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 September 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 WORTHINGTON, OHIO 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 October 31, 1999 was 4,345,526.
2
TEAM AMERICA CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
PAGE
NO.
----
Item 1. Financial Statements:
Consolidated Statements of Income -- Three-month periods
ended September 30, 1999 and 1998 (unaudited) - 2 -
Consolidated Statements of Income -- Nine-month periods
ended September 30, 1999 and 1998 (unaudited) - 3 -
Consolidated Balance Sheets -- September 30, 1999 (unaudited)
and December 31, 1998 - 4 -
Consolidated Statements of Cash Flows -- Nine-month periods
ended September 30, 1999 and 1998 (unaudited) - 6 -
Consolidated Statement of Changes in Shareholders' Equity-
Nine-month period ended September 30, 1999 (unaudited) - 7 -
Notes to Consolidated Financial Statements - 8 -
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - 9 -
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K - 20 -
Signature - 20 -
Exhibit Index - 21 -
- ----------------
Note: Item 3 of Part I and Items 1 through 5 of Part II are omitted because they
are not applicable.
3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
(unaudited)
REVENUES $102,677,397 $89,499,100
DIRECT COSTS:
Salaries and wages 88,506,319 77,231,712
Payroll taxes, workers' compensation premiums,
employee benefits and other 9,615,074 7,952,045
------------ -----------
Total direct costs 98,121,393 85,183,757
------------ -----------
Gross profit 4,556,004 4,315,343
EXPENSES:
Administrative salaries, wages and employment taxes 1,813,217 2,001,527
Other general and administrative expenses 1,620,831 1,365,089
Depreciation and amortization 439,801 372,849
------------ -----------
Total operating expenses 3,873,849 3,739,465
------------ -----------
Income from operations 682,155 575,878
INTEREST INCOME (EXPENSE) (34,260) 13,391
------------ -----------
Income before income taxes 647,895 589,269
INCOME TAX EXPENSE 337,000 356,000
------------ -----------
Net income $ 310,895 $ 233,269
============ ===========
Earnings per share:
Basic $ 0.07 $ 0.05
============ ===========
Diluted $ 0.07 $ 0.05
============ ===========
Weighted average shares outstanding:
Basic 4,345,526 4,746,590
============ ===========
Diluted 4,378,812 4,794,519
============ ===========
-2-
4
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
(unaudited)
REVENUES $294,710,604 $243,588,670
DIRECT COSTS:
Salaries and wages 252,248,969 208,534,653
Payroll taxes, workers' compensation premiums,
employee benefits and other 29,151,795 22,997,051
------------ ------------
Total direct costs 281,400,764 231,531,704
------------ ------------
Gross profit 13,309,840 12,056,966
EXPENSES:
Administrative salaries, wages and employment taxes 5,595,668 5,854,641
Other general and administrative expenses 4,497,531 3,882,132
Depreciation and amortization 1,309,936 1,081,365
------------ ------------
Total operating expenses 11,403,135 10,818,138
------------ ------------
Income from operations 1,906,705 1,238,828
INTEREST INCOME (EXPENSE) (70,738) 92,140
------------ ------------
Income before income taxes 1,835,967 1,330,968
INCOME TAX EXPENSE 1,034,000 850,000
------------ ------------
Net income $ 801,967 $ 480,968
============ ============
Earnings per share:
Basic $ 0.18 $ 0.10
============ ============
Diluted $ 0.18 $ 0.10
============ ============
Weighted average shares outstanding:
Basic 4,388,563 4,730,239
============ ============
Diluted 4,421,693 4,928,196
============ ============
-3-
5
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 6,027,163 $ 5,010,630
Short-term investments 2,000,000 250,000
Receivables:
Trade, net of allowance for doubtful accounts
of $50,000 each period 4,087,665 4,231,838
Unbilled revenues 13,621,185 8,586,671
Other 211,177 452,869
----------- -----------
Total receivables 17,920,027 13,271,378
----------- -----------
Prepaid expenses 349,914 193,060
Deferred income tax asset 180,000 180,000
----------- -----------
Total current assets 26,477,104 18,905,068
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
AND AMORTIZATION 1,770,703 1,808,495
OTHER ASSETS:
Goodwill and non-compete agreements, net 25,848,907 26,059,333
Cash surrender value of life insurance policies 575,527 438,170
Mandated benefit/security deposits 240,185 259,073
Deferred income tax asset 23,000 23,000
Other assets 67,986 46,964
----------- -----------
Total other assets 26,755,605 26,826,540
----------- -----------
Total assets $55,003,412 $47,540,103
=========== ===========
-4-
6
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Client prepayments $ 3,358,428 $ --
Trade accounts payable 1,216,026 906,758
Notes payable and short-term borrowings 3,850,000 --
Accrued compensation 11,159,006 7,527,598
Accrued payroll taxes and insurance 3,004,636 4,139,945
Accrued workers' compensation costs 1,634,791 2,585,486
Federal and state income taxes payable 602,000 631,000
Other accrued expenses 149,276 432,385
Client deposits 705,658 637,135
----------- -----------
Total current liabilities 25,679,821 16,850,400
DEFERRED RENT 53,778 62,997
DEFERRED COMPENSATION LIABILITY 596,035 439,715
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; 28,599,236 28,404,509
Excess purchase price (83,935) (83,935)
Retained earnings 3,042,975 2,241,008
----------- -----------
31,558,276 30,561,582
Less - Treasury stock, 622,113 and 122,113 shares
respectively, at cost (2,884,498) (384,498)
----------- -----------
Total shareholders' equity 28,673,778 30,177,084
----------- -----------
Total liabilities and shareholders' equity $55,003,412 $47,540,103
=========== ===========
-5-
7
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 801,967 $ 480,968
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation and amortization 1,309,936 1,081,365
Deferred tax expense (benefit) -- --
(Increase) decrease in operating assets:
Receivables (4,648,649) (6,025,424)
Prepaid expenses (156,854) (56,418)
Mandated benefit/security deposits 18,888 112,510
Other (21,022) 89,902
Increase (decrease) in operating liabilities:
Client prepayments 3,358,428 --
Accounts payable 309,268 (139,497)
Accrued expenses and other payables 1,233,294 5,045,108
Client deposits 68,523 (13,960)
Deferred liabilities 147,101 120,906
----------- -----------
Net cash provided by operating activities 2,420,880 695,460
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (389,695) (905,630)
Increases in cash surrender value of life
insurance policies (137,357) (186,495)
Non-compete agreements (210,000) --
Acquisition costs,net of cash obtained (26,728) (1,430,876)
Increase in short term investments (1,750,000) --
----------- -----------
Net cash used in investing activities (2,513,780) (2,523,001)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations -- (82,180)
Short-term borrowings 800,000 --
Notes payable issued 3,700,000 --
Notes payable repaid (650,000) --
Purchase of treasury stock (2,500,000) --
Stock price guarantee payment (240,567) (57,515)
----------- -----------
Net cash provided by (used in) financing
activities 1,109,433 (139,695)
----------- -----------
Net increase (decrease) in cash and cash
equivalents 1,016,533 (1,967,236)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,010,630 5,949,508
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,027,163 $ 3,982,272
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for: Interest $ 140,000 $ 20,000
=========== ===========
Income Taxes $ 1,050,000 $ 215,000
=========== ===========
-6-
8
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Excess
Common Stock Treasury Stock Excess
------------ -------------- Purchase Retained
Number Value Number Value Price Earnings Total
----------------------------------------------------------------------------------------------
Balance December 31, 1998 4,878,348 $28,404,509 122,113 $ (384,498) $(83,935) $2,241,008 $30,177,084
Net income -- -- -- -- -- 801,967 801,967
Shares issued for
acquisition 89,291 435,294 -- -- -- 435,294
Shares repurchased -- -- 500,000 (2,500,000) -- -- (2,500,000)
Stock price guarantee
payment -- (240,567) -- -- -- -- (240,567)
----------------------------------------------------------------------------------------------
Balance September 30, 1999 4,967,639 $28,599,236 622,113 $(2,884,498) $(83,935) $3,042,975 $28,673,778
==============================================================================================
-7-
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 September 30, 1999 and for the three month and nine 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 Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Weighted average shares outstanding 4,345,526 4,746,590 4,388,563 4,730,329
Shares issuable upon the exercise of
stock options, less shares
repurchased from the proceeds 183 -- 27 150,028
Shares in escrow from acquisitions 33,103 47,929 33,103 47,929
---------------------------------------------------
Diluted shares outstanding 4,378,812 4,794,519 4,421,693 4,928,196
===================================================
NOTE 4 - Proposed Acquisition
On October 1,1999 the Board of Directors of the Company
approved an offer to purchase all of the outstanding shares of its common stock
at $7.75 per share. The offer is subject to the completion of due diligence and
a definitive purchase agreement.
-8-
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 nine-month periods ended September 30, 1999 and 1998 expressed as a
percentage of revenues:
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
- -------------------------------------------------------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
- -------------------------------------------------------------------------------------------------------------------
Direct costs:
- -------------------------------------------------------------------------------------------------------------------
Salaries and wages 86.2 86.3 85.6 85.6
- -------------------------------------------------------------------------------------------------------------------
Payroll taxes, workers' compensation, etc. 9.4 8.9 9.9 9.4
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Gross profit 4.4 4.8 4.5 5.0
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses:
- -------------------------------------------------------------------------------------------------------------------
Administrative salaries, wages and employment taxes 1.8 2.2 1.9 2.4
- -------------------------------------------------------------------------------------------------------------------
Other selling general and administrative expenses 1.6 1.5 1.5 1.6
- -------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 0.4 0.4 0.4 0.4
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 3.8 4.1 3.8 4.4
- -------------------------------------------------------------------------------------------------------------------
Interest income (expense) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Income before taxes 0.6 0.7 0.6 0.6
- -------------------------------------------------------------------------------------------------------------------
Provision for income taxes 0.3 0.4 0.3 0.4
- -------------------------------------------------------------------------------------------------------------------
Net income 0.3 0.3 0.3 0.2
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES
Revenues increased 14.7% to $102,677,000 in the three months ended
September 30, 1999 from $89,499,000 in the three months ended September 30,
1998. Revenues from the acquisition of accounts in San Diego, California in
December 1998 accounted for approximately 20% of the additional revenue in the
third quarter of 1999 compared to the third quarter of 1998. The remainder of
the growth during the quarter came from internal sources which grew at a rate of
12%. The year to date internal growth rate is at 16%. New account sales tend to
slow in the third quarter as prospects may look to the first of the year as a
more appropriate time to begin a PEO relationship. New sales activity in the
Northwest region was also affected by reassignment of sales management
responsibilities in the third quarter of 1999.
-9-
11
DIRECT COSTS/MARGIN
Direct costs increased 15.2% to $98,121,000 in the three months ended
September 30, 1999 from $85,184,000 in the three months ended September 30,
1998. Salaries and wages for worksite employees rose 14.5% while taxes and
insurance costs increased 20.9%. Margins were consistent between the second and
third quarters of 1999 at 4.4% of revenues.
EXPENSES
Total operating expenses increased 3.6% to $3,874,000 in the three
months ended September 30, 1999 from $3,739,000 in the three months ended
September 30, 1998. Salaries and wages declined 9.4% to $1,813,000 in the third
quarter of 1999 from $2,001,000 in the third quarter of 1998. Wages decreased as
a result of reallocation or reductions in administrative positions in connection
with the consolidation of functions to the corporate headquarters associated
with the conversion to the Company's new operating software. At September 30,
1999, 95% of the Company's worksite employees were being served by Company
locations operating on the new software. One Company location remains to be
converted to the new system which is scheduled to occur in the fourth quarter of
1999.
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. Also,
effective March 1, 1999, two executives from the Oregon acquisition resigned
their positions with a Company subsidiary. They remain affiliated with the
Company as independent marketing agents. 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.
-10-
12
Other general and administrative expenses rose 18.7% to $1,621,000 in
the three months ended September 30, 1999 from $1,365,000 in the three months
ended September 30, 1998 and increased to 1.6% of revenues in 1999 from 1.5% in
1998. This increase was due to the timing of expenditures during the year. On a
year to date basis, these other operating expenses have increased 16% but have
declined from 1.6% of revenues in the nine months ended September 30, 1998 to
1.5% of revenues in the nine months ended September 30, 1999.
Depreciation and amortization rose 18.0% to $440,000 in the three months
ended September 30, 1999 from $373,000 in the three months ended September 30,
1998. The increase comes from the amortization of the non-competition agreements
entered into with the former executives of the Oregon location and increased
depreciation from the ongoing investment in hardware and software for the new
payroll/operating system.
OPERATING INCOME
Primarily as a result of the lower administrative salaries and wages,
operating expenses declined to 3.8% of total revenues in 1999 from 4.1% in 1998
and operating income increased 18.5% to $682,000 in the three months ended
September 30, 1999 from $576,000 in the three months ended September 30, 1998.
INTEREST INCOME (EXPENSE)
Net interest changed from income of $13,000 in the three months ended
September 30, 1998 to expense of $34,000 in the three months ended September 30,
1999. The 1999 results reflect 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. In the 1998 period, the Company had no
debt and had $2,500,000 invested in interest earning accounts.
INCOME TAX EXPENSE
Income tax expense was $337,000 in the three months ended September 30,
1999 compared to $356,000 in the three months ended September 30, 1998. The
effective tax rate was 52.0% in 1999 compared to 60% 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 on a year-to-date
basis.
NET INCOME AND EARNINGS PER SHARE
Net income was $311,000 or $.07 per diluted share in the three months
ended September 30, 1999 compared to $233,000 or $.05 per diluted share in the
three months ended September 30, 1998. Average shares outstanding declined to
4,378,000 in the third quarter of 1999 from 4,795,000 in the third 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 a 1998 acquisition.
-11-
13
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUES
Revenues increased 20.9% to $294,711,000 in the nine months ended
September 30, 1999 from $243,589,000 in the nine months ended September 30,
1998. Approximately one-fourth of the increase came from acquisitions completed
in 1998. The remainder came from internal sources such as growth in the number
of employees and clients which indicates an internal growth rate of nearly 16%.
DIRECT COSTS/MARGIN
Direct costs increased 21.5% to $281,401,000 in the nine months ended
September 30, 1999 from $231,532,000 in the nine months ended September 30,
1998. Salaries and wages for worksite employees rose 20.9% while the costs of
taxes and insurances increased 26.8% primarily due to higher costs for workers'
compensation resulting from a lower benefit in 1999 from premium dividend
credits from the Ohio Bureau of Workers' Compensation compared to 1998. Gross
profit increased 10.4% to $13,310,000 in the nine months ended September 30,
1999 from $12,057,000 in the nine months ended September 30, 1998 and declined
to 4.5% of revenues in the first half of 1999 compared to 5.0% of revenues in
the first half of 1998. The lower margin percentage in 1999 reflects the higher
workers' compensation costs and also 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 50% of total revenues, their
lower fees and margins 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 5.4% to $11,403,000 in the nine
months ended September 30, 1999 from $10,818,000 in the nine months ended
September 30, 1998. Administrative salaries and wages declined 4.4% to
$5,596,000 in 1999 from $5,855,000 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.
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. Also,
effective March 1, 1999, two executives from the Oregon acquisition resigned
their positions with the Company. 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.
-12-
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 general and administrative expenses rose 15.9% to $4,498,000 in
the nine months ended September 30, 1999 from $3,882,000 in the nine months
ended September 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 21.1% to $1,310,000 in the nine
months ended September 30, 1999 from $1,081,000 in the nine months ended
September 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 administrative salaries and wages,
operating expenses declined to 3.9% of total revenues in 1999 from 4.4% in 1998
and operating income increased 54.0% to $1,907,000 in the nine months ended
September 30, 1999 from $1,239,000 in the nine months ended September 30, 1998.
INTEREST INCOME (EXPENSE)
Net interest changed from income of $92,000 in the nine months ended
September 30, 1998 to expense of $71,000 in the nine months ended September 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 Company's December 1996 initial public offering had declined
to approximately $1,500,000 at December 31, 1998 and $1,200,000 at September 30,
1999, from $2,500,000 at September 30, 1998.
INCOME TAX EXPENSE
Income tax expense was $1,034,000 in the nine months ended September 30,
1999 compared to $850,000 in the nine months ended September 30, 1998. The
effective tax rate was 56.3% in 1999 compared to 63.9% 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 $802,000 or $.18 per diluted share in the nine months
ended September 30, 1999 compared to $481,000 or $.10 per diluted share in the
nine months ended September 30, 1998. Average shares outstanding declined to
4,422,000 in 1999 from 4,928,000 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 a 1998 acquisition.
-13-
15
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had a working capital surplus of
$797,000. At December 31, 1998, the working capital surplus was $2,055,000. The
change in working capital correlates with seasonal variations in balances during
the year, depending in part on the day of the week the period ends on, 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 operating activities was $2,421,000 and $695,000
for the nine-month periods ended September 30, 1999 and 1998, respectively. The
increase in cash provided by operating activities was from customer prepayments
which occurred because the third quarter ended on a Thursday, and many payrolls
were dated for Friday October 1, 1999. The Company collects from many of its
customers via electronic transfer on the day before the paydate. The remaining
increases and decreases in the accounts comprising working capital reflect
normal seasonal variations.
Net cash used in investing activities was $2,514,000 in the nine months
ended September 30, 1999 compared to $2,563,000 in the nine months ended
September 30, 1998. The 1998 period reflected increased activity for the
acquisition of other businesses and development expenses and hardware
acquisitions for TEAM Direct(TM). There were no acquisitions in 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 1999, $210,000
was paid to former executives of the Company's location in Oregon for covenants
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 was recorded in short-term
investments. The certificate of deposit and the related borrowing were retired
in October 1999.
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 towards the acquisition of
the shares. The borrowing bears interest at LIBOR plus 2.25%. The ninety day
fixed rate was 7.76% on the balance outstanding on September 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. $650,000 was repaid on the note prior to September 30, 1999 and an
additional $50,000 was repaid on October 1, 1999.
The Company did not make any other purchases of treasury stock during
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.
-14-
16
In connection with an acquisition in 1997, the Company guaranteed the
price of 68,468 shares at $10.25 per share. During 1999, $240,567 was paid to
one of the holders of the shares under this guarantee arrangement.
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
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 provided 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 renewed this line of credit
commitment for $3,500,000 in August 1999.
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 through the
third quarter of 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).
-15-
17
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 tested the system for Year 2000
compliance and is satisfied that the system is Y2K compliant.
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 October 31, 1999
only one acquired location remains to be converted to TEAM Direct(TM).
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. The Company has received
correspondence from its primary providers and banks that indicate they are or
will be substantially Y2K compliant.
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 believes it has adequate alternative sources to maintain
systems processing in the event of a temporary disruption of electric utility
service at its main corporate headquarters. It also has alternative means of
transmitting data, etc. if either of the Internet or its private frame relay is
not enabled because of vendor Y2K problems. If neither the Internet nor the
private frame relay are operational the Company's business could be adversely
affected. Similarly, the loss of telephone service for an extended period at the
Company's headquarters facility or at its service locations could adversely
affect operations and ultimately the profitability of the Company.
The Company believes that the disruption of electric utility service at
any of its locations outside of its main corporate office would not have a
material effect on its operations as long as either Internet or phone access is
possible. More than a temporary disruption of both phone service or Internet
service nationally or regionally would adversely affect the Company's operations
and ultimately its profitability.
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.
-16-
18
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
While the Company believes that its internal technology systems are Year
2000 compliant, there are risks in connection with the loss of electric utility
service or telecommunication service. As of November 1999, the Company has not
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 eleven consecutive quarters for the period ended September 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. All amounts presented are in
thousands of dollars, except per share amounts.
-17-
19
- --------------------------------------------------------------------------
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 Sept 30
1999 1999 1999
---- ---- ----
- --------------------------------------------------------------------------
Revenues $90,654 $101,379 102,677
- --------------------------------------------------------------------------
Direct Costs 86,410 96,870 98,121
- --------------------------------------------------------------------------
Net Income 184 307 311
- --------------------------------------------------------------------------
Earnings Per Share:
- --------------------------------------------------------------------------
Basic $ .04 $ .07 $ .07
- --------------------------------------------------------------------------
Diluted $ .04 $ .07 $ .07
- --------------------------------------------------------------------------
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.
-18-
20
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.
-19-
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Reports on Form 8-K
On September 29,1999 the Company filed a Form 8-K with the SEC dated as
of September 27,1999 reporting that it had received an offer to purchase all of
the outstanding shares of its common stock. On September 30,1999 the Company
filed a Form8-K with the SEC dated as of September 28,1999 reporting that it had
been notified by Nasdaq that its shares of common stock would be delisted from
the Nasdaq National Market and become listed on the Nasdaq SmallCap Market
effective October 1, 1999. On October 1,1999 the Compnay filed a Form 8-K with
the SEC dated as of October 1,1999 reporting that the Company's board of
directors had approved an offer to purchase all of the outstanding shares of its
common stock.
(b.) Exhibits
27 Financial Data Schedule
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 CORPORATION
/S/ MICHAEL R. GOODRICH
Chief Financial Officer and
Authorized Signing Officer
November 12, 1999
-20-
22
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27* Financial Data Schedule
* In SEC EDGAR-filed document only
-21-