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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2000
Commission file number: 0-21533
TEAM MUCHO, INC.
(Name of registrant as specified in its charter)
OHIO 31-1209872
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 E. WILSON BRIDGE ROAD
WORTHINGTON, OHIO 43085
(Address of principal executive offices)(Zip Code)
(614) 848-3995
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, no par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of our voting stock held by our non-affiliates
as of March 26, 2001 was approximately $13,241,000.
There were 8,066,288 shares of our common stock outstanding at March
26, 2001.
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Business.................................................................................................. 1
Item 2. Properties................................................................................................ 12
Item 3. Legal Proceedings......................................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 13
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................. 13
Item 6. Selected Financial Data................................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation...................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................ 28
Item 8. Financial Statements and Supplementary Data............................................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant........................................................ 49
Item 11. Executive Compensation.................................................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management............................................ 54
Item 13. Certain Relationships and Related Transactions............................................................ 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................... 59
Signatures .......................................................................................................... 62
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PART I
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify such forward-looking statements by the
words "expects," "intends," "plans," "projects," "believes," "estimates," and
similar expressions. In the normal course of business, we, in an effort to help
keep our shareholders and the public informed about our operations, may from
time to time issue such forward-looking statements, either orally or in writing.
Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, or
projections involving anticipated revenues, earnings or other aspects of
operating results. We base the forward-looking statements on our current
expectations, estimates and projections. We caution you that these statements
are not guarantees of future performance and involve risks, uncertainties and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Therefore, the actual results of the future events described in
the forward-looking statements in this Annual Report on Form 10-K, or elsewhere,
could differ materially from those stated in the forward-looking statements.
Among the factors that could cause actual results to differ materially are the
risks and uncertainties discussed in this Annual Report on Form 10-K, including,
without limitation, factors discussed in Item 1, "Business" and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," including the factors discussed under the caption "Business - Risk
Factors," beginning on page 21.
ITEM 1. BUSINESS.
GENERAL
Mucho.Com was originally incorporated as Muchocode.com on July 8, 1999
in the State of Nevada. In September 1999, we changed our name to Mucho.com,
Inc. From inception (July 8, 1999) through December 28, 2000, we operated as
Mucho.com and focused our efforts on developing our offerings and client base as
an online business center offering products and services for small and emerging
companies. For accounting purposes, on December 28, 2000, we acquired TEAM
America Corporation in a reverse acquisition.
As a combined company, we changed our name to TEAM Mucho, Inc. (an Ohio
Corporation). As a result of this acquisition, we began focusing our efforts on
the professional employer organization ("PEO") business acquired from TEAM
America Corporation. As a result of the merger, we are now a PEO which was
founded in 1986 and incorporated in Ohio in 1987. We provide comprehensive and
integrated human resource management services to small and medium-sized
businesses. These services allow our clients to outsource their human resource
responsibilities. We offer a broad range of "back office" services, including
human resource administration, regulatory compliance management, employee
benefits administration, risk management services, employer liability
protection, payroll and payroll tax administration, and placement services. We
provide these services by becoming the co-employer of our client's employees.
While we become the co-employer for some purposes, the client remains in
operational control of its business.
We have expanded our business through acquisitions. As of December 31,
2000, we provided professional employer services to approximately 1,700 clients
and approximately 13,600 worksite employees, located in the midwestern,
northwestern/intermountain, mid-south and western regions of the United States.
By becoming the co-employer of our clients' employees, we are able to
take advantage of certain economies of scale in the "business of employment" and
to pass those benefits on to our clients and worksite employees. As a result,
they are able to obtain, at an economical cost, services and expertise similar
to those provided by the human resource departments of large companies. Our
services provide substantial benefits to both the client and its worksite
employees. We believe our services assist business owners by:
- permitting the managers of the client to concentrate on the
client's core business as a result of the reduced time and
effort that they are required to spend dealing with complex
human resource, legal and regulatory compliance issues and
employee administration; and
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- managing escalating costs associated with unemployment,
workers' compensation, health insurance coverage, worksite
safety programs and employee-related litigation.
We also believe that our worksite employees benefit from their
relationship with us by having access to better, more affordable benefits,
enhanced benefit portability, improved worksite safety and employment stability.
We provide our service by entering into a client services agreement,
which establishes a three-party relationship whereby we and the client act as
co-employers of the employees who work at the client's location ("worksite
employees"). Under the client services agreement, we assume responsibility for
personnel administration and compliance with most employment-related
governmental regulations, while the client company retains the employees'
services in its business and remains the employer for various other purposes. We
charge a comprehensive service fee, which is invoiced concurrently with the
processing of payroll for the worksite employees of the client. The fee is based
upon the gross payroll of each client by employee and our estimated cost of
providing the services included in the client services agreement as elected by
the client.
We believe that there are opportunities for growth in our industry.
There is an increasing trend of businesses to outsource non-core activities and
functions. Only a relatively small percentage of businesses, however, currently
utilize PEOs, although there is significant growth in the number of small
businesses. These factors, coupled with the ever increasing complexity of the
human resource legal and regulatory framework and the costs associated with
implementing the necessary management information systems to deal with these
issues, should lead to significant consolidation opportunities in the PEO
industry.
The Merger. On June 16, 2000, TEAM America Corporation entered into an
agreement and plan of merger with TEAM Merger Corporation, a wholly owned
subsidiary, and Mucho.com, Inc., pursuant to which TEAM Merger would be merged
with and into Mucho, and Mucho would become a wholly owned subsidiary. Under the
terms of the merger agreement, TEAM America Corporation agreed to acquire all of
the stock (including options and warrants) of Mucho in exchange for up to
5,925,925 shares of TEAM America Corporation's common stock. The merger was
completed on December 28, 2000, and we changed our name to TEAM Mucho, Inc.
Pursuant to the terms of the merger agreement, 3,643,709 shares of
common stock were issued, 196,105 shares were reserved for future issuance for
Mucho.com options and 1,111,111 shares were placed in escrow (the "Escrow"). The
board of directors approved the issuance of the 5,925,925 shares pursuant to the
merger agreement on June 16, 2000, and the shareholders approved the merger and
the issuance of the 5,925,925 shares on December 28, 2000.
Simultaneous with the merger, we announced an issuer tender offer to
all of our existing shareholders. Under the terms of the issuer tender offer, we
offered to purchase up to 2,175,492 shares of our common stock, representing 50%
of our outstanding common stock on November 10, 2000, at a price of $6.75 per
share. The issuer tender offer expired at 12:00 p.m. on December 28, 2000. In
connection with the issuer tender offer, a total of 1,721,850 shares of our
common stock were tendered and delivered to us, and we accepted all 1,721,850
shares for payment at $6.75 per share, for a total redemption of $11,622,488.
Immediately following the merger, we received a $10 million investment
from Stonehenge Opportunity Fund, LLC and Provident Bank for 100,000 shares of
our Class A cumulative convertible redeemable preferred stock which are
convertible into 1,481,481 shares of our common stock. The preferred stock is
subject to redemption in June 2004. As additional consideration for the purchase
of the preferred stock, we issued a warrant to purchase an additional 1,481,481
shares of our common stock at an exercise price of $6.75 per share, exercisable
for a period of ten years from December 28, 2000. We also secured up to $18
million of senior secured credit from Provident and from Huntington National
Bank for acquisitions and other uses.
Mucho.com, Inc. Mucho is an online business center and community
designed to save small businesses time and money when they purchase goods and
services or when they need sound, reliable information. Mucho's objective is to
build a community that will be the preferred online business center for small
business owners and their managers to find business solutions, services,
information, tools and products. Mucho intends to provide content and direct
links to a list of qualified vendors for each service and will allow its
customers to choose between a premium, standard or economy service. Mucho plans
to capture data on each customer and receive commissions on purchases.
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Mucho's market is businesses in the United States with 5 to 500
employees. Mucho's target audience is the business owner and the managers and
staff that research, recommend and/or make the purchase decisions for the
products and services Mucho offers. This audience is Mucho's "community." Mucho
hopes to aggregate high-quality tools, information, products and services to
make its Internet website the single source for its community's business
solutions.
The small business market is highly fragmented and expanding rapidly.
There are currently more than 23 million small businesses in the United States,
according to the Small Business Administration. Many of these small businesses
are beginning to utilize the Internet. Cahners In-Stat Group reports that by the
end of 2000, 43 million small business employees will be able to log on to the
Internet with a projected growth to 59 million employees by 2003. The rapid
expansion of small businesses and the ability of the Internet to unite this
highly fragmented market segment represent a potentially huge market opportunity
for business-to-business e-commerce. Forrester Research estimates
business-to-business revenues will grow to $2.3 trillion by 2003, while the
International Data Corporation estimates that small business online spending is
currently growing 100 percent or more per year.
Mucho currently features approximately 100 national product and service
providers in 66 categories organized within the following Mucho departments:
Operations, Human Resources, Finance & Accounting, Insurance, Technology &
Internet, Sales & Marketing, Shipping, and Training.
Mucho's service vendor partners range from organizations like Outward
Bound, which focuses on improving employee teamwork, to AT&T, which delivers
long distance calling plans to businesses. On the product side, Mucho provides a
marketplace where a small business operator can purchase a wide variety of
products, from an IBM computer to high quality office furniture.
OUR STRATEGIC PLAN
Our strategic plan for 2001 will be characterized by the acronym
"MAGIC." Each letter represents a particularly important part of our new
business direction.
"M" = Merge, through effective and well-targeted acquisitions in the
PEO industry.
On December 28, 2000, Mucho merged with TEAM America Corporation. In
anticipation of the merger with TEAM America Corporation, we initiated the
restructuring of our online business center segment in order to focus on the
opportunities to be derived from integrating our internet technology with TEAM
America Corporation's PEO business and the opportunities for cross-promotion
between TEAM America Corporation's client and worksite employee base and our
online business center.
The PEO industry is highly fragmented, with in excess of 2,500
companies providing PEO services in 2000 according to industry sources. We
believe significant opportunities for additional consolidation exists in the PEO
industry. This industry consolidation will be driven by growing human resource,
legal and regulatory complexities, by increasing capital requirements, and by
the significant economies of scale available to PEOs with a regional
concentration of clients. We intend to look for opportunities to expand in our
current markets by acquiring the accounts of competitors in what we refer to as
"fold in" acquisitions, and possibly to enter selected new markets by acquiring
established high-quality PEOs in order to provide a platform for future regional
consolidation. We have identified certain fundamental attributes, which
characterize attractive markets, such as:
- proximity to a major metropolitan area;
- regulatory receptivity to PEOs;
- prior successful introduction of the PEO concept;
- favorable economic conditions; and
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- a high concentration of small to medium-sized businesses.
"A" = Automate, web enable our proprietary PEO operating system, TEAM
Direct, so clients and employees can perform all human resource tasks online.
We will continue to develop our proprietary information systems which
will enable us to integrate all aspects of the administration of payroll, human
resources and employee benefits, thereby providing a significant competitive
advantage in managing costs and delivering a full range of high-quality
services. See "Information Technology."
"G" = Grow, by improving the productivity of our proprietary sales
force and establishing strategic business alliances with selected organizations
to offer our services. The following are key elements of our growth strategy.
- web enabling of our TEAM Direct system so clients and
employees can perform all human resource tasks online,
reducing our overhead;
- active pursuit of acquisition candidates in the PEO industry;
- cross-selling of other outsourcing services to our human
resource outsourcing clients and their employees to help boost
our gross margins;
- boosting of our internal growth rate; and
- offering of non-PEO human resource services to clients who are
not candidates for the PEO service.
We intend to further strengthen our position in various U.S. markets by
pursuing the following growth strategies:
Deliver High-Quality Services and Expand Client Base. By offering a
broad range of high-quality services, we believe we are attractive to employers
who are seeking a single-source solution to their human resource needs. We
intend to continue to focus on providing high-quality, value-added services as a
means to differentiate ourselves from competitors. Certain PEOs compete
primarily by offering comparatively lower-cost health and workers' compensation
coverage to high-risk industries or by providing principally basic payroll and
payroll tax administration with only limited additional services. In contrast,
we provide comprehensive and integrated human resource management to clients who
are selected after we perform a risk management assessment. We believe that our
strategy of emphasizing the quality and breadth of our services results in lower
client turnover and more consistent growth and profits than the strategy of
certain PEOs which compete by offering comparatively lower-cost coverage or
limited services.
Increase Penetration in Existing Markets. We believe that additional
market penetration in our established markets, California, Intermountain West
and Ohio, offers significant growth potential. Less than 2.0% of the total
number of businesses having between 20 and 500 employees utilize a PEO. In
established markets, our ability to achieve our growth objectives is enhanced by
a larger number of referrals, a higher client retention rate, a more experienced
sales force and greater momentum in the marketing efforts than that which occurs
in new markets. We intend to capitalize on these advantages and to achieve
higher penetration in our existing markets by hiring additional sales personnel
and by improving sales productivity. In addition, we intend to continue our
advertising and promotional efforts in order to educate the market place
regarding the quality and breadth of our services and the benefits to companies
of outsourcing their human resource function to us. We believe that increasing
our penetration in existing markets will allow us to leverage our current
economies of scale, thereby increasing our cost effectiveness and profit
margins.
Target Selected Clients in Growth Industries. We attempt to target, and
tailor our services to meet the needs of businesses with between 5 and 500
employees in industries which we believe have the potential for significant
growth. As of December 31, 2000, our clients had an average of approximately
eight worksite employees. Our targeted businesses are likely to:
- desire the wide range of employee benefits offered by us;
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- recognize the burden of their human resource administration
costs;
- experience greater employment-related regulatory burdens; and
- be more financially stable.
In addition, we believe that targeting such businesses results in
greater marketing efficiency, lower business turnover due to client business
failure, and less exposure to credit risk.
"I" = Integrate, that the various new acquisitions be effectively
managed to capture the intended benefits of these transactions.
"C" = Cross Sell, by offering the existing prospective and acquired
clients and their employees new products and services through existing and
to-be-created alliances through Mucho's online business center.
PEO INDUSTRY
The PEO industry began to evolve in the early 1980's largely in
response to the burdens placed on small and medium-sized employers by an
increasingly complex legal and regulatory environment. While various service
providers were available to assist these businesses with specific tasks, PEOs
emerged as providers of a more comprehensive range of services relating to the
employer/employee relationship. PEO arrangements generally transfer broad
aspects of the employer/employee relationship to the PEO. Because PEOs provide
employee-related services to a large number of employees, they can achieve
economies of scale that allow them to perform employment-related functions more
efficiently, provide employee benefits at a level typically available only to
large corporations with substantial resources and devote more attention to human
resources management.
Growth in the PEO industry has been significant. We believe that the
key factors driving demand for PEO services include (i) trends relating to the
growth and productivity of the small and medium-sized business community in the
United States, such as outsourcing and a focus on core competencies, (ii) the
need to provide competitive health care and related benefits to attract and
retain employees, (iii) the increasing costs associated with health and workers'
compensation insurance coverage, workplace safety programs, employee-related
complaints and litigation and (iv) complex regulation of labor and employment
issues and the related costs of compliance, including the allocation of time and
effort to such functions by owners and key executives.
A significant factor in the growth of the PEO industry has been
increasing recognition and acceptance of PEOs and the co-employer relationship
by federal and state governmental authorities. We and other industry leaders, in
concert with the National Association of Professional Employer Organizations, or
NAPEO, have worked with the relevant governmental entities for the establishment
of a regulatory framework that protects clients and employees, discourages
unscrupulous and financially unsound companies, and promotes the legitimacy and
further development of the industry. While 47 states have recognized PEOs in
their employment laws, many states do not explicitly regulate PEOs. However, 21
states have enacted legislation containing licensing, registration, or
certification requirements, and several others are considering such regulation.
Such laws vary from state to state but generally provide for monitoring the
fiscal responsibility of PEOs. State regulation assists in screening
insufficiently capitalized PEO operations and, in our view, has the effect of
legitimizing the PEO industry by resolving interpretive issues concerning
employee status for specific purposes under applicable state law. We have
actively supported such regulatory efforts and are currently licensed or
registered in 44 of these states. The cost of compliance with these regulations
is not material to our financial position or results of operations.
PEO SERVICES
Client Service Teams. We have client service directors who oversee a
service staff consisting of client service representatives and client service
assistants. A team consisting of a client service director, a client service
representative and a client service assistant is assigned to each client. The
client service team is responsible for the client's personnel administration,
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for coordinating our response to client needs for administrative support and for
responding to any questions or problems encountered by the client.
The client service representative acts as our principal client contact
and typically is on call and in contact with each client throughout the week.
This individual serves as the communication link between our various corporate
departments and our on-site supervisor, who in many cases is the owner of the
client's business. Accordingly, this individual is involved in every aspect of
our delivery of services to the client. For example, the client service
representative is responsible for gathering all information necessary to process
each payroll of the client and for all other information needed by our human
resources, accounting and other departments with respect to such client and to
our worksite employees. A client service representative also actively
participates in hiring, disciplining and terminating worksite employees;
administering employee benefits; and responding to employee complaints and
grievances.
Core Activities. We provide professional employer services through six
core activities:
- human resources administration;
- regulatory compliance management;
- employee benefits administration;
- risk management services and employer liability protection;
- payroll and payroll tax administration; and
- placement services.
Human Resources Administration. We, as an employer, provide our clients
with a broad range of human resource services including on-going supervisory
education and training regarding risk management and employment laws, policies
and procedures. In addition, our Human Resources Department handles sensitive
and complicated employment issues such as employee discipline, termination,
sexual harassment, and wage and salary planning and analysis. We are in the
process of expanding our human resources services to assist clients in areas
such as employee morale and worksite employee training. We provide a
comprehensive employee handbook, including customized, site-specific materials
concerning each worksite, to all worksite employees. In addition, we maintain
extensive files and records regarding worksite employees for compliance with
various state and federal laws and regulations. This extensive record keeping is
designed to substantially reduce legal actions arising from lack of proper
documentation.
Regulatory Compliance Management. We, under our standard client
agreement, assume responsibility for complying with many employment related
regulatory requirements. As an employer, we must comply with numerous federal,
state and local laws, including:
- certain tax, workers' compensation, unemployment, immigration,
civil rights, and wage and hour laws;
- the Americans with Disabilities Act of 1990;
- the Family and Medical Leave Act;
- laws administered by the Equal Employment Opportunity
Commission; and
- employee benefits laws such as ERISA and COBRA.
We provide bulletin boards to our clients and maintain them for
compliance with required posters and notices. We also assist our clients in
their efforts as employers to comply with and understand certain other laws and
responsibilities with respect to which we do not assume liability and
responsibility. For example, while we provide significant safety training and
risk
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management services to our clients, we do not assume responsibility for
compliance with the Occupational Safety and Health Act because the client
controls its worksite facilities and equipment.
Employee Benefits Administration. We offer a broad range of employee
benefit programs to our worksite employees. We administer such benefit programs,
thereby reducing the administrative responsibilities of our clients for
maintaining complex and tax-qualified employee benefit plans. By combining our
multiple worksite employees, we are able to take advantage of certain economies
of scale in the administration and provision of employee benefits. As a result,
we are able to offer to our worksite employees benefit programs that are
comparable to those offered by large corporations. In fact, some programs
offered by us would not otherwise be available to the worksite employees of many
clients if such clients were the sole employers. Eligible worksite and corporate
staff employees are entitled to participate in our employee benefit programs
without discrimination. Such programs include life insurance coverage as well as
our cafeteria plan that offers a choice of different health plans and dental,
vision and prescription card coverage. In addition, we permit each eligible
employee to participate in our 401(k) retirement plan and our medical and
dependent care reimbursement program. Each worksite employee is given:
- the opportunity to purchase group-discounted, payroll-deducted
optional life insurance and long-term disability insurance;
and
- access to store discount programs, free checking accounts with
participating banks, a prepaid legal services plan, and
various other employee benefits.
We believe that by offering our worksite employees a broad range of
large corporation style benefit plans and programs we are able to reduce
worksite employee turnover, which results in cost savings for our clients and
for us. We perform regulatory compliance and plan administration in accordance
with state and federal benefit laws.
Risk Management Services and Employer Liability Protection. Our risk
management of the worksite includes policies and procedures designed to
proactively prevent and control costs of lawsuits, fines, penalties, judgments,
settlements and legal and professional fees. In addition, we control benefit
plan costs by attempting to prevent fraud and abuse by closely monitoring
claims. Other risk management programs include effectively processing workers'
compensation and unemployment claims and aggressively contesting any suspicious
or improper claims. We believe that such risk management efforts increase our
profitability by reducing our liability exposure and by increasing the value of
our services to our clients.
Many of our direct competitors in both the public and private sector
are self-insured for health care, workers' compensation and employment practices
risks. In 1999, we became self-insured for Ohio workers' compensation. We also
maintain insurance for employment practices risks, including liability for
employment discrimination and wrongful termination. We believe that we
historically have been able to achieve a higher level of client satisfaction and
security by being insured for such risks. We believe that being insured with
this type of coverage has greatly reduced our liability exposure and,
consequently, the potential volatility of our income from operations because we
are not required to rely exclusively on contractual indemnification from our
clients. Many of these clients do not carry insurance which covers employment
practices liability or do not have sufficient net worth to support their
indemnification obligations. For this coverage we have arranged for a large
surplus lines insurance company rated A++ (superior) by A.M. Best Company to
provide to us, and to our clients as additional insureds, employment practices
liability insurance. We believe that this arrangement is better received by
clients who are seeking to reduce their employment liability exposures and also
prevents us from becoming involved in adversarial situations with our clients by
eliminating the need for us to seek indemnification. We continue to study the
possibility of becoming self-insured in the future for selected risks and
believe that significant additional opportunities to self-insure may arise.
Payroll and Payroll Tax Administration. We provide our clients with
comprehensive payroll and payroll tax administration which, except for the
obligation to pay us, substantially eliminates client responsibility for payroll
and payroll taxes beyond verification of payroll information. Subject to the
client's obligation to pay us, we, as the co-employer, assume liability and
responsibility for the payroll and payroll taxes of our worksite employees and
for the obligations of our client to make federal and state unemployment and
workers' compensation filings, FICA deposits, child support levies and
garnishments, and new hire reports. We receive all payroll information,
calculate, process and record all such information, and either issue payroll
checks or directly deposit the net pay of worksite employees into their bank
accounts. We deliver all payroll checks either to the on-site supervisor of the
worksite or directly to the worksite employees. As part of our strategic plan of
expanding our information
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technology, we are in the process of developing client-based software interfaces
to make it possible for clients to enter and submit payroll information via
computer modems.
Placement Services. As a part of our overall employment relationship,
we assist our clients in their efforts to hire new employees. As a result of our
advertising volume and contracts with newspapers and other media, we are able to
place such advertisements at significantly lower prices than are available to
our clients. In addition, in some cases, we do not have to place such
advertisements because we already have multiple qualified candidates in a job
bank or pool of candidates. We interview, screen and pre-qualify candidates
based on criteria established in a job description prepared by us with the
client's assistance and perform background checks. In addition, depending on the
needs of our client, we test worksite employees for skills, health, and drug-use
in accordance with state and federal laws. Following the selection of a
candidate, we complete all hiring paperwork and, if the employee is eligible,
enroll the employee in our benefit programs. We believe that our unique approach
in providing such services gives us a significant advantage over our
competitors. These services also enable us to reduce our administrative expenses
and employee turnover and to avoid hiring unqualified or problem employees.
CLIENTS
All clients enter into our client services agreement. The client
services agreement generally is for one year and provides for an on-going
relationship, subject to termination by us or the client upon 30 days written
notice.
The client services agreement establishes our comprehensive service
fee, which is subject to periodic adjustments to account for changes in the
composition of the client's workforce and statutory changes that affect the
costs. The client services agreement also establishes the division of
responsibilities between us and the client. Pursuant to the client services
agreement, we are responsible for all personnel administration and are liable
for certain employment-related government regulation. In addition, we, subject
to the obligation of the client to pay us, assume responsibility for payment of
salaries and wages of our worksite employees and responsibility for providing
employee benefits to such persons. The client retains the employees' services
and remains liable for compliance with certain governmental regulations, which
requires control of the worksite, daily supervisory responsibility, or is
otherwise beyond our ability to assume. A third group of responsibilities and
liabilities are shared by us and the client where such joint responsibility is
appropriate. The specific division of applicable responsibilities under the
client services agreement is as follows:
TEAM Mucho
- Payroll administration and related tax reporting and
remittance (state and federal withholding, FICA, FUTA, state
unemployment);
- state unemployment compliance, management and reporting;
- workers' compensation compliance, procurement, management and
reporting;
- compliance with COBRA, IRCA, HIPAA and ERISA (for plans
sponsored by us), as well as monitoring changes in other
governmental regulations governing the employer/employee
relationship and updating the client when necessary;
- promulgation of policies and procedures for compliance with
all federal, state and local employment laws; and
- employee benefits administration.
Client
- Payment and related tax reporting and remittance of
non-qualified deferred compensation and equity-based
compensation;
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- assignment to, and ownership of, all intellectual property
rights;
- compliance with Section 414(o) of the Internal Revenue Code
regarding benefit discrimination;
- compliance with OSHA regulations, EPA regulations and state
and local equivalents and compliance with government
contracting provisions;
- compliance with NLRA, including all organizing efforts and
expenses related to a collective bargaining agreement and
related benefits;
- professional licensing requirements and fidelity bonding;
- implementation of policies and practices relating to the
employee/employer relationship and compliance with all
federal, state and local employment laws; and
- products produced and/or services provided.
Joint
- Employer's professional liability insurance.
Because we are a co-employer, it is possible that we could incur
liability for violations of such laws even if we are not responsible for the
conduct giving rise to such liability. The client services agreement addresses
this issue by providing that the client will indemnify us for liability incurred
to the extent the liability is attributable to conduct by the client.
Notwithstanding this contractual right to indemnification, it is possible that
we could be unable to collect on a claim for indemnification and may therefore
be ultimately responsible for satisfying the liability in question. We maintain
certain general insurance coverages (including coverages for our clients) to
manage our exposure for these types of claims, and, as a result, the costs in
excess of insurance premiums incurred by us with respect to this exposure have
historically been insignificant to our operating results.
Clients are generally required to remit their comprehensive service
fees no later than one day prior to the applicable payroll date by wire transfer
or automated clearinghouse transaction. We retain the ability to terminate the
client services agreement as well as the continued employment of the employees
upon non-payment by a client. This right, the periodic nature of payroll and the
overall quality of our client base have resulted in an excellent overall
collection history.
At December 31, 2000, we served approximately 1,700 clients and
approximately 13,600 worksite employees resulting in an average of eight
worksite employees per client. No single client accounted for more than 4% of
our revenues for the twelve months ended December 31, 2000. As a result of
acquisitions in 1997 and 1998, our clientele is geographically diverse. In 1996,
approximately 94% of our client base was located in Ohio. At December 31, 2000,
less than 30% of the worksite employees were located in Ohio. Our client base is
broadly distributed throughout a wide variety of industries. Our clientele is
heavily weighted towards professional, service, light manufacturing and
non-profit businesses. Our exposure to higher workers' compensation claims
businesses such as construction, transportation and commercial is less than 25%
of our total business.
In general, we have benefited from a high level of client retention,
resulting in a significant recurring revenue stream. The attrition that we have
experienced has typically been caused by a variety of factors, including:
- sale or acquisition of the client;
- termination by us resulting from the client's inability to
make timely payments;
- client business failure or downsizing; and
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- client non-renewal due to price or service dissatisfaction.
We believe that the risk of a client terminating its relationship with
us decreases substantially after the client has been associated with us for over
one year because of the client's increased appreciation of our value-added
services and because of the difficulties associated with a client reassuming the
burdens of being the sole employer. We believe that only a small percentage of
nonrenewing clients withdraw due to dissatisfaction with our services or to
retain the services of a competitor. We did, however, experience higher than
normal attrition at the end of calendar 2000 due to a change in medical costs by
a supplier and due to the general downturn in the economy.
SALES AND MARKETING
We market our services through a direct sales force. Each of our sales
personnel enters into an employment agreement with us which establishes a
performance-based compensation program, which currently includes a base amount,
sales commissions and a bonus for each new worksite employee enlisted. These
employment agreements contain certain non-competition and non-solicitation
provisions that prohibit the sales personnel from competing against us. We
attribute the productivity of our sales personnel in part to their experience in
fields related to one or more of our core services. The background of our sales
personnel includes experience in industries such as information services, health
insurance, business consulting and commercial sales. Our sales materials
emphasize our broad range of high-quality services and the resulting benefits to
clients and worksite employees.
Our sales and marketing strategy is to achieve higher penetration in
certain existing markets by hiring additional sales personnel and increasing
sales productivity. Currently, we generate sales leads from the two primary
sources of referrals and direct sales efforts. These leads result in initial
presentations to prospective clients. Our sales personnel gather information
about the prospective client and its employees, including job classification,
workers' compensation and health insurance claims history, salary and the
desired level of employee benefits. We perform a risk management analysis of
each prospective client which involves a review of such factors as the client's
credit history, financial strength, and workers' compensation, and health
insurance and unemployment claims history. Following a review of these factors,
a client proposal is prepared for acceptable clients. Stringent underwriting
procedures greatly reduce our controllable costs and liability exposure, and
are, in part, responsible for our high rate of client retention and control of
direct costs.
INFORMATION TECHNOLOGY
Our primary information-processing center is located at our corporate
headquarters. Our other offices are connected to our centralized system through
network dial-up services. We use industry-standard software to process our
payroll and other commercially available software to manage standard business
functions such as accounting and finance. We maintain a back-up payroll
processing facility in San Diego, and maintain a back-up of our Team Direct(TM)
PEO operating system in Lafayette, California, as part of the web-enabling
process with Mucho. We also maintain a contract with a mobile recovery service
as part of a disaster recovery plan of our corporate headquarter.
Since October 1995, we have been developing and continue to develop our
proprietary integrated information system based on client-server technology
using an Oracle(TM) relational database. Our system, called TEAMDirect(TM), will
allow clients to enter and submit payroll data via modem and over the Internet.
The system also is used to store and retrieve information regarding all aspects
of our business, including human resource administration, regulatory compliance
management, employee benefits administration, risk management services, payroll
and payroll tax administration, and placement services. As of December 31, 2000,
all of our locations were utilizing TEAMDirect(TM). We believe that this system
will be capable of being upgraded and expanded to meet our needs for the
foreseeable future.
CORPORATE EMPLOYEES
As of December 31, 2000, we had 208 corporate employees located at our
headquarters in Worthington, Ohio and at our offices around the country.
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PEO RESPONSIBILITIES
Federal, State and Local Employment Taxes. We assume the administrative
responsibility for the payment of federal, state and local employment taxes with
respect to wages and salaries paid to our employees, including worksite
employees. There are essentially three types of federal, state and local
employment tax obligations:
- income tax withholding requirements;
- social security obligations under FICA; and
- unemployment obligations under FUTA and SUTA.
Under these Internal Revenue Code sections, the employer has the obligation to
withhold and remit the employer portion and, where applicable, the employee
portion of these taxes.
Employee Benefit Plans. We offer various employee benefit plans to our
worksite employees, including 401(k) plans, cafeteria plans, group health plans,
a group life insurance plan, a group disability insurance plan and an employee
assistance plan. Generally, employee benefit plans are subject to provisions of
both the Internal Revenue Code and ERISA. In order to qualify for favorable tax
treatment under the Internal Revenue Code, the plans must be established and
maintained by an employer for the exclusive benefit of its employees. Most of
these benefit plans are also offered to our corporate employees.
Representatives of the IRS have publicly stated that a Market Segment
Study Group established by the IRS is examining whether PEOs are the employers
of worksite employees under Internal Revenue Code provisions applicable to
employee benefit plans and consequently able to offer to worksite employees
benefit plans that qualify for favorable tax treatment and whether client
company owners are employees of PEOs under Internal Revenue Code provisions
applicable to employee benefit plans. We have limited knowledge of the nature,
scope and status of the Market Segment Study, and the IRS has not publicly
released any information regarding the study to date. In addition, our 401(k)
plan was audited for the year ended December 31, 1992, and, as a part of that
audit, the IRS regional office has asked the IRS national office to issue a
Technical Advise Memorandum regarding whether or not we are the employer for
benefit plan purposes. We have stated our position in a filing with the IRS that
we are the employer for benefit plan purposes. We are unable to predict the
timing or nature of the findings of the Market Segment Study Group, the timing
or conclusions of the Technical Advise Memorandum, or the ultimate outcome of
such conclusions or findings. If the IRS study were to conclude that a PEO is
not an employer of its worksite employees for plan purposes, then worksite
employees could not continue to make contributions to our 401(k) plan or
cafeteria plan. We believe that, although unfavorable to us, a prospective
application by the IRS of an adverse conclusion would not have a material
adverse effect on our financial position and results of operations. If such
conclusion were applied retroactively, then employees' vested account balances
could become taxable immediately, we would lose our tax deduction for deposits
to the plan trust which would become a taxable trust, and penalties could be
assessed. In such a scenario, we would face the risk of client dissatisfaction
as well as potential litigation. A retroactive application by the IRS of an
adverse conclusion could have a material adverse effect on our financial
position and results of operations. While we believe that a retroactive
disqualification is unlikely, there can be no assurance as to the ultimate
resolution of these issues.
The Staffing Firm Workers Benefits Act of 1997 (H.R. 1891) proposed
legislation that would have clarified who is the employer for benefit plan
purposes, thus eliminating much of the current confusion and uncertainty
surrounding these issues. H.R. 1891 did not become legislation in 2000. The bill
will be reintroduced in 2001 with additional support and sponsorship. It is
uncertain at this time whether this legislation will become law, and, if it
does, what changes, if any, may be required of our existing benefit plans in
order to comply with its provisions.
In addition to the employer/employee relationship issues described
above, pension and profit-sharing plans, including our 401(k) plan, must satisfy
certain other requirements under the Internal Revenue Code. These other
requirements are generally designed to prevent discrimination in favor of highly
compensated employees to the detriment of non-highly compensated employees with
respect to both the availability of, and the benefits, rights and features
offered in, qualified employee benefit plans. We apply the nondiscrimination
requirements of the Internal Revenue Code to ensure that our 401(k) plan is in
compliance with the requirements of the Internal Revenue Code.
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Workers' Compensation. Workers' compensation is a state mandated,
comprehensive insurance program that requires employers to fund medical
expenses, lost wages and other costs resulting from work-related injuries
illnesses and deaths. In exchange for providing workers' compensation coverage
for employees, employers are not subject to litigation by employees for benefits
in excess of those provided by the relevant state statute. In most states, the
extensive benefits coverage (for both medical cost and lost wages) is provided
through the purchase of commercial insurance from private insurance companies,
participation in state-run insurance funds or employer self-insurance. Workers'
compensation benefits and arrangements vary on a state-by-state basis and are
often highly complex. These laws establish the rights of workers to receive
benefits and to appeal benefit denials.
As a creation of state law, workers' compensation is subject to change
by the state legislature in each state and is influenced by the political
processes in each state. Some states, such as Ohio, have mandated that employers
receive coverage only from state operated funds. Although Ohio maintains such a
"state fund," it does allow employers of a sufficient size and with sufficient
ties to the state to self-insure for workers' compensation purposes. In July of
1999, we became self-insured for Ohio Workers' Compensation. We are self-funded
up to $250,000 and we have purchased private insurance for costs in excess of
that amount. Although workers' compensation in Ohio is mandatory and generally
shields employers from common law civil suits, the Ohio Supreme Court has
created an exception for so-called "intentional torts." However, our contract
language provides some protection in this area.
Ohio and certain other states have recently adopted legislation
requiring that all workers' compensation injuries be treated through a managed
care program. Ohio's program became effective in March 1997. We believe that
such a program will not significantly impact our operations because all Ohio
employers will be subject to such new laws and regulations.
Other Employer Related Requirements. As an employer, we are subject to
a wide variety of federal and state laws and regulations governing
employer-employee relationships, including the Immigration Reform and Control
Act, the Americans with Disabilities Act of 1990, the Family Medical Leave Act,
the Occupational Safety and Health Act, wage and hour regulations, and
comprehensive state and federal civil rights laws and regulations, including
those prohibiting discrimination and sexual harassment. The definition of
employer may be broadly interpreted under these laws.
Responsibility for complying with various state and federal laws and
regulations is allocated by agreement between our clients and us, or, in some
cases, is the joint responsibility of both. Because we act as a co-employer of
worksite employees for many purposes, it is possible that we could incur
liability for violations of laws even though we are not contractually or
otherwise responsible for the conduct giving rise to such liability. Our
standard client agreement generally provides that the client will indemnify us
for liability incurred both as a result of an act of negligence of a worksite
employee under the direction and control of the client and to the extent the
liability is attributable to the client's failure to comply with any law or
regulation for which it has specified contractual responsibility. However, there
can be no assurance that we will be able to enforce such indemnification, and we
may therefore be ultimately responsible for satisfying the liability in
question.
ITEM 2. PROPERTIES.
We lease office facilities in Ohio, Michigan, Florida, Georgia,
California, Idaho, Utah, Montana, Oregon, Tennessee, Washington, and
Mississippi. Our corporate headquarters are located in a suburb of Columbus,
Ohio in a leased building that houses our executive offices and our PEO
operations for central Ohio worksite employees. Our Mucho operations are in a
facility shared with our Northern California PEO operations. Our other offices
are used to service our local PEO operations and are also leased. We believe
that our current facilities are adequate for our current needs and that
additional suitable space will be available as required.
ITEM 3. LEGAL PROCEEDINGS.
We are not involved in any material pending legal proceedings, other
than ordinary routine litigation incidental to our business. We do not believe
that any such pending legal proceedings, individually or in the aggregate, will
have a material adverse effect on our financial results.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held a Special Meeting of Shareholders on Thursday, December 28,
2000 for the following purpose:
(1) To consider and vote on a proposal to adopt a merger
agreement, as amended, pursuant to which TEAM Merger
Corporation, a wholly owned subsidiary of TEAM America, will
merge with and into Mucho.com, Inc. The Mucho shareholders
will collectively receive 5,925,925 shares of TEAM America
common stock in exchange for their shares of Mucho including
all outstanding Mucho options and warrants as described in
our proxy statement.
Management's proposal as presented in the proxy statement was approved
with the following vote:
Proposal 1: The adoption of a merger agreement, as amended,
pursuant to which TEAM Merger Corporation, a wholly
owned subsidiary of TEAM America, will merge with and
into Mucho.com, Inc.:
NUMBER OF SHARES VOTED
-----------------------------------------------------------------------
FOR AGAINST ABSTAIN TOTAL
---------------- ---------------- -------------- ---------------
2,954,439 45,080 2,730 3,002,249
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock was quoted on the Nasdaq National Market under the
symbol "TMAM" from the commencement of our initial public offering on December
10, 1996 until October 1, 1999, when our common stock began trading on the
Nasdaq SmallCap Market. Following the merger with Mucho.com, Inc. on December
28, 2000, we changed our trading symbol to "TMOS." The following table sets
forth, for the periods indicated, the high and low sales prices for our common
stock, as reported on the Nasdaq National Market and the Nasdaq SmallCap Market.
CALENDAR PERIOD COMPANY COMMON STOCK
--------------- ---------------------------
HIGH LOW
---------- ----------
Fiscal 1999:
First Quarter........................................................................ $ 6.50 $ 4.00
Second Quarter....................................................................... $ 5.38 $ 4.13
Third Quarter........................................................................ $ 6.88 $ 4.00
Fourth Quarter....................................................................... $ 7.25 $ 5.25
Fiscal 2000:
First Quarter........................................................................ $ 7.13 $ 5.63
Second Quarter....................................................................... $ 6.66 $ 3.13
Third Quarter........................................................................ $ 6.00 $ 4.06
Fourth Quarter....................................................................... $ 5.38 $ 3.00
Fiscal 2001:
First Quarter (through March 26, 2001)............................................... $ 5.56 $ 2.50
As of March 26, 2001, the number of record holders of our common stock
was 324. The closing sales price of the common stock on March 26, 2000, was
$3.00.
We have not paid any cash dividends to holders of our common stock and
do not anticipate paying any cash dividends in the foreseeable future, but
intend instead to retain future earnings for reinvestment in our business. The
payment of any future dividends would be contingent upon approval of our Class A
preferred equity shareholders and our lenders.
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During the fourth quarter of 2000, we announced an issuer tender offer
to all of our existing shareholders. Under the terms of the issuer tender, we
offered to purchase up to 2,175,492 shares of our common stock, representing 50%
of our common stock on November 10, 2000, at a price of $6.75 per share. The
issuer tender offer expired at 12:00 p.m. on December 28, 2000. In connection
with the issuer tender offer, a total of 1,721,850 shares of our common stock
were tendered and delivered to us, and we accepted all 1,721,850 shares for
payment at $6.75 per share for a total of approximately $11.6 million.
During the fourth quarter of 2000, we received a $9 million investment
from Stonehenge for 90,000 shares of our Class A preferred stock which are
convertible into 1,333,333 shares of our common stock. As additional
consideration for the purchase of the Class A preferred stock, we issued
Stonehenge a warrant to purchase an additional 1,333,333 shares of our common
stock at an exercise price of $6.75 per share, exercisable for a period of ten
years from December 28, 2000. Additionally, we received a $1 million investment
from Provident Bank for 10,000 shares of our Class A preferred stock which are
convertible into 148,148 shares of our common stock. As additional consideration
for the purchase of the Class A preferred stock, we issued Provident a warrant
to purchase an additional 148,148 shares of our common stock at an exercise
price of $6.75 per share, exercisable for a period of ten years from December
28, 2000.
In March 2001, we received a $1 million investment from Professional
Staff Management, Inc. As additional consideration for the purchase of the Class
A preferred stock, we issued Professional Staff Management, Inc. a warrant to
purchase an additional 148,148 shares.
ITEM 6. SELECTED FINANCIAL DATA.
SUMMARY OF TEAM MUCHO, INC. SELECTED FINANCIAL DATA
The following table presents summary selected financial data of Team
Mucho, Inc. as of and for the period from July 8, 1999 to December 31, 1999, and
as of and for the year ended December 31, 2000. This financial data should be
read in conjunction with Team Mucho, Inc.'s historical financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Annual Report on Form 10-K.
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STATEMENT OF OPERATIONS DATA
(000'S OMITTED)
YEAR ENDED PERIOD FROM JULY 8, 1999
DECEMBER 31, 2000 TO DECEMBER 31, 1999
----------------- --------------------
Revenues $ 51 $ -
-------------- --------------
Expenses:
Salaries, wages and employment taxes 5,651 883
Other selling, general and administrative expenses 2,468 271
Depreciation and amortization 262 20
Restructuring charges 654 -
-------------- --------------
Total operating expenses 9,035 1,174
-------------- --------------
Loss from operations (8,984) (1,174)
-------------- --------------
Interest expense (512) (80)
-------------- --------------
NET LOSS $ (9,496) $ (1,254)
============== ==============
Net loss per share
Basic and diluted $ $ (0.66)
(3.37)
Weighted average shares outstanding
Basic and diluted 2,816,501 1,903,095
Balance Sheet Data:
Working capital deficit $ (4,803) $ (957)
Total assets $ 53,354 $ 292
Long-term obligations $ 1,261 $ 62
Total shareholders' equity (deficit) $ 19,757 $ (803)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ACCOUNTING PRESENTATION
The Company operated as Mucho.com, Inc. ("Mucho") through December 28,
2000, and on that date merged with TEAM America Corporation in a transaction
accounted for as a reverse acquisition with Mucho treated as the acquiring
company and TEAM America Corporation treated as the target company. At the date
of the merger, the Company changed its name to Team Mucho, Inc.
The consolidated financial statements included in this Form 10-K annual
report have been prepared in conformity with generally accepted accounting
principles. The results of operations reflected in the Team Mucho, Inc.
Consolidated Statement of Operations for the year ended December 31, 2000 and
the period from inception (July 8, 1999) to December 31, 1999, include only the
operations of Mucho.com, Inc. for those periods. No results of operations of
TEAM America Corporation are included in the 2000 consolidated statement of
operations, as the acquisition of TEAM America Corporation did not occur until
year-end. The future expected combined results of operations should not be
evaluated based on the 2000 statement of operations.
The December 31, 2000 balance sheet of the Company includes the balance
sheet of Mucho consolidated with the balance sheet of TEAM America Corporation,
after the application of purchase accounting.
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OVERVIEW
During 2000 and 1999, the Company operated as a business-to-business
e-marketplace, or online business center, for small business owners and
decision-makers. Since its inceptions in July 1999, the Company has allocated
the majority of its resources to developing a unique and proprietary site
architecture, building infrastructure, establishing a core set of service and
product offerings, and acquiring new members. Improvements to the Company's
technology include development of functional features on its website, expansion
of its web server traffic capacity, development of its underlying databases and
creation of accurate and comprehensive management reporting capabilities. The
Company's site was beta launched in April 2000 and definitively launched in June
2000.
In 2000, in anticipation of its acquisition of TEAM America
Corporation, the Company initiated the restructuring of its online business
center segment in order to focus on the opportunities to be derived from
integrating its internet technology with TEAM America Corporation's PEO business
and the opportunities for cross-promotion between TEAM America Corporation's
client and worksite employee base and the Company's online business center. As a
result, in 2001 the Company will substantially reduce the level of 2000
operating expenses incurred at the early stages of web development by reducing
expenditures for third party contractors, development, creative and
administrative staff, and advertising.
RESULTS OF OPERATIONS
In view of the rapidly changing nature of the Company's business, its
limited operating history, and its recent acquisition of TEAM America
Corporation, the Company believes that a historical comparison of revenue and
operating results is not necessarily meaningful and should not be relied upon as
an indication of future performance.
As indicated in the section immediately above, no results of operations
of TEAM America Corporation are included in the 2000 consolidated statement of
operations. The future expected combined results of operations of Team Mucho,
Inc. should not be evaluated based on the 2000 statement of operations.
The following table sets forth the Company's statements of operations
data for the period from incorporation, July 8, 1999, through December 31, 1999,
and the year ended December 31, 2000. The financial data for December 31, 1999
and 2000 are derived from Team Mucho, Inc.'s audited financial statements.
STATEMENT OF OPERATIONS DATA
(000'S OMITTED)
PERIOD FROM INCEPTION
YEAR ENDED (JULY 8, 1999) TO
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
Revenues $ 51 $ -
-------------- ------------
Expenses:
Salaries, wages and employment taxes 5,651 883
Other selling, general and administrative expenses 2,468 271
Depreciation and amortization 262 20
Restructuring costs 654 -
-------------- ------------
Total operating expenses 9,035 1,174
-------------- ------------
Loss from operations (8,984) (1,174)
Interest expense (512) (80)
-------------- ------------
Net loss before income taxes (9,496) (1,254)
Provision for income taxes - -
-------------- ------------
NET LOSS $ (9,496) $ (1,254)
============== ============
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PLAN TO DERIVE REVENUE
No revenue was generated for the period from incorporation, July 8,
1999, to December 31, 1999. During the year ending December 31, 2000, the
Company recognized $51,000 of revenue primarily from the sale of sponsorships to
strategic vendors. Product revenue is also derived from commissions and fees
from contracted vendors who pay the Company a commission or fee depending on the
nature of the purchase made online by the Company's customers. Revenue is
reported as the net amount paid to the Company by the vendor with respect to the
product or service purchased. The Company's revenue recognition policy resulted
in $75,000 of deferred revenue at December 31, 2000.
Orders with the vendors are initiated directly by the Company's members
through the Company's site. Vendors consummate purchases with members and
separately pay the Company's commissions or fees. The Company requires that all
vendors be web enabled and be capable of transacting business with customers on
the web. The Company also requires that each vendor be national in scope and
service the Company's customers in the continental U.S. The Company does not
have minimum commitments or guaranteed pricing with any vendors nor does the
Company have minimum commitments or guaranteed pricing with any of its
suppliers. The Company's agreements are generally cancelable at any time by
either party. The Company has entered into contracts with approximately 100
vendors that are able to sell valuable products and services online and provide
nationwide customer service to the Company's members. The Company intends to
widen the number of vendors as the demand for new products and services
increases.
Another of the Company's strategies to derive revenues is to encourage
its members to utilize the other services it offers, such as online accounting,
tax preparation, and sales force management. Because of the relatively smaller
cost associated with these services, which are primarily commission based, they
carry significantly higher margins. As a result, if the Company is successful in
this strategy, it anticipates that gross margin from service revenue will
account for a greater portion of total gross margin in the future.
In 2001, the Company's primary focus will be on maximizing its PEO
related revenues. The Company's efforts to market to TEAM America's small
business customers and the employees of these customers, provides the Company
with several channels of distribution. As a result, although additional revenues
related to the Company's online business center segment are anticipated, the
same level of expenditures made in 2000 to develop this revenue stream is not
anticipated to occur in 2001.
OPERATING EXPENSES
The Company expects to obtain members and drive traffic to its website
in part by offering its members attractive and important services that can
improve members' business productivity and competitive prices on products that
small businesses often purchase on a repeat basis. The Company believes the
combination of its service and product offerings, as well as its news,
information and tools, will support its efforts to retain and attract members in
the future.
A substantial proportion of the Company's total operating expenses of
$1,174,000 for the six-month period ended December 31, 1999, and $9,035,000 for
the year ended December 31, 2000, related to the technical development of the
Company's site. The Company believes the success of its online business center
segment depends on developing an attractive and easy-to-navigate website that
provides a high level of utility to small business owners and decision-makers.
The Company has incurred net losses and negative operating cash flow in
each quarterly period since its incorporation.
Approximately 20% of the Company's operating expenses of $9,035,000
were non-cash expenses, paid in the form of stock options, warrants and common
shares.
Non-cash charges consist of stock-based compensation expense pursuant
to the grant of stock options, interest expense on the issuance of warrants,
various expenses related to the issuance of common stock for services rendered,
strategic
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marketing equity instruments expense and other equity expenses. Stock-based
compensation expense consists of expenses related to employee stock option
grants issued with exercise prices lower than the deemed fair value of the
underlying shares at the time of the grant.
Other equity expense consists of warrants granted with respect to
services rendered or financing provided to the Company. These expenses are based
on the estimated fair value of the warrants as determined by the Black-Scholes
option pricing model and the provisions of EITF 96-18.
SALARIES, WAGES AND EMPLOYMENT TAXES
Salaries, wages and employment taxes increased from $883,000 in 1999 to
$5,651,000 in 2000. A significant portion of the increase is attributable to
1999 including only six months of activity and 2000 including twelve months of
activity. In addition, the Company increased the number of employees from 28 at
the end of 1999 to a peak of 47 in July 2000. The increase in employee headcount
was attributable to the Company's efforts developing the content and technical
segments of the Company's website. The Company believes the success of its
online business center will depend on developing an attractive and
easy-to-navigate website that provides a high level of utility to small business
owners and decision makers.
In the third quarter of 2000, the staff levels had started to decrease
as the web site development had been completed. Further reductions were made in
the fourth quarter of 2000 as the restructuring plan was implemented in
anticipation of the merger with TEAM America Corporation. In 2001, it is
expected that the level of expenditures for salaries, wages and employment taxes
for the online business center segment will be reduced significantly, primarily
due to a reduction to the number of staff in the areas of content, marketing and
sales.
At the closing of the merger with Team America Corporation an officer
of the Company received, as an executive bonus, previously granted and
fully-vested non-qualified incentive stock options to acquire 600,000 shares of
its common stock for $3.875 per share. At the time of the grant the fair market
value of the Company's common stock was $5.00. At December 31, 2000, the Company
recognized a compensation bonus expense of $675,000. The options vested
immediately, and the term of the option agreement is for ten years.
During 2000, the Company issued common stock valued at $200,000 for
directors' services to be performed during the year and has recorded $200,000 as
director's compensation expense in the year ended December 31, 2000.
During 2000, the Company issued common stock valued at $689,000 as
bonus compensation, and this amount was recorded as employee compensation bonus
expense in the year ended December 31, 2000.
OTHER SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Other selling, general and administrative expenses increased from
$271,000 in 1999 to $2,468,000 in 2000. A significant portion of the increase is
attributable to 1999 including only six months of activity, while 2000 included
an entire year of activity. The most significant portion of the costs incurred
in 2000 were incurred before July 2000 in the development and launch of the
Company's website. The Company expects to focus its future expenditures on
technical areas and to reduce its expenditures in the selling, general and
administrative areas as it shifts its concentration on web-enabling TEAM Direct
(TM), focuses on other opportunities to integrate its internet technology with
TEAM America's PEO business, and focuses on cross-promotion opportunities
between TEAM America's client and worksite employee base and its online business
center segment.
During 2000, the Company issued common stock valued at approximately
$269,000 to non-employees for services.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased from $20,000 in 1999 to
$262,000 in 2000. A portion of the increase is attributable to 1999 including
only six months of activity, while 2000 included an entire year of activity. The
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majority of the increase was due to significant fixed asset additions made by
the Company during 2000. In 2000, the Company acquired $973,000 of fixed assets,
including $207,000 acquired through capital leases.
RESTRUCTURING CHARGES
During the last quarter of 2000, the Company began to restructure in
contemplation of its acquisition of TEAM America Corporation. The primary
purpose of this restructuring was to position the Company to focus on the
opportunities to be derived from integrating the Company's internet technology
with TEAM America's PEO business and the opportunities for cross-promotion
between TEAM America's client and worksite employee base and the Company's
online business center. The Company has initiated efforts to reduce its
operating losses, and accordingly the Company has narrowed its focus and
curtailed certain operating costs. As a result of this shift, certain assets
utilized in the online segment were determined to be impaired. Additionally,
certain exit costs were accrued related to leased office space no longer being
utilized, employee severance, and costs to break contractual agreements with
vendors. An expense of $654,000 for restructuring charges appears as a line
item of the income statement for the year ended December 31, 2000.
INTEREST EXPENSE
Interest expense results from activities under the Company's capital
leasing activities, loans from stockholders and the convertible note. Interest
expense increased from $80,000 in 1999 to $512,000 in 2000.
In September 1999, in relation to a $500,000 loan, the Company issued a
warrant to acquire up to 50,000 shares of the Company's common stock at no cost.
Interest expense of $61,000 and $127,000 was accreted during 1999 and 2000,
respectively.
In August 2000, the Company issued a convertible note for $955,000 that
bore interest at the rate of 9% per annum with all principal and interest due
upon the closing of the merger with TEAM America Corporation. The holder of the
convertible note had the right to convert all or any part of the convertible
note to common stock at a 10% discount from the then market price of $7.08 per
share. At issuance of the note the Company recorded debt discount of $100,000,
which was deferred and recognized as interest expense over the term of the note.
The Company also accrued $30,000 of interest expense during the term of the
loan. Upon conversion of the note the company issued a greater number of shares
than provided by the conversion ratio in exchange for a warrant that had been
originally issued with the note. The cost of the additional shares issued,
$92,000, has been recorded in interest expense as a loan termination cost.
In March 2000, as additional consideration for a loan made to the
Company, the Company issued two warrants to acquire up to 16,000 shares of
common stock at a price of $3.80 per share for up to 10 years. In July 2000, the
Company issued at no cost 2,400 shares of its common stock in exchange for one
warrant to purchase 4,000 shares, and in December 2000, the Company issued at no
cost 7,300 shares of its common stock in exchange for the other warrant for the
remaining 12,000 shares. At December 31, 2000, the Company had recorded interest
expense of $34,500 relating to the debt discount amortization.
During 2000, a stockholder agreed to make advances of up to $450,000 to
the Company, and in consideration at the closing of the merger with TEAM America
Corporation the Company issued common stock to the stockholder in lieu of
accrued interest of $100,750.
In 2000, the Company had certain equipment under capital lease and
incurred interest expense of $27,000.
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INFORMATION ON TEAM AMERICA
Because of the importance of the PEO operations to our future, we have
provided the following unaudited pro forma condensed comparative information on
TEAM America's PEO results for 2000 and 1999:
STATISTICAL DATA
2000 1999
---- ----
Operations Data (in 000's):
---------------------------
Revenue $424,257 $401,940
Gross profit $ 16,449 $ 15,722
Statistical Data:
-----------------
Worksite employees at period end 13,600 14,500
Average worksite employees 14,050 14,250
Clients at period end 1,700 1,800
Revenue per average worksite employee $ 30,196 $ 28,206
Average gross payroll per employee $ 26,482 $ 24,613
Gross profit per average worksite employee $ 1,171 $ 1,103
Balance Sheet Data (in 000's):
------------------------------
Total assets $ 52,689 $ 47,886
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its cash requirements primarily
through private equity and debt financing transactions. Through December 31,
1999, the Company raised cumulative equity proceeds of $390,000. During the year
ended December 31, 2000, the Company raised an additional $7,842,000 of equity
funding. As of December 31, 1999, the Company had cash and cash equivalents of
$74,000 and a working capital deficit of $957,000. As of December 31, 2000, the
Company had cash and cash equivalents of $10,925,000 and a working capital
deficit of $4,803,000.
Included in the working capital deficit at December 31, 2000, was the
impact of the Company's stock repurchase program that became effective on
December 28, 2000, the date of the merger with Team America Corporation.
Pursuant to that program the Company recorded at December 31, 2000, a current
payable of $11,622,000 for the stock it agreed to repurchase, while cash
included net proceeds of $9,425,000 from the sale of preferred stock. On January
3, 2001, the Company received a $4,000,000 initial advance from its credit
facility, the principal of which does not start to become due until February
2003, and used a major portion of the proceeds to reduce the remaining payable
for the stock repurchases.
Net cash used for operating activities totaled $744,000 in 1999 and
$6,050,000 in the year ended December 31, 2000. Net cash used for investing
activities totaled $125,000 in 1999 and net cash received from investing
activities was $1,598,000 for the year ended December 31, 2000 due primarily to
the cash received in the acquisition of TEAM America Corporation. The Company
has invested $891,000 in property and equipment since its inception, not
including property acquired under capital leases.
Net cash provided by financing activities was $943,000 in 1999 and
$15,303,000 for the year ended December 31, 2000, primarily from the sale of
common stock and the issuance of preferred stock.
The Company does not expect significant growth in its operating costs
for the foreseeable future as it integrates its internet business with Team
America's human resource product offering. The Company does, however, intend to
emphasize its strategy to obtain members through alliances and co-marketing
relationships with organizations and firms with large aggregations of small
business customers or members. The Company believes that it will better serve
the small business
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community by leveraging the established "trust and confidence" relationships of
existing organizations with its customers and/or members. The Company expects
that this will lead to an increased utilization of the Company's wide variety of
business products and services over the web.
The Company's long-term plan for strengthening its financial position
continued with its merger with TEAM America Corporation in December 2000. At the
same time the Company issued 100,000 shares of Series A convertible preferred
stock for a total net proceeds of $9,425,000 and it entered into an $18,000,000
credit facility. Also in December 2000, the Company initiated the restructuring
of its online business center segment in order to focus on the opportunities to
be derived from integrating its Internet technology with TEAM America's PEO
business and the opportunities for cross-promotion between TEAM America's client
and worksite employee base and its online business center. The Company has
substantially reduced the level of 2000 operating expenses incurred at the early
stages of web development by reducing expenditures for third party contractors,
development, creative and administrative staff, and advertising.
In March 2001, the Company continued its expansion plans with the
acquisition of substantially all the assets of Professional Staff Management,
Inc. This acquisition not only strengthened its existing operating base in
California, Ohio and Utah, but also expanded into a new growing market in
Nevada.
The Company expects to generate sufficient cash flow from operations
and the utilization of its tax loss carryforwards to meet all its operating
expenses and service all its debt. In addition, the Company has $8,000,000
available for future acquisitions under its credit agreement.
RISK FACTORS
RISKS RELATED TO OUR PEO BUSINESS
IF GOVERNMENT REGULATIONS REGARDING PEOS ARE IMPLEMENTED, OR IF CURRENT
REGULATIONS ARE CHANGED, OUR BUSINESS COULD BE HARMED.
Because many of the laws related to the employment relationship were
enacted prior to the development of professional employer organizations and
other staffing businesses, many of these laws do not specifically address the
obligations and responsibilities of non-traditional employers. Our operations
are affected by numerous federal, state and local laws and regulations relating
to labor, tax, insurance and employment matters. By entering into an employment
relationship with employees who work at client locations, we assume some
obligations and responsibilities of an employer under these laws. Uncertainties
arising under the Internal Revenue Code of 1986, include, but are not limited
to, the qualified tax status and favorable tax status of certain benefit plans
provided by us and other alternative employers. The unfavorable resolution of
these unsettled issues could have a material adverse effect on our results of
operations and financial condition.
While many states do not explicitly regulate PEOs, approximately 21 of
the states, but not Ohio, have enacted laws that have licensing or registration
requirements for PEOs, and several additional states, including Ohio, are
considering such laws. Such laws vary from state to state but generally provide
for the monitoring of the fiscal responsibility of PEOs and specify the employer
responsibilities assumed by PEOs. There can be no assurance that we will be able
to comply with any such regulations which may be imposed upon us in the future,
and our inability to comply with any such regulations could have a material
adverse effect on our results of operations and financial condition.
In addition, there can be no assurance that existing laws and
regulations which are not currently applicable to us will not be interpreted
more broadly in the future to apply to our existing activities or that new laws
and regulations will not be enacted with respect to our activities. Either of
these changes could have a material adverse effect on our business, financial
condition, results of operations and liquidity.
IF THE IRS DETERMINES THAT WE ARE NOT AN "EMPLOYER," OUR 401(K) PLAN COULD BE
REVOKED AND OUR CAFETERIA PLAN MAY LOSE FAVORABLE TAX TREATMENT.
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If the IRS concludes that PEOs are not "employers" of certain worksite
employees for purposes of the Internal Revenue Code, then the tax qualified
status of our 401(k) plan could be revoked and our cafeteria plan may lose its
favorable tax status. The loss of qualified status for the 401(k) plan and the
cafeteria plan could increase our administrative expenses, increase client
dissatisfaction and adversely affect our ability to attract and retain clients
and worksite employees, and, thereby, materially adversely affect our financial
condition and results of operations. We are unable to predict the impact that
the foregoing could have on our administrative expenses, and whether our
resulting liability exposure, if any, will relate to past or future operations.
Accordingly, we are unable to make a meaningful estimate of the amount, if any,
of such liability exposure.
WE INTEND TO GROW OUR EXISTING BUSINESS, AND, IF WE ARE UNABLE TO MANAGE THIS
GROWTH, OUR BUSINESS AND RESULTS OF OPERATIONS COULD BE HARMED.
We intend to continue our internal growth and to pursue an acquisition
strategy. Such growth may place a significant strain on our management,
financial, operating and technical resources. Growth through acquisition
involves substantial risks, including the risk of improper valuation of the
acquired business and the risks inherent in integrating businesses with our
operations. There can be no assurance that suitable acquisition candidates will
be available, that we will be able to acquire or profitably manage such
additional companies, or that future acquisitions will produce returns that
justify the investment. In addition, we may compete for acquisition and
expansion opportunities with companies that have significantly greater resources
than we have. There can be no assurance that management skills and systems
currently in place will be adequate to implement a strategy of growth through
acquisitions and through increased market penetration. Our failure to manage
growth effectively, or to implement our strategy, could have a material adverse
effect on our results of operations and financial condition.
WE BEAR THE RISK OF NONPAYMENT FROM OUR CLIENTS.
To the extent that any client experiences financial difficulty, or is
otherwise unable to meet its obligations as they become due, our financial
condition and results of operations could be adversely affected. Although we
historically have not incurred significant bad debt expense, in each payroll
period we have a nominal number of clients who fail to make timely payment prior
to delivery of the payroll.
IF OUR WORKERS' COMPENSATION AND UNEMPLOYMENT COSTS RISE, OUR RESULTS OF
OPERATIONS AND BUSINESS MAY SUFFER.
Our workers' compensation and unemployment costs could increase as a
result of many factors, including increases in the rates charged by the
applicable states and private insurance companies and changes in the applicable
laws and regulations. Although we believe that historically we profited from
such services, our results of operations and financial condition could be
materially adversely affected in the event that our actual workers' compensation
and unemployment costs exceed those billed to our clients. Although, we have the
right to pass onto our clients rate increases for those costs, we may be unable
to do so to the full extent of the increases, or client terminations may occur
if such increases are made.
OUR CLIENT AGREEMENTS ARE SHORT TERM IN NATURE, AND, IF A SIGNIFICANT NUMBER OF
CLIENTS DO NOT RENEW THEIR CONTRACTS, OUR BUSINESS MAY SUFFER.
Our standard client agreement provides for successive one-year terms,
subject to termination by us or by the client at any time upon 30 days' prior
written notice. A significant number of terminations by clients could have a
material adverse effect on our financial condition, results of operations and
liquidity.
WE MAY BE LIABLE FOR ACTIONS OF WORKSITE EMPLOYEES OR CLIENTS, AND OUR INSURANCE
POLICIES MAY NOT BE SUFFICIENT TO COVER THESE LIABILITIES.
Our client agreement establishes a contractual division of
responsibilities between us and each client for various human resource matters,
including compliance with and liability under various governmental laws and
regulations. However, we may be subject to liability for violations of these or
other laws despite these contractual provisions, even if we do not participate
in such violations. Although such client agreements generally provide that the
client indemnify us for any liability
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attributable to the client's failure to comply with its contractual obligations
and to the requirements imposed by law, we may not be able to collect on such a
contractual indemnification claim, and thus may be responsible for satisfying
these liabilities. In addition, worksite employees may be deemed to be our
agents, subjecting us to liability for the actions of the worksite employees.
As an employer, we, from time to time, may be subject in the ordinary
course of our business to a wide variety of employment-related claims such as
claims for injuries, wrongful death, harassment, discrimination, wage and hours
violations and other matters. Although we carry $2 million of general liability
insurance, with a $25,000 deductible and with a $10 million commercial umbrella
policy, and carry employment practices liability insurance in the amount of $10
million, with a $50,000 deductible, there can be no assurance that any of the
insurance carried by us or our providers will be sufficient to cover any
judgments, settlements or costs relating to any present or future claims, suits
or complaints. There also can be no assurance that sufficient insurance will be
available to our providers or to us in the future and, if available, on
satisfactory terms. If the insurance carried by us or our providers is not
sufficient to cover any judgments, settlements or costs relating to any present
or future claims, suits or complaints, then our business and financial condition
could be materially adversely affected.
COMPETITIVE PRESSURES WE FACE MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
The PEO industry is highly fragmented, with, according to industry
sources, in excess of 2,500 companies providing PEO services in 2000. We
encounter competition from other PEOs and from single-service and
"fee-for-service" companies such as payroll processing firms, insurance
companies and human resource consultants. We may encounter substantial
competition from new market entrants. Some of our current and future competitors
may be significantly larger, have greater name recognition and have greater
financial, marketing and other resources than us. There can be no assurance that
we will be able to compete effectively against such competitors in the future.
AVAILABILITY OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK FOR SALE IN THE FUTURE
COULD ADVERSELY AFFECT OUR STOCK PRICE.
At March 26, 2001, we had 8,066,288 shares of our common stock
outstanding. Of these shares, 4,413,793 shares are held by nonaffiliates and are
freely tradable without restriction or further registration under the Securities
Act of 1933 or eligible for resale under an exemption from registration. The
holders of the remaining 3,652,495 shares are entitled to resell them only
pursuant to a registration statement under the Securities Act of 1933 or an
applicable exemption from registration thereunder.
Sales of substantial amounts of these shares in the public market or
the prospect of such sales could adversely affect the market price of our common
stock.
OUR PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS OWN A CONTROLLING INTEREST IN
OUR VOTING STOCK.
Our officers, directors and shareholders with greater than 5% holdings,
in the aggregate, beneficially own approximately 4,807,000 shares, or 59.6% of
our outstanding common stock as of March 26, 2001. The holders of the preferred
shares have the right to acquire beneficial ownership of an additional 1,481,481
shares through the exercise of stock warrants. The holders of the preferred
shares also have the right to convert their preferred shares to an additional
1,481,481 shares of common stock. As a result, these shareholders, acting
together, may have the ability to determine the outcome of substantially all
matters submitted to our shareholders for approval, including:
- election of the board of directors;
- removal of any of the directors;
- amendment of the articles of incorporation or code of
regulations; and
- adoption of measures that could delay or prevent a change in
control or impede a merger, takeover or other business
combination involving us.
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These shareholders will have substantial influence over our management
and affairs. Accordingly, this concentration of ownership may have the effect of
impeding a merger, consolidation, takeover or other business consolidation
involving us, or discouraging a potential acquirer from making a tender offer
for our shares which would prevent shareholders from realizing the benefits of
the transaction, such as a purchase price premium or significant increase in
stock price.
ANTI-TAKEOVER PROVISIONS IN OUR ARTICLES OF INCORPORATION AND CODE OF
REGULATIONS MAKE A CHANGE IN CONTROL OF TEAM MUCHO MORE DIFFICULT.
The provisions of our articles of incorporation and code of regulations
and of the Ohio Revised Code, together or separately, could discourage potential
acquisition proposals, delay or prevent a change in control and limit the price
that certain investors might be willing to pay in the future for our common
stock. Among other things, these provisions:
- require certain supermajority votes;
- establish certain advance notice procedures for nomination of
candidates for election as directors and for shareholders
proposals to be considered at shareholders' meetings; and
- divide the board of directors into two classes of directors
serving staggered two-year terms.
Pursuant to our articles of incorporation, the board of directors has
authority to issue up to 5,000,000 preferred shares without further shareholder
approval. Such preferred shares could have dividend, liquidation, conversion,
voting and other rights and privileges that are superior or senior to our common
stock. Issuance of preferred shares could result in the dilution of the voting
power of our common stock, adversely affecting holders of our common stock in
the event of our liquidation or delay, and defer or prevent a change in control.
In certain circumstances, such issuance could have the effect of decreasing the
market price of our common stock.
In addition, the Ohio Revised Code contains provisions that require
shareholder approval of any proposed "control share acquisition" of any Ohio
corporation at any of three ownership thresholds: 20%, 33 1/3% and 50%. The Ohio
Revised Code also contains provisions that restrict certain business
combinations and other transactions between an Ohio corporation and interested
shareholders.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND MAY NOT ACCURATELY PREDICT OUR
FUTURE PERFORMANCE.
Our quarterly results of operations have varied significantly and
probably will continue to do so in the future as a result of a variety of
factors, many of which are outside our control. These factors include:
- changes in our pricing policies or those of our competitors;
- timing and number of new client agreements and existing client
terminations;
- seasonal patterns in revenue and expenses; and
- other changes in levels of operating expenses, personnel and
general economic conditions.
As a result, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful, and you should not rely on
them as an indication of our future performance. In addition, our operating
results in a future quarter or quarters may fall below expectations of
securities analysts or investors and, as a result, the price of our common stock
may fluctuate.
RISKS RELATED TO MUCHO'S BUSINESS
MUCHO HAS A LIMITED OPERATING HISTORY, MAKING IT DIFFICULT TO EVALUATE AND
FORECAST ITS BUSINESS RESULTS.
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Mucho was incorporated in July 1999. In April 2000, Mucho launched the
beta version of its website and in June 2000, Mucho launched its website with a
core of fully functional services. This is an extremely limited operating
history upon which to evaluate Mucho's business and prospects.
MUCHO HAS INCURRED LOSSES SINCE ITS INCORPORATION, AND EXPECTS TO INCUR
OPERATING LOSSES FOR THE FORESEEABLE FUTURE.
Mucho has incurred net losses from operations in each quarter since its
incorporation and, as of December 31, 2000, had an accumulated deficit of
$10,750,000. Mucho expects to continue to incur losses for the foreseeable
future. To become profitable, Mucho must increase revenue substantially and
reduce operating expenses. To increase revenue, Mucho will need to continue to
attract members and expand its service and product offerings. If Mucho fails to
achieve profitability, our business and results of operations could be adversely
affected.
MUCHO'S NETWORK AND SOFTWARE ARE VULNERABLE TO SECURITY BREACHES AND SIMILAR
THREATS THAT COULD RESULT IN LIABILITY AND COULD HARM MUCHO'S REPUTATION.
Network infrastructure is vulnerable to computer viruses, break-ins,
network attacks and similar disruptive problems. This could result in liability
for damages, and Mucho's reputation could suffer, thus deterring potential
members from transacting business with Mucho. Security problems caused by third
parties could lead to interruptions and delays or to the cessation of service to
Mucho's members. Furthermore, inappropriate use of the network by third parties
could also jeopardize the security of confidential information stored in Mucho's
computer systems.
Mucho intends to continue to implement security measures, but cannot
assure you that the measures it implements will not be circumvented, resulting
in interruptions, delays or cessation of service to Mucho's members. Liability,
loss of members or damage to Mucho's reputation due to security breaches could
harm Mucho and adversely affect our business and results of operations.
MUCHO'S GROWTH DEPENDS ON INCREASING MEMBERSHIP AND MEMBER PURCHASING.
To generate revenue, Mucho must attract new members to Mucho's website
and increase member purchasing. Currently, Mucho is using a variety of
techniques to increase its member purchasing, including entering into
partnerships with trade associations and other organizations that have a trust
and confidence relationship with their members. Many of these techniques are new
and unproven, and Mucho cannot be certain that any of them will be successful in
helping Mucho increase membership or member purchasing. If Mucho is unable to
attract new members to its website and increase member purchasing, its business
will not grow as expected.
INTENSE COMPETITION COULD IMPEDE MUCHO'S ABILITY TO GAIN MARKET SHARE AND HARM
ITS FINANCIAL RESULTS.
E-commerce is rapidly evolving and intensely competitive. In addition,
the traditional non-Internet-based markets for business products and services
are also intensely competitive. Mucho competes with both traditional
distribution channels as well as other online services. Mucho's current and
potential competitors include:
- Internet sites targeting the small business market including
Onvia.com, BizBuyer.com, Digitalwork.com and Works.com;
- Internet sites targeting the consumer market that also sell to
small business customers, including Beyond.com, Buy.com and
Onsale.com;
- companies such as AOL Time Warner, Microsoft, NBCi and Yahoo!
that offer a broad array of Internet-related services and
either offer business-to-business e-commerce services
presently or have announced plans to introduce such services
in the future; and
- traditional non-Internet-based retailers that sell business
service and products.
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All of Mucho's competitors have significantly greater market
penetration than Mucho. In addition, there are minimal barriers to entry to
Mucho's market, and new competitors could launch a competitive website offering
services and products targeted to the small business market. To compete
successfully and to gain market share, Mucho must significantly increase its
membership and the volume of services and products it sells through its website.
Mucho's failure to achieve these objectives could limit its ability to achieve
profitability, which could hurt our business and results of operations.
MUCHO'S BUSINESS MODEL IS NEW, UNPROVEN AND EVOLVING.
Mucho's business model is new, unproven and continues to evolve. In
particular, Mucho's business model is based on assumptions, which may not prove
to be correct, including the following:
- a significant number of small businesses will be willing to
purchase their business services and products online; and
- a significant number of small businesses and small business
service providers will use Mucho's website to buy and sell
services and products.
If use of the Internet as a medium for business communications and
commerce does not continue to increase, demand for Mucho's services and products
will be limited and Mucho's financial results could suffer. Even if small
businesses increase their use of the Internet, the Internet infrastructure may
not be able to support the demands of this growth. If the Internet's
infrastructure is not improved or expanded to meet demand, the Internet's
performance and reliability will be degraded and consumers and businesses may
slow or stop their use of the Internet as a transaction medium.
MUCHO'S BUSINESS MAY SUFFER IF IT IS UNABLE TO HIRE AND RETAIN HIGHLY SKILLED
QUALIFIED EMPLOYEES.
Mucho's future success depends in large part on its ability to
identify, hire, train and retain highly qualified sales and marketing,
technical, managerial and administrative personnel. As Mucho continues to
introduce new services, products and features on its website, and as its member
base and revenue continue to grow, Mucho will need to hire a significant number
of qualified personnel. Competition for qualified personnel, especially those
with Internet experience, is intense, and Mucho may not be able to attract,
train, assimilate or retain qualified personnel in the future. Failure to do so
could disrupt Mucho's operations and could increase Mucho's costs as it would be
required to use more expensive outside consultants, which could have a negative
impact on us.
MUCHO'S EXECUTIVE OFFICERS AND KEY EMPLOYEES ARE CRITICAL TO ITS BUSINESS, AND
THESE OFFICERS AND KEY EMPLOYEES MAY NOT REMAIN WITH MUCHO IN THE FUTURE.
Mucho's business and operations are substantially dependent on the
performance of its key employees, all of whom are employed on an at-will basis
and have worked together for less than two years. Mucho does not maintain "key
person" life insurance on any of its executives.
IF MUCHO FAILS TO EXPAND ITS CURRENT TECHNOLOGY INFRASTRUCTURE, IT WILL BE
UNABLE TO ACCOMMODATE ITS ANTICIPATED GROWTH.
To be successful, Mucho must continue to attract new members to its
website. Accommodating this potential growth in website traffic and member
transactions will require Mucho to continue to develop its technology
infrastructure. To maintain the necessary technological platform in the future,
Mucho must continue to expand and stabilize the performance of its web servers,
improve its transaction processing system, optimize the performance of its
network servers and ensure the stable performance of its entire network. Mucho
may not be successful in its ongoing efforts to upgrade its systems, or if it
does successfully upgrade its systems, Mucho may not do so on time and within
budget.
Any system failure that causes an interruption in the service of
Mucho's website or a decrease in its responsiveness could result in reduced
member traffic and reduced revenue. Further, prolonged or ongoing performance
problems on Mucho's website could damage its reputation and result in the
permanent loss of members. Mucho has occasionally
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experienced system interruptions that have made its website totally unavailable,
or slowed its response time, and these problems may occur again in the future.
FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT MUCHO'S
BUSINESS OR INDIRECTLY IMPACT MUCHO'S BUSINESS BY LIMITING THE GROWTH OF
E-COMMERCE.
As e-commerce evolves, federal, state and foreign agencies could adopt
regulations covering issues such as privacy, content and taxation of services
and products. If enacted, government regulations could limit the market for
Mucho's services and products. Although many regulations might not apply to
Mucho's business directly, laws that regulate the collection or processing of
personal or consumer information could indirectly affect Mucho's business. It is
possible that legislation could expose companies involved in e-commerce to
liability, which could limit the growth of e-commerce generally. Legislation
could hinder the growth in Internet use and decrease its acceptance as a medium
for communication and commerce.
RISKS RELATED TO THE MERGER
WE MAY FAIL TO REALIZE THE ANTICIPATED BENEFITS OF THE MERGER.
The success of the merger will depend, in part, on our ability to
realize the anticipated growth opportunities and synergies from combining TEAM
Mucho and Mucho. To realize the anticipated benefits of this combination, the
management team must develop strategies and implement a business plan that will:
- effectively combine Mucho's services and Internet technology
with our PEO services;
- successfully use the anticipated opportunities for
cross-promotion and sales of the products and services of
Mucho and TEAM Mucho;
- successfully retain and attract our key employees, including
operating management and key technical personnel, during the
period of integration and in light of the competitive
employment market; and
- while integrating the two company's operations, maintain
adequate focus on the core businesses of each company in order
to take advantage of competitive opportunities and to respond
to competitive challenges.
If the management team is not able to develop strategies and implement
a business plan that achieves these objectives, we may not realize the
anticipated benefits of the merger. In particular, anticipated growth in
revenue, earnings before interest, taxes, depreciation, and amortization, or
"EBITDA," and cash flow may not be realized, which would have an adverse impact
on us and the market price of our common stock.
THE MERGER MAY RESULT IN DISRUPTION OF OUR EXISTING BUSINESSES, DISTRACTION OF
OUR MANAGEMENT AND DIVERSION OF OTHER RESOURCES.
The integration of our businesses may divert management time and
resources from the main businesses of both companies. This diversion of time and
resources could cause the market price of our common stock to decrease. The new
management will need to spend some of their time integrating our operations.
This could cause our business to suffer.
THE COSTS ASSOCIATED WITH THE MERGER MAY AFFECT LIQUIDITY AND WORKING CAPITAL.
In connection with the merger, we have acquired previously issued and
outstanding shares as part of a tender offer. The cost of acquiring these shares
was approximately $11,622,000. Net funding from the issuance of preferred stock
to support that redemption was $9,425,000 after associated fees. The balance of
the funding came from a bank loan in January 2001 and from operating cash flow.
The capitalized costs associated with the merger, the tender offer, the issuance
of preferred stock and the new bank line exceeded $3 million. A portion of these
costs has been paid from or will be paid from operating cash flow or, as in the
case of the preferred stock and the $4,000,000 bank loan, as a reduction of
gross proceeds. If improvements in
27
30
TEAM Mucho, including reductions in operating costs of Mucho and the expected
benefits from the PSMI acquisition are not achieved, or if the existing PEO
business fails to grow as expected, then we may experience liquidity and working
capital problems.
INFLATION
We believe the effects of inflation have not had a significant impact
on the results of operations or financial condition.
QUARTERLY RESULTS
The following table sets forth certain unaudited operating results of
each of the six consecutive quarters since inception on July 8, 1999. The
information is unaudited, but in the opinion of management, includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for such periods. This
information should be read in conjunction with our consolidated financial
statements and the notes thereto.
QUARTER ENDED
-------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
1999 1999 2000 2000 2000 2000
---- ---- ---- ---- ---- ----
Revenues $ 0 $ 0 $ 0 $ 0 $ 28 $ 23
Direct Costs 140 1,034 2,135 2,456 1,829 2,614
Net (Loss) (140) (1,034) (2,135) (2,456) (1,801) (2,591)
(Loss) Per Share:
Basic $(.06) $ (.59) $ (.89) $ (.98) $ (.69) $ (1.01)
Diluted $(.06) $ (.59) $ (.89) $ (.98) $ (.69) $ (1.01)
FORWARD-LOOKING INFORMATION
Statements in the preceding discussion that indicate our intentions,
hopes, beliefs, expectations or predictions of the future are forward-looking
statements. It is important to note that our 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 "Risk Factors" in our Annual report on Form 10-K for the year
ended December 31, 2000 filed with the Securities and Exchange Commission, as
the same may be amended from time to time.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Our future results and shareholder
values may differ materially from those expressed in these forward-looking
statements. Many of the factors that will determine these results and values are
based upon our ability to control or predict the future. Shareholders are
cautioned not to put undo reliance on forward-looking statements. In addition,
we do 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, we
claim the protection of the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-- CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2000 AND 1999 - TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
Report of Independent Public Accountants
To the Board of Directors of TEAM MUCHO, INC. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheet of TEAM Mucho, Inc.
(an Ohio corporation) and subsidiaries as of December 31, 2000, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
financial statements of TEAM Mucho, Inc. (then doing business as Mucho.com) as
of December 31, 1999 and for the period from inception (July 8, 1999) to
December 31, 1999 were audited by other auditors whose report dated July 26,
2000, expressed an unqualified opinion on those financial statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TEAM Mucho, Inc. and
subsidiaries, as of December 31, 2000, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Columbus, Ohio,
March 27, 2001.
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31
TEAM MUCHO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2000 and 1999 (000's Omitted)
- ---------------------------------------------------------------------------------------------------------------------------------
2000 1999
------------------ ------------------
ASSETS
- ------
CURRENT ASSETS:
Cash $ 10,925 $ 74
Receivables:
Trade, net of allowance for doubtful accounts of $200 in 2000 and
$0 in 1999 1,978 2
Unbilled revenues 8,792 -
Other receivables 1,461 -
Prepaid expenses 332 -
Deferred income tax 420 -
------------------ ------------------
Total current assets 23,908 76
------------------ ------------------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 184 35
Computer hardware and software 1,559 184
Leasehold improvements 117 8
------------------ ------------------
1,860 227
Accumulated depreciation and amortization (279) (20)
------------------ ------------------
Total property and equipment, net 1,581 207
------------------ ------------------
OTHER ASSETS:
Goodwill, net 26,732 -
Cash surrender value of life insurance policies 587 -
Deferred income tax asset 249 -
Other 297 9
------------------ ------------------
Total other assets 27,865 9
------------------ ------------------
Total assets $ 53,354 $ 292
================== ==================
(Continued on next page)
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32
TEAM MUCHO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
As of December 31, 2000 and 1999 (000's Omitted)
- ---------------------------------------------------------------------------------------------------------------------------------
2000 1999
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Trade accounts payable $ 1,954 $ 338
Capital leases - current portion 103 32
Notes payable to related parties -- 561
Stock repurchase obligation 11,622 --
Accrued compensation 8,367 --
Accrued payroll taxes and insurance 3,967 --
Accrued workers' compensation liability 630 --
Federal and state income taxes payable 72 --
Other accrued expenses 1,996 102
-------- --------
Total current liabilities 28,711 1,033
LONG-TERM LIABILITIES:
Capital lease obligations, less current portion 127 62
Accrued workers' compensation liability 198 --
Client deposits 349 --
Deferred compensation 587 --
-------- --------
Total liabilities 29,972 1,095
-------- --------
MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK, face
amount of $10,000,000
3,625 --
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value:
45,000,000 shares authorized; 9,603,558 and 1,976,393 issued
at December 31, 2000 and 1999, respectively 45,001 451
Deferred compensation (28) --
Retained deficit (10,750) (1,254)
-------- --------
34,223 (803)
Less -Treasury stock, 2,722,366 common shares, at cost (14,466) --
-------- --------
Total shareholders' equity 19,757 (803)
-------- --------
Total liabilities and shareholders' equity $ 53,354 $ 292
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
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33
TEAM MUCHO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year Ended December 31, 2000 and for the Period from Inception (July 8,
1999) to December 31, 1999 (000's Omitted Except for Share Amounts)
- ---------------------------------------------------------------------------------------------------------------------------
PERIOD FROM
YEAR ENDED INCEPTION TO
DECEMBER 31, DECEMBER 31,
2000 1999
----------- -----------
REVENUES $ 51 $ --
----------- -----------
EXPENSES:
Salaries, wages and employment taxes 5,651 883
Other selling, general and administrative expenses 2,468 271
Depreciation and amortization 262 20
Restructuring charges 654 --
----------- -----------
Total operating expenses 9,035 1,174
----------- -----------
Loss from operations (8,984) (1,174)
INTEREST EXPENSE (512) (80)
----------- -----------
Net loss before income taxes (9,496) (1,254)
PROVISION FOR INCOME TAXES -- --
----------- -----------
NET LOSS $ (9,496) $ (1,254)
=========== ===========
NET LOSS PER SHARE:
Basic $ (3.37) $ (0.66)
Diluted $ (3.37) $ (0.66)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 2,816,501 1,903,095
Diluted 2,816,501 1,903,095
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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34
TEAM MUCHO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Year Ended December 31, 2000 and for the Period from Inception to
December 31, 1999 (000's Omitted, Except for Share Amounts)
- -----------------------------------------------------------------------------------------------------------------------
COMMON STOCK ISSUED
----------------------- DEFERRED TREASURY
NUMBER STOCK COMPENSATION STOCK
--------- ---------- ------------ ---------
Balance, July 8, 1999 (inception)
Issuance of common stock 1,976,393 $ 390 $ -- $ --
Issuance of warrants -- 61 -- --
Net loss for the period -- -- -- --
--------- ---------- --- ----------
Balance, December 31, 1999 1,976,393 451 -- --
Issuance of common stock 1,086,597 5,553 -- --
Issuance of common stock for services 606,219 1,212 -- --
Conversion of debt to equity 349,500 1,077 -- --
Issuance of warrants -- 127 -- --
Grant of qualified and non-qualified stock options -- 710 (28) --
Acquisition of TEAM America Corporation 4,984,849 30,071 -- (14,466)
Issuance of common stock and warrants related to
preferred stock offering 600,000 5,800 -- --
Net loss for the year -- -- -- --
--------- ---------- --- ----------
Balance, December 31, 2000 9,603,558 $ 45,001 $(28) $ (14,466)
========= ========== ==== ==========
- -------------------------------------------------------------------------------------
TOTAL
RETAINED STOCKHOLDERS'
DEFICIT EQUITY
--------------------------------
Balance, July 8, 1999 (inception)
Issuance of common stock $ -- $ 390
Issuance of warrants -- 61
Net loss for the period (1,254) (1,254)
---------- ----------
Balance, December 31, 1999 (1,254) (803)
Issuance of common stock -- 5,553
Issuance of common stock for services -- 1,212
Conversion of debt to equity -- 1,077
Issuance of warrants -- 127
Grant of qualified and non-qualified
stock options -- 682
Acquisition of TEAM America Corporation -- 15,605
Issuance of common stock and warrants related
to preferred stock offering -- 5,800
Net loss for the year (9,496) (9,496)
---------- ----------
Balance, December 31, 2000 $ (10,750) $ 19,757
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
32
35
TEAM MUCHO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended December 31, 2000 and for the Period from Inception (July 8,
1999) to December 31, 1999 (000's Omitted)
- --------------------------------------------------------------------------------------------------------------------------
PERIOD FROM
YEAR ENDED INCEPTION TO
DECEMBER 31, DECEMBER 31,
2000 1999
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,496) $ (1,254)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 262 20
Write-down of property and equipment related to restructuring 477 --
Compensation expense on grant of stock options 682 --
Changes in assets and liabilities, excluding the impact of acquisitions:
Accounts receivable (1) --
Other receivables -- (2)
Prepaid expenses and other current assets (93) --
Accounts payable 1,523 338
Accrued liabilities 683 164
Other (87) (10)
-------- --------
Net cash used in operating activities (6,050) (744)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (766) (125)
Acquisition, net of cash acquired 2,364 --
-------- --------
Net cash provided by (used in) investing activities 1,598 (125)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,553 390
Proceeds from issuance of preferred stock 9,425 --
Proceeds from loans payable to related party 955 561
Payment of loans payable to related party (561) --
Payment on capital lease obligations (69) (8)
-------- --------
Net cash provided by financing activities 15,303 943
-------- --------
Net increase in cash 10,851 74
CASH, beginning of period 74 --
-------- --------
CASH, end of period $ 10,925 $ 74
======== ========
(Continued on next page)
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36
TEAM MUCHO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Year Ended December 31, 2000 and for the Period from Inception (July 8,
1999) to December 31, 1999 (000's Omitted)
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
2000 1999
----------------- -----------------
Interest paid $ 54 $ -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During 2000, the Company acquired TEAM America Corporation in a transaction
accounted for as a reverse acquisition. As a result of this transaction, the
Company acquired the outstanding common stock of TEAM America Corporation for
$15,605,000. See Note 3 for additional information.
During 2000 and 1999, the Company acquired $207,000 and $102,000, respectively,
of property and equipment under capital leases.
During 2000 and 1999, the Company satisfied accrued interest through the
issuance of warrants valued at $249,000 and $61,000, respectively.
During 2000, the Company satisfied accounts payable for services performed
through the issuance of common stock valued at $1,212,000.
In December 2000, in conjunction with the acquisition of TEAM America
Corporation, $955,000 of debt was converted to equity.
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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37
(1) NATURE AND SCOPE OF BUSINESS
----------------------------
TEAM Mucho, Inc. (the Company) originally incorporated as Muchocode.com,
Inc., was incorporated on July 8, 1999 in the State of Nevada. In September
1999, the Company changed its name to Mucho.com, Inc. From inception (July
8, 1999) through December 28, 2000, the Company operated as Mucho.com and
focused its efforts on developing its offerings and client base as an
online business center offering products and services for small and
emerging companies. On December 28, 2000, Mucho.com acquired TEAM America
Corporation in a reverse acquisition. The combined company changed its name
to TEAM Mucho, Inc. (an Ohio Corporation). As a result of this acquisition,
the Company began focusing its efforts on the professional employer
organization (PEO) business acquired from TEAM America Corporation.
TEAM Mucho, Inc. (formerly doing business as TEAM America Corporation), is
the largest professional employer organization ("PEO") headquartered in
Ohio and one of the oldest PEOs in the United States, having been founded
in 1986. The Company provides, on a "co-employer" basis, comprehensive and
integrated human resource management services to small and medium-sized
businesses, thereby allowing such businesses to outsource their payroll and
human resource responsibilities. This allows TEAM Mucho clients to
concentrate on their core competencies. The Company offers a broad range of
services including human resource administration, regulatory compliance
management, employee benefits administration, risk management services and
employee liability protection, payroll and payroll tax administration, and
placement services.
The Company provides its services by entering into a Client Services
Agreement, which establishes a three-party relationship whereby, the
Company and the client act as co-employers of the employees who work at the
client's location. Pursuant to the Client Services Agreement, the Company
assumes responsibility for personnel administration and compliance with
most employment related government regulations, while the client company
retains the employee's services in its business and remains the employer
for various other purposes.
In its financial statements for the period ended December 31, 1999, the
Company was considered a development stage company. Effective with the
acquisition of TEAM America Corporation, the Company is no longer
considered a development stage company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF PRESENTATION
The Company's financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include TEAM Mucho, Inc. and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION - ONLINE BUSINESS SEGMENT
Revenue is derived from sponsorship contracts ranging from six months to
one year in which the Company commits to provide sponsors promotional
opportunities on its web site. Sponsorship revenue is recognized on a
straight-line
35
38
basis over the term of the related contract. At December 31, 2000, the
Company has $75,000 of deferred revenue, which is classified within other
accrued expenses on the balance sheet.
REVENUE RECOGNITION - PEO BUSINESS SEGMENT
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's 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 client's claims and rate
history. The amount billed is intended (i) to cover payments made by the
Company for insurance premiums and unemployment taxes, (ii) the Company's
cost 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 which
relates to changes in direct costs is effective as of the date of the
changes, and all changes require thirty days' prior notice.
Consistent with PEO industry practice, the Company recognizes all amounts
billed to its clients as revenue because the Company is at risk for the
payment of its direct costs, whether or not the Company's clients pay the
Company on a timely basis. The Company also recognizes as revenue and as
unbilled receivables, on an accrual basis, any such amounts which relate to
services performed by worksite employees which have not yet been billed to
the client as of the end of the accounting period.
Because the acquisition of TEAM America Corporation occurred on December
28, 2000, the Company recognized no revenue or expenses related to the PEO
business segment during 2000. Unbilled revenues on the balance sheet at
December 31, 2000 represent amounts generated by TEAM America Corporation
prior to the acquisition and billed to clients after the acquisition.
SEGMENT INFORMATION
During 2000 and 1999, the Company operated entirely in the online business
segment. As a result, the statements of operations are composed entirely of
the results of this business segment. With the acquisition of TEAM America
Corporation, the Company entered the PEO business segment. At December 31,
2000, the assets and liabilities of the Company are substantially all
related to the PEO business segment. For 2001, the Company will emphasize a
combined strategy which enables the Company's PEO and on-line business to
target their services to small business owners and therefore cross-sell
business and services. As a result, it is expected that these two service
offerings will essentially merge into one segment for reporting purposes.
36
39
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist principally of accounts receivable.
The Company provides its services to its clients based upon an evaluation
of each client's financial condition. Exposure to losses on receivables is
primarily dependent on each client's financial condition. The Company
mitigates such exposure by requiring deposits, letters-of-credit or
personal guarantees from certain of its clients. Exposure to credit losses
is monitored by the Company, and allowances for anticipated losses are
maintained when appropriate.
WORKERS' COMPENSATION INSURANCE
The Company has a high retention workers' compensation insurance policy
covering most of its non-Ohio employees. The retention limit is $250,000
per occurrence. There are also aggregate minimum and maximum policy premium
limits. The Company's policy is to record workers' compensation costs at
the estimated total cost of each claim, plus an estimate for incurred but
not reported claims, subject to the $250,000 retention limit and also
subject to the minimum and maximum aggregate limits in the policy. In Ohio,
since July 1999, the Company has maintained a self-insurance program for
workers compensation. The Company is self-funded up to $250,000 per
occurrence and purchases private insurance for costs in excess of that
amount.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and betterments for
property and equipment over certain minimum dollar amounts are capitalized.
Repair and maintenance costs are expensed as incurred. Depreciation and
amortization are provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
straight-line method of depreciation is followed for substantially all
property and equipment. Estimated service life for equipment, capital
leases, and furniture and fixtures is 3-5 years. Leasehold improvements are
amortized over the lesser of the term of the related lease or the estimated
useful life of the improvement.
GOODWILL
Goodwill is the excess of the purchase price paid for an acquired business,
including liabilities assumed, over the fair market value of the assets
acquired. Goodwill is amortized over 20 years.
The Company will continually evaluate whether events and circumstances have
occurred which indicate that the remaining estimated useful life of
goodwill may warrant revision or that the remaining balance of goodwill may
not be recoverable. If such an event were to occur, the Company would
estimate the sum of the expected cash flows, undiscounted and without
interest charges, derived from such goodwill over its remaining life. The
Company believes that no such impairment existed at December 31, 2000.
The goodwill on the consolidated balance sheet at December 31, 2000,
relates entirely to its acquisition of TEAM America Corporation on December
28, 2000. As a result, no amortization expense or accumulated amortization
has been recognized in these consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of current assets and liabilities approximate their
fair value because of the immediate or short-term maturity of these
financial instruments.
37
40
INCOME TAXES
Income taxes are accounted for using the asset and liability approach for
financial reporting. The Company recognized deferred tax liabilities and
assets for the expected future tax consequences of temporary differences
between the financial statement carrying amount and the tax basis of assets
and liabilities.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
STOCK-BASED COMPENSATION AND AWARDS
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation ("SFAS 123")
for all stock-based compensation to employees and directors. Under the
provisions of this standard, employee and director stock-based compensation
expense is measured using either the intrinsic-value method as prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"), or the fair value method described in SFAS 123.
Companies choosing the intrinsic-value method are required to disclose the
pro forma impact of the fair value method on net income.
The Company has elected to account for stock-based compensation and awards
under the provisions of APB 25. Under APB 25, compensation cost for stock
options is measured as the excess, if any, of the fair value of the
underlying common stock on the date of grant over the exercise price of the
option. The Company is required to implement the provisions of SFAS 123 for
stock-based awards to those other than employees and directors. Stock-based
compensation and award expense for all equity instruments is recognized
based on the related vesting periods.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense for
the year and period ended December 31, 2000 and December 31, 1999 was
approximately $32,000 and $4,000, respectively.
EARNINGS PER SHARE
At December 31, 2000 and 1999, 2,051,000 and 881,000 options, and 1,501,000
and 65,000 warrants, with a weighted average price of $5.39 and $4.39 for
the options, and $6.75 and $0.91 for the warrants, respectively, are
excluded from the calculation of diluted earnings per share because their
effect is anti-dilutive. Additionally, preferred stock convertible into
approximately 1,481,000 shares of common stock was excluded from the
calculation of diluted earnings per share because its effect is
anti-dilutive. As a result, no reconciliation between weighted average
shares used for the calculation of basic earnings per share and weighted
average shares used for the calculation of diluted earnings per share is
necessary.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial statements
to conform with the 2000 financial statement presentation.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," as amended in June 2000 by Statement of Financial Accounting
Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which requires companies to
recognize all derivatives as either assets or liabilities in the balance
sheet and measure such instruments at fair value. As amended by Statement
of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133, "the provisions of SFAS 133 will require
adoption no later than fiscal years beginning after June 15, 2000.
38
41
Adoption of SFAS 133, as amended by SFAS 138, is not expected to have a
material impact on the Company's consolidated financial statements.
(3) ACQUISITION
On December 28, 2000, the Company completed the acquisition of TEAM America
Corporation, a professional employer organization. The acquisition was
accounted for under the purchase method of accounting as a reverse
acquisition, whereby the legal target (Mucho.com), was treated as the
acquiring company for accounting purposes because its shareholders
controlled more than 50% of the post transaction combined company. The
historical earnings per share and share amounts of the Company have been
retroactively restated for all periods presented in these consolidated
financial statements to give effect to the conversion ratio utilized in the
merger with TEAM America Corporation. As a result, all share amounts and
earnings per share are presented in TEAM America Corporation equivalent
shares.
No results of operations of TEAM America Corporation are included in the
2000 statement of operations as the acquisition of TEAM America Corporation
occurred on December 28, 2000.
Total consideration paid for this acquisition was (000's omitted except for
share amounts):
NUMBER OF
SHARES OR
OPTIONS VALUE
---------- ----------
TEAM America Corporation common stock owned by Mucho.com control group
prior to date of acquisition at historical cost of $6.34
per share 1,296,044 $ 8,221
Other TEAM America Corporation common stock outstanding at fair 1,341,439 6,707
market value of $5 per share
TEAM America stock options acquired at fair market value 850,637 677
Direct expenses related to acquisition 1,664
---------- ----------
Total purchase price 3,488,120 $ 17,269
========== ==========
The purchase price was allocated to the assets acquired based on their
relative fair market values with the excess allocated to goodwill. Goodwill
of $26,732,000 was recorded as a result of this acquisition and will be
amortized using the straight-line method over 20 years. At December 31,
2000, 1,111,111 shares of TEAM Mucho, Inc. common stock were contingently
issuable related to this acquisition and were not included in total shares
outstanding. Because this transaction was accounted for as a reverse
acquisition, these shares will be accounted for as a stock dividend if the
contingency is satisfied.
Concurrent with the acquisition of TEAM America Corporation by the Company,
TEAM America Corporation made a tender offer to its shareholders to
purchase up to 50% of the outstanding TEAM America Corporation common
shares at $6.75 per share. A total of approximately 1,722,000 shares were
tendered for a total cost of approximately $11,622,000. This liability is
shown on the consolidated balance sheet as "stock repurchase obligation" in
current liabilities. In January 2001 this obligation was settled. Tendered
shares, plus shares held in treasury stock by TEAM America Corporation
prior to the acquisition, are reflected as treasury stock on the post
acquisition consolidated balance sheet.
39
42
The following table presents unaudited condensed pro forma operating
results as if TEAM America Corporation had been acquired as of July 8,
1999. These results are not necessarily an indication of operating results
that would have occurred had the Company actually operated the business
during the periods indicated (000's omitted except for shares).
2000 1999
(UNAUDITED) (UNAUDITED)
------------------ ----------------
Revenues $ 424,000 $ 202,000
Net loss (8,860) (1,716)
Net loss available for common
shareholders (11,460) (2,769)
Loss per share
Basic $ (1.93) $ (0.41)
Diluted $ (1.93) $ (0.41)
The pro forma net loss available for common shareholders includes accretion
of the preferred stock discount and dividends of approximately $2,600,000
in 2000 and approximately $881,000 in 1999.
(4) MANAGEMENT'S PLAN FOR CONTINUING OPERATIONS (UNAUDITED)
------------------------------------------------------
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States, which contemplate continuation of the Company as a going concern.
As explained in Note 3, the results of operations of TEAM America
Corporation are not included in the 2000 statement of operations.
Therefore, the results of operations reflected in the accompanying
Consolidated Statement of Operations for the year ended December 31, 2000
and the period from inception (July 8, 1999) to December 31, 1999, include
only the operations of Mucho.com, Inc. for those periods. Consequently, the
future expected combined results of operations cannot be evaluated based on
the 2000 statement of operations.
For the year ended December 31, 2000 and the period from inception (July 8,
1999) to December 31, 1999, the Company had a net loss of $9,496,000 and
$1,254,000, respectively. As of December 31, 2000 and 1999, the Company had
an accumulated deficit of $10,750,000 and $1,254,000, respectively.
The merger of Mucho.com, Inc. and TEAM America Corporation occurred on
December 28, 2000. For future periods the consolidated results of
operations of both companies will be reported. The accompanying
Consolidated Balance Sheet as of December 31, 2000 reflects the results of
the merger of the two companies.
Immediately prior to December 31, 2000, the Company received a commitment
from a bank to disburse the initial advance of $4,000,000, net of debt
issuance costs of approximately $720,000, on its long-term credit agreement
(see Note 9). These loan proceeds were to be used to partially fund the
stock repurchase obligation that was recorded as a current liability at
December 31, 2000. Had this initial advance been received by December 31,
2000 instead of on January 3, 2001, the working capital deficiency at the
end of 2000 would have been reduced from $4,803,000 to $1,523,000.
Capitalized expenses of approximately $2,239,000 incurred in connection
with the merger, the preferred stock issuance and the long-term credit
agreement also contributed to the working capital deficit at December 31,
2000.
The Company's plan for strengthening its financial position continued with
its acquisition of TEAM America Corporation in December 2000. Concurrent
with the acquisition, the Company issued 100,000 shares of Series A
convertible preferred stock for total net proceeds of $9,425,000 (see Note
6), and entered into an $18,000,000 credit facility (see Note 9). Also in
December 2000, the Company initiated the restructuring of its online
business center segment in order to focus on the opportunities to be
derived from integrating its Internet technology with TEAM America's PEO
business, and the opportunities for cross-promotion between TEAM America's
client and worksite
40
43
employee base and its online business center. The Company has substantially
reduced the level of 2000 operating expenses incurred at the early stages
of web development by reducing expenditures for third party contractors,
development, creative and administrative staff, and advertising.
In March 2001, the Company continued its expansion plans with the
acquisition of substantially all the assets of Professional Staff
Management, Inc. This acquisition not only strengthened its existing
operating base in California, Ohio and Utah, but also expanded into a new
growing market in Nevada.
The Company expects to generate sufficient cash flow from operations and
the utilization of its tax loss carryforwards to meet all its operating
expenses and service all its debt. In addition, the Company has $8,000,000
available for future acquisitions under its credit agreement.
(5) COMMON STOCK
------------
The Company is authorized to issue 50,000,000 shares, consisting of
45,000,000 common shares, without par value, 2,500,000 Class A Voting
Preferred Shares, and 2,500,000 Class B Nonvoting Preferred Shares. The
Board of Directors is authorized to fix the terms of the Class A and Class
B Preferred Stock prior to the issuance of each such series. See Note 6 for
a description of the terms of the currently outstanding Series A preferred
stock.
In connection with the sales of its common stock the Company has issued
warrants to purchase approximately 17,000 shares of common stock for $7.09,
which was the fair market value of the stock when the warrants were issued.
The warrants are exercisable until December 27, 2001.
As part of its master lease agreement with a lessor of its capital
equipment, the Company issued warrants to purchase up to approximately
7,000 shares of common stock for $7.09 per share, which was the market
value of the stock when the agreement was executed. The warrants will be
issued quarterly in arrears based on the dollar amount of equipment leased
to the Company. At December 31, 2000, warrants to purchase 2,853 shares
have been earned and issued. The warrants are exercisable for one year from
the date of issuance.
(6) PREFERRED STOCK
---------------
On December 28, 2000, in connection with the acquisition of TEAM America
Corporation (see Note 3), the Company issued 100,000 shares of Series A
mandatorily redeemable convertible preferred stock for total net proceeds
of $9,425,000. The proceeds of the preferred stock issuance were used to
partially fund the TEAM America Corporation treasury stock purchase.
The terms of the Preferred Stock Agreement include the following:
- Annual cumulative dividends in an amount equal to 9.75%, payable
quarterly in cash, beginning January 1, 2003, and payable in kind
prior to that date.
- In the event of liquidation or winding up of the Company, a
liquidation preference over the common stock.
- The right to convert, in whole or in part, at any time, into the
number of shares of common stock of the Company (1,481,481 at December
31, 2000) determined by dividing the aggregate liquidation amount (as
defined in the Preferred Stock Agreement, but $10,000,000 as of
December 31, 2000) by the conversion price (as defined in the
Preferred Stock Agreement, but $6.75 as of December 31, 2000).
- Mandatorily redeemable at the liquidation amount in June 2004.
- Issuance of warrants to purchase 1,481,481 shares of common stock of
the Company at $6.75 per share. The warrants expire December 28, 2010.
41
44
- The right to designate two members of the Board of Directors of the
Company.
- Issuance of 600,000 shares of common stock in the Company to the
holders of the preferred stock, upon issuance of the initial preferred
stock on December 28, 2000.
As a result of the issuance of the 600,000 shares of common stock in the
Company to the holders of the preferred stock, and the issuance of warrants
to purchase 1,481,481 shares of common stock of the Company, the proceeds
of the preferred stock issuance were allocated between preferred stock,
warrants, and common stock issued, on the basis of their relative fair
values. The proceeds were allocated as follows (000's omitted):
Preferred Stock, net of expenses
of $575 $3,625
Warrants 2,800
Common Stock 3,000
------
Total $9,425
======
The portion of the proceeds allocated to warrants and common stock are
reflected as common stock on the balance sheet. The difference between the
face value of the preferred stock ($10 million) and the current carrying
value ($3,625,000), will be accreted back to preferred stock using the
interest rate method over the forty-two month redemption period as
additional accretion of preferred stock dividends.
Subsequent to year-end, the Company issued an additional 10,000 shares of
Series A mandatorily redeemable convertible preferred stock for $1,000,000
in connection with the acquisition of PSMI.
(7) COMMITMENTS
-----------
The Company, including its PEO operations, leases office facilities,
automobiles and certain office equipment under long-term agreements
expiring through 2005, which are accounted for as operating leases. The
future minimum lease payments as of December 31, 2000 are presented as
follows (000's omitted):
2001 $ 907
2002 587
2003 196
2004 157
2005 and thereafter 33
--------
$1,880
========
Rent expense under all Mucho operating leases was $139,000 and $16,000 for
the year and period ended December 31, 2000 and 1999, respectively.
The Company also has certain equipment under capital leases. The cost of
assets acquired under capital leases was $207,000 and $102,000 at December
31, 2000 and 1999, respectively. Accumulated depreciation on these assets
was $76,188 and $8,000 at December 31, 2000 and 1999, respectively.
42
45
Future minimum commitments under capital leases as of December 31, 2000
are as follows (000's omitted):
2001 $ 126
2002 114
2003 31
-------
Total minimum lease payments 271
Less: amount representing interest (41)
-------
230
Less: current portion (103)
-------
$ 127
=======
(8) DEFERRED COMPENSATION
---------------------
As a part of the TEAM America Corporation acquisition, the Company assumed
the rights and responsibilities under various deferred compensation
agreements with certain Company and client employees. The liabilities under
these agreements are being accrued over the participants' remaining periods
of employment so that, on the payout date, the then-present value of the
payments will have been accrued. These liabilities will be funded by the
cash surrender value of life insurance policies, wherein the Company is the
beneficiary. The cash surrender value of such policies dictates the amount
of the deferred compensation benefits due, as defined by the respective
agreements. The total face value of related life insurance policies was
approximately $13,000,000 at December 31, 2000.
(9) CREDIT FACILITY AND DEBT OBLIGATIONS
------------------------------------
Concurrent with the acquisition of TEAM America Corporation, the Company
entered into a credit agreement (the "Credit Agreement"). The Credit
Agreement provided for an initial advance of $4,000,000, which was made to
the Company on January 3, 2001. The Credit Agreement also provides for
acquisition loans up to an aggregate of an additional $14,000,000. In March
2001, the Company made a $4,250,000 draw against the acquisition loan
related to the purchase of PSMI (see Note 17). Additionally, the Credit
Agreement provides for letters-of-credit up to $2,000,000. In January 2001,
the Company replaced an existing letter-of-credit for $750,000 with a
letter-of-credit under the Credit Agreement. In March 2001, the Company
issued an additional $1,000,000 letter-of-credit in connection with the
purchase of PSMI. This left $8,000,000 available under the line for future
acquisitions.
Interest under the Credit Agreement is payable monthly in arrears at prime
plus 1% or at LIBOR plus 3.50%, as specified by the Company at the date of
the advance, for both the initial advance and acquisition loans. The
initial advance of $4,000,000 is payable in 42 equal monthly installments
of principal and interest, beginning in February 2003.
Acquisition loans are payable in equal monthly installments of principal
and interest, beginning the month after said acquisition loan is received,
through July 2006 (the maturity date of the Credit Agreement). The
acquisition loan commitments shall terminate, to the extent not borrowed,
in January 2003.
The Credit Agreement is secured by substantially all of the assets of the
Company and includes certain quarterly financial and non-financial
covenants. The financial covenants include a minimum current ratio,
interest coverage ratio, fixed charge coverage ratio, maximum annual lease
obligations, minimum earnings before interest, taxes, depreciation and
amortization, maximum operating losses, consolidated senior debt leverage
ratio, and parent senior debt leverage ratio. The first date at which
compliance with these covenants will be tested is March 31, 2001.
In August 2000, the Company issued a convertible note for $955,000 which
bore interest at the rate of 9% per annum with all principal and interest
due on the earlier of December 31, 2000 or the closing of the acquisition
of TEAM America Corporation. Prior to December 31, 2000, the holder of the
note converted the note and all accrued but unpaid interest into 349,500
shares of common stock of the Company.
43
46
The holder of the convertible note was also issued a warrant to purchase up
to 13,401 shares of common stock at $7.09 per share, which was the then
estimated fair market value of the stock. The warrant was exercisable for
one year from the date of issuance. The fair value of the warrant was
estimated to be $100,000 at the date of grant. The warrant was exchanged
for stock in 2000.
At December 31, 2000, the Company had standby letters-of-credit in the
aggregate of $950,000. The letters-of-credit expire through February 2001,
and collateralize the Company's workers' compensation programs. The Company
incurred debt issuance costs of approximately $60,000 related to the credit
agreement, which are being amortized over the term of the Credit Agreement.
(10) EMPLOYEE BENEFIT PROGRAMS
-------------------------
The following plans were assumed as part of the acquisition of TEAM
America:
CAFETERIA PLANS
The Company sponsors Section 125 cafeteria plans that include a fully
insured health, dental, vision and prescription card program. The plans are
offered to full-time employees. Entrance to the plan is the first day of
the month following thirty days of service.
401(k) RETIREMENT PLANS
The Company sponsors 401(k) retirement plans that cover all full-time
employees. Entrance to the plan is the first day of the month following
ninety days of service. The plans did not provide for Company contributions
in 2000.
OTHER PROGRAMS
Other available employee benefit programs include health, life, accidental
death and dismemberment insurance, disability insurance, and medical and
dependent care reimbursement programs. Benefits under such programs are
funded by the Company's employees and clients.
(11) STOCK OPTION PLANS
------------------
The Company established the 2000 Stock Plan in January 2000, and assumed
the TEAM America Corporation Incentive Stock Plan upon acquisition of TEAM
America Corporation. The TEAM America Corporation Stock Plan was
established on December 10, 1996. These plans are collectively referred to
as "the Plans." The Plans provide for the granting, at the discretion of
the Board of Directors of: (a) options that are intended to qualify as
incentive stock options, within the meaning of Section 422 of the Internal
Revenue Code of 1986 (the "Code"), as amended, to employees, officers and
directors and (b) options not intended to so qualify to employees,
officers, consultants and directors. The total number of shares of common
stock for which options may be granted under the Plans is 1,775,256. At
December 31, 2000, approximately 326,000 shares remain available for future
grants.
Options granted to employees and officers generally vest 20% per year over
five years; options granted to directors fully vest after one year. Options
generally have a ten-year exercise period and are issued with an exercise
price equal to the fair market value of Company common stock on the date of
grant.
44
47
The Company has granted non-qualified options in connection with
acquisitions and employment agreements with key executives of the acquired
businesses and to officers and key employees of the Company. During 2000,
non-qualified options were granted to employees under the Plans to purchase
shares at $0.47, which was below the fair market value at the date of
grant. At December 31, 2000, in connection with these grants, compensation
expense of $7,000 had been recorded as compensation expense and $28,000
remained to be amortized over the remaining vesting period. Also during
2000, non-qualified options were granted to an officer of the Company to
purchase up to 600,000 shares at $3.875, which was below the fair market
value at the date of grant. The options vested upon grant. The $675,000
difference between the grant price and the fair market value was recorded
as compensation expense.
Activity under the Company's stock option plans is summarized as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISABLE
SHARES EXERCISABLE PRICE
----------- ----------- ------------
Options granted 880,674 721,693 $ 4.33
Options exercised -- -- $ --
Options cancelled/surrendered (104,418) -- $ 8.17
Options assumed in acquisition 1,274,516 667,402 $ 7.31
---------- ---------- --------
Outstanding December 31, 2000 2,050,772 1,389,095 $ 5.99
========== ========== ========
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2000:
EXERCISABLE AT
EXPIRATION DATES DECEMBER 31,
EXERCISE PRICE RANGE NUMBER OF SHARES RANGE 2000
-------------------- ---------------- ---------------- --------------
$11.00 to $11.375 9,000 01/08 to 05/08 3,600
$10.00 to $10.50 356,734 10/07 to 01/08 207,880
$9.45 33,466 05/05 to 07/05 -
$8.50 to $9.35 218,282 09/07 146,322
$5.375 97,500 12/08 39,000
$4.00 to $4.785 593,000 05/09 to 12/10 270,600
$3.875 600,000 12/10 600,000
$2.360 132,274 12/05 121,693
$0.470 10,516 02/05 -
---------- ---------
2,050,772 1,389,095
========== =========
At December 31, 2000, the weighted average remaining contractual life of
all options outstanding under the Plans was approximately 8.8 years.
(12) RELATED PARTY TRANSACTIONS
--------------------------
The Company has clients which are owned by officers of the Company or
members of the Board of Directors. The Company also has paid professional
fees, office rent and other services to entities owned or controlled by
officers or members of the Board of Directors.
45
48
The Company had accounts payable of $33,000 and $195,000 to such parties at
December 31, 2000 and 1999, respectively.
Officers of the Company are trustees of the Company's 401(k) plans.
In 1999, a stockholder made a loan of $500,000 to the Company, which
accrued interest at 9% per annum. In relation to the loan, the Company
issued a warrant to the stockholder to acquire up to 50,000 shares of the
Company's stock at no cost. Interest expense of $61,000 was recorded for
the year-ended December 31, 1999 in connection with the warrant. In March
2000, the Company paid $277,000 of cash to the stockholder, issued
approximately 116,000 shares of its common stock valued at approximately
$3.80 per share in exchange for the note and the warrant, and recorded
interest expense of $127,000.
In 1999, a stockholder made a demand loan to the Company. In March 2000, as
additional consideration for the loan, the Company issued two warrants to
acquire up to 16,000 shares of common stock at a price of $3.80 per share,
which were exercisable within a ten-year period. In July 2000, the Company
issued at no cost 2,400 shares of its common stock valued at approximately
$7.10 per share in exchange for one warrant to purchase 4,000 shares. In
December 2000, the Company issued at no cost 7,300 shares of its common
stock valued at approximately $7.10 per share in exchange for the other
warrant for the remaining 12,000 shares. For the year-ended December 31,
2000, the Company had recorded interest expense of $34,500 for the
conversion of these two warrants.
During the year ended December 31, 2000, the Company recorded interest
expense of $56,687 to provide for the cost of the conversion of the warrant
for 4,000 shares and the eventual conversion of the warrant for the
remaining 12,000 shares of common stock.
Certain officers and members of the Board of Directors of the Company are
stockholders or principals of firms from which the Company contracted for
legal services, and of TEAM America Corporation which provided the
co-employment of essentially all the staff of the Company during both 2000
and 1999. During the year ended December 31, 2000 and the period from
inception, July 8, 1999, through December 31, 1999, the Company incurred
charges for legal services of $46,000 and $137,000, respectively and staff
leasing of $3,785,000 and $539,000, respectively to such related firms. At
December 31, 1999, the Company had accounts payable totaling $194,880 owed
to a related company for legal services.
The Company has an account receivable of $117,000 from a partnership, which
is partially owned by an officer of the Company.
(13) INCOME TAXES
------------
Deferred income tax assets and liabilities represent amounts taxable or
deductible in the future. These taxable or deductible amounts are based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense is
the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities. No provision for
income taxes for the year ended December 31, 2000 and the period ended
December 31, 1999 has been provided due to operating losses in both
periods. Deferred tax assets and liabilities which includes the balance
sheet account of TEAM America are as follows (000's omitted):
46
49
2000 1999
------------ ------------
Deferred income tax assets (liabilities):
Deferred compensation $ 239 $ -
Depreciation and amortization 77 -
Other 289 -
Net operating loss carryforward 2,969 420
------------ ------------
Total long-term deferred tax asset, net 3,574 420
Valuation allowance (3,325) (420)
------------ ------------
Total long-term deferred tax assets $ 249 $ -
============ ============
Accrued vacation $ 69 $ 5
Accrued self-insurance 140 -
Allowance for doubtful accounts 80 -
Other accrued liabilities 555 -
------------ ------------
Total short-term deferred tax assets 844 5
Valuation allowance (424) (5)
------------ ------------
Total short-term deferred tax assets, net $ 420 $ -
============ ============
The Company has considered the realizability of its deferred tax assets and
liabilities and has recorded valuation allowances, as appropriate, to
reduce its deferred tax assets to an amount which, in the opinion of
management, is more likely than not to be realized. At December 31, 2000,
the Company has net operating loss carryforwards available for federal tax
purposes of approximately $7,400,000, which begin to expire in 2019.
The following table reconciles the statutory federal tax rate to the
Company's effective tax rate:
2000 % 1999 %
--------------- -------------- -------------- --------------
Tax benefit - federal $ (3,229) (34%) $ (426) (34%)
State tax benefit, net of federal benefit (570) (6%) (75) (6%)
Permanent differences, net 50 1% 76 6%
Valuation allowance 3,749 39% 425 34%
--------------- -------------- -------------- --------------
Tax provision $ - 0% $ - 0%
=============== ============== ============== ==============
(14) STOCK OPTION COMPENSATION
-------------------------
The Company accounts for stock options according to APB No. 25 (Accounting
for Stock Issued to Employees), under which no compensation expense has
been recognized at the time of grant if the strike price is at the then
fair market value. Had compensation cost for the Company's stock options
been determined based on fair values at the grant date consistent with
SFAS. No. 123 (Accounting for Stock Based Compensation), the Company's net
loss and diluted loss per share for 2000 would have been increased to the
pro forma amounts of ($10,983,000) and ($3.90). For 1999, the pro forma
amounts would not have been materially different from the reported net loss
and diluted loss per share. The fair values of the options granted are
estimated on the date of grant using the Black-Scholes option pricing model
with assumptions of a risk-free interest rate of 4.8%, expected lives of 10
years and expected volatility of 23%. The weighted average fair values of
options granted in 2000 was $1.47.
(15) RESTRUCTURING CHANGES
---------------------
During the last quarter of 2000, the Company began to restructure in
contemplation of its acquisition of TEAM America Corporation. The primary
purpose of this restructuring was to position the Company to focus on the
opportunities to be derived from integrating the Company's internet
technology with TEAM America Corporation's PEO business and the
opportunities for cross-promotion between TEAM America Corporation's client
and worksite
47
50
employee base and the Company's online business center. As a result of this
shift, certain assets utilized in the online business segment were
determined to be impaired. Additionally, certain exit costs were accrued
related to leased office space no longer being utilized, employee
severance, and costs to break contractual agreements with vendors. A
summary of expenses included in the restructuring costs line item of the
consolidated statements of operations are as follows (000's omitted):
Write-down of impaired assets $ 477
Employee severance benefits 49
Costs to exit contractual agreements 100
Abandoned leases 28
-------
Total $ 654
=======
(16) CONTINGENCIES
-------------
The Internal Revenue Service ("IRS") has been conducting a Market Segment
Study since 1994, focusing on selected PEOs (not including the Company), in
order to examine the relationships among PEOs, worksite employees and
owners of client companies. The Company has limited knowledge of the
nature, scope and status of the Market Segment Study because it is not a
part thereof and the IRS has not publicly released any information
regarding the study to date. In addition, TEAM America's 401(k) retirement
plan (the "Plan") was audited for the year ended December 31, 1992, and, as
part of that audit the IRS regional office has asked the IRS national
office to issue a Technical Advice Memorandum ("TAM") regarding whether or
not the Company is the employer for benefit plan purposes. The Company has
stated its position in a filing with the IRS that it is the employer for
benefit plan purposes.
If the IRS concludes the PEOs are not "employers" of certain worksite
employees for purposes of the Code as a result of either the Market Segment
Study or the TAM, then the tax qualified status of the Plan could be
revoked and its cafeteria plan may lose its favorable tax status. The loss
of qualified status for the Plan and the cafeteria plan could increase the
Company's administrative expenses, and thereby, materially adversely affect
the Company's financial condition and result of operations.
The Company is unable to predict the timing or nature of the findings of
the Market Segment Study, the timing or conclusions of the TAM, and the
ultimate outcome of such conclusions or findings. The Company is also
unable to predict the impact, if any, that the foregoing could have on the
Company's administrative expenses, and the Company's resulting exposure.
The Company has ongoing litigation matters pertaining to worksite employees
and other legal matters which have arisen in the ordinary course of
business for which the Company provides reserves for as deemed necessary.
Management believes these claims will not have a material adverse effect on
the results of operations or financial condition of the Company.
(17) SUBSEQUENT EVENT
----------------
In March 2001, the Company acquired substantially all of the assets of
Professional Staff Management, Inc. (PSMI), a Utah corporation. The
acquisition will be accounted for under the purchase method of accounting.
The purchase price of $6,750,000 for PSMI included cash of $4,250,000,
74,074 shares of common stock of TEAM Mucho, Inc., with an agreed upon fair
market value of $500,000 at the date of the acquisition and preferred
stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
Set forth below are the names, ages and past and present positions of the
persons serving as our Directors:
NAME AGE DIRECTOR SINCE PRINCIPAL OCCUPATION FOR THE PAST FIVE YEARS
---- --- -------------- --------------------------------------------
S. Cash Nickerson 41 2000 Chairman and Chief Executive Officer of the
Corporation since December 2000; Chairman and
Chief Executive officer of Mucho.com, Inc. since
1999; Member of the board of directors of the
corporation from 1997 to 1999; partner in the law
firm of Strauss Nickerson LLP from 1998 to 2000;
and from 1995 to 1997, Mr. Nickerson was the
President and founder of Workforce Strategies,
Inc. which was sold to TEAM America Corporation
in 1997.
Kevin T. Costello 51 1992 Chief Operating Officer of the Corporation since
December 2000; Chief Executive Officer of the
Corporation from 1999 to 2000; President of the
Corporation since 1998; Senior Vice President of
Operations and Chief Operating Officer of the
Corporation from 1993 to 1998; Vice President of
Sales and Marketing of the Corporation from 1991
to 1993.
Jose C. Blanco 44 2000 Chief Financial Officer of the Corporation since
December 2000; Chief Financial Officer of
Mucho.com, Inc. since July 1999. Assistant
Professor of Finance in the MBA and Executive MBA
programs at St. Mary's College, Moraga,
California since September 1996. From September
1994 to September 1996, Mr. Blanco attended Utah
State University, where he received a Ph.D. with
a focus in Econometrics, Applied Microeconomics
and Finance.
Jay R. Strauss 56 2000 Chief Legal Officer and Vice President of the
Corporation since December 2000. Chief Legal
Officer and director of Mucho.com Inc. from July
1999 until December 2000. Partner in the law
firm of Strauss Nickerson LLP from August 1998 to
July 2000. Practiced law with the firm of Foley,
McIntosh, Frey, Claytor and Strauss from 1990 to
August 1998.
William W. Johnston 55 1990 Secretary of the Corporation from 1990 to January
2001; outside general counsel to the Corporation
since 1989.
49
52
Crystal Faulkner 40 1997 Principal in the accounting firm of Cooney,
Faulkner & Stevens, LLC since 1999. Principal in
the accounting firm of Rippe & Kingston,
Cincinnati, Ohio from 1991 to 1999.
Daniel J. Jessee 48 2000 Principal of Stonehenge Financial Holdings, a
private investing group headquartered in
Columbus, Ohio since August 1998. Senior Manager
Corporate Finance for Banc One Capital
Corporation from August 1991 to August 1998.
Joseph Mancuso 59 2000 Chief Executive Officer of the CEO Club, Inc. and
of the Center for Entrepreneurial Management,
Inc. since 1977. Chairman of the Management
Department at Worcester Polytechnic Institute in
Massachusetts since 1978.
Lawrence A. McLernon 62 2000 Executive Vice President of Dynergy Inc. and
Chief Executive Officer and President of Dynegy
Global Communications. Chairman, President and
Chief Executive Officer of Extant, Inc., from
September 1998 to September 2000. Chairman of
Rummler-Brache Group, Ltd. from January 1996 to
December 1998.
M. R. Swartz 62 1991 Business Manager for Delaware Bible Church in
Delaware, Ohio since 1998. Former owner,
operator of a restaurant located in Delaware,
Ohio.
Michael H. Thomas 51 2000 Principal of Stonehenge Partners, Inc. a private
equity group based in Columbus, Ohio since August
1999. Business consultant specializing in
investments mergers and acquisitions from January
1998 to July 1999. Executive Vice President and
Treasurer of JMAC, Inc., a private holding
company, from 1980 to 1998.
MEETINGS, COMMITTEES, AND COMPENSATION OF THE BOARD OF DIRECTORS
A total of 18 meetings of the Directors of the Corporation were held during
fiscal 2000. Each of the Directors attended 75% or more of the meetings of the
Directors held while the respective director was in office.
The Corporation has an Audit Committee and a Compensation Committee. Both
such committees were formed by the Board of Directors at its first meeting
following the completion of the Corporation's initial public offering in
December 1996.
Audit Committee. The Audit Committee, which consists of Messrs. Swartz and
Mancuso and Ms. Faulkner is charged with the responsibility of reviewing such
financial information (both external and internal) about the Corporation and its
subsidiaries, so as to assure (i) that the overall audit coverage of the
Corporation and its subsidiaries is satisfactory and appropriate to protect the
shareholders from undue risks and (ii) that an adequate system of internal
financial control has been
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implemented throughout the Corporation and is being effectively followed. The
Board of Directors adopted a written charter for the Audit Committee on June 8,
2000. The Audit Committee met once in fiscal 2000.
Compensation Committee. The Compensation Committee, which consists of
Messrs. McLernon, Swartz and Mancuso, considers and formulates recommendations
to the Board with respect to all aspects of compensation to be paid to the
executive officers of the Corporation subject to the provisions of the
applicable employment agreements, undertakes such evaluations and makes such
reports as are required by then applicable rules of the Securities and Exchange
Commission and performs and exercises such other duties and powers as shall from
time to time be designated by action of the Board of Directors. The Compensation
Committee met once during fiscal 2000.
In connection with the initial public offering of the Corporation's Common
Stock in December 1996, the Corporation granted to each non-employee Director,
including William W. Johnston, Crystal Faulkner and Ray Swartz, an option to
purchase 5,000 shares of Common Stock at $12.00 per share, subject to vesting on
December 9, 1997. These options are subject to the terms and conditions of the
Corporation's 1996 Incentive Stock Plan. On September 3, 1997, the options
issued in December 1996 were cancelled and replaced with options to purchase
5,000 shares of Common Stock at $8.50 per share. In addition, Mr. Johnston was
granted an option to acquire 18,400 shares of Common Stock at $8.50 per share.
These options expire September 2, 2007.
On June 8, 2000, Messrs. Johnston and Swartz and Ms Faulkner each received
20,000 options at $4.00 per share vesting on June 7, 2001, and expiring on June
7, 2010.
Non-employee Directors receive $1,000 for each Board of Directors meeting
attended, plus out-of-pocket expenses incurred in connection with attending
meetings. Directors who are employees do not receive any separate compensation
for their services as Directors.
EXECUTIVE OFFICERS
The following table and biographies set forth information concerning our
executive officers, who are elected by the Board of Directors:
NAME AGE POSITION
- ---- --- --------
S. Cash Nickerson.................... 41 Chairman and Chief Executive Officer
Kevin T. Costello.................... 51 President, Chief Operating Officer and a Director
Jose C. Blanco....................... 44 Chief Financial Officer, Treasurer and a Director
Jay R. Strauss....................... 56 Chief Legal Officer, Vice President, Secretary and a Director
Thomas Gerlacher..................... 58 Chief Accounting Officer
William W. Johnston.................. 55 Assistant Secretary and Director
The backgrounds of each of Messrs. Nickerson, Costello, Blanco, Strauss and
Johnston are set forth above.
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Thomas Gerlacher has been Chief Accounting Officer of the Corporation since
December 2000. Mr. Gerlacher was Vice President of Finance, Treasurer and Chief
Financial Officer of the Corporation from March 2000 to December 2000. Mr.
Gerlacher was Vice President of Finance for United Magazine Company from July
1998 to February 1999 and Chief Financial Officer of United Magazine Company
from December 1993 to July 1998.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Corporation's Directors and
executive officers, and persons who own more than ten percent of a registered
class of the Corporation's equity securities, to file initial statements of
beneficial ownership (Form 3), and statements of changes in beneficial ownership
(Forms 4 and 5), of shares of Common Stock of the Corporation with the
Securities and Exchange Commission. Executive officers, Directors and greater
than ten-percent shareholders are required to furnish the Corporation with
copies of all such forms they file.
To the Corporation's knowledge, based solely on its review of the copies of
such forms received by it, and written representations from certain reporting
persons that no additional forms were required, all filing requirements
applicable to its executive officers, Directors and greater than ten-percent
shareholders were complied with in fiscal 2000.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the annual
and long-term compensation of the chief executive officer of the Corporation and
the other executive officers (together, the "Named Executives"), whose total
salary and bonus for the last completed fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- AWARDS
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) ($) (1)
--------------------------- ---- ---------- --------- ----------- -------------
S. Cash Nickerson, Chairman and 2000 $ -- $ -- -- $ --
Chief Executive 1999 $ -- $ -- -- $ --
Officer(2)........................ 1998 $100,000 $ -- -- $6,195
Kevin T. Costello, President and 2000 $378,478(3) $ 135,000 850,000 $9,210
Chief Operating 1999 $351,550(3) $ 63,000 -- $8,703
Officer(3)........................ 1998 $308,752(3) $ -- 50,000 $8,587
Thomas Gerlacher, Chief 2000 $ 96,619 $ 22,500 70,000 $7,849
Accounting Officer............. 1999 $ -- $ -- -- $ --
1998 $ -- $ -- -- $ --
(1) Represents health care insurance premiums paid by the Corporation for the
benefit of the indicated Named Executive Officer and the compensatory value
of a company provided car.
(2) Mr. Nickerson was elected Chief Executive Officer on December 28, 2000. Mr.
Nickerson earned $0 in 1999, and $100,000 in 1998 while employed by us as
the President of TEAM America of California, Inc.
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(3) Includes commissions in the amounts of $143,116 in 2000, $134,704 in 1999,
and $115,620 in 1998 paid to Mr. Costello.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning options
granted during fiscal 2000 to the Named Executives.
INDIVIDUAL GRANTS
----------------------------
PERCENTAGE
OF TOTAL POTENTIAL
OPTIONS REALIZABLE VALUE AT
NUMBER GRANTED TO EXERCISE ASSUMED ANNUAL RATES
OF EMPLOYEES PRICE OF STOCK PRICE
OPTIONS IN FISCAL PER EXPIRATION APPRECIATION
NAME GRANTED 2000 SHARE DATE FOR OPTION TERM(1)(2)
- ---- ------- ------------ -------- ----------- ---------------------
5%($) 10%($)
----- ------
Kevin T. Costello 125,000 11.3% $4.000 05/17/10 $ 314,447 $ 796,871
125,000 11.3% $4.785 12/13/10 $ 376,158 $ 953,257
600,000 54.1% $3.875 12/27/10 $ 1,462,180 $ 3,705,451
Thomas Gerlacher 30,000 2.7% $4.000 05/17/10 $ 75,467 $ 191,249
40,000 3.6% $4.785 12/13/10 $ 120,370 $ 305,042
- ---------------------
(1) The dollar amounts in these columns are the product of (a) the difference
between (1) the product of the per share market price at the date of the
grant and the sum of 1 plus the assumed rate of appreciation (5% and 10%)
compounded over the term of the option (ten years) and (2) the per share
exercise price and (b) the number of shares underlying the grant.
(2) The appreciation rates stated are arbitrarily assumed, and may or may not
reflect actual appreciation in the stock price over the life of the option.
Regardless of any theoretical value which may be placed on a stock option,
no increase in its value will occur without an increase in the value of the
underlying shares. Whether such an increase will be realized will depend
not only on the efforts of the recipient of the option, but also upon
conditions in the Corporation's industry and market area, competition, and
economic conditions, over which the optionee may have little or no control.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning the value of
unexercised stock options held as of December 31, 2000 by the Named Executives:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(2)
SHARES VALUE ------------------------------ -------------------------
ACQUIRED ON REALIZED
EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------ -------- ----------- ------------- ----------- -------------
S. Cash Nickerson................ 0 0 0 0 $ 0 $ 0
Kevin T. Costello ............... 0 0 695,000 330,000 $ 712,500 $ 167,500
Thomas Gerlacher................. 0 0 6,000 64,000 $ 6,375 $ 36,600
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(1) Represents the difference between the per share fair market value on the
date of exercise and the per share option exercise price, multiplied by the
number of shares to which the exercise relates. There were no shares
exercised during 2000.
(2) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and per share fair market value at year end of
$5.0625. An option is in-the-money if the fair market value of the
underlying shares exceeds the exercise price of the option.
AGREEMENTS WITH KEY EMPLOYEES
Mr. Costello has executed an employment agreement with us pursuant to which
he has agreed to serve as our President and Chief Executive Officer for a period
of three years and, unless terminated in accordance with the provisions therein,
on the first day of each month that the agreement is in effect, the remaining
term thereof will be automatically extended for one additional month. Under the
terms of the agreement, Mr. Costello receives an annual base salary, which was
$235,362 in 2000, plus incentive compensation in an amount determined by our
compensation committee based upon various factors including our results of
operations and financial condition and Mr. Costello's performance during the
relevant period. In addition to such base salary and incentive compensation, Mr.
Costello may receive commissions on sales to clients for which he is responsible
pursuant to terms and conditions determined by our compensation committee. In
the event Mr. Costello's employment is terminated for cause, we will pay Mr.
Costello the compensation and benefits due under his employment agreement
through the date of such termination. Mr. Costello's employment agreement
contains certain noncompetition and non-solicitation provisions which prohibit
him from competing with us during his employment and for a period of one year
after termination of his employment.
We have agreed to maintain one or more life insurance policies on the life
of Mr. Costello in an aggregate amount sufficient to pay Mr. Costello's widow
approximately $110,000 per year for 15 years in the event that he dies prior to
his retirement. No such benefit will be paid in the event that Mr. Costello dies
after his retirement. In addition, upon Mr. Costello's retirement on or after
his sixty-fifth birthday, we will pay him an amount calculated to be equal to
the maximum loan available from such insurance policy which will not cause the
insurance policy to lapse prior to his life expectancy. Thereafter, such amount
shall be recalculated on an annual basis and we will pay Mr. Costello any
increase in such amount. Additionally, we maintain a key man life insurance
policy on Mr. Costello in the amount of $750,000 for the benefit of the
Corporation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Common Stock as of March 26, 2001, by each person known by the
Corporation to own beneficially more than five percent of the Corporation's
outstanding Common Stock, by each Nominee and Continuing Director, by each
executive officer named in the Summary Compensation table contained in
"Executive Compensation," and by all directors and executive officers as a
group. Except as otherwise noted, each person named in the table has sole voting
and investment power with respect to all shares shown as beneficially owned by
him or her.
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PERCENT
OF SHARES
NAME AND ADDRESS OF SHARES BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER (1) OWNED AT MARCH 26, 2001 OWNED(2)
- -------------------- ----------------------- ------------
S. Cash Nickerson...................................................... 2,023,683 (3) 25.09%
Kevin T. Costello...................................................... 1,333,100 (4) 16.53%
Jose C. Blanco......................................................... 190,475 (5) 2.36%
Jay R. Strauss......................................................... 195,003 (6) 2.42%
Thomas L. Gerlacher.................................................... 6,000 (7) *
Joseph Mancuso......................................................... 52,908 (8) *
Crystal Faulkner....................................................... 5,000 (9) *
William W. Johnston.................................................... 16,400 (10) *
M. R. Swartz........................................................... 5,000 (11) *
Daniel J. Jessee....................................................... 0 --
Michael H. Thomas...................................................... 0 --
Lawrence A. McLernon................................................... 0 --
Stonehenge Opportunity Fund LLC........................................ 2,674,074 (12) 33.15%
Forrest Note Trust..................................................... 456,030 5.65%
All Directors and Executive Officers as a group (12 Persons)........... 3,827,209 (13) 47.45%
* Represents less than 1% of our outstanding shares of common stock.
(1) The address of each of the directors and officers listed in the table is
110 East Wilson Bridge Road, Worthington, Ohio 43085. The address for
Stonehenge Opportunity Fund LLC is 191 W. Nationwide Boulevard Columbus,
Ohio 43215. The Address for the Forrest Note Trust is 3390 Mt. Diablo
Boulevard, Lafayette, California 94549
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute ownership of
securities to persons who possess sole or shared voting power and/or
investment power with respect to those shares. "Percent of Shares
Beneficially Owned" is calculated on the basis of the number of shares
outstanding on March 26, 2001, or 8,066,288 shares, plus the number of
shares a person has the right to acquire within 60 days of March 26, 2001.
(3) Includes shares held in street name and escrow shares.
(4) Includes 280,900 shares owned of record by Mr. Costello and his wife, Anne
M. Costello, as joint tenants, of which Mr. Costello shares with his wife
voting and investment power. Also includes 232,200 shares, which Mr.
Costello has a right to vote and dispose as general partner of TEAM
Partners LP, a limited partnership. Also includes 820,000 shares as to
which Mr. Costello has the right to acquire beneficial ownership upon the
exercise of stock options exercisable within 60 days.
(5) Includes 95,238 shares as to which Mr. Blanco has the right to acquire
beneficial ownership upon the exercise of stock options exercisable within
60 days of March 26, 2001.
(6) Includes 26,455 shares as to which Mr. Strauss has the right to acquire
beneficial ownership upon the exercise of stock options exercisable within
60 days of March 26, 2001.
(7) Includes 6,000 shares as to which Mr. Gerlacher has the right to acquire
beneficial ownership upon the exercise of stock options exercisable within
60 days of March 26, 2001.
(8) Includes 52,908 shares as to which Mr. Mancuso is custodian under UTMA.
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(9) Includes 5,000 shares as to which Ms. Faulkner has the right to acquire
beneficial ownership upon the exercise of stock options exercisable within
60 days of March 26, 2001.
(10) Includes 16,040 shares as to which Mr. Johnston has the right to acquire
beneficial ownership upon the exercise of stock options exercisable within
60 days of March 26, 2001.
(11) Includes 5,000 shares as to which Mr. Swartz has the right to acquire
beneficial ownership upon the exercise of stock options exercisable within
60 days of March 26, 2001.
(12) Includes 1,037,037 shares as to which Stonehenge Opportunity Fund LLC has
the right to acquire beneficial ownership upon the exercise of stock
warrants exercisable within 60 days of March 26, 2001. Also includes
1,037,037 shares issuable upon conversion of preferred stock.
(13) Includes 973,733 shares available from the exercise of stock options
exercisable with 60 days of March 26, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Nickerson is our Chairman and Chief Executive Officer. Mr. Strauss is
our Secretary. Ms. Faulkner and Mr. Swartz are not employees of the Corporation.
Mr. Nickerson was paid as an employee of a subsidiary until August 1, 1998 and
from that date until September 2000 had provided legal services to TEAM America.
During fiscal 2000, Mr. Johnston received fees for legal services provided to
TEAM America in the amount of $156,000. Ms. Faulkner received fees for
accounting services provided to TEAM America in the amount of $104,000 in fiscal
2000.
Mr. Johnston has entered into our standard client agreement pursuant to
which he is both our client and worksite employee. We have provided, and expect
to continue to provide, professional employer organization services to Mr.
Johnston upon terms and conditions no more favorable than those generally
provided to our other clients.
TRANSACTIONS BETWEEN EXECUTIVE OFFICERS AND THE CORPORATION
Effective December 28, 2000, TEAM Merger Corporation, a wholly owned
subsidiary of TEAM America Corporation merged with and into Mucho.com, Inc. This
merger effectively merged Mucho.com, Inc. with TEAM America Corporation. Each of
Messrs. Nickerson, Blanco and Strauss were directors and officers of Mucho.com,
Inc. In 2000, TEAM America Corporation paid $90,000 to a law firm in which Mr.
Nickerson and Mr. Strauss were partners.
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Report of Independent Public Accountants
- ----------------------------------------
To the Board of Directors of
TEAM MUCHO, INC. AND SUBSIDIARIES:
We have audited in accordance with auditing standards generally accepted in the
United States the consolidated financial statements of TEAM Mucho, Inc. and
Subsidiaries included in this Form 10-K, and have issued our report thereon
dated March 27, 2001. Our audit was made for the purposes of forming an opinion
on those statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Columbus, Ohio,
March 27, 2001.
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TEAM MUCHO, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
As of December 31, 2000
- -----------------------------------------------------------------------------------------------------
BEGINNING OTHER ENDING
BALANCE ADDITIONS ADDITIONS DEDUCTIONS BALANCE
--------- --------- --------- ---------- -------
December 31, 2000
Allowance for doubtful accounts
Accounts receivable - trade $ -- $ -- $200,000(1) $ -- $200,000
Restructuring reserve
Other accrued expenses -- 654,462 -- -- 654,462
(1) Other additions represent allowance for doubtful accounts originating from
the acquisition of TEAM America.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements are included in this annual report on
form 10-K:
(1) The following financial statements of the Company are included in Item
8 of this report:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the year ended December 31,
2000 and the Period from Inception (July 8, 1999) to December 31,
1999.
Consolidated Statements of Shareholders' Equity for the year ended
December 31, 2000 and the Period from Inception (July 8, 1999) to
December 31, 1999.
Consolidated Statements of Cash Flows for the year ended December 31,
2000 and the Period from Inception (July 8, 1999) to December 31,
1999.
Notes to Consolidated Financial Statements December 31, 2000 and 1999
(2) The following financial statement schedules for the Company are filed
as part of this report:
Report of Independent Public Accountants on Financial Statement
Schedule.
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because the required information is
either presented in the financial statements or notes thereto, or is
not applicable, required or material.
(3) Exhibits:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of June 16, 2000, among
the Company, TEAM Merger Corporation and Mucho.com, Inc.
(Attached as Appendix A to the Registration Statement on Form
S-4, Reg. No. 333-43630, filed with the Securities and Exchange
Commission on November 27, 2000 and incorporated herein by
reference.)
3.1 Second Amended and Restated Articles of Incorporation of the
Company (Attached as Appendix D to the Registration Statement on
Form S-4, Reg. No. 333-43630, filed with the Securities and
Exchange Commission on November 27, 2000, and incorporated herein
by reference.)
3.2 Second Amended and Restated Code of Regulations of the Company
(Attached as Appendix E to the Registration Statement on Form
S-4, Reg. No. 333-43630, filed with the Securities and Exchange
Commission on November 27, 2000, and incorporated herein by
reference.)
*10.1 Company's 1996 Incentive Stock Plan (Attached as Exhibit 10.1 to
the Registration Statement on Form S-1, as amended, Reg. No.
333-13913, and incorporated herein by reference.)
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*10.2 Executive employment agreement between the Company and Mr. Kevin
T. Costello (Attached as Exhibit 10.2 to the Annual Report on
Form 10-K, File No.0-21533, filed with the Securities and
Exchange Commission on April 14, 2000, and incorporated herein by
reference.)
10.3 Lease for Cascade Corporate Center dated June 22, 1990 between
EastGroup Properties and the Company, as amended (Attached as
Exhibit 10.4 to the Registration Statement on Form S-1, as
amended, Reg. No. 333-13913, and incorporated herein by
reference)
10.4 Voting Agreement, dated as of December 28, 2000, by and among
TEAM Mucho, Inc., Stonehenge Opportunity Fund, LLC, Provident
Financial Group, Inc., S. Cash Nickerson, Kevin T. Costello, Jose
C. Blanco and Jay R. Strauss
10.5 Securities Purchase Agreement, dated as of December 28, 2000, by
and among TEAM Mucho, Inc., Stonehenge Opportunity Fund, LLC and
Provident Financial Group, Inc.
10.6 Credit Agreement, dated as of December 28, 2000, by and among
TEAM Mucho, Inc. and Mucho.com, Inc. and The Provident Bank
10.7 Registration Rights Agreement, dated as of December 28, 2000, by
and among TEAM Mucho, Inc., Stonehenge Opportunity Fund, LLC and
The Provident Bank
10.8 Company's 2000 Stock Option Plan
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney
- -------------------------
* Management contract or compensation plan or arrangement.
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(b) Reports on Form 8-K
We filed the following Current Reports on Form 8-K since September 30,
2000:
(i) Current Report on Form 8-K, dated December 28, 2000, filed with the
Securities and Exchange Commission on December 29, 2000 (Items 5 and
7);
(ii) Current Report on Form 8-K, dated December 28, 2000, filed with the
Securities and Exchange Commission on January 12, 2001 (Items 2 and
7);
(iii) Current Report on Form 8-K/A No. 1, dated December 28, 2000, filed
with the Securities and Exchange Commission on March 13, 2001 (Items 2
and 7); and
(iv) Current Report on Form 8-K, dated March 13, 2001, filed with the
Securities and Exchange Commission on March 28, 2001 (Items 5 and 7).
(c) Exhibits
The exhibits to this report follow the Signature Page
(d) Financial Statement Schedules
The financial statement schedule and the independent auditors' report
thereon are included in Exhibit 99 to this Annual Report on Form 10-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEAM MUCHO, INC.
Date: March 30, 2001 By: /s/ S. CASH NICKERSON
---------------------------------------
S. Cash Nickerson, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ S. CASH NICKERSON Chairman and Chief Executive Officer March 30, 2001
- ----------------------------------- (Principal Executive Officer)
S. Cash Nickerson
/s/ KEVIN T. COSTELLO Vice Chairman, President and Chief Operating Officer March 30, 2001
- -----------------------------------
Kevin T. Costello
/s/ JOSE C. BLANCO Chief Financial Officer, Treasurer and Director March 30, 2001
- ----------------------------------- (Principal Financial Officer)
Jose C. Blanco
/s/ THOMAS GERLACHER Chief Accounting Officer March 30, 2001
- ----------------------------------- (Principal Financial Officer)
Thomas Gerlacher
/s/ CRYSTAL FAULKNER Director March 30, 2001
- -----------------------------------
Crystal Faulkner
/s/ DANIEL JESSEE Director March 30, 2001
- -----------------------------------
Daniel Jessee
/s/ WILLIAM W. JOHNSTON Director March 30, 2001
- -----------------------------------
William W. Johnston
/s/ JOSEPH MANCUSO Director March 30, 2001
- -----------------------------------
Joseph Mancuso
/s/ LAWRENCE A. MCLERNAN Director March 30, 2001
- -----------------------------------
Lawrence A. McLernan
/s/ JAY R. STRAUSS Chief Legal Officer and Director March 30, 2001
- -----------------------------------
Jay R. Strauss
/s/ M. R. SWARTZ Director March 30, 2001
- -----------------------------------
M. R. Swartz
/s/ MICHAEL H. THOMAS Director March 30, 2001
- -----------------------------------
Michael H. Thomas
*By: /s/ S. CASH NICKERSON
-----------------------------------
S. Cash Nickerson, attorney-in-fact
for each of the persons indicated
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