1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21533
TEAM MUCHO, INC.
(Exact Name of Registrant As Specified In Its Charter)
OHIO 31-1209872
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 EAST WILSON BRIDGE ROAD 43085
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(614) 848-3995
(Former Name, Former Address and Former Fiscal year,
If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
THE NUMBER OF SHARES OF REGISTRANT'S ONLY CLASS OF COMMON STOCK OUTSTANDING ON
JULY 31, 2001 WAS 6,955,266.
2
TEAM MUCHO, INC. AND SUBSIDIARIES
JUNE 30, 2001
INDEX
PART I. FINANCIAL INFORMATION
Page
No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - June 30, 2001 (unaudited)
and December 31, 2000 3
Condensed Consolidated Statements of Operations - Three and six month periods
ended June 30, 2001 (unaudited) and 2000 (unaudited) 5
Condensed Consolidated Statements of Cash Flows - Six-month periods
ended June 30, 2001 (unaudited) and 2000 (unaudited) 6
Condensed Consolidated Statement of Changes in Shareholders' Equity - Six-month
period ended June 30, 2001 (unaudited) 8
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signature 18
Note: Item 3 of Part I and Items 1 through 5 of Part II are omitted because they
are not applicable.
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TEAM MUCHO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND DECEMBER 31, 2000
(000's omitted except share data)
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 1,800 $10,925
Receivables:
Trade, net of allowance for doubtful accounts of $200 and $200, respectively 2,303 1,978
Unbilled revenues 10,854 8,792
Other receivables 1,465 1,461
------- -------
Total receivables 14,622 12,231
------- -------
Prepaid expenses 945 332
Deferred income tax 858 420
------- -------
Total Current Assets 18,225 23,908
------- -------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION AND AMORTIZATION 1,948 1,581
------- -------
OTHER ASSETS:
Goodwill, net 33,606 26,732
Cash surrender value of life insurance policies 814 587
Deferred income tax asset 249 249
Other 567 297
------- -------
Total Other Assets 35,236 27,865
------- -------
Total Assets $55,409 $53,354
======= =======
Continued on next page
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TEAM MUCHO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND DECEMBER 31, 2000
(000's omitted except share data)
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 945 $ 1,954
Capital lease obligations, current portion 106 103
Debt, current portion 810 -
Stock repurchase obligation - 11,622
Accrued compensation 10,019 8,367
Accrued payroll taxes and insurance 5,255 3,967
Accrued workers' compensation liability 778 630
Federal and state income taxes payable - 72
Other accrued expenses 1,954 1,996
-------- --------
Total Current Liabilities 19,867 28,711
-------- --------
LONG-TERM LIABILITIES:
Debt, less current portion 8,305 -
Capital lease obligations, less current portion 66 127
Accrued workers' compensation liability 714 198
Client deposits 582 349
Deferred compensation 814 587
-------- --------
Total Liabilities 30,348 29,972
-------- --------
CONVERTIBLE PREFERRED STOCK, FACE AMOUNT OF $11,000 AND $10,000, RESPECTIVELY 5,074 3,625
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value:
Common stock, 45,000,000 shares authorized, 9,677,632 and 9,603,558
issued, respectively 45,317 45,001
Deferred compensation (24) (28)
Accumulated deficit (10,840) (10,750)
-------- --------
34,453 34,223
Less - Treasury stock 2,722,366 shares, at cost (14,466) (14,466)
-------- --------
Total Shareholders' Equity 19,987 19,757
-------- --------
Total Liabilities and Shareholders' Equity $ 55,409 $ 53,354
======== ========
See Notes to Condensed Consolidated Financial Statements
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TEAM MUCHO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(000'S OMITTED EXCEPT EARNINGS PER SHARE INFORMATION)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------- -------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
---------------- --------------- ------------ -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES $ 119,893 $ - $ 217,364 $ -
---------------- --------------- ------------ -----------------
DIRECT COSTS:
Salaries and wages 102,670 - 186,168 -
Payroll taxes, workers' compensation
and other direct costs 11,333 - 20,961 -
---------------- --------------- ------------ -----------------
Total direct costs 114,003 - 207,129 -
---------------- --------------- ------------ -----------------
GROSS PROFIT 5,890 - 10,235 -
---------------- --------------- ------------ -----------------
EXPENSES:
Administrative salaries 2,748 1,172 5,137 2,674
Other selling, general and
administrative expenses 1,780 1,227 3,003 1,811
Depreciation 165 57 322 106
Amortization 482 - 846 -
---------------- --------------- ------------ -----------------
Total operating expenses 5,175 2,456 9,308 4,591
---------------- --------------- ------------ -----------------
OPERATING INCOME (LOSS) 715 (2,456) 927 (4,591)
Interest (expense), net (255) (54) (397) (195)
---------------- --------------- ------------ -----------------
INCOME (LOSS) BEFORE INCOME TAXES 460 (2,510) 530 (4,786)
Income tax expense (76) - (96) -
---------------- --------------- ------------ -----------------
NET INCOME (LOSS) 384 (2,510) 434 (4,786)
Less: Preferred stock dividends (271) - (524) -
---------------- --------------- ------------ -----------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 113 $ (2,510) $ (90) $ (4,786)
================ =============== ============ =================
Earnings (loss) per common share:
Basic $ 0.02 $ (0.86) $ (0.01) $ (1.87)
Diluted $ 0.02 $ (0.86) $ (0.01) $ (1.87)
Weighted average number of shares used in earnings per share computation:
Basic 6,955 2,934 6,926 2,561
Diluted 6,996 2,934 6,926 2,561
See Notes to Condensed Consolidated Financial Statements.
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TEAM MUCHO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(000's omitted)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000
----------- ----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 434 $ (4,786)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities, excluding the impact of acquisitions
Depreciation and amortization 1,168 106
Amortization of deferred compensation 4 -
Issuance of common stock and warrants for services and interest - 978
Change in other assets and liabilities (2,179) 963
-------- --------
NET CASH (USED IN) OPERATING ACTIVITIES (573) (2,739)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (737) (702)
Cash used in acquisitions (4,250) -
Other - (116)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (4,987) (818)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 3,733
Proceeds from bank borrowings, net of debt issuance fees paid 8,250 165
Notes payable and short-term borrowing repaid (193) (384)
Payment of stock repurchase obligation (11,622) -
Other - (31)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,565) 3,483
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,125) (74)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,925 74
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,800 $ -
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 254 $ 38
Cash paid during the period for income taxes $ 516 $ 1
See Notes to Condensed Consolidated Financial Statements.
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SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the six month period ending June 30, 2000, the Company acquired $187,000
of property and equipment under capital leases, satisfied accrued interest
through the issuance of warrants valued at $179,000, recorded compensation
expense of $34,000 upon the granting of non-qualified stock options and
satisfied accounts payable for goods and services performed through the issuance
of common stock valued at $799,000.
During the six-month period ending June 30, 2001, the Company acquired certain
assets of Professional Staff Management, Inc. and as partial consideration
issued common stock valued at $241,000 and Series A convertible preferred stock
with a face amount of $1,000,000 and warrants valued at $75,000.
During the six month period ended June 30, 2001, the Company had accrued
preferred stock dividends payable in kind equivalent of $524,000 in connection
with the $11,000,000 face value of preferred stock.
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TEAM MUCHO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(000'S OMITTED, EXCEPT FOR SHARE AMOUNTS)
Common Stock Treasury Stock
----------------------- Deferred ------------------------- Accumulated
Number Value Comp. Number Value Deficit Total
----------- ----------- --------- ------------- ----------- ----------- ----------
Balance,
December 31, 2000 9,603,558 $45,001 $ (28) (2,722,366) $(14,466) $(10,750) $19,757
Shares issued 74,074 241 - - - - 241
Warrants - 75 - - - - 75
Amortization of deferred compensation - - 4 - - - 4
Convertible preferred stock dividend - - - - - (524) (524)
Net income - - - - - 434 434
----------- ----------- --------- ------------- ----------- ----------- ----------
Balance,
June 30, 2001 9,677,632 $45,317 $ (24) (2,722,366) $(14,466) $(10,840) $19,987
=========== =========== ========= ============= =========== =========== ==========
See Notes to Condensed Consolidated Financial Statements
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
TEAM Mucho, Inc., (the "Company"), an Ohio corporation, is a business process
outsourcing ("BPO") company with 15 years of experience, providing small and
medium sized businesses both conventional and Internet-driven solutions. Through
TEAM America and TEAM PSMI, its human resource outsourcing divisions, clients
are relieved of their human resource administrative responsibilities and
liabilities, including employee benefits, risk management and payroll and
payroll tax administration. Through Mucho.com, Inc. ("Mucho"), its online
business center ("OBC") division, clients benefit from a comprehensive offering
of products, services, expert business content, and interactive tools that
enable business decision-makers to simplify their everyday business operations.
TEAM Mucho, Inc. was formed by the merger of TEAM America Corporation and Mucho
in a transaction accounted for under the purchase method of accounting as a
reverse acquisition. Mucho 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 June
30, 2000 statement of operations, as the acquisition of TEAM America Corporation
occurred on December 28, 2000.
The number of common shares outstanding and the weighted average number of
shares used in the earnings per share calculation referenced in all places in
these condensed consolidated financial statements and related footnotes do not
include 1,111,111 common shares that have been contingently issued but are being
held in an escrow pursuant to an Escrow Agreement dated December 28, 2000 as
part of the merger between TEAM America Corporation and Mucho.com, Inc. The
release of the shares from escrow to Mucho.com, Inc. shareholders is conditional
upon the occurrence of certain events prior to certain dates, and if these
conditions are not met, the shares will be returned to the Company.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Company is required to adopt FAS 142 effective January 1,
2002. The Company expects full year 2001 goodwill amortization to be
approximately $1.7 million. As a result of adopting FAS 142, the Company will
not recognize any goodwill amortization in 2002 or subsequent years. The Company
is evaluating what, if any, additional impact the statements may have on its
results of operations and financial position.
NOTE 3 - UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements should be read in conjunction with the audited
financial statements contained in TEAM Mucho, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 2000. The financial statements for the six
months ended June 30, 2001 include the results of TEAM Mucho, Inc. for the
entire quarter and the results from the acquisition of substantially all of the
assets of Professional Staff Management, Inc. ("PSMI"), a Utah corporation,
since the acquisition date (March 13, 2001). The financial statements for the
six months ended June 30, 2000 include only the results of Mucho.
Effective January 1, 2001, the Company changed its financial reporting period to
a 52/53-week year ending the Saturday closest to December 31. The Company
believes that capturing monthly information on a 4-4-5 week basis in each
quarter will provide better comparability of quarterly and monthly results.
Since June 30, 2001 was a Saturday, this change had no financial statement
impact.
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NOTE 4 - PURCHASE OF ASSETS OF PROFESSIONAL STAFF MANAGEMENT, INC.
As of March 14, 2001, the Company acquired certain of the assets of PSMI. The
acquisition was accounted for under the purchase method of accounting. The
purchase price of $6,491,000 for these assets included cash of $4,250,000,
seller financing of $1,000,000, shares of common stock of TEAM Mucho, Inc.
(74,074 shares with a fair market value of $241,000 at the date of the
acquisition) and convertible preferred stock with a face amount of $1,000,000
and warrants. The preferred stock was assigned an estimated fair value of
$925,000 and the warrants were assigned an estimated fair value of $75,000. The
purchase price was preliminarily allocated to the assets acquired based on their
relative fair market value with the excess allocated to goodwill. Goodwill of
$6,391,000 was recorded related to this transaction and will be amortized over
20 years.
NOTE 5 - ACCOUNTING POLICIES
The financial statements should be read in conjunction with the audited
consolidated financial statements contained in TEAM Mucho, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 2000.
NOTE 6 - EARNINGS (LOSS) PER SHARE
Earnings (loss) per share were determined in accordance with SFAS No. 128. There
are no differences to reconcile net (loss) for basic and diluted earnings per
share purposes.
In the calculation of net income (loss) per share for the three-month period
ending June 30, 2000 and the six-month periods ending June 30, 2000 and 2001,
warrants and common stock equivalents were excluded from the calculation because
their assumed exercise would have been anti-dilutive.
The effect of dilutive common stock equivalents for the three-month period ended
June 30, 2001 was as follows:
Weighted average shares outstanding 6,955,266
Dilutive shares from stock options - treasury stock method 40,483
---------------
Weighted average shares outstanding, plus effect of dilutive shares 6,995,749
===============
NOTE 7 - PRO-FORMA RESULTS
The following table sets forth the pro-forma results of operations for the
three-month and six-month periods ended June 30, 2001 and 2000. The pro-forma
results of operations for the periods ending June 30, 2000 include the unaudited
results of Mucho, the unaudited results as previously filed by TEAM America
Corporation as Registrant including pro-forma adjustments associated primarily
with preferred stock dividends and interest, and the unaudited pro-forma results
of PSMI. The pro-forma results of operations for the three-month and six-month
periods ending June 30, 2001 include the reported unaudited results of TEAM
Mucho, Inc., which includes the division comprising the assets acquired from
PSMI ("TEAM PSMI").
Interest on the $4,250,000 bank loan and the amortization of goodwill resulting
from the PSMI asset acquisition are included in the pro-forma results for
periods ending June 30, 2001 and 2000 as if the acquisition occurred on January
1, 2000.
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(000'S OMITTED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue $119,893 $146,868 $244,093 $279,173
Operating income (loss) $ 715 $ (1,930) $ 961 $ (4,198)
Net income (loss) $ 384 $ (2,240) $ 372 $ (4,934)
Net income (loss) attributable to
common shareholders $ 113 $ (2,508) $ (170) $ (5,470)
Income (loss) per common share:
Basic $ 0.02 $ (0.41) $ (0.02) $ (0.87)
Diluted $ 0.02 $ (0.41) $ (0.02) $ (0.87)
Weighted average number of shares outstanding:
Basic 6,955 6,144 6,949 6,296
Diluted 6,996 6,144 6,949 6,296
NOTE 8 - BANK LINE OF CREDIT
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 for the purchase of substantially
all of the assets of PSMI. Additionally, the Credit Agreement provides for the
issuance of letters of credit of 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. As part of the PSMI acquisition, there was $1 million of
seller financing that is supported by a $1,000,000 letter of credit that expires
on July 13, 2002. The seller financing is repaid as the seller makes draws under
the letter of credit to satisfy obligations to its creditors. Draws under the
letter of credit will be funded by the Credit Agreement. The Company has
$8,000,000 remaining under the Credit Agreement.
Interest due 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. The $4,250,000 draw on March 13, 2001 is
payable in 63 equal monthly installments of principal and interest beginning
April 2001.
Further, any additional acquisition loans are payable in equal monthly
installments of principal and interest, beginning the month after an 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, at
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. At June 30, 2001, the Company was in compliance with all
financial covenants.
NOTE 9 - STOCK REPURCHASE
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 December 31, 2000
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.
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NOTE 10 - INCOME TAXES
No provision for federal income taxes was provided for the period ended June 30,
2000 due to operating losses for that period. At December 31, 2000, the Company
had net operating loss carryforwards available for federal tax purposes of
approximately $6,700,000 which begin to expire in 2019. At June 30, 2001, the
provision for income taxes includes state and local income taxes not subject to
state operating loss carryforwards.
The effective state and local tax rate for the quarter ended June 30, 2001
differs from the expected rates due to non-deductible goodwill and other
permanent differences.
NOTE 11 - PREFERRED STOCK
On December 28, 2000, in connection with the acquisition of TEAM America
Corporation, 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 in January 2001 and were allocated
$3,625,000 to preferred stock, $3,000,000 to common stock and $2,800,000 to
warrants.
Effective January 1, 2001, the preferred shareholders and the Company agreed to
eliminate the mandatory redemption feature of the preferred shares, therefore,
accretion to the redeemable amount has ceased. However, under certain
conditions, the preferred shareholders may "put" their shares to the Company,
therefore, the preferred stock is not included in Shareholders' Equity. In
connection with the elimination of the mandatory redemption feature, the
preferred stock agreement was amended such that the Company is committed to
complete a secondary offering of common stock in which the preferred
shareholders can participate, prior to June 28, 2004. In the event the Company
fails to complete the secondary offering, the preferred shareholders will be
granted a secondary lien on the assets of the Company, and the Company will be
deemed to be in default of the preferred stock agreement.
In March 2001, the Company issued an additional 10,000 shares of Series A
convertible preferred stock with a face amount of $1,000,000 in connection with
the acquisition of the assets of PSMI. The proceeds were allocated $75,000 to
warrants and $925,000 to preferred stock. At June 30, 2001, the Company had
accrued preferred stock dividends payable in kind equivalent to $524,000.
-12-
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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. No results of operations of TEAM America
Corporation are included in the March 31 and June 30, 2000 consolidated
statements of operations included in this Quarterly Report.
The following tables should be read in conjunction with the condensed
consolidated financial statements of the Company and the notes thereto and the
other financial information included elsewhere in this Quarterly Report on Form
10-Q, as well as the factors set forth under the caption "Forward Looking
Information" below.
The tables below are presented to facilitate comparison between current period
results and the historical results of TEAM America.
The assets acquired from Professional Staff Management, Inc. are operated as a
division ("TEAM PSMI") of the Company. The results of operations of TEAM PSMI
from March 14, 2001 are combined with the TEAM America division and shown under
the heading BPO (Business Process Outsourcing) in the three-month and six-month
periods ended June 30, 2001 in the tables below. The tables also includes the
results of TEAM America Corporation for the three month and six month periods
ended June 30, 2000, which are included for comparison because TEAM America
Corporation was the registrant for those periods. The Company operates in the
business process outsourcing industry.
In view of the rapidly changing nature of the Company's business, its limited
operating history, the acquisition of TEAM America Corporation on December 28,
2000 and the acquisition of the assets of PSMI on March 13, 2001, the Company
believes that an historical comparison of revenue and operating results is not
necessarily meaningful and should not be relied upon as an indication of future
performance.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
(000'S OMITTED) (000'S OMITTED)
THREE MONTHS ENDED
THREE MONTHS ENDED JUNE 30, 2001 JUNE 30,
------------------------------------------ --------------------------
2000 2000
------------ ------------
TEAM
MUCHO BPO TOTAL MUCHO AMERICA
------------ ------------- ------------ ------------ ------------
Revenue $ 28 $ 119,865 $ 119,893 $ - $106,722
Gross profit 28 5,862 5,890 - 4,412
Operating income (loss) (399) 1,114 715 (2,456) 647
Interest expense (5) (250) (255) (54) (34)
Income (loss) before taxes (404) 864 460 (2,510) 613
Net income (loss) (404) 788 384 (2,510) 199
Net income (loss) attributable
to common shareholders $ (404) $ 517 $ 113 $ (2,510) $ 199
The above BPO and Total columns for the three-month period ending June 30, 2001
include $271,000 of preferred stock dividends. No federal income tax provision
has been attributed to the earnings in the BPO segment of the company's business
due to the availability of tax net loss carryforwards generated by Mucho. The
Company believes that net income before taxes provides the most meaningful
comparison of the Company's operating results.
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REVENUES
Consolidated revenues were $119,893,000 for the three months ended June 30, 2001
compared to Mucho revenue of $0 for the comparable three-month period ending
June 30, 2000. The BPO segment accounted for $119,865,000 and Mucho had revenues
of $28,000. The increase in Mucho revenue versus the same period in 2000 and
increased BPO revenues from the TEAM PSMI acquisition contributed to the
increased revenues.
DIRECT COSTS/GROSS PROFIT
For the quarter ended June 30, 2001, consolidated direct costs were
$114,003,000, or 95.09% of revenue. The gross margin was $5,890,000, or 4.91% of
revenue compared to 4.1% for the three months ended June 30, 2000. Within the
BPO segment, reductions in the TEAM America division's direct costs, as well as
an increase in billing rates for previously less profitable customers favorably
impacted gross profits. An increase in workers' compensation billing rates in
the fourth quarter of 2000 and continued conservative underwriting of workers'
compensation risks also contributed to the improvement.
OPERATING EXPENSES
For the quarter ended June 30, 2001, consolidated operating expenses were
$5,175,000, or 4.32% of revenue, compared to $2,456,000 for Mucho in the second
quarter of 2000. Mucho decreased its operating expense by $2,029,000, with
$664,000 in payroll related reductions and $1,367,000 in other selling, general
and administrative reductions. Within the BPO segment, operating expenses
increased by $983,000 primarily from the inclusion of the TEAM PSMI division.
Payroll reductions in the TEAM America division of $169,000 were offset by
increases in depreciation and amortization related to acquisitions of $129,000.
OPERATING INCOME (LOSS)
For the quarter ended June 30, 2001, the consolidated operating income was
$715,000, or 0.60% of revenue, compared to a loss of $2,456,000 for Mucho in the
comparable quarter in 2000. Mucho's improvement of $2,057,000 was due to expense
reduction. Lower incremental operating expenses in the TEAM PSMI division
following the integration of business operations contributed to improvement in
operating income in the BPO segment from .6% of revenue in 2000 to .9% in 2001.
INTEREST INCOME (EXPENSE)
For the quarter ended June 30, 2001, the consolidated interest expense was
$255,000 compared to net interest expense of $54,000 for Mucho in the second
quarter of 2000. TEAM Mucho, Inc. borrowed $4,000,000 from a bank pursuant to a
Credit Agreement in January 2001. In March 2001, the Company borrowed an
additional $4,250,000 pursuant to the same Credit Agreement in connection with
the acquisition of the assets of PSMI.
INCOME TAX EXPENSE
No provision for federal income taxes has been provided for the three-month
period ended June 30, 2000 due to operating losses for that period. At June 30,
2001, the Company had net operating loss carryforwards available for federal tax
purposes of approximately $6,700,000 for use in 2001 and thereafter. At June 30,
2001, the provision for income taxes of $76,000 includes state and local income
taxes not subject to federal operating loss carryforwards.
NET INCOME (LOSS) AND EARNINGS PER SHARE
The net income for the quarter ended June 30, 2001, was $384,000, or $.06 per
share on a basic and diluted basis, compared to a net loss for the quarter ended
June 30, 2000 of $2,510,000, or $(.86) per share. Preferred stock dividends of
$271,000 for the quarter ended June 30, 2001 resulted in a net income
attributable to common shareholders of $113,000, or $.02 per share on a basic
and diluted basis. The historical share amounts of the Company have been
retroactively restated to give effect to the merger with TEAM America
Corporation. As a result, all share amounts and earnings per share are presented
in TEAM America Corporation equivalent shares.
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The weighted average number of shares outstanding at June 30, 2000 excludes
options and warrants from the calculation because they are anti-dilutive.
However, the June 2001 calculation of earnings per share was made on both a
basic and diluted basis.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
(000'S OMITTED) (000'S OMITTED)
SIX MONTHS ENDED
SIX MONTHS ENDED JUNE 30, 2001 JUNE 30,
------------------------------------------ --------------------------
2000 2000
------------ ------------
TEAM
MUCHO BPO TOTAL MUCHO AMERICA
------------ ------------- ------------ ------------ ------------
Revenue $ 69 $217,295 $217,364 $ - $203,705
Gross profit 69 10,166 10,235 - 8,368
Operating income (loss) (965) 1,892 927 (4,591) 1,091
Interest expense (11) (386) (397) (195) (64)
Income (loss) before taxes (976) 1,506 530 (4,786) 1,027
Net income (loss) (977) 1,411 434 (4,786) 350
Net income (loss) attributable
to common shareholders $ (977) $ 887 $ (90) $ (4,786) $ 350
The above BPO and Total columns for the six-month period ending June 30, 2001
include $524,000 of preferred stock dividends. No federal income tax has been
attributed to the earnings in the BPO segment of the company's business due to
the availability of tax net loss carryforwards generated by Mucho. The Company
believes that net income before taxes provides the most meaningful comparison of
the Company's operating results.
REVENUES
Consolidated revenues were $217,364,000 for the six months ended June 30, 2001
compared to Mucho revenue of $0 for the comparable six-month period ending June
30, 2000. The BPO segment contributed revenues of $217,295,000 and Mucho
contributed $69,000. The increase in Mucho revenue versus the same period in
2000 and increase in BPO revenues from the TEAM PSMI acquisition contributed to
the increased revenues.
DIRECT COSTS/GROSS PROFIT
For the six months ended June 30, 2001 consolidated direct costs were
$207,129,000, or 95.29% of revenue, and the gross margin was $10,235,000, or
4.71% compared to 4.1% for the six months ended June 30, 2000. Within the BPO
segment, reductions in the TEAM America division's direct costs, as well as an
increase in billing rates for previously less profitable customers favorably
impacted gross profits. An increase in workers' compensation billing rates in
the fourth quarter of 2000 and continued conservative underwriting of workers'
compensation risks also contributed to the improvement.
OPERATING EXPENSES
For the six months ended June 30, 2001, consolidated operating expenses were
$9,308,000, or 4.28% of revenue, compared to $4,591,000 for Mucho through six
months of 2000. Mucho decreased its operating expense by $3,557,000, with
$1,725,000 in payroll related reductions and $1,858,000 in other selling,
general and administrative reductions. Within the BPO segment, operating
expenses increased by $997,000 primarily from the inclusion of the TEAM PSMI
division. Payroll reductions in the TEAM America division of $471,000 were
offset by increases in depreciation and amortization related to acquisitions of
$118,000.
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OPERATING INCOME (LOSS)
For the six-month period ended June 30, 2001, the consolidated operating income
was $927,000, or 0.43% of revenue, compared to a loss of $4,591,000 for Mucho in
the comparable period in 2000. Mucho's improvement of $3,626,000 was due to
expense reductions. Lower incremental operating expenses in the TEAM PSMI
division following the integration of business operations contributed to
improvement in operating income in the BPO segment from .5% of revenue to .9% in
2001.
INTEREST INCOME (EXPENSE)
Through the six months ended June 30, 2001, the consolidated interest expense
was $397,000 compared to net interest expense of $195,000 for Mucho in the same
period of 2000. TEAM Mucho, Inc. borrowed $4,000,000 from a bank pursuant to a
Credit Agreement in January 2001. In March 2001, the Company borrowed an
additional $4,250,000 pursuant to the same Credit Agreement in connection with
the acquisition of the assets of PSMI.
INCOME TAX EXPENSE
No provision for federal income taxes has been provided for the six-month period
ended June 30, 2000 due to operating losses for that period. At June 30, 2001,
the Company had net operating loss carryforwards available for federal tax
purposes of approximately $6,700,000 for use in 2001 and thereafter. At June 30,
2001, the provision for income taxes of $96,000 includes state and local income
taxes not subject to federal operating loss carryforwards.
NET INCOME (LOSS) AND EARNINGS PER SHARE
The net income for the six months ended June 30, 2001, was $434,000, or $.06 per
share on a basic and diluted basis, compared to a net loss for the six months
ended June 30, 2000 of $4,786,000, or $(1.87) per share. Preferred stock
dividends of $524,000 for the six month period ended June 30, 2001 resulted in a
net loss attributable to common shareholders of $90,000, or ($.01) per share on
a basic and diluted basis. The historical share amounts of the Company have been
retroactively restated to give effect to the merger with TEAM America
Corporation. As a result, all share amounts and earnings per share are presented
in TEAM America Corporation equivalent shares.
The weighted average number of shares outstanding at June 30, 2000 excludes
options and warrants from the calculation because they are anti-dilutive.
However, the June 2001 calculation of earnings per share was made on both a
basic and diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, the Company had a working capital deficit of $1,642,000, a
$3,161,000 improvement over the December 2000 working capital deficit of
$4,803,000.
During 2001, in connection with the merger with TEAM America Corporation and
related financing, the Company incurred expenses of approximately $1,560,000
that were appropriately capitalized as goodwill or debt issuance costs, which
are non-current assets. As of June 30, 2001, all such costs have been paid, thus
significantly contributing to the working capital deficit.
The Company expects to continue to improve its working capital position in the
near future. The Company's primary source of liquidity and capital resources has
historically been its internal cash flow from operations and its EBITDA
(Earnings before Interest, Taxes, Depreciation and Amortization). For the
quarter ended June 30, 2001, the EBITDA was $1,362,000 compared to a negative
EBITDA of $2,399,000 for Mucho in June 2000. The improvement of $3,761,000
included a reduction of the Mucho negative EBITDA by $2,058,000 and a
contribution of $1,703,000 from the BPO segment.
Net cash used in operating activities was $621,000 for the six months ended June
30, 2001 compared with $2,739,000 used in operating activities for the six
months ended June 30, 2000. The $2,118,000 improvement was due to the increase
in net income from period to period. During the six months ended June 30, 2000,
the Company paid $978,000 in expenses through the issuance of stock and
warrants.
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Net cash used in investing activities was $4,939,000 for the six months ended
June 30, 2001 compared to $818,000 for the six months ended June 30, 2000. The
primary reason for the increase was the use of $4,250,000 of cash to purchase
the assets of PSMI in March 2001. Additions to property and equipment were
$737,000 in the six months ended June 30, 2001 compared to $702,000 in the six
months ended June 30, 2000. The 2001 additions were primarily software
development related to the web enablement of TEAM Direct, the Company's
proprietary operating software system.
Net cash provided by financing activities was $3,565,000 for the six months
ended June 30, 2001 compared with $3,483,000 for the six months ended June 30,
2000. In the six months ended June 30, 2000, the Company sold common stock for
$3,733,000 and used $384,000 to repay borrowed funds. In January 2001, the
Company redeemed $11,622,000 of treasury stock in connection with a tender offer
from December 2000. In January 2001, the Company borrowed $4,000,000 from a bank
and paid $696,000 in related fees for the bank line. In March 2001, the Company
borrowed an additional $4,250,000 in connection with the acquisition of the
assets of PSMI as well as $1.0 million of seller financing.
The Company's acquisition line at June 30, 2001 was $18,000,000. At that date,
the Company had borrowed $8,250,000 against that line and had letters of credit
totaling $1,750,000 issued on its behalf, leaving an available balance of
$8,000,000 for future acquisitions. In the second quarter of 2001, the Company
repaid $135,000 against the acquisition line.
The Company does not expect significant growth in its operating costs for the
foreseeable future as it integrates its Internet business with the BPO segment.
The Company's long-term plan for strengthening its financial position continued
with the acquisition of the assets of PSMI. This acquisition strengthened its
existing operating base in California, Ohio and Utah and expanded the Company
into the new and growing market of Nevada. TEAM PSMI's net income and EBITDA are
expected to improve in subsequent full quarters of operations.
The Company has approximately $6,700,000 in tax net operating carryforwards for
partial use in 2001 and subsequent years. The Company expects to generate
sufficient cash flow from combined operations and from the utilization of tax
loss carryforwards to meet its operating expenses and to service its debt.
INFLATION
The Company believes the effects of inflation have not had a significant impact
on its results of operations or financial condition.
FORWARD LOOKING INFORMATION
Statements in the preceding discussion that indicate the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward looking statements. It is important to note that the
Company's actual results could differ materially from those projected in such
forward looking statements.
Additional information concerning factors that could cause actual results to
differ materially from those suggested in the forward looking statements is
contained under the caption "Business Risk Factors" in the Company's Annual
Report on Form 10 K for the year ended December 31, 2000 filed with the
Securities and Exchange Commission and may be amended from time to time. Forward
looking statements are not guarantees of performance. They involve risks,
uncertainties and assumptions. The future results and shareholder values of the
Company may differ materially from those expressed in these forward looking
statements. Many of the factors that will determine these results and values are
beyond the Company's ability to control or predict. Shareholders are cautioned
not to put undue reliance on forward looking statements. In addition, the
Company does not have any intention or obligation to update forward looking
statements after the date hereof, even if new information, future events, or
other circumstances have made them incorrect or misleading. For those
statements, the Company claims the protection of the safe harbor for forward
looking statements contained in the Private Securities Litigation Reform Act of
1995.
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PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the
second quarter ending June 30, 2001:
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TEAM MUCHO, INC.
/s/ Jose C. Blanco
----------------------------------
Chief Financial Officer and
Authorized Signing Officer
August 13, 2001
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