--------- --------- --------- ---------
DIRECT COSTS:
Salaries and wages 98,945 102,670 199,609 186,324
Payroll taxes, workers' compensation
and other direct costs 15,104 15,199 28,935 29,311
--------- --------- --------- ---------
Total direct costs 114,049 117,869 228,544 215,635
--------- --------- --------- ---------
GROSS PROFIT 5,159 5,261 9,781 9,290
--------- --------- --------- ---------
OPERATING EXPENSES:
Administrative salaries 2,904 2,723 5,726 5,072
Other selling, general and administrative expenses 1,895 1,788 4,101 3,006
Restructuring charges 241 34 241 75
Systems and operations development costs - - 302 -
Depreciation and amortization 365 648 667 1,167
--------- --------- --------- ---------
Total operating expenses 5,405 5,193 11,037 9,320
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (246) 68 (1,256) (30)
Interest expense, net (538) (254) (750) (396)
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (784) (186) (2,006) (426)
Income tax expense (37) (21) (37) (36)
--------- --------- --------- ---------
NET LOSS (821) (207) (2,043) (462)
Preferred stock dividends (302) (271) (597) (524)
--------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1,123) $ (478) $ (2,640) $ (986)
========= ========= ========= =========
Basic and diluted net loss per common share $ (0.14) $ (0.07) $ (0.33) $ (0.14)
Weighted average number of shares used in per share computation 8,197 6,955 8,123 6,926
See Notes to Condensed Consolidated Financial Statements.
6
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 29, 2002 AND JUNE 30, 2001
(000's omitted)
Six Months Ended
----------------------------
JUNE 29, JUNE 30,
2002 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,043) $ (462)
Adjustments to reconcile net loss to net cash used in
operating activities, excluding the impact of acquisitions:
Depreciation and amortization 667 1,167
Bad debt expense 119 -
Amortization of financing costs, warrants 85 -
Loss in fair market value of derivative 38 -
Change in other assets and liabilities (4,072) (1,334)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (5,206) (629)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (144) (689)
Cash used in acquisitions of intangible assets (550) (4,250)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (694) (4,939)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Checks drawn in excess of bank balances 2,563 -
Proceeds from bank borrowings 750 8,250
Proceeds from short term borrowing - related party 1,500 -
Notes payable and short-term borrowing repaid (693) (193)
Proceeds from issuance of common stock 500 -
Payments on capital lease obligations (142) -
Payment of stock repurchase obligation - (11,622)
Other financing costs (25) -
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,453 (3,565)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,447) (9,133)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,447 10,925
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ - $ 1,792
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 580 $ 254
Income tax paid, net $ 15 $ 516
See Notes to Condensed Consolidated Financial Statements
7
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the six-month periods ended June 29, 2002 and June 30, 2001, the Company
accrued preferred stock dividends payable in-kind equivalent of $597,000 and
$524,000, respectively, in connection with the $11,000,000 face value of
preferred stock.
During the six-month period ended June 29, 2002, the Company acquired $14,000 of
property and equipment under capital leases.
During the six-month period ended June 30, 2001, the Company acquired certain
assets of Professional Staff Management, Inc. and as partial consideration
issued common stock valued at $241,000 and Series A convertible preferred stock
with a face amount of $1,000,000 and warrants valued at $75,000.
During the six-month period ended June 29, 2002, the Company acquired certain
assets of Inovis Corporation. In connection with the transaction, the Company
recorded $104,000 of property and equipment, $605,000 of other intangible assets
and $491,000 of goodwill and assumed liabilities of $50,000.
8
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 29, 2002
(000'S OMITTED EXCEPT SHARE AMOUNTS)
Common Stock
--------------------------- Treasury Accumulated
Number Value Other Stock Deficit Total
-------------- ------------ ------------ ------------ ------------ ------------
Balance at December 29, 2001 10,788,743 $ 43,947 $ (20) $ (14,776) $ (17,087) $ 12,064
Issuance of common stock 166,667 500 - - - 500
Issuance of warrants to purchase common stock - 105 - - - 105
Amortization of deferred compensation - - 5 - - 5
Preferred stock dividends - - - - (597) (597)
Net loss - - - - (2,043) (2,043)
-------------- ------------ ------------ ------------ ------------ ------------
Balance at June 29, 2002 10,955,410 $ 44,552 $ (15) $ (14,776) $ (19,727) $ 10,034
============== ============ ============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
TEAM America, Inc. (the "Company"), (formerly known as TEAM Mucho, Inc.), an
Ohio corporation, is a Business Process Outsourcing ("BPO") Company specializing
in human resources. TEAM America is a provider of Professional Employment
Organization ("PEO") services in Ohio, Utah, Nevada, Oregon, Idaho, Tennessee,
Mississippi and California. TEAM America's Single-Point-Of-Contact Human
Resource Solution(TM) includes payroll, benefits administration, on-site and
online employee and employer communications and self-service, employment
practices and human resources risk management, workforce compliance
administration and severance management.
The Company was formed by the December 28, 2000 merger of TEAM America
Corporation and Mucho.com, Inc. in a transaction accounted for under the
purchase method of accounting as a reverse acquisition. Mucho.com, Inc. was
treated as the acquiring company for accounting purposes because its
shareholders controlled more than 50% of the post transaction combined company.
NOTE 2 - UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements set forth herein should be read in conjunction with the
unaudited financial statements contained in the Company's Amendment No. 1 to the
Annual Report on Form 10-K/A for the year ended December 29, 2001 (the "Amended
Annual Report") filed with the Securities and Exchange Commission (the "SEC") on
August 13, 2002. The financial statements for the six months ended June 29, 2002
include the results of TEAM America, Inc. for the period and the results from
the acquisition of certain of the assets of Strategic Staff Management, Inc.
("SSMI") since the date of acquisition (March 1, 2002) and of Inovis Corporation
("Inovis") since the date of acquisition (May 1, 2002). The financial statements
for the six months ended June 30, 2001 include the results of TEAM America, Inc.
for the entire quarter and the results from the acquisition of Professional
Staff Management, Inc. ("PSMI") since the date of acquisition (March 13, 2001).
In the opinion of management, such financial statements contain all adjustments
necessary for a fair presentation of the Company's financial position, results
of operations and cash flows. However, such financial statements do not include
any adjustments relating to matters discussed in NOTE 4, other than the
reclassification of debt to current liabilities.
NOTE 3 - DELAY IN FILING QUARTERLY REPORT
On August 14, 2002, the Company filed a Notification of Late Filing relating to
its Quarterly Report for the quarter ended June 29, 2002. At that time, the
Company was unable to file its quarterly report due to the significance of
ongoing discussions between the Company, its senior lenders and its Series A
Preferred Shareholders. On August 17, 2002, the Company's Board of Directors
authorized management to take the necessary actions to complete these
transactions.
NOTE 4 - LIQUIDITY AND FINANCIAL CONDITION
As of June 29, 2002, the Company was in violation of the current ratio and
senior debt leverage ratio requirements of its credit facility. The Company's
banks have not (as of August 22, 2002) issued a notice of default as a result of
the noted debt covenant violations. Should a notice of default be issued, the
banks could request the following:
- Termination of commitments and obligations to issue letters of
credit under the credit agreement.
- Declaration of all obligations, including the entire unpaid
principal, all unpaid interest accrued thereon and all other
sums payable by the Company under the credit agreement,
including letter of credit, to be immediately due and payable.
As a result of the covenant violations, the Company's debt outstanding under the
senior credit facility is classified in the Company's balance sheet as a current
liability at June 29, 2002.
Under the terms of the Company's Series A Preferred Securities Purchase
Agreement, should the Company be declared in default under the terms of its
credit facility, the Company would than be in default of its Series A Preferred
Securities Purchase Agreement, and the holder of the preferred shares would have
the right to put the shares back to the Company.
Additionally, should the Company be in default of the Series A Preferred
Securities Purchase Agreement, the dividend rate on the Series A Preferred
Shares would be increased to 20% thereafter, and the holders of such shares
would be entitled to an
10
extraordinary special dividend in an amount that would have been recorded had
the previously declared dividends at 9.75% been accrued at 20%.
In addition to the above, the $1,500,000 Note Payable - Related Party (Series A
Preferred Shareholder) was due on August 9, 2002. This note has not been paid.
The Company is currently in negotiations with its banks and its Series A
Preferred Shareholders regarding additional capital infusion, a waiver of
covenant violations and amendments to its credit facility and note payable -
related party and Series A Preferred Shares.
During the second quarter 2002, the Company received an unsolicited offer from a
potential equity partner. In May 2002, the Company formed a Special Committee of
the Board of Directors to evaluate the proposal. Management is in continuing
discussions with the potential equity partner. While evaluating this offer,
management engaged an investment banker to assist in evaluating this and other
offers, as well as other assistance in raising capital. As a result of its
discussions with its banks and Series A Preferred Shareholders, as well as other
interested parties, management anticipates a capital infusion before the end of
2002. Proceeds from any capital transaction will be used for general corporate
purposes, primarily the pay down of the working capital deficit.
There can be no guarantee that any such capital infusion will be completed,
accordingly management is evaluating other potential financial arrangements.
Failure by the Company to raise additional capital will result in a material
adverse affect on the future financial condition and future results of
operations of the Company.
NOTE 5 - ACQUISITIONS AND OTHER TRANSACTIONS
On March 13, 2001, the Company acquired certain of the assets of PSMI. The
acquisition was accounted for under the purchase method of accounting. Cash and
stock consideration of $6,575,000 for these assets included cash of $4,250,000,
seller financing of $1,000,000, shares of common stock of TEAM America, Inc.
(74,074 shares with a fair market value of $241,000 at the date of the
acquisition), convertible preferred stock with a face amount of $1,000,000 and
warrants and direct expenses of $84,000. The preferred stock was assigned an
estimated fair value of $925,000 and the warrants were assigned an estimated
fair value of $75,000. The purchase price was allocated to the assets acquired
based on their relative fair market value with the excess allocated to goodwill.
Goodwill of $6,660,000 was recorded related to this transaction and during the
period ended March 31, 2001 was being amortized over 20 years. Effective
December 30, 2001, the Company ceased amortizing goodwill in accordance with new
accounting pronouncements (see NOTE 6).
On March 1, 2002, the Company acquired certain assets and assumed certain
liabilities of SSMI. The purchase price of $476,000 included cash of $300,000,
the assumption of customer deposits of $172,000 and other costs of $4,000. The
purchase price was allocated to the assets acquired based on their relative fair
values. In connection with this transaction, the Company recorded $426,000 of
intangible assets related to customer relationships, which is being amortized
over seven years, the estimated useful life of such relationships and $50,000 in
a non-compete agreement which is being amortized over five years, the term of
the agreement. On May 1, 2002, the Company purchased certain assets of Inovis.
Under the terms of this transaction, the Company is required to pay the greater
of $1,150,000 (the "Minimum Price") or a factor of gross profits generated by
the Inovis business over the 24 months beginning May 2002 and ending April 2004.
Additionally, the Company agreed to assume $50,000 of liabilities. Inovis is
based in Atlanta, Georgia and has clients throughout the United States, but
primarily concentrated in Georgia. Inovis' total revenue for its fiscal year
ended June 30, 2001 was approximately $109,761,000.
The Company paid $250,000 at closing and recorded an account payable to Inovis
of $950,000. The $950,000 is classified as a current liability and included in
other accrued expenses on the accompanying balance sheet. In connection with
this transaction, the Company recorded $104,000 of property and equipment,
$605,000 of customer contracts/relationships and $491,000 of goodwill. The
customer contracts/relationships are included in other intangibles in the
accompanying balance sheet and are being amortized over the estimated useful
life of the contracts/relationship of seven years. The amortization expense is
being recorded based on the relative amounts of estimated annual cash flows over
the life of the contracts/relationships.
11
NOTE 6 - ACCOUNTING POLICIES
Goodwill
Effective July 1, 2001 and December 30, 2001, respectively, the Company adopted
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"), which were issued by the Financial
Accounting Standards Board in July 2001. SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and that certain intangible assets acquired in a
business combination shall be recognized as assets apart from goodwill. SFAS 142
requires goodwill to be tested for impairment under certain circumstances, and
written down when impaired, rather than being amortized as previous standards
required. Furthermore, SFAS 142 requires purchased intangible assets other than
goodwill to be amortized over their useful lives unless these lives are
determined to be indefinite.
As required by SFAS 142, the Company has completed an assessment of the
categorization of its existing intangible assets and goodwill and the
transitional impairment test in accordance with the new criteria. As of the date
of adoption, no goodwill impairment was recognized under the provisions of the
transitional impairment test. The Company is required to test for impairment on
an annual basis and between annual tests in certain circumstances. There can be
no assurance that future goodwill impairment tests will not result in a charge
to operations (see NOTE 4 - LIQUIDITY AND FINANCIAL CONDITION).
Had the Company adopted this statement as of the beginning of 2001, $450,000 and
$801,000 of amortization expense would not have been recognized and net loss
would have decreased by $450,000 and $801,000 and loss per share attributable to
common shareholders would have decreased by $0.06 and $0.12 for the three and
six months ended June 30, 2001, respectively.
Contingencies
At June 29, 2002, the Company has recorded a $360,000 reserve for certain tax
related contingencies. The estimated amount of possible loss in excess of these
reserves is $240,000.
New Accounting Standards
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 establishes a single accounting model, based on the framework
established in Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("SFAS 121"), for long-lived assets to be disposed of by sale, and resolves
significant implementation issues related to SFAS 121. The Company adopted SFAS
144 as of December 30, 2001. Adoption of this statement had no impact on the
Company's results of operations or financial condition.
NOTE 7 - LOSS PER SHARE
Loss per share was determined in accordance with Statement of Financial
Accounting Standard No. 128, "Earnings Per Share." There were no differences to
reconcile net (loss) for basic and diluted earnings per share purposes.
NOTE 8 - PRO-FORMA RESULTS
The following table sets forth the pro-forma results of operations for the three
and six-month periods ended June 29, 2002 and June 30, 2001.
The pro-forma results of operations for the three and six-month periods ended
June 29, 2002 and June 30, 2001 include the unaudited results of the Company and
the pro-forma results of PSMI and Inovis as if they were acquired by the Company
as of January 1, 2001. The primary adjustments from the historical results of
the acquired entities include amortization of goodwill, preferred stock
dividends and interest.
12
(000'S OMITTED EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues $ 125,595 $ 151,758 $ 268,879 $ 305,641
Net loss (1,099) (141) (2,169) (302)
Net loss attributable to common shareholders (1,401) (412) (2,766) (846)
Net loss per common share:
Basic $ (0.17) $ (0.06) $ (0.34) $ (0.11)
Diluted (0.17) (0.06) (0.34) (0.11)
Weighted average number of shares outstanding:
Basic 8,197 6,955 8,123 6,955
Diluted 8,197 6,955 8,123 6,955
NOTE 9 - CREDIT FACILITY
On March 1, 2002, the Company made a draw of $750,000 against its credit
facility in connection with the SSMI transaction. This draw is due in monthly
installments of principal in the amount of $12,000 and interest beginning April
1, 2002.
In connection with this funding, the total credit facility was reduced from
$18,000,000 to $14,000,000. As of June 29, 2002, the Company has the following
outstanding obligations under this facility (000's omitted):
Notes Payable $ 9,106
Letters of Credit 914
-------
$10,020
=======
At June 29, 2002, the Company was not in compliance with the current ratio
requirement and the senior debt leverage ratio requirement under the terms of
its credit agreement. The Company is currently in negotiations with its lenders
to restructure its credit facility. As the Company has not yet received a waiver
from its lenders regarding these covenant violations, the debt under the Credit
Agreement has been classified as a current liability as of June 29, 2002. The
Company is current on all principal and interest payments under the Credit
Agreement (see NOTE 4 - LIQUIDITY AND FINANCIAL CONDITION).
NOTE 10 - RESTRUCTURING CHARGES
During the second quarter 2002, the Company began to restructure its operations
in order to obtain necessary efficiencies throughout the organization. This
restructuring included reducing corporate headcount and relocating several key
individuals to its Columbus, Ohio headquarters. A summary of expenses included
in restructuring costs for the six months ended June 29, 2002 in the
accompanying statement of operations is as follows (000's omitted):
Relocation costs $127
Employee severance 115
----
$242
====
As of June 29, 2002, $71,000 related to employee severance and $66,000 related
to relocation costs are included in accrued expenses.
NOTE 11 - INCOME TAXES
At December 29, 2001, the Company had net operating loss carryforwards (NOL's)
available for federal tax purposes of approximately $12,000,000. Certain of
these NOL's are subject to annual limits and begin to expire in 2019. At June
29, 2002, the provision for income taxes includes state and local income taxes
not subject to state operating loss carryforwards.
13
NOTE 12 - RELATED PARTY TRANSACTIONS
Related Party Transactions
On April 3, 2002, the Company posted, outside of its credit facility discussed
in Note 9, a $2,000,000 Letter of Credit as collateral relating to its 2002
Workers' Compensation Program for non-Ohio employees. In connection with this
transaction, certain officers and shareholders of the Company pledged shares of
Company common stock as collateral with the lending institution for the letters
of credit. The Company paid a $60,000 fee to the officers and shareholders in
connection with this transaction.
On April 9, 2002, the Company entered into a Bridge Agreement and Common Stock
Purchase with one of its Series A Preferred Shareholders (the "Purchaser").
Under the terms of these agreements, the Purchaser acquired 166,667 shares of
common stock of the Company at $3.00 per share for a total purchase price of
$500,000. In addition, the Purchaser provided a short-term bridge note of
$1,500,000 to the Company which was due August 9, 2002 and bears interest of 15%
per annum. In connection with this transaction, the Company issued a warrant to
the Purchaser to purchase 100,000 shares of common stock at $3.00 per share.
Certain officers and shareholders of the Company have guaranteed the repayment
of $500,000 of this note.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has operated as a Professional Employer Organization ("PEO")
actively since 1986 as TEAM America. The Company participated in a reverse
merger with Mucho.com (Lafayette, CA) on December 28, 2000, which operated as an
Online Business Center ("OBC") beginning in July 1999.
PEO revenue is recognized as service is rendered. The PEO revenue consists of
charges by the Company for the wages and employer payroll taxes of the worksite
employees, the administrative service fee, workers' compensation charges, and
the health and retirement benefits provided to the worksite employees. These
charges are invoiced to the client at the time of each periodic payroll. The
Company negotiates the pricing for its various services on a client-by-client
basis based on factors such as market conditions, client needs and services
requested, the client's workers' compensation experience, credit exposure and
the required resources to service the account, among other factors. Because the
pricing is negotiated separately with each client and varies according to
circumstances, the Company's revenue, and therefore its gross margin, will
fluctuate based on the Company's client mix.
Direct costs of services are reflected in the Company's Statement of Operations
as "direct costs" and are reflective of the type of revenue being generated.
Direct costs of revenue include wages paid to worksite employees, employment
related taxes, costs of health and welfare benefit plans and workers'
compensation insurance costs. The Company primarily maintains two workers'
compensation programs. One covers the Ohio worksite employees co-employed by the
Company through the Ohio Bureau of Workers' Compensation program and the other
covers the Company's worksite employees co-employed by TEAM America located
outside the state of Ohio or all-other-states ("AOS"). The Company does not
provide workers' compensation to non-employees of the Company. The AOS workers'
compensation program insurance provider is The Hartford Insurance Company
(Hartford) which provides coverage for substantially all of the Company's
worksite and corporate employees outside the state of Ohio.
The Company's insurance policy dictates that if losses and fixed costs under the
policy are less than the amounts the Company paid, the insurer will refund the
difference to the Company. The amount of claims incurred in any policy year may
vary, and in a year with significantly fewer claims than estimated, the amount
of repayment from this account may be significant. The Company records in direct
costs a monthly charge based upon its estimate of the year's ultimate fully
developed losses plus the fixed costs charged by the insurance carrier to
support the program. This estimate is established each quarter based in part
upon information provided by the Company's insurers, internal analysis and its
insurance broker. The Company's internal analysis includes a quarterly review of
open claims and review of historical claims and losses related to the workers'
compensation programs. While management uses available information, including
nationwide loss ratios, to estimate ultimate losses, future adjustments may be
necessary based on actual losses. Since the recorded ultimate expense is based
upon a ten-year projection of actual claims paid and the timing of these
payments, as well as the interest earned on the Company's prepayments, the
Company relies on actuarial tables to estimate its ultimate expense.
As of June 29, 2002, the adequacy of the workers' compensation reserves were
determined, in management's opinion, to be reasonable. However, since these
reserves are for losses that have not been sufficiently developed due to the
relatively young age of these claims, and such variables as timing of payments
and investment returns thereon are uncertain or unknown, actual
14
results may vary from current estimates. The Company will continue to monitor
the development of these reserves, the actual payments made against the claims
incurred, the timing of these payments, the interest accumulated in the
Company's prepayments and adjust the reserves as deemed appropriate.
The Company's clients are billed at fixed rates, which are determined when the
contract is negotiated with the client. The fixed rates include charges for
workers' compensation based upon the Company's assessment of the costs of
providing workers' compensation to the client. If the Company's costs for
workers' compensation are greater than the costs included in the client's
contractual rate, the Company may be unable to recover these excess charges from
the clients. The Company reserves the right in its contracts to increase the
workers' compensation charges on a prospective basis only.
The Company maintains group insurance programs for all its worksite employees
nationwide, which include medical, dental, life, short-term disability,
long-term disability and vision care coverage. All of the Company's insurance
programs are conventionally insured where the maximum cost represents the
premium paid to the insurance carrier.
The Company's principal insurance carriers include United HealthCare, Ameritas,
Intermountain Health Care, Sierra Health Systems, Blue Cross and Blue Shield of
California, Blue Cross and Blue Shield of Georgia, Blue Cross and Blue Shield of
Idaho and Lifewise of Oregon.
The Company has finalized all of its rate actions for the 2002 fiscal year.
These rate increases or decreases were well below the national average and
ranged from a rate decrease of 3% to a rate increase up to 13% in all of the
Company's core markets. The reason for the reduced levels of rate increases were
attributable to changes in the plan designs and a more thorough medical
underwriting process, which began the middle of 2001.
Effective March 13, 2001, the Company acquired Professional Staff Management,
Inc. ("PSMI"), a PEO based in Salt Lake City with offices in San Diego,
Columbus, Cincinnati, and Las Vegas. Under the terms of the purchase agreement,
the Company acquired substantially all of the assets for $4,250,000 in cash,
$1,000,000 of seller financing supported by a letter of credit which was drawn
between September 2001 and June 2002, $1,000,000 in TEAM America Series A
Preferred Stock and $241,000 in TEAM America common stock. The transaction was
valued at approximately $6,491,000. The Company also incurred $84,000 of certain
legal, accounting and investment banking expenses, resulting in a total purchase
price of $6,575,000. The acquisition has been accounted for under the purchase
method and the results of operations of the acquired company have been included
in the statements of operations since the date of the acquisition. The purchase
price has been allocated based on the estimated fair value at the date of the
acquisition.
On March 1, 2002, the Company acquired certain assets and assumed certain
liabilities of Strategic Staff Management, Inc. ("SSMI"). The purchase price of
$476,000 included cash of $300,000, the assumption of customer deposits of
$172,000 and other costs of $4,000. The purchase price was allocated to the
assets acquired based on their relative fair values. In connection with this
transaction, the Company recorded $426,000 of intangible assets related to
customer relationships, which is being amortized over seven years, the estimated
useful life of such relationships and $50,000 for a non-compete agreement which
is being amortized over five years, the term of the agreement.
On May 1, 2002, the Company purchased certain assets of Inovis Corporation
("Inovis"). Under the terms of this transaction, the Company is required to pay
the greater of $1,150,000 (the "Minimum Price") or a factor of gross profits
generated by the Inovis business over the 24 months beginning May 2002 and
ending April 2004. Additionally, the Company agreed to assume $50,000 of
liabilities. Inovis is based in Atlanta, Georgia and has clients throughout the
United States, but primarily concentrated in Georgia. Inovis' total revenue for
its fiscal year ended June 30, 2001 was approximately $109,761,000.
The Company paid $250,000 at closing and recorded an account payable to Inovis
of $950,000. The $950,000 is classified as a current liability and included in
other accrued expenses on the accompanying balance sheet. In connection with
this transaction, the Company recorded $104,000 of property and equipment,
$605,000 of customer contracts/relationships and $491,000 of goodwill. The
customer contracts/relationships are included in other intangibles in the
accompanying balance sheet and are being amortized over the estimated useful
life of the contracts/relationship of seven years. The amortization expense is
being recorded based on the relative amounts of estimated annual cash flows over
the life of the contracts/relationships.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United
15
States. The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to customer bad debts, workers' compensation reserves,
income taxes, and contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
The Company believes the following critical accounting policies reflect the more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
REVENUE RECOGNITION. The Company bills its clients on each payroll date for (i)
the actual gross salaries and wages, related employment taxes and employee
benefits of the Company's worksite employees, (ii) actual advertising costs
associated with recruitment, (iii) workers' compensation and unemployment
service fees and (iv) an administrative fee. The Company's administrative fee is
computed based upon either a fixed fee per worksite employee or an established
percentage of gross salaries and wages (subject to a guaranteed minimum fee per
worksite employee), negotiated at the time the client service agreement is
executed. The Company's administrative fee varies by client based primarily upon
the nature and size of the client's business and the Company's assessment of the
costs and risks associated with the employment of the client's worksite
employees. Accordingly, the Company's administrative fee income will fluctuate
based on the number and gross salaries and wages of worksite employees, and the
mix of client fee income will fluctuate based on the mix of total client fee
arrangements and terms. Although most contracts are for one year and renew
automatically, the Company and its clients generally have the ability to
terminate the relationship with 30 days' notice.
The Company bills its clients for workers' compensation and unemployment costs
at rates which vary by client based upon the clients' claims and rate history.
The amount billed is intended (i) to cover payments made by the Company for
insurance premiums and unemployment, (ii) to cover the Company's costs of
contesting workers' compensation and unemployment claims, and other related
administrative costs and (iii) to compensate the Company for providing such
services. The Company has an incentive to minimize its workers' compensation and
unemployment costs because the Company bears the risk that its actual costs will
exceed those billed to its clients, and conversely, the Company profits in the
event that it effectively manages such costs. The Company believes that this
risk is mitigated by the fact that its standard client agreement provides that
the Company, at its discretion, may adjust the amount billed to the client to
reflect changes in the Company's direct costs, including without limitation,
statutory increases in employment taxes and insurance. Any such adjustment that
relates to changes in direct costs is effective as of the date of the changes,
and all changes require 30 days' prior notice to the client.
WORKERS' COMPENSATION. The Company has maintained a self-insured workers'
compensation program for its Ohio employees since July 1999 and has a high
retention workers' compensation policy covering most of its non-Ohio employees.
The Company records workers' compensation expense based on the estimated
ultimate total cost of each claim, plus an estimate for incurred but not
reported (IBNR) claims. Under the Ohio Self-Insurance Program, the Company is
self-funded up to $250,000 per occurrence and purchases private insurance for
individual claims in excess of that amount. Effective January 1, 2002, the
Company purchased excess loss coverage for individual claims that exceed
$500,000 through The Hartford Insurance Company. As of June 1, 2002, the Company
obtained coverage for its Ohio employees through the Ohio Bureau of Workers'
Compensation Program.
Under its insured program for non-Ohio employees, the Company has a per claim
retention limit of $500,000 for the first two occurrences and $250,000 per
occurrence thereafter. For the insurance program covering the periods July 1,
1999 through September 30, 2000, October 1, 2000 through December 31, 2001 and
January 1, 2002 through December 31, 2002, the aggregate caps were $4,176,000,
$4,950,000 and $9,000,000, respectively.
In addition to providing the claims expense under the plan, as described above,
the Company is required to "pre-fund" a portion of the estimated claims under
the non-Ohio program. The amounts "pre-funded" are used by the insurance carrier
to pay claims. The amount "pre-funded" is measured at various periods in the
insurance contract to determine, based upon paid and incurred claims history,
whether the Company is due a refund or owes additional funding. As of June 29,
2002, the Company has recorded prefunded amounts to its carrier of $3,628,000 of
which $1,016,000 is included in current assets and $2,612,000 is included in
non-current assets.
16
Goodwill
Effective July 1, 2001 and December 30, 2001, respectively, the Company adopted
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"), which were issued by the Financial
Accounting Standards Board in July 2001. SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and that certain intangible assets acquired in a
business combination shall be recognized as assets apart from goodwill. SFAS 142
requires goodwill to be tested for impairment under certain circumstances, and
written down when impaired, rather than being amortized as previous standards
required. Furthermore, SFAS 142 requires purchased intangible assets other than
goodwill to be amortized over their useful lives unless these lives are
determined to be indefinite.
As required by SFAS 142, the Company has completed an assessment of the
categorization of its existing intangible assets and goodwill and the
transitional impairment test in accordance with the new criteria. As of the date
of adoption, no goodwill impairment was recognized under the provisions of the
transitional impairment test. The Company is required to test for impairment on
an annual basis and between annual tests in certain circumstances. There can be
no assurance that future goodwill impairment tests will not result in a charge
to operations (see NOTE 4 - LIQUIDITY AND FINANCIAL CONDITION).
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's 2001
Annual Report on Form 10-K/A, as well as the consolidated financial statements
and notes thereto included in this quarterly report on Form 10-Q.
THREE MONTHS ENDED JUNE 29, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
The following table presents certain information related to the Company's
results of operations for the three months ended June 29, 2002 and June 30,
2001:
(000'S OMITTED EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
June 29, June 30, %
2002 2001 Change
-------- -------- ---------
Revenues $ 119,208 $ 123,130 -3.19%
Gross Profit 5,159 5,261 -1.94%
Operating Expenses 5,405 5,193 4.08%
Operating Income (Loss) (246) 68 -461.76%
Net Loss (821) (207) -296.62%
Net Loss Attributable to Common Shareholders (1,123) (478) -134.94%
Net Loss Per Share Attributable to Common Shareholders (0.14) (0.07) -100.00%
REVENUES
Consolidated revenues were $119,208,000 for the three months ended June 29, 2002
compared to $123,130,000 for the three months ended June 30, 2001. The decrease
of $3,922,000 is attributable to the following:
- The incremental clients associated with the SSMI transaction
contributed $5,816,000 to the increase and the incremental
clients associated with the Inovis transaction contributed
$15,771,000.
- Total revenue, excluding the items discussed above, decreased
to $97,621,000 for the three months ended June 29, 2002 from
$123,130,000, resulting in an aggregate decrease in revenue of
$25,509,000. This lower revenue is a result of the combination
of the Company's efforts during 2001 to focus its efforts on
clients with lower risk and higher margin, as well as the
overall impact of the nationwide economic downturn experienced
in 2001 and into 2002 which has resulted in many of the
Company's clients reducing payroll and/or postponing planned
expansions.
DIRECT COSTS/GROSS PROFIT
For the three months ended June 29, 2002, direct costs were $114,094,000, or
95.71% of revenues, compared to direct costs of $117,869,000, or 95.73% of
revenues, for the three months ended June 30, 2001. Gross profit for the three
months ended June 29, 2002 was $5,159,000, or 4.29% of revenues, compared to
$5,261,000, or 4.27% of revenues, for the three months ended June 30, 2001.
17
OPERATING EXPENSES
For the three months ended June 29, 2002, consolidated operating expenses were
$5,405,000, or 4.53% of revenues, compared to $5,193,000, or 4.22% of revenues,
for the three months ended June 30, 2001. This increase of $212,000 is due to an
increase in corporate payroll and payroll related expenses of $181,000, other
selling, general and administrative expenses of $107,000, restructuring expenses
of $207,000, and depreciation expense of $97,000, partially offset by a
reduction in amortization expense of $384,000.
OPERATING LOSS
For the three months ended June 29, 2002 consolidated operating loss was
$246,000 compared to consolidated operating income of $68,000 for the three
months ended June 30, 2001. This change is primarily a result of the changes in
operating expenses discussed above.
INTEREST EXPENSE
For the three months ended June 29, 2002 net interest expense was $538,000
compared to $254,000 for the three months ended June 30, 2001. The increase in
net interest expense is due to an increase in interest on bank debt of $30,000,
interest expense on the bridge note of $56,000 and amortization of deferred
financing fees associated with warrants issued in connection with the bridge
note of $85,000, a loss due to change in fair value of interest swap instrument
of $81,000, an increase in interest due to capital leases of $17,000 and a
decrease in interest income of $15,000, resulting in an increase in interest
expense, net of $284,000.
The increase in interest expense on bank debt and other financing arrangements
is primarily due to increased average borrowings under the Company's Credit
Facility. The increase in interest due to capital leases is due to computer
equipment purchased during 2001 under capital leases.
INCOME TAX EXPENSE
For the three months ended June 29, 2002 and June 30, 2001, respectively, no
provision for federal income taxes has been recorded. The provision for income
taxes relates to certain state and local income taxes.
NET LOSS AND LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
The net loss for the three months ended June 29, 2002 was $821,000 compared to a
net loss of $207,000 for the three months ended June 30, 2001. During the three
months ended June 29, 2002 and June 30, 2001 the Company recorded preferred
stock dividends of $302,000 and $271,000, respectively, contributing to net loss
attributable to common shareholders of $1,123,000, or $0.14 per share, and
$478,000, or $0.07 per share, respectively.
The weighted average number of shares used in the calculation of loss
attributable to common shareholders for the three months ended June 29, 2002 and
June 30, 2001, excludes options, warrants and the convertible preferred stock,
as their inclusion would be anti-dilutive.
SIX MONTHS ENDED JUNE 29, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
The following table presents certain information related to the Company's
results of operations for the six months ended June 29, 2002 and June 30, 2001:
18
(000'S OMITTED EXCEPT FOR SHARE AMOUNTS)
June 29, June 30, %
2002 2001 Change
--------- --------- ---------
Revenues $ 238,325 $ 224,925 5.96%
Gross Profit 9,781 9,290 5.29%
Operating Expenses 11,037 9,320 18.42%
Operating Income (Loss) (1,256) (30) -4086.67%
Net Loss (2,043) (462) -342.21%
Net Loss Attributable to Common Shareholders (2,640) (986) -167.75%
Net Loss Per Share Attributable to Common Shareholders (0.33) (0.14) -135.71%
REVENUES
Consolidated revenues were $238,325,000 for the six months ended June 29, 2002
compared to $224,925,000 for the six months ended June 30, 2001. The increase of
$13,400,000 is attributable to the following:
- The inclusion of PSMI for the entire period ended June 29,
2002. PSMI revenues included in the period ended June 29, 2002
were $45,131,000 compared to $41,778,000 in the period ended
June 30, 2001, contributing $3,353,000 to the net increase in
revenues.
- The incremental clients associated with the SSMI transaction
contributed $8,324,000 to the increase and the incremental
clients associated with the Inovis transaction contributed
$15,771,000.
- Certain clients paid bonuses of approximately $20,056,000
during the period ended June 29, 2002. These clients did not
pay comparable bonuses during the period ended June 30, 2001,
therefore such revenue was incremental for the June 29, 2002
period.
- Total revenue, excluding the items discussed above, decreased
to $149,043,000 for the period ended June 29, 2002 from
$183,147,000, reducing the aggregate increase in revenue by
$34,104,000. This lower revenue is a result of the combination
of the Company's efforts during 2001 to focus its efforts on
clients with lower risk and higher margin, as well as the
overall impact of the nationwide economic downturn experienced
in 2001 and into 2002 which has resulted in many of the
Company's clients reducing payroll and/or postponing planned
expansions.
DIRECT COSTS/GROSS PROFIT
For the six months ended June 29, 2002, direct costs were $228,544,000, or
95.90% of revenues, compared to direct costs of $215,635,000, or 95.87% of
revenues, for the six months ended June 30, 2001. Gross profit for the six
months ended June 29, 2002 was $9,781,000, or 4.10% of revenues, compared to
$9,290,000, or 4.13% of revenues, for the six months ended June 30, 2001. The
gross profit as a percent of revenues for the six months ended June 29, 2002 is
impacted by the $20,056,000 of bonuses discussed above, as the Company
recognized only its normal payroll margin on these amounts. Accordingly, the
gross profit as a percent of revenue would be 4.48% after excluding such
incremental revenue.
OPERATING EXPENSES
For the six months ended June 29, 2002, consolidated operating expenses were
$11,037,000, or 4.63% of revenues, compared to $9,320,000, or 4.14% of revenues,
for the six months ended June 30, 2001. This increase of $1,717,000 is due to an
increase in corporate payroll and payroll related expenses of $654,000, other
selling, general and administrative expenses of $1,095,000, systems and
operations development expenses of $302,000, and depreciation expense of
$194,000, partially offset by a reduction in amortization expense of $705,000.
OPERATING LOSS
For the six months ended June 29, 2002 consolidated operating loss was
$1,256,000 compared to a consolidated operating loss of $30,000 for the six
months ended June 30, 2001. The increase in operating loss is a result of the
changes in gross profit and operating expenses discussed above.
19
INTEREST EXPENSE
For the six months ended June 29, 2002, net interest expense was $750,000
compared to $396,000 for the six months ended June 30, 2001. The increase in net
interest expense is due to an increase in interest on bank debt of $118,000,
interest expense on the bridge note of $56,000 and amortization of financing
costs associated with warrants issued in connection with the bridge note of
$85,000, a loss due to change in fair value of interest rate swap instrument of
$38,000, increase in interest due to capital leases of $32,000 and a decrease in
interest income of $25,000, resulting in an increase in net interest expense of
$354,000.
The increase in interest expense on bank debt and other financing arrangements
is primarily due to increased average borrowings under the Company's Credit
Facility. The increase in interest due to capital leases is due to computer
equipment purchased during 2001 under capital leases.
INCOME TAX EXPENSE
For the six months ended June 29, 2002 and June 30, 2001, respectively, no
provision for federal income taxes has been recorded. The provision for income
taxes relates to certain state and local income taxes.
NET LOSS AND LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
The net loss for the six months ended June 29, 2002 was $2,043,000 compared to a
net loss of $462,000 for the six months ended June 30, 2001. During the six
months ended June 29, 2002 and June 30, 2001 the Company recorded preferred
stock dividends of $597,000 and $524,000, respectively, contributing to net loss
attributable to common shareholders of $2,640,000, or $0.33 per share and
$986,000, or $0.14 per share, respectively.
The weighted average number of shares used in the calculation of loss
attributable to common shareholders for the six months ended June 29, 2002 and
June 30, 2001, excludes options, warrants and the convertible preferred stock,
as their inclusion would be anti-dilutive.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $5,206,000 for the six months ended
June 29, 2002 compared to $629,000 for the six months ended June 30, 2001, or a
$4,577,000 increase in cash used in operating activities.
Net cash used in investing activities was $694,000 for the six months ended June
29, 2002 compared to $4,939,000 for the six months ended June 30, 2001. The
primary use of cash for investing activities during the six months ended June
29, 2002 was $300,000 for the acquisition of customer relationship rights from
SSMI and a related non-compete agreement and $250,000 for the acquisition of
certain assets of Inovis. During the six months ended June 30, 2001, the Company
purchased PSMI, which used $4,250,000 of cash. Property and equipment additions
during the six months ended June 29, 2002 were funded primarily through capital
leases. During the period ended June 30, 2001, the Company purchased $689,000 of
property and equipment.
Net cash provided by financing activities during the six months ended June 29,
2002 was $4,453,000, compared to net cash used in financing activities during
the six months ended June 30, 2001 of $3,565,000. The net cash provided by
financing activities during the six months ended June 29, 2002 was primarily
from $2,563,000 from checks drawn in excess of bank balances, $750,000 from
borrowing under the Company's acquisition credit facility, $1,500,000 under the
bridge note and $500,000 from the issuance of common stock partially offset by
repayments of bank notes of $693,000 and capital lease obligations of $142,000.
The checks drawn in excess of bank balances is primarily a timing function
related to the Company's cash inflows from clients being distributed between
electronic payments and cash payments and the majority of client related cash
outflows being paid electronically. The Company has recently implemented a
process to convert clients to electronic payment methods. The $750,000 borrowed
under the Company's credit facility was used for the SSMI transaction. The net
cash flow used in financing activities for the six months ended June 30, 2001
was due to the payment of $11,622,000 in connection with a stock repurchase
obligation related to the Mucho.com reverse acquisition of TEAM America, offset
by $8,250,000 borrowed under the Company's credit facility.
In connection with the borrowing of $750,000 in March 2002, the Company and its
lenders agreed to temporarily reduce the Credit Facility from $18,000,000 to
$14,000,000. As of June 29, 2002 the Company had outstanding loans against the
facility of $9,106,000 and outstanding letters of credit of $914,000.
20
As a result of the SSMI transaction and the Inovis transaction completed March
1, 2002 and May 1, 2002, respectively, the Company has added incremental gross
margin to its operations which contributes to cash flow from operations. In
addition to the incremental gross margin from these transactions, the Company is
continually evaluating its operating expenses and is in the process of
implementing various cost savings measures, including the containment of
corporate payroll costs.
On April 9, 2002, the Company entered into a Bridge Agreement and Common Stock
Purchase Agreement with one of its Series A Preferred Shareholders (the
"Purchaser"). Under the terms of these agreements, the Purchaser acquired
166,667 shares of common stock for $500,000. In addition, the Purchaser provided
a short-term bridge note of $1,500,000 to the Company which was due August 9,
2002 and bears interest at 15% per annum.
As of June 29, 2002, the Company was in violation of the current ratio and
senior debt leverage ratio requirements of its credit facility. The Company's
banks have not (as of August 22, 2002) issued a notice of default as a result of
the noted debt covenant violations. Should a notice of default be issued, the
banks could request the following:
- Termination of commitments and obligations to issue letters of
credit under the credit agreement.
- Declaration of all obligations, including the entire unpaid
principal, all unpaid interest accrued thereon and all other
sums payable by the Company under the credit agreement,
including letter of credit, to be immediately due and payable.
Under the terms of the Company's Series A Preferred Securities Purchase
Agreement, should the Company be declared in default under the terms of its
credit facility, the Company would then be in default of its Series A Preferred
Securities Purchase Agreement, and the holders of the preferred shares would
have the right to put the shares back to the Company.
Additionally, should the Company be in default of the Series A Preferred
Securities Purchase Agreement, the dividend rate on the Series A Preferred
Shares would be increased to 20% thereafter, and the holders of such shares
would be entitled to an extraordinary special dividend in an amount that would
have been recorded had the previously declared dividends at 9.75% been accrued
at 20%.
In addition to the above, the $1,500,000 Note Payable - Related Party (Series A
Preferred Shareholder) was due on August 9, 2002. This note has not been paid.
The Company is currently in negotiations with its banks and its Series A
Preferred Shareholders regarding additional capital infusion, a waiver of
covenant violations and amendments to its credit facility and note payable -
related party and Series A Preferred Shares.
During the second quarter 2002, the Company received an unsolicited offer from a
potential equity partner. In May 2002, the Company formed a Special Committee of
the Board of Directors to evaluate the proposal. Management is in continuing
discussions with the party. While evaluating this offer, management engaged an
investment banker to assist in evaluating this and other offers, as well as
other assistance in raising capital. As a result of its discussions with its
banks and Series A Preferred Shareholders, as well as other interested parties,
management anticipates a capital infusion before the end of 2002. Proceeds from
any capital transaction will be used for general corporate purposes, primarily
the pay down of the working capital deficit.
There can be no guarantee that any such capital infusion will be completed,
accordingly management is evaluating other potential financial arrangements.
Failure by the Company to raise additional capital will result in a material
adverse affect on the future financial condition and future results of
operations of the Company.
GOODWILL
Effective July 1, 2001 and December 30, 2001, respectively, the Company adopted
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"), which were issued by the Financial
Accounting Standards Board in July 2001. SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and that certain intangible assets acquired in a
business combination shall be recognized as assets apart from goodwill. SFAS 142
requires goodwill to be tested for impairment under certain circumstances, and
written down when impaired, rather than being amortized as previous standards
required. Furthermore, SFAS 142 requires purchased intangible assets other than
goodwill to be amortized over their useful lives unless these lives are
determined to be indefinite.
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As required by SFAS 142, the Company has completed an assessment of the
categorization of its existing intangible assets and goodwill and the
transitional impairment test in accordance with the new criteria. As of the date
of adoption, no goodwill impairment was recognized under the provisions of the
transitional impairment test. The Company is required to test for impairment on
an annual basis and between annual tests in certain circumstances. There can be
no assurance that future goodwill impairment tests will not result in a charge
to operations (see NOTE 4 - LIQUIDITY AND FINANCIAL CONDITION).
Had the Company adopted this statement as of the beginning of 2001, $450,000 and
$801,000 of amortization expense would not have been recognized and net loss
would have decreased by $450,000 and $801,000 and loss per share attributable to
common shareholders would have decreased by $0.06 and $0.12 for the three and
six months ended June 30, 2001, respectively.
CONTINGENCIES
At June 29, 2002, the Company has recorded a $360,000 reserve for certain tax
related contingencies. The estimated amount of possible loss in excess of these
reserves is $240,000.
NEW ACCOUNTING STANDARDS
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 establishes a single accounting model, based on the framework
established in Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("SFAS 121"), for long-lived assets to be disposed of by sale, and resolves
significant implementation issues related to SFAS 121. The Company adopted SFAS
144 as of December 30, 2001. Adoption of this statement had no impact on the
Company's results of operations or financial condition.
INFLATION
The Company believes the effects of inflation have not had a significant impact
on its results of operations or financial condition.
FORWARD-LOOKING INFORMATION
Statements in the preceding discussion that indicate the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. It is important to note that the
Company's actual results could differ materially from those projected in such
forward-looking statements.
Additional information concerning factors that could cause actual results to
differ materially from those suggested in the forward-looking statements is
contained under the caption "Business-Risk Factors" in the Company's Annual
Report on Form 10-K/A for the year ended December 29, 2001 filed with the
Securities and Exchange Commission and may be amended from time to time.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and shareholder values
of the Company may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results and values are beyond the Company's ability to control or predict.
Shareholders are cautioned not to put undue reliance on forward-looking
statements. In addition, the Company does not have any intention or obligation
to update forward-looking statements after the date hereof, even if new
information, future events, or other circumstances have made them incorrect or
misleading. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
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