1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 CORPORATION
(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
not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
THE NUMBER OF SHARES OF REGISTRANT'S ONLY CLASS OF COMMON STOCK OUTSTANDING ON
JULY 31, 1999 WAS 4,345,526.
2
TEAM AMERICA CORPORATION AND SUBSIDIARIES
JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
PAGE
NO.
---
Item 1. Financial Statements:
Consolidated Statements of Income -- Three-month periods
ended June 30, 1999 and 1998 (unaudited) - 3 -
Consolidated Statements of Income -- Six-month periods
ended June 30,1999 and 1998 ( unaudited) - 4-
Consolidated Balance Sheets -- June 30, 1999 (unaudited)
and December 31, 1998 - 5 -
Consolidated Statements of Cash Flows -- Six month periods
ended June 30, 1999 and 1998 (unaudited) - 7 -
Consolidated Statement of Changes in Shareholders' Equity-
Six-month period ended June 30, 1999 (unaudited) - 8 -
Notes to Consolidated Financial Statements - 9 -
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - 10 -
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders - 21 -
Item 6. Exhibits and Reports on Form 8-K - 21 -
Signatures - 22 -
Exhibit Index - 23 -
- ----------
Note: Item 3 of Part I and Items 1 through 3 and Item 5 of Part II are omitted
because they are not applicable.
2
3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30,
1999 1998
(unaudited)
REVENUES $ 101,379,018 $ 84,107,464
DIRECT COSTS:
Salaries and wages 86,923,624 72,218,013
Payroll taxes, workers' compensation premiums,
employee benefits and other 9,946,147 7,558,597
-------------- --------------
Total direct costs 96,869,771 79,776,610
-------------- --------------
Gross profit 4,509,247 4,330,854
EXPENSES:
Administrative salaries, wages and employment taxes 1,949,979 2,090,331
Other selling, general and administrative expenses 1,387,668 1,309,330
Depreciation and amortization 447,862 369,101
-------------- --------------
Total operating expenses 3,785,509 3,768,762
-------------- --------------
Income from operations 723,738 562,092
INTEREST INCOME (EXPENSE) (30,134) 35,390
-------------- --------------
Income before income taxes 693,604 597,482
INCOME TAX EXPENSE 386,500 352,000
-------------- --------------
NET INCOME $ 307,104 $ 245,482
============== ==============
EARNINGS PER SHARE:
Basic $ 0.07 $ 0.05
============== ==============
Diluted $ 0.07 $ 0.05
============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 4,337,675 4,746,622
============== ==============
Diluted 4,370,778 5,061,241
============== ==============
3
4
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30,
1999 1998
(unaudited)
REVENUES $ 192,033,207 $ 154,141,895
DIRECT COSTS:
Salaries and wages 163,742,650 131,346,478
Payroll taxes, workers' compensation premiums,
employee benefits and other 19,536,721 15,054,593
-------------- --------------
Total direct costs 183,279,371 146,401,071
-------------- --------------
Gross profit 8,753,836 7,740,824
EXPENSES:
Administrative salaries, wages and employment taxes 3,782,451 3,853,114
Other selling, general and administrative expenses 2,876,699 2,517,043
Depreciation and amortization 870,136 708,516
-------------- --------------
Total operating expenses 7,529,286 7,078,673
-------------- --------------
Income from operations 1,224,550 662,151
INTEREST INCOME (EXPENSE) (36,478) 78,749
-------------- --------------
Income before income taxes 1,188,072 740,900
INCOME TAX EXPENSE 697,000 494,000
-------------- --------------
NET INCOME $ 491,072 $ 246,900
============== ==============
EARNINGS PER SHARE:
Basic $ 0.11 $ 0.05
============== ==============
Diluted $ 0.11 $ 0.05
============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 4,410,440 4,721,928
============== ==============
Diluted 4,443,543 5,060,683
============== ==============
4
5
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 3,585,199 $ 5,010,630
Short-term investments 2,250,000 250,000
Receivables:
Trade, net of allowance for doubtful accounts
of $50,000 each year 3,968,915 4,231,838
Unbilled revenues 13,612,018 8,586,671
Other 200,664 452,869
---------------- --------------
Total receivables 17,781,597 13,271,378
Prepaid expenses 615,197 193,060
Deferred income tax asset 180,000 180,000
---------------- --------------
Total current assets 24,411,993 18,905,068
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
AND AMORTIZATION 1,823,001 1,808,495
OTHER ASSETS:
Goodwill and non-compete agreements, net 26,144,368 26,059,333
Cash surrender value of life insurance policies 486,012 438,170
Mandated benefit/security deposits 262,160 259,073
Deferred income tax asset 23,000 23,000
Other assets 70,018 46,964
---------------- --------------
Total other assets 26,985,558 26,826,540
---------------- --------------
Total assets $ 53,220,552 $ 47,540,103
================ ==============
5
6
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 2,215,798 $ 906,758
Notes payable and short-term borrowings 4,050,000 --
Accrued compensation 11,456,401 7,527,598
Accrued payroll taxes and insurance 1,966,361 4,139,945
Accrued workers' compensation costs 2,640,358 2,585,486
Federal and state income taxes payable 869,000 631,000
Other accrued expenses 303,690 432,385
Client deposits 702,016 637,135
--------------- --------------
Total current liabilities 24,203,624 16,850,400
DEFERRED RENT 53,778 62,997
DEFERRED COMPENSATION LIABILITY 528,996 439,715
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock, no par value::
Class A, 500,000 shares authorized; -- --
none issued or outstanding
Class B, 500,000 shares authorized; -- --
none issued or outstanding
Common Stock, no par value:
Common Stock, 10,000,000 shares authorized
4,967,639 and 4,878,348 issued, respectively;
4,345,526 and 4,756,235 outstanding, respectively; 28,670,507 28,404,509
Excess purchase price (83,935) (83,935)
Retained earnings 2,732,080 2,241,008
--------------- --------------
31,318,652 30,561,582
Less - Treasury stock, 622,113 and 122,113 shares
respectively, at cost (2,884,498) (384,498)
--------------- --------------
Total shareholders' equity 28,434,154 30,177,084
--------------- --------------
Total liabilities and shareholders' equity $ 53,220,552 $ 47,540,103
=============== ==============
6
7
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
1999 1998
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 491,072 $ 246,900
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation and amortization 870,136 708,516
Deferred tax expense (benefit) -- --
(Increase) decrease in operating assets:
Receivables (4,510,219) (2,155,661)
Prepaid expenses (422,137) (196,950)
Mandated benefit/security deposits (3,087) 113,454
Other (23,055) 50,469
Increase (decrease) in operating liabilities:
Accounts payable 1,309,040 24,309
Accrued expenses and other payables 1,919,396 1,938,161
Client deposits 64,881 (30,571)
Deferred liabilities 80,062 85,187
-------------- --------------
Net cash provided by (used in) operating activities (223,911) 783,814
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (297,654) (529,869)
Increases in cash surrender value of life insurance policies (47,842) (135,088)
Non-compete agreements (210,000) --
Acquisition costs,net of cash obtained (26,728) (1,425,168)
Increase in short term investments (2,000,000) --
-------------- --------------
Net cash used in investing activities (2,582,224) (2,090,125)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations -- (63,770)
Short-term borrowings 800,000 --
Notes payable issued 3,700,000 --
Notes payable repaid (450,000) --
Purchase of treasury stock (2,500,000) --
Stock price guarantee payment (169,296) --
-------------- --------------
Net cash used in financing activities 1,380,704 (63,770)
-------------- --------------
Net decrease in cash and cash equivalents (1,425,431) (1,370,081)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,010,630 5,949,508
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,585,199 $ 4,579,427
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for: Interest $ 35,135 $ 17,745
============== ==============
Income Taxes $ 900,000 $ 84,685
============== ==============
7
8
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Common Stock Treasury Stock
------------ --------------
Number Value Number Value
-----------------------------------------------------------------------------
Balance
December 31, 1998 4,878,348 $ 28,404,509 122,113 $ (384,498)
Net income -- -- -- --
Shares issued from escrow
for acquisition 89,291 435,294 -- --
Shares repurchased -- -- 500,000 (2,500,000)
Stock price guarantee
payment -- (169,296) -- --
Balance
-----------------------------------------------------------------------------
June 30, 1999 4,967,639 $ 28,670,507 622,113 $ (2,884,498)
=============================================================================
Excess
Purchase Retained
Price Earnings Total
-------------------------------------------------------
Balance
December 31, 1998 $ (83,935) $ 2,241,008 $ 30,177,084
Net income -- 491,072 491,072
Shares issued from escrow
for acquisition -- 435,294
Shares repurchased -- -- (2,500,000)
Stock price guarantee
payment -- -- (169,296)
Balance
-------------------------------------------------------
June 30, 1999 $ (83,935) $ 2,732,080 $ 28,434,154
=======================================================
8
9
TEAM AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Unaudited Interim Consolidated Financial Statements
The accompanying interim consolidated financial statements as
of June 30, 1999 and for the three month and six month periods then ended are
unaudited. However, in the opinion of management, these interim statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position, results of
operations and cash flows of TEAM America Corporation.
NOTE 2 - Accounting Policies
The financial statements should be read in conjunction with
the audited financial statements contained in TEAM America Corporation's Form
10-K Annual Report for the year ended December 31, 1998.
NOTE 3 - Earnings Per Share
Earnings per share were determined in accordance with SFAS No.
128. There were no differences to reconcile to determine net income for basic
and diluted earnings per share purposes. The effects of dilutive common stock
equivalents were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Weighted average shares outstanding 4,337,675 4,746,622 4,410,440 4,721,928
Shares issuable upon the exercise of stock options,
less shares repurchased from the proceeds -- 214,152 -- 238,288
Shares earned but still in escrow
from acquisitions 33,103 100,467 33,103 100,467
--------------------------------------------------------------
Diluted shares outstanding 4,370,778 5,061,241 4,443,543 5,060,683
==============================================================
9
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
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 following table sets forth results of operations for the
three-month and six-month periods ended June 30, 1999 and 1998 expressed as a
percentage of revenues:
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1999 1998 1999 1998
---- ---- ---- ----
Revenues 100% 100% 100% 100%
Direct costs:
Salaries and wages 85.8 85.8 85.2 85.2
Payroll taxes, workers; compensation 9.8 9.0 10.2 9.8
premiums, employee benefits and other
Gross profit 4.4 5.2 4.6 5.0
Operating Expense:
Administrative salaries, wages and
employment taxes 1.9 2.5 2.0 2.5
Other selling general and
administrative expenses 1.4 1.6 1.5 1.6
Depreciation and amortization .4 .4 .5 .4
Total operating expenses 3.7 4.5 4.0 4.5
Interest income (expense) -- -- -- --
Income before taxes .7 .7 .6 .5
Provision for income taxes .4 .4 .4 .3
Net income .3 .3 .2 .2
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES
Revenues increased 20.5% to $101,379,000 in the three months ended June
30, 1999 from $84,107,000 in the three months ended June 30, 1998. Approximately
90% of the increase came from internal growth - increases in clients, worksite
employees, and wages and benefits charges. The remainder came from one small
acquisition completed in December, 1998 in San Diego, California.
10
11
DIRECT COSTS/MARGIN
Direct costs increased 21.4% to $96,870,000 in the three months ended
June 30, 1999 from $79,777,000 in the three months ended June 30, 1998. Salaries
and wages for worksite employees rose 20.4% while the costs of taxes and
insurances increased 31.5% primarily due to higher costs for workers'
compensation resulting from the timing and amount of benefit from rebates from
the Ohio Bureau of Workers' Compensation. In 1998, all of the benefit was
recorded in the second quarter. The overall benefit was lower in 1999 and was
recorded ratably between the first and second quarters. Gross profit increased
4.1% to $4,509,000 in the three months ended June 30, 1999 from $4,331,000 in
the three months ended June 30, 1998 and declined to 4.4% of revenues in the
second quarter of 1999 compared to 5.2% of revenues in the second quarter of
1998. The lower margin in 1999 reflects the higher workers' compensation costs
and the lower fees charged in the acquired locations compared to the core
business in the Midwest. As revenues from the acquired locations have increased
to more than 60% of total revenues, their lower fees have had a greater impact
so as to reduce margin as a percentage of revenues. The potential to increase
fees charged at the acquired locations remains as an opportunity for revenue and
margin expansion.
EXPENSES
Total operating expenses increased .5% to $3,786,000 in the three
months ended June 30, 1999 from $3,769,000 in the three months ended June 30,
1998. Salaries and wages declined 6.7% to $1,950,000 in the second quarter of
1999 from $2,090,000 in the second quarter of 1998. Wages decreased as a result
of reallocation or reductions in administrative positions as a result of the
consolidation of functions to the corporate headquarters in connection with, or
in anticipation of, the conversion to the Company's new operating software. At
June 30, 1999, approximately 90% of the Company's worksite employees were being
served by Company locations operating on the new software. All locations are
expected to be using the new software by the end of the third quarter.
Reductions in executive level compensation have also had a significant
effect on salary expense. Effective January 1, 1999, the Company's Chairman, CEO
and founder resigned. The Company acquired 500,000 shares of common stock at $5
per share, the fair market value at that date, in lieu of any other payments
that may have been required under previous employment agreements. Those payments
would have aggregated to nearly $1,000,000 over a three-year period. Also,
effective March 1, 1999, two executives from the Oregon acquisition resigned
their positions with the Company's subsidiary, TEAM America West, Inc. They
remain affiliated with the Company as independent marketing agents. Also, in
mid-1998, the Company's Chief Administrative Officer left the Company. Those
responsibilities were re-assigned internally. The President of the Company's
California subsidiary also restructured his arrangement with the Company. He
remains under contract with the Company but now is on a fee for services basis
providing legal and consulting services to the Company.
11
12
Other selling and general and administrative expenses rose 6.0% to
$1,388,000 in the three months ended June 30, 1999 from $1,309,000 in the three
months ended June 30, 1998 and declined to 1.4% of revenues in 1999 from 1.6% in
1998. This increase in other operating expenses trailed the growth in the
business during the period because of lower spending on marketing, travel and
other discretionary expenses.
Depreciation and amortization rose 21.4% to $448,000 in the three
months ended June 30, 1999 from $369,000 in the three months ended June 30,
1998. The increase comes from the amortization of goodwill from the three
acquisitions completed in 1998 and the depreciation arising from the additional
hardware and software for the TEAM Direct(TM) operating system.
OPERATING INCOME
Primarily as a result of the lower salaries and wages, operating
expenses declined to 3.7% of total revenues in 1999 from 4.5% in 1998 and
operating income increased 28.8% to $724,000 in the three months ended June 30,
1999 from $562,000 in the three months ended June 30, 1998.
INTEREST INCOME (EXPENSE)
Net interest changed from income of $35,000 in the three months ended
June 30, 1998 to expense of $30,000 in the three months ended June 30, 1999. The
1998 period had $5,000 of interest expense and $40,000 of interest income that
came from funds remaining from the December 1996 IPO. The 1999 results reflect
$46,000 of interest expense from the $2,500,000 borrowed to acquire 500,000
shares of common stock and $2,000,000 borrowed in mid-June and placed in an
interest bearing account. Interest income for the second quarter of 1999 was
$16,000.
INCOME TAX EXPENSE
Income tax expense was $386,500 in the three months ended June 30, 1999
compared to $352,000 in the three months ended June 30, 1998. The effective tax
rate was 55.7% in 1999 compared to 59% in 1998. The effective tax rate reflects
the non-deductibility of goodwill amortization for income tax purposes. The
effect of non-deductible goodwill amortization on the effective tax rate lessens
as income before income taxes increases.
NET INCOME AND EARNINGS PER SHARE
Net income was $307,000 or $.07 per diluted share in the three months
ended June 30, 1999 compared to $245,000 or $.05 per diluted share in the three
months ended June 30, 1998. Average shares outstanding declined to 4,371,000 in
the second quarter of 1999 from 5,061,000 in the second quarter of 1998 as a
result of the repurchase by the Company of 500,000 shares in early February
1999, offset by the issuance of 89,000 shares in April, 1999 from escrow related
to an acquisition on April 1, 1998. Also, there were no common stock equivalents
in the three months ended June 30, 1999 compared to 214,000 in the three months
ended June 30, 1998 because their effect would be anti-dilutive in 1999.
12
13
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES
Revenues increased 24.6% to $192,033,000 in the six months ended June
30, 1999 from $154,142,000 in the six months ended June 30, 1998. The increase
came from internal growth - increases in clients, worksite employees, and wages
and benefits charges, and acquisitions completed in March, April and December,
1998.
DIRECT COSTS/MARGIN
Direct costs increased 25.2% to $183,279,000 in the six months ended
June 30, 1999 from $146,401,000 in the six months ended June 30, 1998. Salaries
and wages for worksite employees rose 24.7% while the costs of taxes and
insurances increased 29.8% primarily due to higher costs for workers'
compensation resulting from a lower benefit in 1999 from rebates from the Ohio
Bureau of Workers' Compensation. Gross profit increased 13.1% to $8,754,000 in
the six months ended June 30, 1999 from $7,741,000 in the six months ended June
30, 1998 and declined to 4.4% of revenues in the first half of 1999 compared to
5.2% of revenues in the first half of 1998. The lower margin in 1999 reflects
the higher workers' compensation costs and the lower fees charged in the
acquired locations compared to the core business in the Midwest. As revenues
from the acquired locations have increased to more than 60% of total revenues,
their lower fees have had a greater impact so as to reduce margin as a
percentage of revenues. The potential to increase fees charged at the acquired
locations remains as an opportunity for revenue and margin expansion.
EXPENSES
Total operating expenses increased 6.4% to $7,530,000 in the six months
ended June 30, 1999 from $7,079,000 in the six months ended June 30, 1998.
Salaries and wages declined 1.8% to $3,782,000 in 1999 from $3,853,000 in 1998.
Wages decreased as a result of reallocation or reductions in administrative
positions as a result of the consolidation of functions to the corporate
headquarters in connection with, or in anticipation of, the conversion to the
Company's new operating software. At June 30, 1999, approximately 90% of the
Company's worksite employees were being served by Company locations operating on
the new software. All locations are expected to be using the new software by the
end of the third quarter.
Reductions in executive level compensation have also had a significant
effect on salary expense. Effective January 1, 1999, the Company's Chairman, CEO
and founder resigned. The Company acquired 500,000 shares of common stock at $5
per share, the fair market value at that date, in lieu of any other payments
that may have been required under previous employment agreements. Those payments
would have aggregated to nearly $1,000,000 over a three-year period. Also,
effective March 1, 1999, two executives from the Oregon acquisition resigned
their positions with the Company's subsidiary, TEAM America West, Inc. They
remain affiliated with the Company as independent marketing agents. Also, in mid
1998, the Company's Chief Administrative Officer left the Company. Those
responsibilities were re-assigned internally.
13
14
The President of the Company's California subsidiary also restructured
his arrangement with the Company. He remains under contract with the Company but
now is on a fee for services basis providing legal and consulting services to
the Company.
Other selling and general and administrative expenses rose 14.3% to
$2,877,000 in the six months ended June 30, 1999 from $2,517,000 in the six
months ended June 30, 1998. This increase in other operating expenses trailed
the growth in the business during the period due to lower spending on marketing
and other discretionary costs
Depreciation and amortization rose 22.7% to $870,000 in the six months
ended June 30, 1999 from $709,000 in the six months ended June 30, 1998. The
increase comes from the amortization of goodwill from the acquisitions completed
in 1998 and the depreciation arising from the additional hardware and software
for the TEAM Direct(TM) operating system.
OPERATING INCOME
Primarily as a result of the lower salaries and wages, operating
expenses declined to 3.7% of total revenues in 1999 from 4.5% in 1998 and
operating income increased 85.0% to $1.225,000 in the six months ended June 30,
1999 from $662,000 in the six months ended June 30, 1998.
INTEREST INCOME (EXPENSE)
Net interest changed from income of $79,000 in the six months ended
June 30, 1998 to expense of $36,000 in the six months ended June 30, 1999. The
1999 results reflect interest expense from the $2,500,000 borrowed to acquire
500,000 shares of common stock, while interest income was lower as funds
remaining from the IPO had declined to approximately $1,500,000 at December 31,
1998 and $1,200,000 at June 30, 1999, from $2,500,000 at June 30, 1998.
INCOME TAX EXPENSE
Income tax expense was $697,000 in the six months ended June 30, 1999
compared to $494,000 in the six months ended June 30, 1998. The effective tax
rate was 58.6% in 1999 compared to 66.7% in 1998. The effective tax rate
reflects the non-deductibility of goodwill amortization for income tax purposes.
The effect of non-deductible goodwill amortization on the effective tax rate
lessens as income before income taxes increases.
NET INCOME AND EARNINGS PER SHARE
Net income was $491,000 or $.11 per diluted share in the six months
ended June 30, 1999 compared to $247,000 or $.05 per diluted share in the six
months ended June 30, 1998. Average shares outstanding declined to 4,444,000 in
1999 from 5,061,000 in 1998 as a result of the repurchase by the Company of
500,000 shares in early February 1999, offset by the issuance of 89,000 shares
in April, 1999 from escrow related to an acquisition on April 1, 1998. Also,
there were no common stock equivalents from options in 1999 compared to 238,000
in 1998 because their effect would be anti-dilutive in the 1999 period.
14
15
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had a working capital surplus of
$208,000. At December 31, 1998, the working capital surplus was $2,055,000. The
change in working capital correlates with seasonal increases in taxes during the
first half of each year, and short-term borrowing to acquire treasury stock in
1999.
The Company's primary source of liquidity and capital resources has
historically been its internal cash flow from operations. In addition, in
December 1996, net cash of $13,314,000 was provided from an initial public
offering of Company stock.
Net cash provided by (used in) operating activities was ($224,000) and
$784,000 for the six-month periods ended June 30, 1999 and 1998, respectively.
The change in cash provided by operating activities was due to an increase in
accounts receivable which occurred as a result of the timing of payrolls and
billings to clients at the end of the quarter. In 1999, more Company locations
have gone to a bi-weekly payroll and billing cycle whereas in the past, the
acquired locations had more clients on a semi-monthly payroll cycle. On a
semi-monthly payroll cycle, the end of the month payrolls are billed and
collected on the last day of the month thus providing less fluctuation in
receivables.
Net cash used in investing activities was $2,582,000 in the six months
ended June 30, 1999 compared to $2,090,000 in the six months ended June 30,
1998. The 1998 period reflected increased acquisition activity and development
expenses and hardware acquisitions for TEAM Direct(TM). There were no
acquisitions in the first half of 1999 and the TEAM Direct(TM) investment needs
were less during the quarter as the activity shifted towards implementation and
away from new development. In the first quarter of 1999, $170,000 was paid to
two former executives of the Company's location in Oregon for a covenant not to
compete in connection with their resignation from the Company. In the second
quarter of 1999 $2,000,000 was borrowed from a bank and is fully collateralized
by a certificate of deposit which is recorded in short-term investments.
Financing activities historically have not been significant for the
Company. However, during the first quarter of 1999, the Company acquired 500,000
shares of common stock from its former Chairman and founder. The Company
borrowed $800,000 on its line of credit with a bank. The borrowing bears
interest at LIBOR plus 2.25%. The ninety day fixed rate was 7.30% on the balance
outstanding on June 30, 1999. The Company also gave a $1,700,000 promissory note
with a 5.75% interest rate to the former chairman with $700,000 due upon demand,
and $1,000,000 is due on February 19, 2000. $450,000 was repaid on the note
prior to June 30, 1999 and an additional $150,000 was repaid between July 1 and
August 5, 1999.
The Company did not make any other purchases of treasury stock during
the first or second quarters of 1999. In September 1998 the Company's Board of
Directors authorized a 200,000 share repurchase. Between September 1998 and
December 1998, 60,000 shares were repurchased.
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In connection with an acquisition in 1998, the Company guaranteed the
price of 68,468 shares at $10.25 per share. During the first quarter of 1999,
$89,296 was paid to one of the holders of the shares under this guarantee
arrangement. Also, in connection with the resignation of two executives from the
Oregon acquisition, $80,000 was paid in connection with an agreement regarding
the sale of company stock owned by them.
Presently, the Company has no material commitments for capital
expenditures. Primary uses of cash may include acquisitions, the size and timing
of which cannot be predicted. However, the Company is limited in its ability to
continue to acquire other PEO companies unless it can raise additional capital
since most acquisitions involve the payment of cash and the issuance of stock
for the purchase price and may also require some additional working capital
following acquisition.
In July 1998, the Company obtained a $10,000,000 revolving credit
agreement with a bank. The credit agreement provides for borrowings at the prime
rate or LIBOR plus 2.25%. The credit agreement requires the Company to maintain
certain financial standards as to net worth, current ratio and cash position and
also requires the bank's consent to acquisitions. $800,000 was borrowed on
February 11, 1999 on this facility. The Company is in compliance with the
covenants or has obtained waivers from the lender. The Company is in the process
of renewing this line of credit commitment for $3,500,000.
The Company believes that the net proceeds from the sale of the common
shares in December 1996 which were invested in marketable securities, together
with existing cash, cash equivalents and internally generated funds will be
sufficient to meet the Company's presently anticipated working capital and
capital expenditure requirements, excluding acquisitions of other PEO's for the
foreseeable future. To the extent that the Company needs additional capital
resources, the Company believes that it will have access to bank financing and
other alternative sources of capital. However, there can be no assurances that
additional financing will be available on terms favorable to the Company, or at
all.
The Company did not pay dividends in 1996, 1997, 1998, or thus far in
1999, and does not expect to pay a dividend in the foreseeable future.
INFLATION
The Company believes the effects of inflation have not had a
significant impact on its results of operations or financial condition.
YEAR 2000
STATE OF READINESS
The Company's primary business is the delivery of payroll and HR
services to a widely diverse and geographically dispersed small business
clientele. The Company's data processing systems are integral and critical to
the efficient and effective delivery of its services. More specifically, the
Company relies on these systems for preparing and processing client payrolls,
payroll tax filings, benefits plan activities, insurance costs and client
invoicing.
Beginning in 1996, the Company began developing a new system that would
better meet the needs of a rapidly growing company and that would also improve
client service and operational efficiency. This new system is TEAM Direct(TM).
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Although this systems project was not embarked upon to address the Year 2000
issue, the result of this project is that TEAM Direct(TM) has been designed to
be Year 2000 compliant. The Company believes TEAM Direct(TM) is Year 2000
compliant in all respects. The Company has not specifically tested the system
for Year 2000 compliance, but intends to do so later this year.
Since September 1997, the Company has acquired eight PEO's outside of
Ohio. These companies have operated on their own systems since being acquired.
Their systems have not been evaluated for Year 2000 compliance because they will
be converted to TEAM Direct(TM) before the year 2000.
As of July 31, 1999, all of the Company's original core business and
the acquired businesses in California, Idaho, Utah, Montana and Michigan have
been converted to the new system. All locations are expected to be on
TEAMDirect(TM) by the end of the third quarter of 1999.
The Company believes it does not have any non-IT Systems that would
result in a material adverse impact to the Company if they are not Year 2000
compliant.
The Company relies upon large regional banks to process its electronic
and non-electronic banking and disbursement activities. It also contracts with
large well-known national and regional insurance carriers to provide and/or
administer its employee benefits plans and insurance programs. The Company has
not specifically approached these institutions about their ability to handle the
Company's business transactions in the Year 2000. If necessary, the Company
believes it will have adequate time to switch to Year 2000 compliant providers,
if there are any, prior to the end of 1999.
The Company's customer base is primarily small businesses located
throughout the mid-west, south and western regions of the United States. No one
client is material to the Company's operations. The Company has not evaluated
the extent of Year 2000 readiness by its customers.
The Company is exploring alternative energy sources, such as diesel
generators, at its main corporate facility where its TEAMDirect(TM) system is
based, in case of utility service disruption. The Company also has the ability
to process from remote backup locations over the Internet, if the Internet is
operational in the Year 2000. The Company has not yet obtained cost estimates
for the alternative energy sources. The Company believes that the disruption of
utility services at any of its locations outside of its main corporate office
would not have a material effect on its operations as long as Internet or phone
access is possible. The Company, however, has not addressed or evaluated the
effects that disruption of phone service or Internet service nationally or
regionally would have on its operations.
COSTS
The Company has not separately identified costs associated with Year
2000 compliance because it has not undertaken Year 2000 compliance as a specific
project and has not employed outside consultants, etc. to address Year 2000
compliance. The Company believes that its development of TEAMDirect(TM) will
result in its primary operating systems being Year 2000 compliant.
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RISKS OF FAILURE
The Company believes that if its primary operating system is not Year
2000 compliant, or if its banking and insurance vendors are not Year 2000
compliant, there would be significant material adverse consequences. The Company
could have difficulty meeting its obligations to its clients to provide timely
payrolls and administer employee benefits and insurance programs. This could
result in lost business and/or significant increases in operating costs which
may not be recoverable through price increases to our clients. The potential
loss of business or increases in costs could have a material adverse effect on
the financial condition and results of operations of the Company.
CONTINGENCY PLAN
As of August 1999, the Company has not yet developed a contingency plan
to address needed actions in the event of failure of its systems or significant
vendor systems to be Year 2000 compliant.
QUARTERLY RESULTS
The following table sets forth certain unaudited operating results of
each of the ten consecutive quarters for the period ended June 30, 1999.
The information is unaudited, but in the opinion of management,
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of operations of such periods.
This information should be read in conjunction with the Company's Consolidated
Financial statements and the Notes thereto.
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QUARTER ENDED
Mar. 31 June 30 Sept. 30 Dec. 31
1997 1997 1997 1997
---- ---- ---- ----
Revenues $25,542 $31,812 $36,697 $61,812
Direct Costs 24,143 30,000 35,000 58,402
Net Income 232 332 173 193
Earnings Per Share:
Basic $.07 $.10 $.05 $.04
Diluted $.07 $.10 $.05 $.04
QUARTER ENDED
Mar. 31 June 30 Sept. 30 Dec. 31
1998 1998 1998 1998
---- ---- ---- ----
Revenues $70,034 $84,107 $89,499 $96,318
Direct Costs 66,624 79,777 85,184 91,606
Net Income 1 246 233 202
Earnings Per Share:
Basic $.00 $.05 $.05 $.04
Diluted $.00 $.05 $.05 $.04
QUARTER ENDED
Mar. 31 June 30
1999 1999
---- ----
Revenues $90,654 $101,379
Direct Costs 86,410 96,870
Net Income 184 307
Earnings Per Share:
Basic $.04 .07
Diluted $.04 .07
AMOUNTS IN $000'S EXCEPT PER SHARE AMOUNTS
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.
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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, 1998 filed with the
Securities and Exchange Commission, as the same may be amended from time to
time.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. The future results and shareholder
values of the Company may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results and values are beyond the Company's ability to control or predict.
Shareholders are cautioned not to put undue reliance on forward-looking
statements. In addition, the Company does not have any intention or obligation
to update forward-looking statements after the date hereof, even if new
information, future events, or other circumstances have made them incorrect or
misleading. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 25,
1999. At the close of business on the record date of April 2, 1999, 4,246,708
common shares were outstanding and entitled to vote at the meeting. At the
Annual Meeting, 3,496,329 or 82.3% of the outstanding common shares entitled to
vote were represented in person or by proxy. Matters voted on at the meeting
were the election of Class I directors.
a.) Election of Directors
The Board of Directors is divided into two classes. Four director
positions, to serve for a term of two years, were up for election.
Directors elected at the Annual Meeting were:
William W. Johnston
Byron G. McCurty
S. Cash Nickerson
M.R. Swartz
The voting for each director was as follows:
For Withheld
William W. Johnston 3,477,279 19,050
Byron G. McCurty 3,475,349 20,950
S. Cash Nickerson 3,477,089 19,240
M.R. Swartz 3,477,279 19,050
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
On July 28, 1999 the company filed a Form 8-K reporting that
it had been contacted by Nasdaq with regards to possible
delisting from the National Market. The Company has appealed
this matter. Also, on July 28, 1999 the company filed a Form
8-K reporting that an offer had been received from S. Cash
Nickerson, a shareholder and director of the company to
acquire all of the company's shares for approximately $6 per
share.
(b) Exhibits
27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to e signed on its behalf by the
undersigned hereunto duly authorized.
TEAM AMERICA CORPORATION
/S/MICHAEL R. GOODRICH
------------------------------
Chief Financial Officer and
Authorized Signing Officer
August 10, 1999
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EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27* Financial Data Schedule
*In SEC EDGAR-filed document only
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