SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A No. 1
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 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 [ ] No |X| See Note 2 to the condensed
consolidated financial statements
THE NUMBER OF SHARES OF REGISTRANT'S ONLY CLASS OF COMMON STOCK OUTSTANDING ON
SEPTEMBER 29, 2001 WAS 8,057,177.
TEAM MUCHO, INC. AND SUBSIDIARIES
SEPTEMBER 29, 2001
INDEX
PART I. FINANCIAL INFORMATION
Page
No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 29, 2001 (unaudited)
and December 31, 2000 3
Condensed Consolidated Statements of Operations - Three and nine-month
periods ended September 29, 2001 (unaudited) and September 30, 2000
(unaudited) 5
Condensed Consolidated Statements of Cash Flows - Nine-month periods
ended September 29, 2001 (unaudited) and September 30, 2000 (unaudited) 6
Condensed Consolidated Statement of Changes in Shareholders' Equity - Nine-month
period ended September 29, 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 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Note: Item 3 of Part I and Items 1, 2, 3 and 5 of Part II are omitted because
they are not applicable.
-2-
TEAM MUCHO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 29, 2001 AND DECEMBER 31, 2000
(000's omitted except share data)
SEPTEMBER 29, DECEMBER 31,
2001 2000
---------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 3 $ 10,925
Receivables:
Trade, net of allowance for doubtful accounts of $200 and $200, respectively 2,595 1,978
Unbilled revenues 9,480 8,792
Other receivables 1,504 1,461
---------- ----------
Total receivables 13,579 12,231
---------- ----------
Prepaid expenses 371 332
Deferred income tax asset 1,901 420
---------- ----------
Total current assets 15,854 23,908
---------- ----------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION AND AMORTIZATION 2,259 1,581
---------- ----------
OTHER ASSETS:
Intangibles, primarily goodwill, net 34,466 26,732
Cash surrender value of life insurance policies 653 587
Deferred income tax asset 249 249
Other 1,303 297
---------- ----------
Total other assets 36,671 27,865
---------- ----------
Total assets $ 54,784 $ 53,354
========== ==========
Continued on next page
-3-
TEAM MUCHO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 29, 2001 AND DECEMBER 31, 2000
(000's omitted except share data)
SEPTEMBER 29, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 1,888 $ --
Trade accounts payable 835 1,954
Capital lease obligations, current portion 135 103
Bank debt, current portion 851 --
Stock repurchase obligation -- 11,622
Accrued compensation 8,856 8,367
Accrued payroll taxes and insurance 4,333 3,967
Accrued workers' compensation liability, current portion 937 630
Federal and state income taxes payable 49 72
Other accrued expenses 1,909 1,996
------------ ------------
Total current liabilities 19,793 28,711
------------ ------------
LONG-TERM LIABILITIES:
Bank debt, less current portion 8,129 --
Capital lease obligations, less current portion 158 127
Fair market value of derivative instruments 221 --
Accrued workers' compensation liability, less current portion 1,160 198
Client deposits and other liabilities 715 349
Deferred compensation 653 587
------------ ------------
Total liabilities 30,829 29,972
------------ ------------
CONVERTIBLE PREFERRED STOCK, FACE AMOUNT OF $11,000 AND
$10,000, RESPECTIVELY 5,362 3,625
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 45,000,000 shares authorized, 10,788,743
and 9,603,558 issued, 8,057,177 and 6,881,192 outstanding, respectively 45,317 45,001
Other (22) (28)
Accumulated deficit (12,207) (10,750)
------------ ------------
33,088 34,223
Less - Treasury stock, 2,731,566 and 2,722,366 shares, respectively, at cost (14,495) (14,466)
------------ ------------
Total shareholders' equity 18,593 19,757
------------ ------------
Total liabilities and shareholders' equity $ 54,784 $ 53,354
============ ============
See Notes to Condensed Consolidated Financial Statements.
-4-
TEAM MUCHO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000
(000'S OMITTED EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES $ 110,874 $ 41 $ 328,238 $ 41
--------- --------- --------- ---------
DIRECT COSTS:
Salaries and wages 95,565 -- 281,889 --
Payroll taxes, workers' compensation
and other direct costs 9,462 -- 31,212 --
--------- --------- --------- ---------
Total direct costs 105,027 -- 313,101 --
--------- --------- --------- ---------
GROSS PROFIT 5,847 41 15,137 41
--------- --------- --------- ---------
EXPENSES:
Administrative salaries 2,794 1,089 7,866 3,763
Other selling, general and
administrative expenses 1,621 631 4,627 2,442
Depreciation and amortization 818 82 1,985 188
Restructuring charges 309 -- 384 --
--------- --------- --------- ---------
Total operating expenses 5,542 1,802 14,862 6,393
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 305 (1,761) 275 (6,352)
Interest expense, net (231) (57) (627) (252)
Interest expense - fair value loss of derivative instruments (221) -- (221) --
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (147) (1,818) (573) (6,604)
Income tax expense (36) -- (72) --
--------- --------- --------- ---------
NET LOSS (183) (1,818) (645) (6,604)
Preferred stock dividends (288) -- (812) --
--------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS: $ (471) $ (1,818) $ (1,457) $ (6,604)
========= ========= ========= =========
Basic and diluted loss per common share: $ (0.06) $ (0.64) $ (0.20) $ (2.44)
Weighted average number of shares used in loss per share computation: 7,491 2,853 7,114 2,703
See Notes to Condensed Consolidated Financial Statements.
-5-
TEAM MUCHO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000
(000's omitted except share data)
NINE MONTHS ENDED
---------------------------------
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
------------ ------------
(UNAUDITED) (UNAUDITED)
CASH FLOW USED IN OPERATING ACTIVITIES:
Net loss $ (645) $ (6,604)
Adjustments to reconcile net loss to net cash used in operating
activities, excluding the impact of acquisitions:
Depreciation and amortization 1,985 188
Issuance of common stock for services -- 970
Loss on swap 221 --
Changes in assets and liabilities (3,338) 1,208
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,777) (4,238)
------------ ------------
CASH FLOW USED IN INVESTING ACTIVITIES:
Cash used in acquisitions (4,250) --
Reduction in short-term investments and marketable securities -- (80)
Purchase of property and equipment (1,146) (745)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (5,396) (745)
------------ ------------
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 4,780
Buy-back of treasury stock (29) --
Proceeds from bank debt 8,250 --
Short term borrowings repaid (270) --
Payment of stock repurchase obligation (11,622) --
Proceeds from issuance of convertible note -- 955
Proceeds from loans payable to stockholders -- (561)
Payment on capital lease obligations (78) (54)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,749) 5,040
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,922) 57
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 10,925 74
------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 3 $ 131
============ ============
Supplemental schedule of noncash investing and financing activities:
Assets acquired under capital leases $ 141 $ 207
------------ ------------
Supplemental disclosure of cash flow information:
Interest paid $ 548 $ 46
------------ ------------
Income taxes paid $ 521 $ 1
------------ ------------
See Notes to Condensed Consolidated Financial Statements
-6-
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the nine-month period ended September 30, 2000, the Company acquired
$207,000 of property and equipment under capital leases, satisfied accrued
interest through the issuance of warrants valued at $183,000, 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 $970,000.
During the nine-month period ended September 29, 2001, the Company acquired
certain assets of Professional Staff Management, Inc. and as partial
consideration issued common stock valued at $241,000, Series A convertible
preferred stock with a face amount of $1,000,000, and warrants valued at
$75,000.
During the nine-month period ended September 29, 2001, the Company had accrued
preferred stock dividends payable in kind equivalent to $812,000 in connection
with the $11,000,000 face value of preferred stock.
See Notes to Condensed Consolidated Financial Statements.
-7-
TEAM MUCHO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001
(000'S OMITTED EXCEPT FOR SHARE AMOUNTS)
Common Stock Treasury Stock
----------------------- ------------------------ Accumulated
Number Value Other Number Value Deficit Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 9,603,558 $ 45,001 $ (28) (2,722,366) $ (14,466) $ (10,750) $ 19,757
Shares issued 1,185,185 241 -- -- -- -- 241
Warrants -- 75 -- -- -- -- 75
Acquisition of treasury stock -- -- -- (9,200) (29) -- (29)
Amortization of deferred compensation -- -- 6 -- -- -- 6
Preferred stock dividends -- -- -- -- -- (812) (812)
Net loss -- -- -- -- -- (645) (645)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at September 29, 2001 10,788,743 $ 45,317 $ (22) (2,731,566) $ (14,495) $ (12,207) $ 18,593
========== ========== ========== ========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
-8-
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 specializing in human resources. TEAM Mucho, Inc.
was created by the December, 2000 reverse merger of online business center
Mucho.com, Inc. and TEAM America Corporation, a market leader in human resource
(PEO) services. TEAM America Human Resources currently has the number-one PEO
market share position in Ohio, Utah, Nevada, Oregon, Idaho, Tennessee and
Mississippi, and top-five positions in Northern and Southern California and
Dallas, Texas. TEAM America's Single-Point-Of-Contact Human Resource
Solution(TM) includes payroll, benefits administration, on-site and online
employee and employer communications and self-service, employment practices and
human resources risk management, workforce compliance administration and
severance management.
TEAM Mucho, Inc. was formed by the merger of TEAM America Corporation and
Mucho.com, Inc. in a transaction accounted for under the purchase method of
accounting as a reverse acquisition. Mucho 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
September 30, 2000 statement of operations, as the acquisition of TEAM America
Corporation occurred on December 28, 2000.
Prior to July 27, 2001, the number of common shares outstanding and the weighted
average number of shares used in the earnings per share calculation did not
include 1,111,111 common shares that had been contingently issued but held in
escrow pursuant to an Escrow Agreement, dated December 28, 2000, as part of the
merger between TEAM America Corporation and Mucho.com, Inc. The terms of the
agreement were met and the Board of Directors approved the release of shares
from escrow to the Mucho.com, Inc. shareholders on July 27, 2001. Under reverse
acquisition accounting, these shares are treated similar to a stock dividend.
NOTE 2 - DELAY IN FILING QUARTERLY REPORT
On November 15, 2001, the Company filed a Notification of Late Filing relating
to its Quarterly Report for the quarter ended September 29, 2001. At that time,
the Company was unable to file the Form 10-Q as required due to delays in
preparing its financial statements for the period ended September 29, 2001.
During the third quarter, the Company undertook a "fast-track" implementation of
new accounting software. The Company was not able to complete the implementation
in time to file its Form 10-Q due to problems encountered in the integration of
the accounting system with the Company's underlying operating system. These
problems were subsequently resolved. Additionally, the Company believes it has
implemented additional measures to ensure that these issues do not recur, which
will improve the Company's financial reporting and internal control processes.
As part of filing the third quarter Form 10-Q, errors were identified relating
to the first and second quarters. Form 10-Q/A's have been filed to reflect the
restated results.
NOTE 3 - 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 $1.9 million. As a result of adopting FAS 142, the Company will
not recognize any goodwill amortization in 2002 or subsequent years and will
evaluate goodwill annually for impairment. The Company is evaluating what, if
any, additional impact the statements may have on its results of operations and
financial position.
-9-
NOTE 4 - 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 nine
months ended September 29, 2001 include the results of TEAM Mucho, Inc. for the
entire period 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
nine months ended September 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.
Mucho maintained its accounting records according to calendar quarters and
therefore its third quarter for 2000 ended on September 30, 2000. Although TEAM
Mucho, Inc.'s third quarter for 2001 ends on September 29, 2001, the one-day
difference, in itself, is not deemed to be significant.
NOTE 5 - PURCHASE OF ASSETS OF PROFESSIONAL STAFF MANAGEMENT, INC.
As of March 13, 2001, the Company acquired certain of the assets of PSMI. The
acquisition was accounted for under the purchase method of accounting. The
consideration 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 until
the adoption of FAS 142 on January 1, 2002.
NOTE 6 - INTEREST RATE SWAP
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133, as amended, requires that the company recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value.
In July 2001, the Company entered into an interest rate swap. The following is a
summary of the fair value gain/(loss) of the Company's swap, based upon the
estimated amount that the Company would receive (or pay) to terminate the
contracts as of September 29, 2001. The fair values are based on quoted market
prices for the same or similar instruments. The Company has not met all the
conditions to make the interest rate swap an effective hedge for accounting
purposes. Accordingly, the change in the fair value of the swap is recorded in
the statement of operations.
Notional Fair Value
Amount Gain/(Loss)
------------------- ------------------
Interest Rate Swaps $ 6,492,063 $ (220,941)
The counterparts to these contracts are major financial institutions. Management
believes the risk of loss due to default by the financial institution is remote.
NOTE 7 - 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 loss per share for the three-month and nine-month
periods ended September 29, 2001 and September 30, 2000, warrants and common
stock equivalents were excluded from the calculation because their assumed
exercise would have been anti-dilutive.
NOTE 8 - PRO-FORMA RESULTS
The following table sets forth the pro-forma results of operations for the
three-month and nine-month periods ended September 29, 2001 and September 30,
2000.
-10-
The pro-forma results of operations from the three and nine month periods ended
September 30, 2000 include the unaudited results of Mucho and the pro-forma
results of TEAM America and PSMI as if they were acquired by TEAM Mucho as of
January 1, 2000. The primary adjustments from the historical results of the
acquired entities include amortization of goodwill, preferred stock dividends
and interest.
The pro-forma results of operations from the nine-month period ended September
29, 2001 include the unaudited results of Mucho, including TEAM America and the
pro-forma results of PSMI as if it had been acquired by TEAM Mucho as of January
1, 2001. The primary adjustments from the historical results of PSMI include
amortization of goodwill, preferred stock dividends and interest.
(000'S OMITTED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenue $ 110,874 $ 144,690 $ 356,848 $ 421,189
Operating income (loss) $ 305 $ (887) $ 361 $ (5,115)
Net loss $ (183) $ (1,119) $ (647) $ (5,994)
Net loss attributable to
common shareholders $ (471) $ (1,389) $ (1,459) $ (6,806)
Loss per common share:
Basic $ (0.06) $ (0.23) $ (0.21) $ (1.13)
Weighted average number of shares outstanding:
Basic 7,491 6,160 7,114 6,010
NOTE 9 - 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. In September 2001,
$200,000 was drawn on the letter of credit. Draws under this letter of credit
are funded by the Credit Agreement. The Company has approximately $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, and can be modified at the beginning of every calendar quarter 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, in
January 2003. The Credit Agreement is collateralized by substantially all of the
assets of the Company and includes certain quarterly financial and non-financial
covenants. The financial covenants include, among others, 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 September 29, 2001, the Company was
not in compliance with the current ratio financial covenant, but has obtained
the appropriate waivers from its lenders.
-11-
NOTE 10 - 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.
NOTE 11 - INCOME TAXES
No provision for income taxes was provided for the period ended September 30,
2000 due to operating losses for that period. At December 31, 2000, the Company
had net operating loss carryforwards (NOL's) available for federal income tax
purposes of approximately $6,700,000 that are subject to annual limits and begin
to expire in 2019. At September 29, 2001, the provision for income taxes
includes federal provision, less eligible NOL's, and includes state and local
income taxes not subject to state operating loss carryforwards.
The effective tax rate for the quarter ended September 29, 2001 differs from the
statutory rates due to non-deductible goodwill and utilization of NOL's.
NOTE 12 - 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 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 September 29, 2001, the Company had issued, or accrued for issuance,
preferred stock dividends payable in kind equivalent to $812,300.
NOTE 13 - RESTRUCTURING COSTS
During the three and nine-month periods ended September 29, 2001, the Company
incurred restructuring costs, in conjunction with the TEAM America Corporation
acquisition, related to relocation of certain key executives in connection with
transferring its headquarters from California to Columbus, Ohio. These
relocations were made in order to allow the Company to focus on its PEO business
in conjunction with a de-emphasis on its online business center business. All
such costs will be expensed when incurred and are expected to be incurred prior
to December 31, 2001.
-12-
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
applicable preliminary purchase accounting adjustments. No results of operations
of TEAM America Corporation are included in the September 30, 2000 consolidated
statement of operations included in this Quarterly Report.
The Company maintains three workers' compensation policies which cover corporate
employees, worksite employees co-employed by the Company and PEO clients. The
Company does not provide workers' compensation to non-employees of the Company.
The Company's primary workers' compensation insurance provider is The Hartford
Insurance Company ("Hartford") which provides coverage for substantially all of
the Company's worksite and corporate employees. The current Hartford policy
covers the 15-month period from October 1, 2000 through December 31, 2001, and
is a large deductible retro type program ($250,000 deductible per claim) with a
maximum liability cap. Premium for this policy is paid on a monthly basis based
upon estimated payroll for the policy period and is subject to a policy audit by
Hartford. In addition to monthly premium payments, the Company makes monthly
pre-fund payments against which claims are paid. This monthly pre-fund amount is
$329,167 or $4,937,500 for the 15-month policy period. If the losses under the
policy are less than the amount the Company paid towards the pre-fund, Hartford
will refund the difference to the Company. If the losses in the policy period
are greater than the pre-fund, the Company will have to pay Hartford based on
the retro calculation not to exceed the program maximum. There is a maximum
pre-fund which is currently estimated at $6,187,500. The program maximum is
based on audited policy period payroll. The amount of claims incurred in any
policy may vary, and in a policy with significantly fewer claims than estimated,
the amount of refund from this account may be significant. The Company records
in direct expenses a monthly amount based upon its estimate of the total year's
calculated ultimate claims exposure. This estimate is established each quarter
based in part upon information provided by the Company's insurers, internal
analysis and independent insurance broker. The Company's internal analysis
includes quarterly review of open claims and review of historical claims and
losses related to the workers' compensation programs. While management uses
available information, including historical loss ratios, to estimate ultimate
losses, future adjustments may be necessary based on actual losses. Since the
recorded ultimate expense is based upon a ten-year projection of actual claims
payment and the timing of these payments, the Company relies on actuarial tables
to estimate its ultimate claims expense. These costs also include the fixed
costs charged by the insurance carrier to support the program.
The Company maintains a separate self-insured workers' compensation program for
its Ohio PEO clients and employees. The Ohio self-insured program commenced on
July 1, 1999 and has been in force for a substantial number of the Ohio leased
worksite employees and all Ohio corporate employees. The Company also maintains
an excess loss insurance policy for the Ohio self-insured program with a
$450,000 per claim deductible for the December 1, 2000 to December 31, 2001
policy period. The balance of Ohio co-employees is covered under the State of
Ohio Bureau of Workers' Compensation program. Not unlike the Hartford program,
the Company records an expense monthly for the ultimate expected claim expense
plus any fees for both programs.
The Company's clients are billed at fixed rates which are determined when the
contract is negotiated with the client. The fixed rates include charges for
workers' compensation which are based upon the Company's assessment of the costs
of providing workers' compensation to the client. If the Company's costs for
workers' compensation are greater than the costs which are included in the
client's contractual rate, the Company is unable to recover these excess charges
from the clients. The Company reserves the right in its contracts to increase
the workers' compensation charges on a prospective basis only.
The insurance business is a cyclical business. Continuing disappointing results
for insurers over the last few years has led, during the last quarter of 2000,
to a definite "hardening" in market pricing. This increase in pricing became
even more apparent and wide-ranging throughout the summer of 2001.
The events of September 11, 2001 have created greater uncertainty in insurance
markets. The $40 billion estimated loss for the insurance industry, while
staggering and the size of three Hurricane Andrews, has provoked many carriers
to review their capital positions. As a result, for the first time, underwriters
are beginning to question "clusters" of different risks that they might insure
at any one location. Due to the geographic distribution of its PEO clients, the
Company is minimally exposed in this area. However, the Company does anticipate
significant increases in insurance premiums for certain coverages for the
-13-
2002 renewal of the Hartford policy. The Company will continue to monitor events
in the marketplace in an attempt to maintain adequate insurance coverage at
competitive levels for all of its PEO clients.
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 a comparison between current period
results and the historical results of TEAM America Corporation.
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 nine-month
periods ended September 29, 2001 in the tables below. The tables also includes
the results of TEAM America Corporation for the three-month and nine-month
periods ended September 29, 2001 and September 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 a 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 SEPTEMBER 29, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
(000'S OMITTED) (000'S OMITTED)
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 29, 2001 SEPTEMBER 30,
--------------------------------------------- --------------------------
TEAM
MUCHO BPO TOTAL MUCHO AMERICA
------------- ------------- ------------- ------------ ------------
Revenue $ 9 $ 110,865 $ 110,874 $ 41 $ 108,542
Gross profit 9 5,838 5,847 41 4,072
Operating income (loss) (495) 800 305 (1,761) 574
Interest expense (4) (229) (233) (57) (11)
Swap Expense -- (221) (221) -- --
Income (loss) before taxes (499) 352 (147) (1,818) 563
Net income (loss) $ (499) $ 316 $ (183) $ (1,818) $ 220
Net income (loss) attributable
to common shareholders $ (499) $ 28 $ (471) $ (1,818) $ 220
The above BPO and Total columns for the three-month period ended September 29,
2001 include $288,000 of preferred stock dividends.
REVENUES
Consolidated revenues were $110,874,000 for the three months ended September 29,
2001, compared to Mucho revenue of $41,000 for the comparable three-month period
ended September 30, 2000. The BPO segment accounted for $110,865,000 and Mucho
had revenues of $9,000. Revenue growth was negatively impacted by a decline in
the current nationwide financial climate which has caused a number of the
Company's customers to reduce payroll, or to postpone plans for expansion.
Further, the Company continues to review the overall quality of its client base,
focusing on those with lower risk and higher margin.
DIRECT COSTS/GROSS PROFIT
For the quarter ended September 29, 2001, consolidated direct costs were
$105,027,000, or 94.73% of revenue. The gross margin was $5,847,000, or 5.27% of
revenue, compared to Mucho gross profit $41,000 for the three months ended
September 30, 2000. Within the BPO segment, reductions in the TEAM America
division's direct costs, acquisition of PSMI, as well as an increase in billing
rates for previously less profitable customers, favorably impacted gross profit.
An increase in the
-14-
Company's workers' compensation billing rates to its clients in the fourth
quarter of 2000 and the third quarter of 2001 along with continued improved
underwriting of workers' compensation risks also contributed to the improvement.
OPERATING EXPENSES
For the quarter ended September 29, 2001, consolidated operating expenses were
$5,542,000, or 5.00% of revenue, compared to $1,802,000 for Mucho in the third
quarter of 2000. Mucho decreased its operating expense by $1,298,000, with
$744,000 in payroll related reductions and $554,000 in other selling, general
and administrative reductions. Within the BPO segment, operating expenses
increased by $1,540,000 versus the prior year quarter ended September 30, 2000,
primarily from the inclusion of the TEAM PSMI division, restructuring charges
and additional amortization related to acquisitions.
OPERATING INCOME (LOSS)
For the quarter ended September 29, 2001, the consolidated operating income was
$305,000, or 0.28% of revenue, compared to a loss of $1,761,000 for Mucho in the
comparable third quarter in 2000. Mucho's improvement of $1,266,000 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 0.53% of revenue in 2000
to 0.72% in 2001.
Operating income for the quarter ended September 29, 2001, before non-cash
depreciation and amortization charges of $818,000, was $1,123,000, or $.15 per
share. Additionally, the Company incurred restructuring charges of $309,000
during the quarter, or $.04 per share. Operating income before depreciation,
amortization, and restructuring charges for the quarter is $1,432,000 or $.19
per share.
INTEREST EXPENSE
For the quarter ended September 29, 2001, the consolidated net interest expense
was $454,000, including $221,000 of costs related to the interest rate "swap"
the Company entered into. The swap expense is a non-cash item that the Company
records in the event it liquidates the derivative contract prior to its
expiration. Additional information on the swap may be found in Note 6 and in the
section titled Interest Rate Management on page 18. In the third quarter of
2000, Mucho had net interest expense of $57,000. 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 income taxes has been provided for the three-month period ended
September 29, 2000 due to operating losses for that period. At September 29,
2001, the Company had net operating loss carryforwards (NOL's) available for
federal tax purposes of approximately $6,700,000 for use in 2001 and thereafter.
At September 29, 2001, the provision for income taxes of $36,000 includes a
federal provision, less eligible federal NOL's and includes state and local
income taxes not subject to federal net operating loss carryforwards.
NET INCOME (LOSS) AND EARNINGS PER SHARE
The net loss for the quarter ended September 29, 2001, was $183,000, or ($.02)
per share on a basic and diluted basis, compared to a net loss for the quarter
ended September 30, 2000 of $1,818,000, or ($.64) per share. Preferred stock
dividends of $288,000 for the quarter ended September 29, 2001 resulted in a net
loss attributable to common shareholders of $471,000, or ($.06) 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 for all periods exclude
options and warrants from the calculation because they are anti-dilutive.
-15-
NINE MONTHS ENDED SEPTEMBER 29, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
(000's omitted) (000's omitted)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 29, 2001 SEPTEMBER 30,
------------------------------------------ --------------------------
TEAM
MUCHO BPO TOTAL MUCHO AMERICA
------------ ------------- ------------ ------------ ------------
Revenue $ 78 $ 328,160 $ 328,238 $ 41 $ 312,247
Gross profit 78 15,059 15,137 41 12,440
Operating income (loss) (1,460) 1,735 275 (6,352) 1,665
Interest expense (15) (612) (627) (252) (75)
Swap Expense -- (221) (221) -- --
Income (loss) before taxes (1,475) 902 (573) (6,604) 1,590
Net income (loss) $ (1,476) $ 831 $ (645) $ (6,604) $ 570
Net income (loss) attributable
to common shareholders $ (1,476) $ 19 $ (1,457) $ (6,604) $ 570
The above BPO and Total columns for the nine-month period ended September 29,
2001 include $812,000 of preferred stock dividends.
REVENUES
Consolidated revenues were $328,238,000 for the nine months ended September 29,
2001, compared to Mucho revenue of $41,000 for the comparable nine-month period
ended September 30, 2000. The BPO segment contributed revenues of $328,160,000
and Mucho contributed $78,000. The increase in Mucho revenue versus the same
period in 2000 and an increase in BPO revenues contributed to the increased
consolidated revenues.
DIRECT COSTS/GROSS PROFIT
For the nine months ended September 29, 2001, consolidated direct costs were
$313,101,000, or 95.39% of revenue, and the gross profit was $15,137,000, or
4.61%. 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 the Company's
workers' compensation billing rates to its clients in the fourth quarter of 2000
and the third quarter of 2001 along with continued improved underwriting of
workers' compensation risks also contributed to the improvement.
OPERATING EXPENSES
For the nine months ended September 29, 2001, consolidated operating expenses
were $14,862,000, or 4.53% of revenue, compared to $6,393,000 for Mucho through
nine-months of 2000. Mucho decreased its operating expense by $4,855,000, was
attributable to $2,469,000 in payroll related reductions and $2,430,000 in other
selling, general and administrative reductions offset by a $44,000 increase in
depreciation and amortization. Within the BPO segment, operating expenses
increased by $2,549,000, primarily from the inclusion of the TEAM PSMI division,
restructuring charges and additional amortization related to acquisitions.
Payroll reductions in the TEAM America division were offset by a $1,365,000
increase in amortization related to acquisitions.
OPERATING INCOME (LOSS)
For the nine months ended September 29, 2001, the consolidated operating income
was $275,000, or 0.08% of revenue, compared to a loss of $6,352,000 for Mucho in
the comparable period in 2000. Mucho's improvement of $4,892,000 was due to
expense reductions, primarily in salaries and wages and other selling, general
and administrative expenses.
Operating income for the nine months ended September 29, 2001, before non-cash
depreciation and amortization charges of $1,985,000, was $2,260,000, or $.32 per
share. Additionally, the Company incurred restructuring charges of $384,000
during the period, or $.05 per share. Operating income before depreciation,
amortization, and restructuring charges for the period is $2,644,000, or $.37
per share.
-16-
INTEREST EXPENSE
Through the nine months ended September 29, 2001, the consolidated net interest
expense was $848,000, including $221,000 in expense related to the interest rate
"swap." Additional information on the swap may be found in Note 6 and in the
section titled Interest Rate Management on page 18. Through the nine months
ended September 30, 2000, net interest expense for Mucho was $252,000. 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 income taxes has been provided for the nine-month period ended
September 30, 2000 due to operating losses for that period. At September 29,
2001, the Company had net operating loss carryforwards (NOL's) available for
federal tax purposes of approximately $6,700,000 for use in 2001 and thereafter.
At September 29, 2001, the provision for income taxes of $72,000 includes a
federal provision, less eligible federal NOL's, and includes state and local
income taxes not subject to federal net operating loss carryforwards.
NET LOSS AND EARNINGS PER SHARE
The net loss for the nine months ended September 29, 2001, was $645,000, or
($.09) per share on a basic and diluted basis, compared to a net loss for the
nine months ended September 30, 2000 of $6,604,000, or ($2.44) per share.
Preferred stock dividends of $812,000 for the nine-month period ended September
29, 2001 resulted in a net loss attributable to common shareholders of
$1,457,000, or ($.20) 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 September 29, 2001 and
September 30, 2000 exclude options and warrants from the calculation because
they are anti-dilutive.
LIQUIDITY AND CAPITAL RESOURCES
At September 29, 2001, the Company had a working capital deficit of $3,939,000,
an $864,000 improvement over the December 2000 working capital deficit of
$4,803,000.
At September 29, 2001, the Company's book cash balance showed a negative balance
of $1,888,000. This amount is reflected in the liabilities section as a bank
overdraft. This negative balance is caused primarily by in-transit receipts from
customers. The Company collects for its services via electronic funds transfers
and by physical check receipts from its customers. While the Company must show
the checks it writes as reductions from cash, it must reflect payments in
transit from its customers as accounts receivable until the checks are deposited
in the Company's banks. If these receipts were able to be shown as cash items,
it would have eliminated the negative cash balance shown at September 29, 2001.
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 capitalized as goodwill or debt issuance costs, which are non-current
assets. As of September 29, 2001, all such costs have been paid, or accrued,
thus significantly contributing to the working capital deficit. Additionally,
the Company incurred significant integration costs related to the acquisition of
TEAM America Corporation and PSMI.
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 nine
months ended September 29, 2001, EBITDA was $2,260,000 ($2,644,000 excluding
restructuring charges) compared to a negative EBITDA of $6,164,000 for Mucho in
September 2000. The improvement of $8,424,000 included a reduction of the Mucho
negative EBITDA by $4,936,000 and a contribution of $3,488,000 from the BPO
segment.
Net cash used in operating activities was $1,777,000 for the nine months ended
September 29, 2001, compared with $4,238,000 used in operating activities for
the nine months ended September 30, 2000. The $2,461,000 improvement was
primarily due to the decrease in net loss from period to period. During the nine
months ended September 30, 2000, the Company paid $970,000 in expenses through
the issuance of stock and warrants.
-17-
Net cash used in investing activities was $5,396,000 for the nine months ended
September 29, 2001, compared to $825,000 for the nine months ended September 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 $1,146,000 in the nine months ended September 29, 2001, compared to
$745,000 in the nine months ended September 30, 2000. The 2001 additions were
primarily software development costs related to the web enablement of TEAM
Direct, the Company's proprietary operating software system.
Net cash used in financing activities was $3,749,000 for the nine months ended
September 29, 2001, compared with $5,120,000 provided by financing activities
for the nine months ended September 30, 2000. In the nine months ended September
30, 2000, the Company issued common stock for $4,780,000 and used $561,000 to
repay borrowed funds. In January 2001, the Company paid $11,622,000 in
connection with a stock repurchase agreement 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 original acquisition line was $18,000,000. At September 29, 2001,
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 third quarter of 2001, the Company
repaid $135,000 against the acquisition line.
The Company is continuing to evaluate its Internet business division.
Significant reductions have been made in headcount and operating expenses during
2001. Significant growth in operating expenses as a percent of revenue is not
expected for the foreseeable future within 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 quarters of operations.
At September 29, 2001, the Company was not in compliance with the current ratio
financial covenant, but has obtained the appropriate waivers from its lenders.
The Company has approximately $6,700,000 in tax net operating loss carryforwards
for partial use in 2001 and subsequent years. The Company expects to generate
sufficient cash flow from combined operations helped by the utilization of tax
net operating loss carryforwards to meet its operating expenses and to service
its debt. As a result of the Company's investments in corporate restructuring,
PSMI, web technology and computer hardware, management believes the Company's
corporate cash balances and capital position are adequate for the fourth quarter
and subsequent periods.
INTEREST RATE MANAGEMENT
At the beginning of fiscal 2001, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivatives and Hedging
Activity," as amended. Under this standard, all derivative instruments are
recorded at fair value on the balance sheet and all changes in fair value are
recorded to earnings or to shareholders' equity through other comprehensive
income. Initial adoption of this standard did not have a material impact on the
Company's consolidated financial statements taken as a whole.
The Company is exposed to the impact of interest rate changes. The Company's
objective is to manage the impact of interest rate changes on the market value
of its borrowings. The Company has undertaken an interest rate swap to exchange
its variable rate exposure to a fixed rate for the duration of its credit
facility. The Company does not use derivative instruments for trading or
speculative purposes.
Any contract that is either not designated as a hedge, or is so designated but
is ineffective, is marked to market and recognized in earnings immediately.
The following is a summary of the fair value gain/(loss) of the Company's
derivative instruments, based upon the estimated amount that the Company would
receive (or pay) to terminate the contracts on September 29, 2001. The fair
values are based on quoted market prices for the same or similar instruments.
Notional Fair Value
Amount Gain/(Loss)
------------------ ------------------
Interest Rate Swaps $ 6,492,063 $ (220,941)
-18-
The counterparts to these contracts are major financial institutions. Management
believes the risk of loss due to default by the financial institutions is
remote.
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.
-19-
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders, holders of 6,387,683 shares of
common stock and 1,629,629 shares of preferred stock were present in person or
by proxy, which constituted a quorum thereof. The vote of shareholders in
respect of the two proposals voted on at the Annual Meeting, both of which were
approved, is set forth below:
1. Election of Class I Directors to serve until the Annual
Meeting of Shareholders in 2003.
For Against
--------------- -------------
Jose C. Blanco 7,940,240 77,072
William W. Johnston 7,828,462 188,850
Joseph Mancuso 7,940,312 77,000
Robert G. McCreary III 7,940,312 77,000
2. Approve and adopt the Amendment to the Company's Second
Amended Articles of Incorporation, as described in the
Company's Proxy Statement.
Common shares voted:
For Against Abstained Total
---------------- ------------- ------------- -------------
5,222,447 65,133 31,420 5,319,000
Preferred shares voted:
For Against Abstained Total
---------------- ------------- ------------- -------------
1,629,629 0 0 1,629,629
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
third quarter ended September 29, 2001:
(i) Current Report on Form 8-K dated October 29, 2001, filed with
the Securities and Exchange Commission on October 30, 2001
(Items 5 and 7).
(ii) Current Report on Form 8-K dated October 29, 2001, filed with
the Securities and Exchange Commission on November 19, 2001
(Items 5 and 7).
(iii) Current Report on Form 8-K dated October 29, 2001, filed with
the Securities and Exchange Commission on November 21, 2001
(Items 5 and 7).
-20-
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.
BY: /s/Jose C. Blanco
---------------------------------------
Chief Financial Officer and
Authorized Signing Officer
December 10, 2001
-21-