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 MARCH 29, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21533
TEAM AMERICA, INC.
(Exact Name of Registrant As Specified In Its Charter)
OHIO 31-1209872
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 EAST CAMPUS VIEW BOULEVARD, SUITE 170
COLUMBUS, OH 43235
(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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|
THE NUMBER OF SHARES OF REGISTRANT'S ONLY CLASS OF COMMON STOCK OUTSTANDING ON
MAY 9, 2003 WAS 8,215,628.
TEAM AMERICA, INC. AND SUBSIDIARIES
MARCH 29, 2003
INDEX
PART I. FINANCIAL INFORMATION
PAGE
NO.
---
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - March 29, 2003
and December 28, 2002................................................................................... 3
Condensed Consolidated Statements of Operations -- Three-month periods
ended March 29, 2003 and March 30, 2002 ................................................................ 5
Condensed Consolidated Statements of Cash Flows - Three-month periods
ended March 29, 2003 and March 30, 2002................................................................. 6
Condensed Consolidated Statement of Changes in Shareholders' Equity - Three-month
period ended March 29, 2003............................................................................. 8
Notes to Condensed Consolidated Financial Statements.................................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 24
Item 4. Controls and Procedures........................................................................... 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................. 25
Signatures................................................................................................. 26
Certifications............................................................................................. 27
Note: Items 1 through 5 of Part II are omitted because they are not
applicable.
2
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 29, 2003 AND DECEMBER 28, 2002
(000's omitted except for share amounts)
MARCH 29, DECEMBER 28,
2003 2002
------- -------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 521 $ --
Receivables:
Trade, net of allowance for doubtful accounts of $152 and $142, respectively 1,350 2,127
Unbilled revenues 10,676 12,813
Other receivables 21 185
Income tax receivable 1,207 1,207
------- -------
Total receivables 13,254 16,332
------- -------
Prepaid expenses 2,962 3,122
Deferred income tax asset 1,037 1,037
------- -------
Total Current Assets 17,774 20,491
------- -------
PROPERTY AND EQUIPMENT, NET 1,800 1,994
------- -------
OTHER ASSETS:
Goodwill, net 36,014 36,014
Other intangible assets, net 853 945
Deferred income tax asset 275 275
Other 3,344 3,544
------- -------
Total Other Assets 40,486 40,778
------- -------
Total Assets $60,060 $63,263
======= =======
Continued on next page
3
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 29, 2003 AND DECEMBER 28, 2002
(000's omitted except for share amounts)
MARCH 29, DECEMBER 28,
2003 2002
-------- --------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 2,730 $ 2,545
Checks drawn in excess of bank balances -- 1,696
Debt 8,540 771
Capital lease obligations 255 303
Accrued compensation 11,077 12,203
Accrued payroll taxes and insurance 6,768 6,564
Accrued workers' compensation liability 2,938 2,252
Other accrued expenses 3,143 3,398
-------- --------
Total Current Liabilities 35,451 29,732
-------- --------
LONG-TERM LIABILITIES:
Debt, less current portion -- 8,128
Capital lease obligations, less current portion 392 463
Accrued workers' compensation liability, less current portion 1,668 2,241
Client deposits and other liabilities 1,885 2,044
-------- --------
Total Liabilities 39,396 42,608
-------- --------
CONVERTIBLE PREFERRED STOCK, FACE AMOUNT OF $11,000 9,552 9,552
BRIDGE NOTE 1,500 1,500
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 45,000,000 shares authorized, 10,955,410 issued 45,189 44,552
Deferred compensation (9) (11)
Accumulated deficit (20,792) (20,162)
-------- --------
24,388 24,379
Less - Treasury stock, 2,739,782 shares, at cost (14,776) (14,776)
-------- --------
Total Shareholders' Equity 9,612 9,603
-------- --------
Total Liabilities and Shareholders' Equity $ 60,060 $ 63,263
======== ========
See Notes to Condensed Consolidated Financial Statements.
4
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 29, 2003 AND MARCH 30, 2002
(000'S OMITTED EXCEPT PER SHARE AMOUNTS)
MARCH 29, MARCH 30,
2003 2002
-------- --------
(UNAUDITED) (UNAUDITED)
REVENUES $ 14,389 $ 13,549
-------- --------
COST OF SERVICES 9,996 8,927
-------- --------
GROSS PROFIT 4,393 4,622
-------- --------
OPERATING EXPENSES:
Administrative salaries 2,702 2,822
Other selling, general and
administrative expenses 1,606 2,206
Restructuring charges (16) --
Systems and operations development costs -- 302
Depreciation and amortization 317 302
-------- --------
Total operating expenses 4,609 5,632
-------- --------
OPERATING LOSS (216) (1,010)
Interest expense, net (421) (212)
-------- --------
LOSS BEFORE INCOME TAXES (637) (1,222)
Income tax expense (benefit) (7) --
-------- --------
NET LOSS (630) (1,222)
Preferred stock dividends -- (295)
-------- --------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (630) $ (1,517)
======== ========
Basic and diluted net loss per common share $ (0.08) $ (0.19)
Weighted average number of shares used in per share computation 8,216 8,059
See Notes to Condensed Consolidated Financial Statements
5
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 29, 2003 AND MARCH 30, 2002
(000's omitted)
MARCH 29, MARCH 30,
2003 2002
------- -------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (630) $(1,222)
Adjustments to reconcile net loss to net cash used in
operating activities, excluding the impact of acquisitions:
Depreciation and amortization 317 302
Amortization of financing costs 197 44
Bad debt expense 60 60
Gain in fair market value of derivative (26) (42)
Change in other assets and liabilities 2,534 (3,446)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,452 (4,304)
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (35) (109)
Cash used in acquisitions of intangible assets -- (300)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (35) (409)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Checks drawn in excess of bank balances (1,696) 2,903
Proceeds from bank borrowings -- 750
Notes payable and short-term borrowing repaid (57) (320)
Payments on capital lease obligations (119) (67)
Payments of financing costs (24) --
------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,896) 3,266
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 521 (1,447)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD -- 1,447
------- -------
CASH AND EQUIVALENTS, END OF PERIOD $ 521 $ --
======= =======
Supplemental disclosure of cash flow information:
Interest paid $ 186 $ 209
Income tax (refunded) paid, net $ (19) $ 91
See Notes to Condensed Consolidated Financial Statements.
6
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the three-month period ended March 30, 2002, the Company accrued
preferred stock dividends payable in-kind equivalent of $295,000 in connection
with the $11,000,000 face value of preferred stock.
During the three-month period ended March 30, 2002, the Company acquired $14,000
of property and equipment under capital leases.
7
TEAM AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 29, 2003
(000's omitted except for share amounts)
Common Stock Issued
------------------------- Deferred Treasury Accumulated
Number Value Compensation Stock Deficit Total
---------- ------- ---- -------- -------- -------
Balance at December 28, 2002 10,955,410 $44,552 $(11) $(14,776) $(20,162) $ 9,603
Amortization of deferred
compensation -- -- 2 -- -- 2
Issuance of warrants to
purchase common stock -- 637 -- -- -- 637
Net loss -- -- -- -- (630) (630)
---------- ------- ---- -------- -------- -------
Balance at March 29, 2003 10,955,410 $45,189 $ (9) $(14,776) $(20,792) $ 9,612
========== ======= ==== ======== ======== =======
See Notes to Condensed Consolidated Financial Statements.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
TEAM America, Inc. (the "Company"), an Ohio corporation, is a Business
Process Outsourcing ("BPO") Company specializing in human resources. TEAM
America is a leading provider of Professional Employment Organization
("PEO") services in Ohio, Texas, Utah, Nevada, Oregon, Idaho, Tennessee,
Mississippi, Georgia and California. The Company, through its subsidiaries,
offers its services to small to medium-sized businesses. These services
include payroll, benefits administration, on-site and online employee and
employer communications and self-service, employment practices and human
resources risk management, and workforce compliance administration.
The Company was formed by the December 28, 2000 merger of TEAM America
Corporation and Mucho.com, Inc. in a transaction accounted for under the
purchase method of accounting as a reverse acquisition. Mucho.com, Inc. was
treated as the acquiring company for accounting purposes because its
shareholders controlled more than 50% of the post-transaction combined
company. 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 losses per share are presented in TEAM America
Corporation equivalent shares.
NOTE 2 - LIQUIDITY AND FINANCIAL CONDITION
The Company continues to operate with a significant working capital deficit
and experiences pressure on the business due to the overall weak national
economy. In addition, the Company was not in compliance with certain
financial covenants under its amended credit facility as of March 29, 2003.
In order to address these issues, management executed restructurings of the
Company's operations throughout 2002 and is continuing the implementation
of cost-savings strategies in 2003.
Management continues to believe that in order to provide a platform for
growth, whether internally-generated growth or through acquisitions, the
Company must continue to pursue additional sources of capital as well as
other strategic alternatives. The Company has been exploring opportunities
to raise capital for the past 12 months. Management believes that as a
result of the Company's continued improvement in operating results, its
continued focus on cost reduction and containment, as well as its
restructuring of its Credit Facility and Preferred Stock Agreements, that
additional opportunities to raise capital may be available. Management is
in active discussions and negotiations with respect to such capital
infusions and/or potential merger partners. Management will continue to
pursue these discussions.
The Company continues to evaluate strategic alternatives. These
alternatives include the potential disposition of business operations in
non-core markets, as well as alternative ways to further reduce operating
costs, including outsourcing key tasks to low-cost providers.
Failure by the Company to continue to control costs may have a significant
negative impact on the Company's ability to generate sufficient cash from
operations during 2003. Accordingly, additional capital sources may be
required to fund operations. Failure to raise such capital, if required, or
complete other strategic alternatives may result in a material adverse
effect on the future financial condition and the future results of
operations of the Company.
NOTE 3 - ACCOUNTING POLICIES
Goodwill
Effective December 30, 2001, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." Under SFAS No. 142, the Company no longer
amortizes goodwill, but is required to test for impairment on an annual
basis and at interim periods if certain factors are present that may
indicate that the carrying value of the reporting unit is greater than its
fair value. The Company has determined that it operates as a single
reporting unit; therefore, any potential goodwill impairment is measured at
the corporate level.
In connection with the adoption of SFAS No. 142, management, in determining
its methodology for measuring fair value, assessed that its market price
may not be reflective of fair value due to various factors, including that
the Company's officers, directors and significant shareholders own a
controlling interest in the Company's common shares and, as a result,
9
that the market may be illiquid at times with regard to the remaining
shares as such shares are thinly traded. Accordingly, in order to assess
fair value of the Company, management determined that a number of measures
should be considered, including but not limited to, market capitalization
of the Company, market capitalization of the Company plus a "control"
premium, discounted projected earnings before interest, depreciation and
amortization (EBITDA), multiples of sales and EBITDA as compared to other
industry participants and comparison of historical transactions.
SFAS No. 142 required that the Company adopt an annual date at which it
would test for impairment of goodwill. In connection with the adoption of
this statement, the Company chose the end of the third quarter as its date
to test for such impairment. At the end of the third quarter of fiscal year
2002, management determined that no impairment existed using the following
calculations and assumptions:
- The common shareholders' equity of the Company at the end of the third
quarter of 2002 was $9,481,000.
- Calculations and assumptions used in the determination of fair value
included the following:
- Market capitalization of the Company based on the closing price
of the Company's common shares on September 27, 2002 was $0.70
per share. Using this market price, the Company's market
capitalization at the end of the third quarter of fiscal year
2002 was approximately $5,751,000.
- Market capitalization plus a "control" premium (assumed to be
20%) was approximately $6,901,000.
- The Company prepared a discounted EBITDA analysis based upon the
Company's forecasted EBITDA (before restructuring charges) for
2002 and applying certain growth factors for 2003 through 2007.
The significant assumptions used in these calculations included:
- Fiscal year 2003 EBITDA was estimated assuming a gross
margin similar to 2002 and certain changes in the Company's
business, including the impact of 2002 restructuring.
- Management assumed the following annual growth rates in
gross margin: 2004 - 10%, 2005 - 8%, 2006 - 6% and 2007 -
4%. Corporate payroll and selling, general and
administrative expenses were assumed to remain at similar
levels relative to gross margin.
- A 20% discount rate was used as well as a 20% "control"
premium.
- Using the above assumptions, the discounted EBITDA was
calculated to be approximately $35,760,000. In order to
arrive at a value attributable to the common shares,
management reduced this amount by the Company's outstanding
senior debt of $8,744,000 and the amount for preferred
shareholders of $9,235,000. The residual amount of
$17,781,000 was used as the estimate of fair value of the
Company under this methodology.
For purposes of these calculations, the Company used its historic or
forecast net loss/income and added to such amounts depreciation and
amortization expense, interest expense and income taxes using historic of
forecast amounts, as appropriate, to calculate EBITDA.
In assessing the Company's fair value at the end of the third quarter of
2002, management determined that the Company's market capitalization was
not reflective of fair value as the common stock price dropped
precipitously immediately following a NASDAQ required press release
describing NASDAQ's initial determination that the Company was not in
compliance with NASDAQ listing requirements and was therefore subject to
delisting. These events were caused by the Company's filing of its second
quarter Form 10-Q without an independent auditor's review, due to the
demise of Arthur Andersen LLP, and the Company's related restatement of its
2001 and 2000 financial statements as described in its Annual Report on
Form 10-K for fiscal year 2002. In accordance with this process, the NASDAQ
appended an "E" to the Company's trading symbol, noting the failure to
comply with continued listing requirements and potential delisting.
Following the Company's press release, the Company's common stock price
dropped from $1.36 to $0.45 per share. For the period from July 1, 2002 up
to the date of the press release, the common stock had traded in the range
of $1.36 to $2.50. Accordingly, in management's judgment, the drop in the
stock price was a temporary event related to the potential delisting and
not due to fundamental changes in the business. The appended "E" was
removed in mid-April and management expects that the stock price will
slowly adjust to better reflect the Company's fair value and underlying
business.
10
Based upon management's determination that the market capitalization was
not necessarily reflective of fair value, the other measurement factors
were heavily considered in this analysis, the most significant being the
discounted EBITDA model that yielded a value of approximately $17,781,000.
In order to reconcile this back to the market capitalization, management
assessed the market price ($1.36) immediately prior to the press release
regarding delisting and the average market price ($1.54) for the quarter.
Based on each of these measures, the market capitalization of the Company
would have been $11,173,000 using the market price of $1.36 per share and
$12,652,000 using the average price of $1.54 per share for the third
quarter of 2002.
After assessing all of the information regarding fair value as outlined
above, management determined that as of the end of the third quarter, no
impairment charge of goodwill was required. Had the Company used only the
market capitalization of the Company as a measure of fair value, an
impairment charge would have been required. Management estimates that the
minimum required charge under this market capitalization methodology would
have been approximately $3,484,000.
During the first quarter of 2003, management, as required by SFAS No. 142,
assessed whether or not events or circumstances had occurred subsequent to
the Company's annual measurement date that would more likely than not
reduce the fair value of the Company below its carrying amount. Based upon
its assessment, management determined that there were no factors subsequent
to the third quarter that would more likely than not reduce the fair value
of the Company. Moreover, management assessed that the stock price had
continued to trade in a range of approximately $0.40 per share to $0.70 per
share subsequent to the third quarter. Consistent with their conclusions at
the end of the third quarter, management determined that the market price
was not reflective of fair value due to the appended "E" denoting potential
delisting of its common shares and, therefore, was not an indicator that
potential impairment may exist.
Management will continue to assess the potential indicators of impairment,
including the Company's common stock price during 2003. Should the market
price of the Company's common stock not improve, management believes that
this test may be performed as early as the second quarter of 2003. Had
management performed the same test of fair value as of the end of the first
quarter 2003 that was applied at the end of the third quarter 2002,
management believes that the results would have been similar to those
described above for the third quarter 2002. Accordingly, management does
not believe that this test would have resulted in an impairment charge. Had
an interim impairment test been required and had management used only the
market capitalization of the Company to measure fair value at March 29,
2003, an impairment charge would have been required. Management estimates
that the minimum required charge under this market capitalization
methodology would have been approximately $5,504,000.
There can be no assurance that future goodwill impairment tests, including
interim tests as may be required, will not result in a charge to future
operations.
Further, there can be no assurance that the Staff of the United States
Securities and Exchange Commission will not have different views in respect
to whether the Company's stock price is reflective of an active market and
that the use of only market price should have been used in the valuation of
goodwill. As previously stated, the use of quoted market price to determine
any goodwill impairment would have resulted in a minimum impairment charge
of approximately $5,504,000 at March 29, 2003.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs and is effective for the fiscal years beginning after June
15, 2002. Adoption of this statement had no impact on the Company's
consolidated financial statements.
On May 1, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 is effective for the Company's fiscal
year beginning December 29, 2002. Adoption of this statement had no impact
on the Company's consolidated financial statements.
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," that is applicable to exit or
disposal activities initiated after December 31, 2002. This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan. This standard does not apply where SFAS No.
144 is applicable. The Company adopted this statement in its first quarter
2003. Adoption of this statement had no significant impact on the Company's
results of operations or financial condition.
11
NOTE 4 - LOSS PER SHARE
Loss per share was determined in accordance with SFAS No. 128. There were
no differences to reconcile net (loss) for basic and diluted earnings per
share purposes.
NOTE 5 - PRO-FORMA RESULTS
The following table sets forth the pro-forma results of operations for the
three-month period ended March 30, 2002.
The pro-forma results of operations from the three-month period ended March
30, 2002 include the unaudited results of TEAM America, Inc. and the
pro-forma results of SSMI and Inovis as if they were acquired by TEAM
America as of December 29, 2001. The primary adjustments from the
historical results of the acquired entities include amortization of other
intangibles and interest expense.
(000'S OMITTED EXCEPT FOR
SHARE AMOUNTS)
Three Months Ended
March 30,
2002
----------------------------
Revenue $ 16,297
Net loss $ (1,070)
Net loss attributable to common shareholders $ (1,365)
Basic and diluted loss per common share $ (0.17)
Weighted average number of shares outstanding 8,059,000
NOTE 6 - CREDIT FACILITY
On March 28, 2003, the Company entered into a Third Amendment and Waiver to
its Senior Credit Facility (the "Bank Agreement").
Under the terms of the Bank Agreement, the Company and its senior lenders
agreed to amend the Senior Credit Facility as follows:
- The outstanding amounts under the Senior Credit Facility of $8,728,000
were restructured into three separate tranches. Tranche A representing
a $6,000,000 Term Loan, Tranche B representing a $3,060,000 Balloon
Loan and Tranche C representing $914,000 of outstanding letters of
credit. Tranche B includes certain costs associated with the Senior
Credit Facility, including accrued interest of $132,000, a forbearance
fee of $100,000 and a renewal fee of $100,000.
- The Senior Credit Facility is senior to the $1,500,000 subordinated
note issued in satisfaction of the Bridge Note discussed below under
the Preferred Agreement.
- The maturity of the Senior Credit Facility is January 5, 2004.
- The interest rate on each tranche is: Tranche A - the Provident Bank
Prime Commercial Lending Rate plus two percent (6.25% at March 28,
2003); Tranche B - 12%, eight percent payable in cash and four percent
payable-in-kind; and Tranche C (if drawn) - the Provident Bank's Prime
Lending Rate plus five percent (9.25% at March 28, 2003).
- Tranche A requires principal payments of $100,000 per month beginning
July 2003, Tranche B is due at maturity and Tranche C is due
immediately upon any draw under the letters of credit.
In addition to the above terms, the Company issued to the banks 1,080,000
warrants to purchase common stock of the Company at a price of $0.50 per
share. These warrants expire in seven years. The Bank Agreement states that
no new indebtedness may be incurred under the facility and that any future
acquisitions are subject to consent of the banks.
12
As a result of the issuance of these warrants, the Company has recorded a
discount to the related debt instruments for fair value of the warrants
using the Black-Scholes pricing model. The total fair value of the warrants
issued of $637,000 will be amortized, as interest expense, over the new
life of the debt instruments.
The Senior Credit Facility is collateralized by all of the assets of the
Company.
The Senior Credit Facility, as amended, contains certain monthly financial
covenants, the most stringent of which are monthly earnings before
interest, taxes, depreciation and amortization and a fixed charge coverage
ratio. The Company was not in compliance with these covenants during the
first quarter 2003.
At March 29, 2003, the Company's outstanding indebtedness under its Senior
Credit Facility, as amended, is:
Tranche A $6,000,000
Tranche B 3,060,000
----------
Total 9,060,000
Current 9,060,000
----------
Non-Current $ --
==========
NOTE 7 - INCOME TAXES
At December 28, 2002, the Company had net operating loss carryforwards
(NOL's) available for federal tax purposes of approximately $12,000,000.
Certain of these NOL's are subject to annual limits and begin to expire in
2019; accordingly, no provision for federal taxes has been provided for the
periods ended March 29, 2003 or March 30, 2002. At March 29, 2003, the
income tax benefit is due to state and local income taxes.
NOTE 8 - STOCK-BASED COMPENSATION
The Company adopted the disclosure requirements of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS 148") effective December 2002. SFAS 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based compensation and also amends the
disclosure requirements of SFAS 123 to require prominent disclosures in
both annual and interim financial statements about the methods of
accounting for stock-based employee compensation and the effect of the
method used on reported results. As permitted by SFAS 148 and SFAS 123, the
Company continues to apply the accounting provisions of Accounting
Principles Board ("APB") Opinion Number 25, "Accounting for Stock Issued to
Employees," and related interpretations, with regard to the measurement of
compensation cost for options granted under the Company's stock option
plans. No employee compensation expense has been recorded as all options
granted had an exercise price equal to the market value of the underlying
common stock on the date of grant. The Company's pro-forma information, as
if the Company had accounted for its employee stock options granted under
the fair value method prescribed by SFAS 123 is as follows:
Periods Ended
-----------------------
March 29, March 30,
2003 2002
----- -------
Net loss attributable to common shareholders, as reported $(630) $(1,517)
Less: Stock-based compensation expense (30) (31)
----- -------
Pro-forma net loss $(660) $(1,548)
===== =======
Net loss attributable to common shareholders:
As reported $(0.08) $ (0.19)
====== =======
Pro-forma $(0.08) $ (0.19)
====== =======
NOTE 9 - RESTRUCTURING RESERVES
During 2002, the Company recorded certain charges related to the
restructuring of its operations. These charges included relocation costs,
employee severance and costs to exit contractual agreements (primarily
office leases). At December 28,
13
2002, the Company had recorded as a current liability in accrued expenses
approximately $196,000 related to these charges, primarily related to
office leases.
During the first quarter of 2003, the Company charged against these
reserves approximately $40,000. Additionally, the Company settled one
office lease obligation for less than the amount estimated at December 28,
2002 and accordingly reversed $16,000. At March 29, 2003, restructuring
reserves of approximately $140,000 are included as other accrued expenses.
NOTE 10 - CONTINGENCIES
At March 29, 2003, the Company has recorded a $482,000 reserve for certain
tax contingencies. The estimated amount of possible loss in excess of these
reserves is $318,000.
The Company has ongoing litigation matters pertaining to worksite employees
and other legal matters that have arisen in the ordinary course of
business. The Company provides reserves for estimated future costs to
defend the Company and/or the estimated amount to be paid if the award or
payment is probable and estimable. Management believes these claims will
not have a material adverse effect on the results of operations or
financial condition of the Company.
NOTE 11 - PREFERRED STOCK RESTRUCTURING
On March 28, 2003, the Company and its preferred shareholders entered into
a Memorandum of Understanding through which they agreed to restructure the
preferred shareholders' investment in the Company, subject to approval by
the Company's shareholders, as follows:
- The $1,500,000 Bridge Note that was to be paid to the preferred
shareholders from proceeds of an equity financing if a financing had
occurred prior to August 9, 2002, will be converted into subordinated
debt with an interest rate accruing at 14%, which shall be
subordinated to the Senior Credit Facility (the "Subordinated Debt").
The Subordinated Debt will be due June 30, 2006 along with all accrued
interest.
- The Series 2000 Class A Preferred Shares will be exchanged by the
holders for:
- $2,500,000 of Class B Series 2003 Preferred Shares that will have
a dividend rate of 14% and be non-voting shares. This dividend
will be accrued and paid in kind. These shares will maintain a
liquidation preference equal to par value plus accrued and unpaid
dividends. The holders of these shares may, at any time, after
the third anniversary of the issuance of such shares and with the
consent of holders of no fewer than two-thirds of the shares,
require the Company to redeem all or any portion of such shares
at par value plus accrued and unpaid dividends;
- Warrants to purchase 2,400,000 common shares of the Company at an
exercise price of $0.50 per share. These warrants will expire 10
years following issuance; and
- 4,800,000 common shares of the Company.
In accordance with the Memorandum of Understanding, no preferred dividends
have been declared for the period ended March 29, 2003.
The following table shows the pro-forma capitalization of the Company as of
March 29, 2003 assuming the above transactions were consummated as of that
date:
14
PERIOD
ENDED MARCH PRO-FORMA
29, 2003 ADJUSTMENTS PRO-FORMA
-----------------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Bank debt $ 8,423 $ - $ 8,423
Other current liabilities 27,028 - 27,028
--------- --------
Total Current Liabilities 35,451 - 35,451
Other non-current liabilities 3,945 - 3,945
--------- --------
Subordinated debt - 1,500 (a) 1,500
Series 2003 Preferred Stock - 2,500 (b) 2,500
Preferred stock 9,552 (9,552) (b) -
Bridge note 1,500 (1,500) (a) -
Shareholders' equity 9,612 7,052 (b) 16,664
--------- --------
Total Liabilities and Shareholders' Equity $ 60,060 $ 60,060
========= =========
(a) Exchange Bridge Note for Subordinated Debt
(b) Exchange existing preferred for $2,500,000 new preferred;
4,800,000 common shares (assumed fair value of $1.03 per share);
2,800,000 warrants (assumed fair value of $0.59 per share) and
reversal of previously recorded beneficial conversion feature
($1,047,000).
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company has operated as a Professional Employer Organization ("PEO")
actively since 1986 as TEAM America. The Company participated in a reverse
merger with Mucho.com (based in Lafayette, California) on December 28,
2000, which had operated as an Online Business Center ("OBC") since July
1999.
PEO revenue is recognized as service is rendered. The PEO revenue consists
of charges by the Company for the administrative service fees, health
insurance, workers' compensation charges and employer paid unemployment
insurance. These charges, along with gross payroll, payroll taxes and
retirement benefits are invoiced to the client at the time of each periodic
payroll. The Company negotiates the pricing for its various services on a
client-by-client basis based on factors such as market conditions, client
needs and services requested, the client's workers' compensation
experience, credit exposure and the required resources to service the
account. Because the pricing is negotiated separately with each client and
varies according to circumstances, the Company's revenue, and therefore its
gross margin, will fluctuate based on the Company's client mix. Costs of
services in the Company's Statement of Operations reflect the type of
revenue being generated. Costs of services include health insurance,
workers' compensation insurance and unemployment insurance costs. The
Company maintained a self-insured workers' compensation program for most of
its Ohio employees from July 1999 through May 2002 and maintained a high
retention workers' compensation policy covering most of its non-Ohio
employees or all other states ("AOS") until December 31, 2002. Effective
June 1, 2002, the Company's Ohio worksite employees became insured through
the Ohio Bureau of Workers' Compensation Program, which is a fully insured
program, where premiums represent the maximum cost. Effective January 1,
2003, the Company participates in fully insured workers' compensation
programs provided by Cedar Hill Zurich, various other regional insurers and
certain state workers' compensation funds. Under these programs, the
Company's maximum cost is represented by the premiums paid to these
insurers. The Company does not provide workers' compensation coverage to
non-employees of the Company. The AOS workers' compensation insurance
program provider was The Hartford Insurance Company ("Hartford") for the
period July 1999 through December 2002.
With respect to the historical loss-sensitive programs, the Company records
in cost of services a monthly charge based upon its estimate of the year's
ultimate fully-developed losses plus the fixed costs charged by the
insurance carrier to support the program. This estimate is established each
quarter based in part upon information provided by the Company's insurers,
internal analysis and its insurance broker. The Company's internal analysis
includes a quarterly review of open
15
claims and review of historical claims and losses related to the workers'
compensation programs. While management uses available information,
including nationwide loss ratios, to estimate ultimate losses, future
adjustments may be necessary based on actual losses.
As of March 29, 2003, the adequacy of the workers' compensation reserves
were determined, in management's opinion, to be reasonable. However, since
these reserves are for losses that have not been sufficiently developed due
to the relatively young age of these claims, and variables such as timing
of payments are uncertain or unknown, actual results may vary from current
estimates. The Company will continue to monitor the development of these
reserves, the actual payments made against the claims incurred, the timing
of these payments and adjust the reserves as deemed appropriate.
The Company's clients are billed at fixed rates determined when the
contract is negotiated with the client. The fixed rates include charges for
workers' compensation based upon the Company's assessment of the costs of
providing workers' compensation to the client. If the Company's costs for
workers' compensation are greater than the costs included in the client's
contractual rate, the Company may be unable to recover these excess charges
from the clients. The Company reserves the right in its contracts to
increase the workers' compensation charges on a prospective basis only.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements
that have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. The Company
evaluates its estimates, including those related to customer bad debts,
workers' compensation reserves, income taxes, and contingencies and
litigation on an on-going basis. The Company bases its estimates on
historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates.
The Company believes the following critical accounting policies reflect the
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
Revenue Recognition. The Company bills its clients on each payroll date for
(i) the actual gross salaries and wages, related employment taxes and
employee benefits of the Company's worksite employees, (ii) actual
advertising costs associated with recruitment, (iii) workers' compensation
and unemployment service fees and (iv) an administrative fee. The Company's
administrative fee is computed based upon either a fixed fee per worksite
employee or an established percentage of gross salaries and wages (subject
to a guaranteed minimum fee per worksite employee), negotiated at the time
the client service agreement is executed. The Company's administrative fee
varies by client based primarily upon the nature and size of the client's
business and the Company's assessment of the costs and risks associated
with the employment of the client's worksite employees. Accordingly, the
Company's administrative fee income will fluctuate based on the number and
gross salaries and wages of worksite employees, and the mix of client fee
income will fluctuate based on the mix of total client fee arrangements and
terms. Although most contracts are for one year and renew automatically,
the Company and its clients generally have the ability to terminate the
relationship with 30 days' notice.
The Company bills its clients for workers' compensation and unemployment
costs at rates that vary by client based upon the client's claims and rate
history. The amount billed is intended (i) to cover payments made by the
Company for insurance premiums and unemployment taxes, (ii) to cover the
Company's cost of contesting workers' compensation and unemployment claims,
and other related administrative costs and (iii) to compensate the Company
for providing such services. The Company has an incentive to minimize its
workers' compensation and unemployment costs because the Company bears the
risk that its actual costs will exceed those billed to its clients, and
conversely, the Company profits in the event that it effectively manages
such costs. The Company believes that this risk is mitigated by the fact
that its typical standard client agreement provides that the Company, at
its discretion, may adjust the amount billed to the client to reflect
changes in the Company's direct costs, including, without limitation,
statutory increases in employment taxes and insurance. Any such adjustment
that relates to changes in direct costs is effective as of the date of the
changes, and all changes require 30 days' prior notice.
In accordance with Emerging Issues Task Force (EITF) Issue No. 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent," the
Company recognizes amounts billed to clients for administrative fees,
health insurance, workers' compensation and unemployment insurance because
revenues as the Company acts as a principal with regard to these matters.
Amounts billed for gross payrolls (less employee health insurance
contributions), employer taxes and 401(k) matching
16
contributions are recorded net of corresponding payments as the Company is
deemed to act only as an agent in these transactions. The Company
recognizes in its balance sheet the entire amounts billed to clients for
gross payroll and related taxes, health insurance, workers' compensation,
unemployment insurance and administrative fees as unbilled receivables, on
an accrual basis, any such amounts that relate to services performed by
worksite employees that have not yet been billed to the client at the end
of an accounting period. The related gross payroll and related taxes and
costs of health insurance, workers' compensation and unemployment insurance
are recorded as accrued compensation at the end of an accounting period.
Workers' Compensation. The Company maintained a self-insured workers'
compensation program for most of its Ohio employees from July 1999 through
May 2002 and maintained a high retention workers' compensation policy
covering most of its non-Ohio employees until December 31, 2002. The
Company records workers' compensation expense for the loss-sensitive
programs based upon the estimated ultimate total cost of each claim, plus
an estimate for incurred but not reported claims. Under the Ohio
self-insured program, the Company was self-funded up to $250,000 per
occurrence through December 31, 2001 and $500,000 per occurrence for the
period January 1, 2002 through May 31, 2002 and purchased private insurance
for individual claims in excess of that amount. Effective June 1, 2002, the
Company's Ohio worksite employees became insured through the Ohio Bureau of
Workers' Compensation Program, which is a fully insured program, where
premiums represent the maximum cost.
Under its historical insured program for non-Ohio employees, the Company
has a per claim retention limit of $500,000 for the first two occurrences
and $250,000 per occurrence thereafter. For the insurance program covering
the periods July 1, 1999 through September 30, 2000, October 1, 2000
through December 31, 2001 and January 1, 2002 through December 31, 2002,
the aggregate caps are estimated to be $4,176,000, $4,950,000 and
$9,000,000, respectively.
In addition to providing the claims expense under the plan, as described
above, the Company was required to "pre-fund" a portion of the estimated
claims under the non-Ohio program. The amounts "pre-funded" are used by the
insurance carrier to pay claims. The amount "pre-funded" is measured at
various periods in the insurance contract to determine, based upon paid and
incurred claims history, whether the Company is due a refund or owes
additional funding.
Effective January 1, 2003, workers' compensation coverage has been obtained
on a guaranteed cost basis, so the premiums for any program represents the
Company's maximum liability.
Goodwill. Effective December 30, 2001, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." Under SFAS No. 142, the Company no
longer amortizes goodwill, but is required to test for impairment on an
annual basis and at interim periods if certain factors are present that may
indicate that the carrying value of the reporting unit is greater than its
fair value. The Company has determined that it operates as a single
reporting unit; therefore, any potential goodwill impairment is measured at
the corporate level.
In connection with the adoption of SFAS No. 142, management, in determining
its methodology for measuring fair value, assessed that its market price
may not be reflective of fair value due to various factors, including that
the Company's officers, directors and significant shareholders own a
controlling interest in the Company's common shares and, as a result, that
the market may be illiquid at times with regard to the remaining shares as
such shares are thinly traded. Accordingly, in order to assess fair value
of the Company, management determined that a number of measures should be
considered, including but not limited to, market capitalization of the
Company, market capitalization of the Company plus a "control" premium,
discounted projected earnings before interest, depreciation and
amortization (EBITDA), multiples of sales and EBITDA as compared to other
industry participants and comparison of historical transactions.
SFAS No. 142 required that the Company adopt an annual date at which it
would test for impairment of goodwill. In connection with the adoption of
this statement, the Company chose the end of the third quarter as its date
to test for such impairment. At the end of the third quarter of fiscal year
2002, management determined that no impairment existed using the following
calculations and assumptions:
- The common shareholders' equity of the Company at the end of the
third quarter of 2002 was $9,481,000.
- Calculations and assumptions used in the determination of fair
value included the following:
- Market capitalization of the Company based on the closing
price of the Company's common shares on September 27, 2002
was $0.70 per share. Using this market price, the Company's
market capitalization at the end of the third quarter of
fiscal year 2002 was approximately $5,751,000.
17
- Market capitalization plus a "control" premium (assumed to be 20%) was
approximately $6,901,000.
- The Company prepared a discounted EBITDA analysis based upon the
Company's forecasted EBITDA (before restructuring charges) for 2002
and applying certain growth factors for 2003 through 2007. The
significant assumptions used in these calculations included:
- Fiscal year 2003 EBITDA was estimated assuming a gross margin
similar to 2002 and certain changes in the Company's business,
including the impact of 2002 restructuring.
- Management assumed the following annual growth rates in gross
margin: 2004 - 10%, 2005 - 8%, 2006 - 6% and 2007 - 4%. Corporate
payroll and selling, general and administrative expenses were
assumed to remain at similar levels relative to gross margin.
- A 20% discount rate was used as well as a 20% "control" premium.
- Using the above assumptions, the discounted EBITDA was calculated
to be approximately $35,760,000. In order to arrive at a value
attributable to the common shares, management reduced this amount
by the Company's outstanding senior debt of $8,744,000 and the
amount for preferred shareholders of $9,235,000. The residual
amount of $17,781,000 was used as the estimate of fair value of
the Company under this methodology.
For purposes of these calculations, the Company used its historic or
forecast net loss/income and added to such amounts depreciation and
amortization expense, interest expense and income taxes using historic of
forecast amounts, as appropriate, to calculate EBITDA.
In assessing the Company's fair value at the end of the third quarter of
2002, management determined that the Company's market capitalization was
not reflective of fair value as the common stock price dropped
precipitously immediately following a NASDAQ required press release
describing NASDAQ's initial determination that the Company was not in
compliance with NASDAQ listing requirements and was therefore subject to
delisting. These events were caused by the Company's filing of its second
quarter Form 10-Q without an independent auditor's review, due to the
demise of Arthur Andersen LLP, and the Company's related restatement of its
2001 and 2000 financial statements as described in its Annual Report on
Form 10-K for fiscal year 2002. In accordance with this process, the NASDAQ
appended an "E" to the Company's trading symbol, noting the failure to
comply with continued listing requirements and potential delisting.
Following the Company's press release, the Company's common stock price
dropped from $1.36 to $0.45 per share. For the period from July 1, 2002 up
to the date of the press release, the common stock had traded in the range
of $1.36 to $2.50. Accordingly, in management's judgment, the drop in the
stock price was a temporary event related to the potential delisting and
not due to fundamental changes in the business. The appended "E" was
removed in mid-April and management expects that the stock price will
slowly adjust to better reflect the Company's fair value and underlying
business.
Based upon management's determination that the market capitalization was
not necessarily reflective of fair value, the other measurement factors
were heavily considered in this analysis, the most significant being the
discounted EBITDA model that yielded a value of approximately $17,781,000.
In order to reconcile this back to the market capitalization, management
assessed the market price ($1.36) immediately prior to the press release
regarding delisting and the average market price ($1.54) for the quarter.
Based on each of these measures, the market capitalization of the Company
would have been $11,173,000 using the market price of $1.36 per share and
$12,652,000 using the average price of $1.54 per share for the third
quarter of 2002.
After assessing all of the information regarding fair value as outlined
above, management determined that as of the end of the third quarter, no
impairment charge of goodwill was required. Had the Company used only the
market capitalization of the Company as a measure of fair value, an
impairment charge would have been required. Management estimates that the
minimum required charge under this market capitalization methodology would
have been approximately $3,484,000.
During the first quarter of 2003, management, as required by SFAS No. 142,
assessed whether or not events or circumstances had occurred subsequent to
the Company's annual measurement date that would more likely than not
reduce the fair value of the Company below its carrying amount. Based upon
its assessment, management determined that there were no factors subsequent
to the third quarter that would more likely than not reduce the fair value
of the Company. Moreover, management assessed that the stock price had
continued to trade in a range of approximately $0.40 per share to
18
$0.70 per share subsequent to the third quarter. Consistent with their
conclusions at the end of the third quarter, management determined that the
market price was not reflective of fair value due to the appended "E"
denoting potential delisting of its common shares and, therefore, was not
an indicator that potential impairment may exist.
Management will continue to assess the potential indicators of impairment,
including the Company's common stock price during 2003. Should the market
price of the Company's common stock not improve, management believes that
this test may be performed as early as the second quarter of 2003. Had
management performed the same test of fair value as of the end of the first
quarter 2003 that was applied at the end of the third quarter 2002,
management believes that the results would have been similar to those
described above for the third quarter 2002. Accordingly, management does
not believe that this test would have resulted in an impairment charge. Had
an interim impairment test been required and had management used only the
market capitalization of the Company to measure fair value at March 29,
2003, an impairment charge would have been required. Management estimates
that the minimum required charge under this market capitalization
methodology would have been approximately $5,504,000.
There can be no assurance that future goodwill impairment tests, including
interim tests as may be required, will not result in a charge to future
operations.
Further, there can be no assurance that the Staff of the United States
Securities and Exchange Commission will not have different views in respect
to whether the Company's stock price is reflective of an active market and
that the use of only market price should have been used in the valuation of
goodwill. As previously stated, the use of quoted market price to determine
any goodwill impairment would have resulted in a minimum impairment charge
of approximately $5,504,000 at March 29, 2003.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 28, 2002, including
all amendments thereto, as well as the consolidated financial statements
and notes thereto included in this Quarterly Report on Form 10-Q.
THREE MONTHS ENDED MARCH 29, 2003 COMPARED TO THREE MONTHS ENDED MARCH 30,
2002
The following table presents certain information related to the Company's
results of operations for the three months ended March 29, 2003 and March
30, 2002:
(000'S OMITTED EXCEPT FOR PER SHARE AMOUNTS)
March 29, March 30, %
2003 2002 Change
----------- ----------- ------
(UNAUDITED) (UNAUDITED)
Revenues $ 14,389 $ 13,549 6.2%
Gross Profit 4,393 4,622 -5.0%
Operating Expenses 4,609 5,632 -18.2%
Operating Loss (216) (1,010) -78.6%
Net Loss (630) (1,222) -48.4%
Net Loss Attributable to Common Shareholders (630) (1,517) -58.5%
Net Loss Per Share Attributable to Common Shareholders (0.08) (0.19) -57.9%
REVENUES
Consolidated revenues were $14,389,000 for the three months ended March 29,
2003 compared to $13,549,000 for the three months ended March 30, 2002,
which is an increase of $840,000, or 6.2%. The increase in revenue is
attributable to an increase in the average number of worksite employees
paid to 11,583 from 11,284, or 2.65%. Additionally, the mix of worksite
employees changed in 2003 with a higher concentration being in the
Company's core urban markets, which generate higher revenues due to an
average higher-per-employee payroll.
COSTS OF SERVICES/GROSS PROFIT
19
For the three months ended March 29, 2003, costs of services were
$9,996,000, or 69.47% of revenues, compared to costs of services of
$8,927,000, or 65.89% of revenues, for the three months ended March 30,
2002. Gross profit for the three months ended March 29, 2003 was
$4,393,000, or 30.53% of revenues, compared to $4,622,000, or 34.11% of
revenues, for the three months ended March 30, 2002. Gross profit and gross
profit margin decreased in 2003 primarily due to the Company earning a
lower margin on workers' compensation, due to its decision to exit the
historic loss-sensitive programs and procure fully-insured programs for its
worksite employees.
OPERATING EXPENSES
For the three months ended March 29, 2003, consolidated operating expenses
were $4,609,000, or 32.03% of revenues compared to $5,632,000, or 41.57% of
revenues for the three months ended March 30, 2002. This decrease of
$1,023,000 is due to decreases in corporate payroll and payroll related
costs of $120,000; decreases in other selling, general and administrative
costs of $600,000; systems and operations development costs of $302,000;
which were partially offset by an increase in depreciation and amortization
expense of $15,000. A significant portion of the reduction in corporate
payroll costs and in selling, general and administrative expenses were a
result of the 2002 restructuring efforts, including office closures after
the first quarter of 2002.
OPERATING LOSS
For the three months ended March 29, 2003, consolidated operating loss was
$216,000 compared to a consolidated operating loss of $1,010,000 for the
three months ended March 30, 2002. The decrease in operating loss is a
result of the changes in gross profit and operating expenses discussed
above.
INTEREST EXPENSE
For the three months ended March 29, 2003, net interest expense was
$421,000 compared to $212,000 for the three months ended March 30, 2002.
The increase in net interest expense is due to an increase in interest on
bank debt and other financing arrangements of $193,000, a decrease in
interest due to capital leases of $1,000, resulting in an increase in
interest expense, net of $209,000. This increase was partially offset by a
change in the fair value of an interest rate swap instrument of $26,000.
The increase in interest expense on bank debt and other financing
arrangements is primarily due to increased average borrowings under the
Company's Credit Facility.
INCOME TAX EXPENSE
For the three months ended March 29, 2003 and March 30, 2002, respectively,
no provision for federal income taxes has been recorded.
NET LOSS AND LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
The net loss for the three months ended March 29, 2003 was $630,000
compared to a net loss of $1,222,000 for the three months ended March 30,
2002. During the three months ended March 30, 2002, the Company recorded
preferred stock dividends of $295,000. Net loss attributable to common
shareholders was $630,000, or $0.08 per share, for the three months ended
March 29, 2003 and $1,517,000, or $0.19 per share, for the three months
ended March 30, 2002.
The weighted average number of shares used in the calculation of loss
attributable to common shareholders for the three months ended March 29,
2003 and March 30, 2002, excludes options, warrants and the convertible
preferred stock, as their inclusion would be anti-dilutive.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2,452,000 for the three
months ended March 29, 2003 compared to net cash used in operating
activities of $4,304,000 for the three months ended March 30, 2002. The
increase in cash provided by operating activities was primarily due to the
timing of cash receipts. At March 29, 2003, the Company had received
$1,930,000 for clients' payrolls to be paid on Monday, March 31, 2003,
while at March 30, 2002, most client payrolls for March 31, 2002 had
already been paid because March 31, 2002 was a Sunday.
20
Net cash used in investing activities was $35,000 for the three months
ended March 29, 2003 compared to $409,000 for the three months ended March
30, 2002. The primary use of cash for investing activities during the three
months ended March 30, 2002 was $300,000 for the acquisition of customer
relationship rights from Strategic Staff Management, Inc. ("SSMI") and a
related non-competition agreement. The Company purchased property and
equipment of $35,000 during the three months ended March 29, 2003. Property
and equipment additions during the three months ended March 30, 2002 were
$109,000.
Net cash used in financing activities during the three months ended March
29, 2003 was $1,896,000 compared to net cash provided by financing
activities during the three months ended March 30, 2002 of $3,266,000. The
primary use of cash during the three months ended March 29, 2003 was for
the pay down of checks drawn in excess of bank balances of $1,696,000,
compared to checks drawn in excess of bank balances of $2,903,000 for the
three months ended March 30, 2002. Other changes included the decrease in
the payment of notes payable and short-term borrowings from $320,000 for
the three months ended March 30, 2002 to $57,000 for the three months ended
March 29, 2003, which was offset by an increase in payments on capital
lease obligations, which increased from $67,000 for the three months ended
March 30, 2002 to $119,000 for the three months ended March 29, 2003. The
checks drawn in excess of bank balances is primarily a timing function
related to the Company's cash inflows from clients being distributed
between electronic payments and cash payments and the majority of client
related cash outflows being paid electronically. The $750,000 borrowed
under the Company's credit facility was used for the SSMI transaction
during the three months ended March 30, 2002.
On March 28, 2003, the Company entered into a Third Amendment and Waiver to
its Senior Credit Facility (the "Bank Agreement").
Under the terms of the Bank Agreement, the Company and its senior lenders
agreed to amend the Senior Credit Facility as follows:
- The outstanding amounts under the Senior Credit Facility of
$8,728,000 were restructured into three separate tranches.
Tranche A representing a $6,000,000 Term Loan, Tranche B
representing a $3,060,000 Balloon Loan and Tranche C representing
$914,000 of outstanding letters of credit. Tranche B includes
certain costs associated with the Senior Credit Facility,
including accrued interest of $132,000, a forbearance fee of
$100,000 and a renewal fee of $100,000.
- The Senior Credit Facility is senior to the $1,500,000
subordinated note issued in satisfaction of the Bridge Note
discussed below under Preferred Agreement.
- The maturity of the Senior Credit Facility is January 5, 2004.
- The interest rate on each tranche is: Tranche A - the Provident
Bank Prime Commercial Lending Rate plus two percent (6.25% at
March 28, 2003); Tranche B - 12%, eight percent payable in cash
and four percent payable-in-kind; and Tranche C (if drawn) - the
Provident Bank's Prime Lending Rate plus five percent (9.25% at
March 28, 2003).
- Tranche A requires principal payments of $100,000 per month
beginning July 2003, Tranche B is due at maturity and Tranche C
is due immediately upon any draw under the letters of credit.
On March 28, 2003, the Company and its preferred shareholders entered into
a Memorandum of Understanding through which they agreed to restructure the
preferred shareholders' investment in the Company, subject to approval by
the Company's shareholders, as follows:
- The $1,500,000 Bridge Note that was to be paid to the preferred
shareholders from proceeds of an equity financing if a financing
had occurred prior to August 9, 2002, will be converted into
subordinated debt with an interest rate accruing at 14%, which
shall be subordinated to the Senior Credit Facility
(the "Subordinated Debt"). The Subordinated Debt will be
due June 30, 2006 along with all accrued interest.
- The Series 2000 Class A Preferred Shares will be exchanged by the
holders for:
- $2,500,000 of Class B Series 2003 Preferred Shares that will
have a dividend rate of 14% and be non-voting shares. This
dividend will be accrued and paid in kind. These shares will
maintain a liquidation preference equal to par value plus
accrued and unpaid dividends. The holders of these shares
may, at any time, after the third anniversary of the
issuance of such shares and with the consent of holders of
no fewer
21
than two-thirds of the shares, require the Company to redeem
all or any portion of such shares at par value plus accrued
and unpaid dividends;
- Warrants to purchase 2,400,000 common shares of the Company
at an exercise price of $0.50 per share. These warrants
expire in 10 years; and
- 4,800,000 common shares of the Company.
In accordance with the Memorandum of Understanding, no preferred dividends
have been declared for the period ended March 29, 2003.
The following table shows the pro-forma capitalization of the Company as of
March 29, 2003 assuming the above transactions were consummated as of that
date:
PERIOD
ENDED MARCH PRO-FORMA
29, 2003 ADJUSTMENTS PRO-FORMA
---------------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Bank debt $ 8,423 $ - $ 8,423
Other current liabilities 27,028 - 27,028
-------- --------
Total Current Liabilities 35,451 - 35,451
Other non-current liabilities 3,945 - 3,945
-------- --------
Subordinated debt - 1,500 (a) 1,500
Series 2003 Preferred Stock - 2,500 (b) 2,500
Preferred stock 9,552 (9,552) (b) -
Bridge note 1,500 (1,500) (a) -
Shareholders' equity 9,612 7,052 (b) 16,664
-------- --------
Total Liabilities and Shareholders' Equity $ 60,060 $ 60,060
============== ===============
(a) Exchange Bridge Note for Subordinated Debt
(b) Exchange existing preferred for $2,500,000 new preferred;
4,800,000 common shares (assumed fair value of $1.03 per
share); 2,800,000 warrants (assumed fair value of $0.59 per
share) and reversal of previously recorded beneficial
conversion feature ($1,047,000).
The Company continues to operate with a significant working capital deficit
and experiences pressure on the business due to the overall weak national
economy. In addition, the Company was not in compliance with certain
financial covenants under its amended credit facility as of March 29, 2003.
In order to address these issues, management executed restructurings of the
Company's operations throughout 2002 and is continuing the implementation
of cost-savings strategies in 2003.
Management continues to believe that in order to provide a platform for
growth, whether internally-generated growth or through acquisitions, the
Company must continue to pursue additional sources of capital as well as
other strategic alternatives. The Company has been exploring opportunities
to raise capital for the past 12 months. Management believes that as a
result of the Company's continued improvement in operating results, its
continued focus on cost reduction and containment, as well as its
restructuring of its Credit Facility and Preferred Stock Agreements, that
additional opportunities to raise capital may be available. Management is
in active discussions and negotiations with respect to such capital
infusions and/or potential merger partners. Management will continue to
pursue these discussions.
The Company continues to evaluate strategic alternatives. These
alternatives include the potential disposition of business operations in
non-core markets, as well as alternative ways to further reduce operating
costs, including outsourcing key tasks to low-cost providers.
22
Failure by the Company to continue to control costs may have a significant
negative impact on the Company's ability to generate sufficient cash from
operations during 2003. Accordingly, additional capital sources may be
required to fund operations. Failure to raise such capital, if required, or
complete other strategic alternatives may result in a material adverse
effect on the future financial condition and the future results of
operations of the Company.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs and is effective for the fiscal years beginning after June
15, 2002. Adoption of this statement had no impact on the Company's
consolidated financial statements.
On May 1, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 is effective for the Company's fiscal
year beginning December 29, 2002. Adoption of this statement had no impact
on the Company's consolidated financial statements.
On July 30, 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," that is applicable to exit or disposal activities initiated
after December 31, 2002. This standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan. This
standard does not apply where SFAS No. 144 is applicable. The Company
adopted this statement in its first quarter 2003. Adoption of this
statement had no significant impact on the Company's results of operations
or financial condition.
INFLATION
The Company believes the effects of inflation have not had a significant
impact on its results of operations or financial condition.
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities
Act") and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). You can identify such forward-looking statements by
the words "expects," "intends," "plans," "projects," "believes,"
"estimates," and similar expressions. It is important to note that the
Company's actual results could differ materially from those projected in
such forward-looking statements. In the normal course of business, we, in
an effort to help keep the Company's shareholders and the public informed
about our operations, may from time to time issue such forward-looking
statements, either orally or in writing. Generally, these statements relate
to business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, or projections involving
anticipated revenues, earnings or other aspects of operating results. We
base the forward-looking statements on our current expectations, estimates
and projections. We caution you that these statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that we
cannot predict. In addition, we have based many of these forward-looking
statements on assumptions about future events that may prove to be
inaccurate. Therefore, the actual results of the future events described in
the forward-looking statements in this Quarterly Report on Form 10-Q, or
elsewhere, could differ materially from those stated in the forward-looking
statements. 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.
As used in this Quarterly Report on Form 10-Q and except as the context
otherwise may require, "Company," "we," "us," and "our" refer to TEAM
America, Inc. and its subsidiaries.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its exposure to market risk associated with its
financial statements is not material.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
(a) Our management, under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of our "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-14(c) within 90 days of
the filing date of this Quarterly Report on Form 10-Q (the "Evaluation
Date"). Based on their evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that as of the Evaluation Date,
our disclosure controls and procedures are effective to ensure that
all material information required to be filed in this Quarterly Report
on Form 10-Q has been made known to them.
(b) There were no significant changes in the Company's internal controls
or in other factors that could significantly affect those controls
subsequent to the Evaluation Date.
24
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Memorandum of Understanding, dated as of March 28, 2003, by
and among TEAM America, Inc., Stonehenge Opportunity Fund,
LLC, Providential Financial Group, Inc. and Professional
Staff Management, Inc.
10.2 Third Amendment to Credit Agreement, dated as of March 28,
2003, by and among TEAM America, Inc., Mucho.com, Inc., The
Provident Bank and The Huntington National Bank
99.1 Certificate of the Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certificate of the Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the
first quarter ended March 29, 2003:
(i) Current Report on Form 8-K/A No. 2 dated January 2, 2003,
filed with the Securities and Exchange Commission on January
2, 2003.
(ii) Current Report on Form 8-K, dated January 10, 2003, filed with
the Securities and Exchange Commission on January 10, 2003.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TEAM AMERICA, INC.
BY: /s/ Andrew H. Johnson
---------------------------------
Andrew H. Johnson
Chief Financial Officer and
Authorized Signing Officer
May 13, 2003
26
CERTIFICATION
I, S. Cash Nickerson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TEAM America,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ S. Cash Nickerson
---------------------------
S. Cash Nickerson
Chief Executive Officer
27
CERTIFICATION
I, Andrew H. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TEAM America,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Andrew H. Johnson
-----------------------------------
Andrew H. Johnson
Chief Financial Officer
28