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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 SEPTEMBER 28, 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
NOVEMBER 8, 2002 WAS 8,215,628.
EXPLANATORY NOTE - RESTATEMENT AND AUDITOR'S REVIEW
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
SEPTEMBER 28, 2002
INDEX
PART I. FINANCIAL INFORMATION
PAGE
NO.
Item 1. Financial Statements:
Explanatory Note........................................................................................... 2
Condensed Consolidated Balance Sheets - September 28, 2002 (unaudited)
and December 29, 2001 (unaudited) ......................................................................... 4
Condensed Consolidated Statements of Operations - Three and nine-month periods
ended September 28, 2002 (unaudited) and September 29, 2001 (unaudited).................................... 6
Condensed Consolidated Statements of Cash Flows - Nine-month periods
ended September 28, 2002 (unaudited) and September 29, 2001 (unaudited)................................... 7
Condensed Consolidated Statement of Changes in Shareholders' Equity - Nine-month
period ended September 28, 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
Item 4. Controls and Procedures.............................................................................. 23
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities..................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders................................................. 24
Item 6. Exhibits and Reports on Form 8-K.................................................................... 24
Signatures.................................................................................................... 25
Certifications................................................................................................ 26
Note: Item 3 of Part I and Items 1, 2 and 5 of Part II are omitted because they are not applicable.
3
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 28, 2002 AND DECEMBER 29, 2001
(000's omitted except share amounts)
SEPTEMBER 28, DECEMBER 29,
2002 2001
---------------- ---------------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 1,539 $ 1,447
Receivables:
Trade, net of allowance for doubtful accounts
of $248 and $392, respectively 1,023 1,036
Unbilled revenues 11,896 9,893
Other receivables 1,125 1,404
---------------- ---------------
Total Receivables 14,044 12,333
---------------- ---------------
Prepaid expenses 452 600
Workers' compensation deposits - current 1,010 1,283
Deferred income tax asset 597 1,497
---------------- ---------------
Total Current Assets 17,642 17,160
---------------- ---------------
PROPERTY AND EQUIPMENT, NET 2,003 2,580
---------------- ---------------
OTHER ASSETS:
Goodwill, net 36,014 35,238
Other intangible assets, net 1,036 150
Cash surrender value of life insurance policies 450 521
Deferred income tax asset 784 784
Workers' compensation deposits - non current 2,943 1,515
Other 882 896
---------------- ---------------
Total Other Assets 42,109 39,104
---------------- ---------------
Total Assets $ 61,754 $ 58,844
================ ===============
Continued on next page
4
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 28, 2002 AND DECEMBER 29, 2001
(000's omitted except share amounts)
SEPTEMBER 28, DECEMBER 29,
2002 2001
---------------- ----------------
(UNAUDITED) (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 2,602 $ 2,325
Debt in default 9,057 1,250
Capital lease obligations 281 296
Accrued compensation 12,429 10,338
Accrued payroll taxes and insurance 8,430 6,475
Accrued workers' compensation liability 1,745 1,750
Other accrued expenses 3,019 2,948
---------------- ----------------
Total Current Liabilities 37,563 25,382
---------------- ----------------
LONG-TERM LIABILITIES:
Debt, less current portion - 7,799
Capital lease obligations, less current portion 368 547
Accrued workers' compensation liability, less current portion 2,020 2,879
Client deposits 811 575
Deferred compensation 451 521
Other 325 723
---------------- ----------------
Total Liabilities 41,538 38,426
---------------- ----------------
NOTE PAYABLE - RELATED PARTY 1,500 -
CONVERTIBLE PREFERRED STOCK, FACE AMOUNT OF $11,000 9,235 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 September 28, 2002 and December 29, 2001, respectively 44,552 43,947
Deferred compensation (13) (20)
Accumulated deficit (20,282) (17,087)
---------------- ----------------
24,257 26,840
Less - Treasury stock, 2,739,782 shares, at cost (14,776) (14,776)
---------------- ----------------
Total Shareholders' Equity 9,481 12,064
---------------- ----------------
Total Liabilities and Shareholders' Equity $ 61,754 $ 58,844
================ ================
See Notes to Condensed Consolidated Financial Statements.
5
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001
(000'S OMITTED EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- -----------------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES $ 121,505 $ 114,343 $ 359,830 $ 339,268
---------------- ---------------- ---------------- ----------------
DIRECT COSTS:
Salaries and wages 101,569 95,565 301,178 281,889
Payroll taxes, workers' compensation
and other direct costs 14,667 13,267 43,602 42,578
---------------- ---------------- ---------------- ----------------
Total direct costs 116,236 108,832 344,780 324,467
---------------- ---------------- ---------------- ----------------
GROSS PROFIT 5,269 5,511 15,050 14,801
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES:
Administrative salaries 2,818 2,794 8,544 7,866
Other selling, general and administrative expenses 1,828 1,825 5,929 4,831
Restructuring charges 29 309 270 384
Systems and operations development costs 10 - 312 -
Depreciation and amortization 363 818 1,030 1,985
---------------- ---------------- ---------------- ----------------
Total operating expenses 5,048 5,746 16,085 15,066
---------------- ---------------- ---------------- ----------------
OPERATING INCOME (LOSS) 221 (235) (1,035) (265)
Interest expense, net (459) (452) (1,209) (848)
---------------- ---------------- ---------------- ----------------
LOSS BEFORE INCOME TAXES (238) (687) (2,244) (1,113)
Income tax expense (7) (36) (44) (72)
---------------- ---------------- ---------------- ----------------
NET LOSS (245) (723) (2,288) (1,185)
Preferred stock dividends (310) (288) (907) (812)
---------------- ---------------- ---------------- ----------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (555) $ (1,011) $ (3,195) $ (1,997)
================ ================ ================ ================
Basic and diluted net loss per common share $ (0.07) $ (0.14) $ (0.39) $ (0.28)
Weighted average number of shares used in per
share computation 8,216 7,491 8,154 7,114
See Notes to Condensed Consolidated Financial Statements.
6
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001
(000's omitted)
Nine Months Ended
-------------------------------------
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
----------------- ------------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,288) $ (1,185)
Adjustments to reconcile net loss to net cash used in
operating activities, excluding the impact of acquisitions:
Depreciation and amortization 1,030 1,985
Bad debt expense 179 -
Amortization of financing costs, warrants 105 -
Loss in fair market value of derivative 125 221
Change in other assets and liabilities 198 (4,559)
----------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES (651) (3,538)
----------------- ------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (168) (1,146)
Cash used in acquisitions of intangible assets (550) (4,250)
----------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES (718) (5,396)
----------------- ------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Checks drawn in excess of bank balances - 1,761
Proceeds from bank borrowings 750 8,250
Proceeds from short term borrowing - related party 1,500 (270)
Notes payable and short-term borrowing repaid (1,055) -
Proceeds from issuance of common stock 500 -
Buy-back of treasury stock - (29)
Payments on capital lease obligations (208) (78)
Payment of stock repurchase obligation - (11,622)
Other financing costs (26) -
----------------- ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,461 (1,988)
----------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 92 (10,922)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,447 10,925
----------------- ------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,539 $ 3
================= ==================
Supplemental disclosure of cash flow information:
Interest paid $ 1,145 $ 548
Income tax paid, net $ 42 $ 521
See Notes to Condensed Consolidated Financial Statements.
7
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the nine-month periods ended September 28, 2002 and September 29, 2001,
the Company accrued preferred stock dividends payable in-kind equivalent of
$907,000 and $812,000, respectively, in connection with the $11,000,000 face
value of preferred stock.
During the nine-month period ended September 28, 2002, the Company acquired
$14,000 of property and equipment under capital leases.
During the nine-month period ended September 29, 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 nine-month period ended September 28, 2002, the Company acquired
certain assets of Inovis Corporation. In connection with this transaction, the
Company recorded $104,000 of property and equipment, $605,000 of other
intangible assets, $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 NINE MONTHS ENDED SEPTEMBER 28, 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 - - 7 - - 7
Preferred stock dividends - - - - (907) (907)
Net loss - - - - (2,288) (2,288)
-------------- ------------- ------------ ------------ ------------- -------------
Balance at September 28, 2002 10,955,410 $ 44,552 $ (13) $ (14,776) $ (20,282) $ 9,481
============== ============= ============ ============ ============= =============
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 Employer
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 nine months ended September
28, 2002 include the results of the Company 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 nine months ended September 29, 2001 include the results of the Company
for the entire period 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 3, other than the
reclassification of debt to current liabilities.
NOTE 3 - LIQUIDITY AND FINANCIAL CONDITION
At September 28, 2002, the Company was in default under its credit facility
related to two financial covenants. As of September 30, 2002, the Company and
its senior lenders entered into an Omnibus Forbearance and Modification
Agreement (the "Forbearance"), which ends on the earlier of March 31, 2003 or
the date of Forbearance Default, as defined in the Forbearance (the "Forbearance
Period"). Under the terms of the Forbearance, the senior lenders forbear from
exercising any other rights or remedies available to them with regards to the
covenant violations under the credit agreement. In connection with the
Forbearance, the Company is obligated to pay interest only on a monthly basis as
required under the terms of the credit agreement. All unpaid principal and
interest is due and payable on April 1, 2003. During the Forbearance Period,
interest will accrue at the default rate of prime plus four (8.75% at September
28, 2002), but the Company is only required to pay interest monthly at a rate of
prime plus one (5.75% at September 28, 2002). In addition to the payment of
principal and interest, the Company is required to pay a $100,000 Forbearance
Fee at the end of the Forbearance Period. The terms of the Forbearance include
monthly financial covenants that must be maintained by the Company, the most
stringent being the maintenance of minimum monthly Earnings Before Interest,
Taxes, Depreciation and Amortization.
The Forbearance also precludes the Company from (i) making any distributions
with respect to its preferred and/or common shares; (ii) making any payments
with respect to indebtedness which has been subordinated to the credit facility;
(iii) making any pay increases or loans to executive officers; and (iv) making
any payment not in the ordinary course of business. Additionally, the Company
may not make any acquisitions that require capital outlays during the
Forbearance Period without lenders approval. The Company is required to engage a
financial consultant to conduct an analysis of the Company's cash flow
projections and to provide a written report to the lenders regarding such
analysis.
As a result of the default and Forbearance, the Company's debt outstanding under
the senior credit facility is classified in the Company's balance sheet as a
current liability at September 28, 2002.
10
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 and fail to cure such default during the cure period, the
Company would then be in default of its Series A Preferred Securities Purchase
Agreement. As a result, the holders of these preferred shares would have certain
rights under this agreement, including 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 equal to
what would have been recorded had all previously declared dividends at 9.75%
been accrued at 20%. Under the terms of the Forbearance, the Company is
currently in a cure period, accordingly, the preferred shares are not deemed to
be in default. If the Company is not successful in refinancing or modifying the
terms of the credit facility and/or the Series A Preferred Securities Purchase
Agreement, or alternatively, entering into an agreement to extend the cure
period under the Forbearance, it is probable the Company could be deemed in
default of the Series A Preferred Securities Purchase Agreement.
In addition to the above, the $1,500,000 Note Payable - Related Party (Series A
Preferred Shareholder) was due on August 9, 2002. In accordance with the terms
of the agreement, this note can only be paid out of an equity financing
occurring prior to August 9, 2002. Since no such financing occurred, the note
has been classified as mezzanine equity in the accompanying balance sheet.
Ongoing discussions with the Related Party as to the ultimate disposition of
this note may result in a reclassification of this financial instrument in the
Company's balance sheet.
The Company is currently in negotiations with its banks, its Series A Preferred
Shareholders and a potential new equity investor regarding financial
restructuring alternatives, including additional capital infusion into the
Company. Additionally, the Company is pursuing negotiations with its banks and
its Series A Preferred Shareholders regarding amendments to its credit facility
and Series A Preferred Shares terms. There can be no assurance that the Company
will be successful in any of these negotiations.
During the second quarter 2002, the Company received an unsolicited offer from a
potential equity investor. In May 2002, the Company formed a Special Committee
of the Board of Directors to evaluate the proposal. 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. A Finance Committee of
the Board of Directors has been formed to respond to equity proposals and
otherwise continue the work of the Special Committee and to investigate and
evaluate alternatives.
Proceeds from any capital transaction will be used for general corporate
purposes, primarily the paydown of the working capital deficit. There can be no
guarantee that any such financial restructuring or capital infusion will be
completed, accordingly management is evaluating other alternatives. Failure by
the Company to raise additional capital will result in a material adverse affect
on the financial condition and results of operations of the Company.
NOTE 4 - 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 (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 during the period ended March 31, 2001 and
was being amortized over 20 years. Effective December 30, 2001, the Company
ceased amortizing goodwill in accordance with new accounting pronouncements (see
NOTE 5).
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.
11
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.
NOTE 5 - 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 3 - LIQUIDITY AND FINANCIAL CONDITION).
Had the Company adopted this statement as of the beginning of 2001, $516,000 and
$1,317,000 of amortization expense would not have been recognized and net loss
would have decreased by $516,000 and $1,317,000 and loss per share attributable
to common shareholders would have decreased by $0.07 and $0.19 for the three and
nine months ended September 29, 2001, respectively.
Contingencies
At September 28, 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 6 - 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.
12
NOTE 7 - PRO-FORMA RESULTS
The following table sets forth the pro-forma results of operations for the three
and nine-month periods ended September 28, 2002 and September 29, 2001.
The pro-forma results of operations for the three and nine-month periods ended
September 28, 2002 and September 29, 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.
(000's omitted except per share amounts)
Three Months Ended Nine Months Ended
--------------------------------------- --------------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
------------------- ------------------ ------------------ ------------------
Revenues $ 121,505 $ 140,747 $ 390,384 $ 444,483
Net loss (245) (738) (2,414) (1,037)
Net loss attributable to common shareholders (555) (1,026) (3,321) (1,849)
Net loss per common share:
Basic $ (0.07) $ (0.14) $ (0.41) $ (0.26)
Diluted (0.07) (0.14) (0.41) (0.26)
Weighted average number of shares outstanding:
Basic 8,216 7,491 8,154 7,134
Diluted 8,216 7,491 8,154 7,134
NOTE 8 - CREDIT FACILITY
On March 1, 2002, the Company made a draw of $750,000 against its credit
facility in connection with the SSMI transaction.
In connection with this funding, the total credit facility was reduced from
$18,000,000 to $14,000,000. The Company does not anticipate that its lenders
will approve any additional draws under this facility during the Forbearance
Period. As of September 28, 2002, the Company has the following outstanding
obligations under this facility (000's omitted):
Notes Payable $ 8,744
Letters of Credit 914
---------------
$ 9,658
===============
At September 28, 2002, the Company was in default under the terms of its credit
agreement and as of September 30, 2002, entered into the Forbearance with its
lenders. The Company is currently in negotiations with its lenders to
restructure its credit facility. As of September 28, 2002, the Company was
current on all principal and interest payments under the credit agreement (see
NOTE 3 - LIQUIDITY AND FINANCIAL CONDITION).
NOTE 9 - RESTRUCTURING CHARGES
Throughout 2002, the Company continued 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 nine months ended September 28, 2002 in the accompanying statement
of operations is as follows (000's omitted):
13
Relocation costs $ 152
Employee severance 118
-------------
$ 270
=============
As of September 28, 2002, $30,000 related to employee severance is included in
accrued expenses.
NOTE 10 - 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
September 28, 2002, the provision for income taxes includes state and local
income taxes not subject to state operating loss carryforwards. At September 28,
2002, the Company's deferred tax assets, net of valuation allowances, totaled
$1,381,000. The Company's estimate of valuation allowances for deferred tax
assets is primarily dependent on the Company's forecast of future taxable
income. It is reasonably possible that changes in these estimates could occur in
the near term. There can be no assurance that future impairments will not occur
and result in additional allowances thereby reducing the carrying value of such
assets (see NOTE 3).
NOTE 11 - 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. The decline in market value of the shares of
the Company's common stock collateralizing the letter of credit caused a default
on the letter of credit. The letter of credit agreement is also subject to the
Forbearance Agreement.
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. In
accordance with the terms of the agreement, this note can only be paid out of
financing occurring before August 9, 2002. Since no such financing occurred,
this note has been classified as mezzanine equity in the accompanying balance
sheet. Ongoing discussions with the Related Party as to the ultimate disposition
of this note may result in a reclassification of this financial instrument in
the Company's balance sheet. Certain officers and shareholders of the Company
have guaranteed the repayment of $500,000 of this note.
NOTE 12 - SUBSEQUENT EVENT
During October 2002, the Company received a Notice of Nonrenewal from The
Hartford Insurance Company ("Hartford") regarding its all-other-states coverage
(Non-Ohio) workers' compensation coverage. The Notice of Nonrenewal is effective
January 1, 2003 and is due to Hartford exiting the PEO sector. The Company is
currently in negotiations with other insurance carriers regarding its 2003
workers' compensation programs.
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
14
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 maintains two primary 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. During October 2002,
the Company received a Notice of Nonrenewal from Hartford for its all other
states (non-Ohio) workers' compensation coverage. The Notice of Nonrenewal is
effective January 1, 2003. The Company is currently in negotiations with other
insurance carriers regarding its 2003 workers' compensation programs.
The Company's insurance policy for its AOS program 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 September 28, 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 the timing of payments are uncertain or
unknown, actual 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 and the timing of these payments 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 costs 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 premium paid to the insurance
carrier represents the maximum cost.
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, Canada Life and Lifewise of Oregon.
The Company has finalized all of its benefit related 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 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
15
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 was based in Atlanta, Georgia and had 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 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 disclosures 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, 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 is currently in the process of
assessing financing alternatives. Failure by the Company to raise additional
capital will result in a material adverse effect on the financial condition and
results of operations of the Company, such effects which may impact these
judgements and estimates and the related carrying amounts of assets and
liabilities.
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' prior written notice.
16
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 maintained a self-insured workers'
compensation program for its Ohio employees from July 1999 through May 2002 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
was self-funded up to $250,000 per occurrence and purchased 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. Effective June 1, 2002, the
Company's Ohio worksite employees became insured through the Ohio Bureau of
Workers' Compensation Program which is a fully insured program where premium
represents the maximum cost.
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 to determine, based upon paid and
incurred claims history, whether the Company is due a refund or owes additional
funding. As of September 28, 2002, the Company has recorded prefunded amounts to
its carrier of $3,953,000 of which $1,010,000 is included in current assets and
$2,943,000 is included in non-current assets.
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 3 - LIQUIDITY AND FINANCIAL CONDITION).
DEFERRED TAXES. The Company records a valuation allowance to reduce its deferred
tax assets to the amount that is more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
termination was made. Likewise, should the Company determine that it would not
be able to realize all or part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made. Significant management judgment is required in
determining our deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets. The Company's estimate of
valuation allowances for deferred tax assets is dependent on the Company's
forecast of future taxable income. It is reasonably possible that changes in the
Company's current estimate of future taxable income could occur in the near
term.
17
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 SEPTEMBER 28, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
29, 2001
The following table presents certain information related to the Company's
results of operations for the three months ended September 28, 2002 and
September 29, 2001:
(000's omitted except for per share amounts)
September 28, September 29, %
2002 2001 Change
------------------- ------------------- -------------------
Revenues $ 121,505 $ 114,343 6.26%
Gross Profit 5,269 5,511 -4.39%
Operating Expenses 5,048 5,746 -12.15%
Operating Income (Loss) 221 (235) 194.04%
Net Loss (245) (723) 66.11%
Net Loss Attributable to Common Shareholders (555) (1,011) 45.10%
Net Loss Per Share Attributable to Common Shareholders (0.07) (0.14) 50.00%
REVENUES
Consolidated revenues were $121,505,000 for the three months ended September 28,
2002 compared to $114,343,000 for the three months ended September 29, 2001. The
increase of $7,162,000 is attributable to the following:
- - The incremental clients associated with the SSMI transaction
contributed $4,588,000 to the increase and the incremental clients
associated with the Inovis transaction contributed $19,841,000.
- - Total revenue, excluding the items discussed above, decreased to
$97,076,000 for the three months ended September 28, 2002 from
$114,343,000, resulting in an aggregate decrease in revenue of
$17,267,000. This lower revenue is a result of the combination of the
Company's efforts during 2001 and 2002 to focus 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 hiring.
DIRECT COSTS/GROSS PROFIT
For the three months ended September 28, 2002, direct costs were $116,236,000,
or 95.66% of revenues, compared to direct costs of $108,832,000, or 95.18% of
revenues, for the three months ended September 29, 2001. Gross profit for the
three months ended September 28, 2002 was $5,269,000, or 4.34% of revenues,
compared to $5,511,000, or 4.82% of revenues, for the three months ended
September 29, 2001.
OPERATING EXPENSES
For the three months ended September 28, 2002, consolidated operating expenses
were $5,048,000, or 4.15% of revenues, compared to $5,746,000, or 5.03% of
revenues, for the three months ended September 29, 2001. This decrease of
$698,000 is due to the reduction in amortization expense related to goodwill of
$516,000 and a reduction in restructuring charges of $280,000 offset by
increased amortization of other intangible assets of $45,000.
OPERATING INCOME/LOSS
For the three months ended September 28, 2002, consolidated operating income was
$221,000 compared to consolidated operating loss of $235,000 for the three
months September 29, 2001. This change is primarily a result of the changes in
operating expenses discussed above.
18
INTEREST EXPENSE
For the three months ended September 28, 2002, net interest expense was $459,000
compared to $452,000 for the three months ended September 29, 2001. The increase
in net interest expense is due to an increase in interest on bank debt of
$82,000, interest expense on the bridge note of $24,000 and amortization of
deferred financing fees associated with warrants issued in connection with the
bridge note of $20,000, a difference in the change in fair value of interest
swap instrument creating a decrease in interest expense of $134,000, an increase
in interest due to capital leases of $13,000 and a decrease in interest income
of $2,000, resulting in an increase in interest expense, net of $7,000.
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 September 28, 2002 and September 29, 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 September 28, 2002 was $245,000 compared
to a net loss of $723,000 for the three months ended September 29, 2001. During
the three months ended September 28, 2002 and September 29, 2001, the Company
recorded preferred stock dividends of $310,000 and $288,000, respectively,
contributing to net loss attributable to common shareholders of $555,000, or
$0.07 per share, and $1,011,000, or $0.14 per share, respectively.
The weighted average number of shares used in the calculation of loss
attributable to common shareholders for the three months ended September 28,
2002 and September 29, 2001, excludes options, warrants and the convertible
preferred stock, as their inclusion would be anti-dilutive.
NINE MONTHS ENDED SEPTEMBER 28, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 29,
2001
The following table presents certain information related to the Company's
results of operations for the nine months ended September 28, 2002 and September
29, 2001:
(000's omitted except for per share amounts)
September 28, September 29, %
2002 2001 Change
------------------ ------------------ -------------
Revenues $ 359,830 $ 339,268 6.06%
Gross Profit 15,050 14,801 1.68%
Operating Expenses 16,085 15,066 6.76%
Operating Income (Loss) (1,035) (265) -290.57%
Net Loss (2,288) (1,185) -93.08%
Net Loss Attributable to Common Shareholders (3,195) (1,997) -59.99%
Net Loss Per Share Attributable to Common Shareholders (0.39) (0.28) -39.29%
REVENUES
Consolidated revenues were $359,830,000 for the nine months ended September 28,
2002 compared to $339,268,000 for the nine months ended September 29, 2001. The
increase of $20,562,000 is attributable to the following:
- - The incremental clients associated with the SSMI transaction
contributed $12,912,000 to the increase and the incremental clients
associated with the Inovis transaction contributed $35,612,000.
19
- - Certain clients paid bonuses of approximately $20,056,000 during the
period ended September 28, 2002. These clients did not pay comparable
bonuses during the period ended September 29, 2001; therefore such
revenue was incremental for the September 28, 2002 period.
- - Total revenue, excluding the items discussed above, decreased to
$291,250,000 for the period ended September 28, 2002 from $339,268,000,
reducing the aggregate increase in revenue by $68,580,000. This lower
revenue is a result of the combination of the Company's efforts during
2001 to focus 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 hirings.
- - The inclusion of PSMI for the entire period ended September 28, 2002.
PSMI revenues included in the period ended September 28, 2002 were
$67,869,000 compared to $72,634,000 in the period ended September 29,
2001, which offset the net increase in revenues by $4,765,000.
DIRECT COSTS/GROSS PROFIT
For the nine months ended September 28, 2002, direct costs were $344,780,000, or
95.82% of revenues, compared to direct costs of $324,467,000, or 95.64% of
revenues, for the nine months ended September 29, 2001. Gross profit for the
nine months ended September 28, 2002 was $15,050,000, or 4.18% of revenues,
compared to $14,801,000, or 4.36% of revenues, for the nine months ended
September 29, 2001. The gross profit as a percent of revenues for the nine
months ended September 28, 2002 is impacted by the $20,056,000 of bonuses
discussed above, as the Company did not recognize any margin on these amounts.
Accordingly, the gross profit as a percent of revenue would be 4.44% after
excluding such incremental revenue.
OPERATING EXPENSES
For the nine months ended September 28, 2002, consolidated operating expenses
were $16,085,000, or 4.47% of revenues, compared to $15,066,000, or 4.44% of
revenues, for the nine months ended September 29, 2001. This increase of
$1,019,000 is due to an increase in corporate payroll and payroll related
expenses of $678,000, other selling, general and administrative expenses of
$1,098,000, systems and operations development expenses of $312,000, and
depreciation expense of $276,000, partially offset by a reduction in
amortization expense of $1,231,000.
OPERATING LOSS
For the nine months ended September 28, 2002 consolidated operating loss was
$1,035,000 compared to a consolidated operating loss of $265,000 for the nine
months ended September 29, 2001. The increase in operating loss is a result of
the changes in gross profit and operating expenses discussed above.
INTEREST EXPENSE
For the nine months ended September 28, 2002, net interest expense was
$1,209,000 compared to $848,000 for the nine months ended September 29, 2001.
The increase in net interest expense is due to an increase in interest on bank
debt of $210,000, interest expense on the bridge note of $80,000 and
amortization of financing costs associated with warrants issued in connection
with the bridge note of $105,000, a gain due to change in fair value of interest
rate swap instrument of $96,000, increase in interest due to capital leases of
$45,000 and a decrease in interest income of $17,000, resulting in an increase
in net interest expense of $361,000.
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 nine months ended September 28, 2002 and September 29, 2001,
respectively, no provision for federal income taxes has been recorded. The
provision for income taxes relates to certain state and local income taxes.
20
NET LOSS AND LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
The net loss for the nine months ended September 28, 2002 was $2,288,000
compared to a net loss of $1,185,000 for the nine months ended September 29,
2001. During the nine months ended September 28, 2002 and September 29, 2001 the
Company recorded preferred stock dividends of $907,000 and $812,000,
respectively, contributing to net loss attributable to common shareholders of
$3,195,000, or $0.39 per share and $1,997,000, or $0.28 per share, respectively.
The weighted average number of shares used in the calculation of loss
attributable to common shareholders for the nine months ended September 28, 2002
and September 29, 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 $651,000 for the nine months ended
September 28, 2002 compared to $3,538,000 for the nine months ended September
29, 2001, or a $2,887,000 decrease in cash used in operating activities.
Net cash used in investing activities was $718,000 for the nine months ended
September 28, 2002 compared to $5,396,000 for the nine months ended September
29, 2001. The primary use of cash for investing activities during the nine
months ended September 28, 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 nine months ended
September 29, 2001, the Company purchased PSMI, which used $4,250,000 of cash.
Property and equipment additions during the nine months ended September 28, 2002
were funded primarily through capital leases. During the period ended September
29, 2001, the Company purchased $1,146,000 of property and equipment.
Net cash provided by financing activities during the nine months ended September
28, 2002 was $1,461,000, compared to net cash used in financing activities
during the nine months ended September 29, 2001 of $1,988,000. The net cash
provided by financing activities during the nine months ended September 28, 2002
was primarily from $750,000 of borrowing under the Company's acquisition credit
facility, $1,500,000 under the bridge agreement and $500,000 from the issuance
of common stock partially offset by repayments of bank notes of $1,055,000 and
capital lease obligations of $208,000. 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 nine months ended September 29, 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 September 28, 2002 the Company had outstanding loans against
the facility of $8,744,000 and outstanding letters of credit of $914,000.
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 active restructuring
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 beared interest at 15% per annum.
At September 28, 2002, the Company was in default under its credit facility. As
of September 30, 2002, the Company and its senior lenders entered into an
Omnibus Forbearance and Modification Agreement (the "Forbearance"), which ends
on the earlier of March 31, 2003 or the date of Forbearance Default, as defined
in the Forbearance (the "Forbearance Period"). Under the terms of the
Forbearance, the senior lenders forbear from exercising any other rights or
remedies available to them with regards to the covenant violations under the
credit agreement. In connection with the Forbearance, the Company is obligated
to pay interest only on a monthly basis as required under the terms of the
credit agreement. All unpaid principal and interest is due and payable on April
1, 2003. During the Forbearance Period, interest will accrue at the default rate
of prime plus four
21
(8.75% at September 28, 2002), but the Company is only required to pay interest
monthly at a rate of prime plus one (5.75% at September 28, 2002). In addition
to the payment of principal and interest, the Company is required to pay a
$100,000 Forbearance Fee at the end of the Forbearance Period. The terms of the
Forbearance include monthly financial covenants that must be maintained by the
Company, the most stringent being the maintenance of minimum monthly Earnings
Before Interest, Taxes, Depreciation and Amortization.
The Forbearance also precludes the Company from (i) making any distributions
with respect to its preferred and/or common shares; (ii) making any payments
with respect to indebtedness which has been subordinated to the credit facility;
(iii) making any pay increases or loans to executive officers; and (iv) making
any payment not in the ordinary course of business. Additionally, the Company
may not make any acquisitions that require capital outlays during the
Forbearance Period without lenders approval. The Company is required to engage a
financial consultant to conduct an analysis of the Company's cash flow
projections and to provide a written report to the lenders regarding such
analysis.
As a result of the default and Forbearance, the Company's debt outstanding under
the senior credit facility is classified in the Company's balance sheet as a
current liability at September 28, 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 and fail to cure such default during the cure period, the
Company would then be in default of its Series A Preferred Securities Purchase
Agreement. As a result, the holders of these preferred shares would have certain
rights under this agreement, including 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 equal to
what would have been recorded had all previously declared dividends at 9.75%
been accrued at 20%. Under the terms of the Forbearance, the Company is
currently in a cure period, accordingly, the preferred shares are not deemed to
be in default. If the Company is not successful in refinancing or modifying the
terms of the credit facility and/or the Series A Preferred Securities Purchase
Agreement, or alternatively, entering into an agreement to extend the cure
period under the Forbearance, it is probable the Company could be deemed in
default of the Series A Preferred Securities Purchase Agreement.
In addition to the above, the $1,500,000 Note Payable - Related Party (Series A
Preferred Shareholder) was due on August 9, 2002. In accordance with the terms
of the Agreement, this note can only be paid out of an equity financing
occurring prior to August 9, 2002. Since no such financing occurred, the note
has been classified as mezzanine equity in the accompanying balance sheet.
Ongoing discussions with the Related Party as to the ultimate disposition of
this note may result in a reclassification of this financial instrument in the
Company's balance sheet.
The Company is currently in negotiations with its banks, its Series A Preferred
Shareholders and a potential new equity investor regarding financial
restructuring alternatives, including additional capital infusion into the
Company. Additionally, the Company is pursuing negotiations with its banks and
its Series A Preferred Shareholders regarding amendments to its Credit facility
and Series A Preferred Shares terms. There can be no assurance that the Company
will be successful in any of these negotiations.
During the second quarter 2002, the Company received an unsolicited offer from a
potential equity investor. In May 2002, the Company formed a Special Committee
of the Board of Directors to evaluate the proposal. 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. A Finance Committee of
the Board of Directors has been formed to respond to equity proposals and
otherwise continue the work of the Special Committee and to investigate and
evaluate alternatives.
Proceeds from any capital transaction will be used for general corporate
purposes, primarily the paydown of the working capital deficit. There can be no
guarantee that any such financial restructuring or capital infusion will be
completed, accordingly management is evaluating other alternatives. Failure by
the Company to raise additional capital will result in a material adverse affect
on the financial condition and results of operations of the Company.
CONTINGENCIES
At September 28, 2002, the Company has recorded a $361,000 reserve for certain
tax related contingencies. The estimated amount of possible loss in excess of
these reserves is $240,000.
22
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 as 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.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days to the filing date of this Quarterly Report on Form 10-Q, the
Company performed an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Accounting Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based on that evaluation,
the Company's management, including the Chief Executive Officer and Chief
Accounting Officer, concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities
Exchange Act of 1934) were effective in ensuring that material information
relating to the Company was made know to them, particularly during the period in
which this quarterly report was prepared. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect these internal controls subsequent to the date of their evaluation.
23
PART II. OTHER INFORMATION
ITEM 3. Defaults Upon Senior Securities
At September 28, 2002, the Company was in default under its credit facility. As
of September 30, 2002, the Company and its senior lenders entered into an
Omnibus Forbearance and Modification Agreement (the "Forbearance"), which ends
on the earlier of March 31, 2003 or the date of Forbearance Default, as defined
in the Forbearance (the "Forbearance Period"). Under the terms of the
Forbearance, the senior lenders forbear from exercising any other rights or
remedies available to them with regards to the covenant violations under the
credit agreement. In connection with the Forbearance, the Company is obligated
to pay interest only on a monthly basis as required under the terms of the
credit agreement. All unpaid principal and interest is due and payable on April
1, 2003. During the Forbearance Period, interest will accrue at the default rate
of prime plus four (8.75% at September 28, 2002), but the Company is only
required to pay interest monthly at a rate of prime plus one (5.75% at September
28, 2002). In addition to the payment of principal and interest, the Company is
required to pay a $100,000 Forbearance Fee at the end of the Forbearance Period.
The terms of the Forbearance include monthly financial covenants that must be
maintained by the Company, the most stringent being the maintenance of minimum
monthly Earnings Before Interest, Taxes, Depreciation and Amortization.
The Forbearance also precludes the Company from (i) making any distributions
with respect to its preferred and/or common shares; (ii) making any payments
with respect to indebtedness which has been subordinated to the credit facility;
(iii) making any pay increases or loans to executive officers; and (iv) making
any payment not in the ordinary course of business. Additionally, the Company
may not make any acquisitions that require capital outlays during the
Forbearance Period without lenders approval. The Company is required to engage a
financial consultant to conduct an analysis of the Company's cash flow
projections and to provide a written report to the lenders regarding such
analysis.
See "Item 1. Financial Statements" notes 4, 9 and 12 to the Company's
consolidated financial statements and "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part 1 of this
Form 10-Q for additional information regarding these defaults. Such
information is incorporated herein by reference.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certificate of Chief Accounting Officer under Section
906 of the Sarbanes-Oxley Act of 2002
99.2 Certificate of Chief Executive Officer under Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K
during the third quarter ended September 28, 2002:
(i) Current Report on Form 8-K, dated August 23, 2002,
filed with the Securities and Exchange Commission on
August 23, 2002
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TEAM AMERICA, INC.
BY: /s/Andrew H. Johnson
------------------------------------------
Chief Accounting Officer and
Authorized Signing Officer
November 12, 2002
25
CERTIFICATION
I, S. Cash Nickerson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TEAM America,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
26
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
/s/ S. Cash Nickerson
----------------------------------
S. Cash Nickerson
Chairman of the Board and Chief Executive
Officer
27
CERTIFICATION
I, Andrew H. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TEAM America,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
28
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Andrew H. Johnson
----------------------------
Andrew H. Johnson
Chief Accounting Officer
29