<PAGE> 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, 1998
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
WORTHINGTON, OHIO
(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, 1998 WAS 4,737,247.
<PAGE> 2
TEAM AMERICA CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NO.
---
<S> <C>
Item 1. Financial Statements:
Consolidated Statements of Income -- Three-month periods
ended September 30, 1998 and 1997 (unaudited) -3-
Consolidated Statements of Income -- Nine-month periods
ended September 30, 1998 and 1997 (unaudited) -4-
Consolidated Balance Sheets -- September 30, 1998 (unaudited)
and December 31, 1997 -5-
Consolidated Statements of Cash Flows -- Nine-month periods
ended September 30, 1998 and 1997 (unaudited) -7-
Consolidated Statement of Changes in Shareholders' Equity-
Nine-month period ended September 30, 1998 (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 6. Exhibits and Reports on Form 8-K -19-
Signature -20-
Exhibit Index -21-
</TABLE>
Note: Item 3 of Part I and Items 1 through 5 of Part II are omitted because they
are not applicable.
2
<PAGE> 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,
<TABLE>
<CAPTION>
1998 1997
(unaudited)
<S> <C> <C>
REVENUES $ 89,499,100 $ 36,697,118
DIRECT COSTS:
Salaries and wages 77,231,712 31,764,551
Payroll taxes, workers' compensation premiums,
employee benefits and other 7,952,045 3,235,718
-------------- --------------
Total direct costs 85,183,757 35,000,269
-------------- --------------
Gross profit 4,315,343 1,696,849
EXPENSES:
Administrative salaries, wages and employment taxes 2,001,527 862,856
Other general and administrative expenses 1,365,089 662,014
Depreciation and amortization 372,849 59,812
-------------- --------------
Total operating expenses 3,739,465 1,544,682
-------------- --------------
Income from operations 575,878 152,167
OTHER INCOME 13,391 148,286
-------------- --------------
Income before income taxes 589,269 300,453
INCOME TAX EXPENSE 356,000 127,661
-------------- --------------
Net income $ 233,269 $ 172,792
============== ==============
Earnings per share:
Basic $ 0.05 $ 0.05
============== ==============
Diluted $ 0.05 $ 0.05
============== ==============
Weighted average shares outstanding:
Basic 4,746,590 3,501,686
============== ==============
Diluted 4,794,519 3,501,686
============== ==============
</TABLE>
3
<PAGE> 4
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1997
(unaudited)
<S> <C> <C>
REVENUES $ 243,588,670 $ 94,051,834
DIRECT COSTS:
Salaries and wages 208,534,653 80,605,444
Payroll taxes, workers' compensation premiums,
employee benefits and other 22,997,051 8,537,646
-------------- --------------
Total direct costs 231,531,704 89,143,090
-------------- --------------
Gross profit 12,056,966 4,908,744
EXPENSES:
Administrative salaries, wages and employment taxes 5,854,641 2,423,471
Other general and administrative expenses 3,882,132 1,530,945
Depreciation and amortization 1,081,365 146,515
-------------- --------------
Total operating expenses 10,818,138 4,100,931
-------------- --------------
Income from operations 1,238,828 807,813
OTHER INCOME 92,140 440,650
-------------- --------------
Income before income taxes 1,330,968 1,248,643
INCOME TAX EXPENSE 850,000 512,313
-------------- --------------
Net income $ 480,968 $ 736,150
============== ==============
Earnings per share:
Basic $ 0.10 $ 0.22
============== ==============
Diluted $ 0.10 $ 0.22
============== ==============
Weighted average shares outstanding:
Basic 4,730,239 3,404,750
============== ==============
Diluted 4,928,196 3,404,750
============== ==============
</TABLE>
4
<PAGE> 5
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents:
Cash $ 2,329,176 $ 1,465,141
Temporary cash investments 1,653,096 4,484,367
Short-term investments 515,000 515,000
Receivables:
Trade, net 3,667,687 1,509,583
Employee advances 277,417 165,519
Unbilled revenues 11,213,469 7,070,588
Refundable income taxes -- 253,396
-------------- --------------
Total receivables 15,158,573 8,999,086
Prepaid expenses 276,333 216,685
Deferred income tax asset 107,000 107,000
-------------- --------------
Total current assets 20,039,178 15,787,279
PROPERTY AND EQUIPMENT, NET 1,717,252 991,477
OTHER ASSETS:
Goodwill and non-compete agreements, net 25,366,670 23,216,338
Cash surrender value of life insurance policies 584,500 398,005
Mandated benefit/security deposits 252,899 329,251
Deferred income tax asset 159,000 159,000
Other assets 65,731 128,585
-------------- --------------
Total other assets 26,428,800 24,231,179
-------------- --------------
Total assets $ 48,185,230 $ 41,009,935
============== ==============
</TABLE>
5
<PAGE> 6
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 198,852 $ 336,694
Accrued compensation 9,360,204 6,575,641
Accrued payroll taxes 3,942,194 2,484,735
Accrued workers' compensation premiums 2,367,324 1,255,013
Federal and state income taxes payable 613,329 160,000
Other accrued expenses 209,424 791,690
Client deposits 619,986 544,330
Capital lease obligation, current portion 68,000 10,128
--------------- --------------
Total current liabilities 17,379,313 12,158,231
CAPITAL LEASE OBLIGATION, net of current portion 16,015 18,941
DEFERRED RENT 62,084 98,832
DEFERRED COMPENSATION LIABILITY 552,341 394,687
--------------- --------------
Total liabilities 18,009,753 12,670,691
--------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock:
Class A, no par value; 500,000 shares authorized; -- --
none issued; (aggregate liquidation preference $0)
Class B, no par value; 500,000 shares authorized;
none issued -- --
Common Stock, no par value:
Common Stock, 10,000,000 shares authorized
4,863,433 and 4,730,716 shares issued; 4,746,622
and 4,613,905 shares outstanding, respectively 28,299,006 26,886,226
Excess purchase price (83,935) (83,935)
Retained earnings 2,039,934 1,558,966
--------------- --------------
30,255,005 28,361,257
Less - Treasury stock, 116,811 and 116,811 shares
respectively, at cost (79,528) (22,013)
--------------- --------------
Total shareholders' equity 30,175,477 28,339,244
--------------- --------------
Total liabilities and shareholders' equity $ 48,185,230 $ 41,009,935
=============== ==============
</TABLE>
6
<PAGE> 7
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1997
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 480,968 $ 736,150
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation and amortization 1,081,365 146,515
(Increase) decrease in operating assets:
Receivables (6,025,424) (2,409,602)
Prepaid expenses (56,418) (20.133)
Mandated benefit/security deposits 112,510 (17,850)
Other 89,902 --
Increase (decrease) in operating liabilities:
Accounts payable (139,497) 108,695
Accrued expenses and other payables 5,045,108 1,120,559
Client deposits (13,960) 32,794
Deferred liabilities 120,906 106,723
-------------- --------------
Net cash provided by (used in) operating activities 695,460 (196,149)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (905,630) (413,782)
Increases in cash surrender value of life insurance policies (186,495) (130,503)
Decrease in short-term investments -- 1,798,680
Acquisitions, net of cash obtained (1,430,876) (2,176,092)
-------------- --------------
Net cash provided by (used in) investing activities (2,523,001) (921,697)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation (82,180) (8,395)
Offering costs incurred -- (20,580)
Purchase of treasury stock (57,515) --
-------------- --------------
Net cash used in financing activities (139,695) (28,975)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (1,967,236) (1,146,821)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,949,508 8,100,520
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,982,272 $ 6,953,699
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 20,148 $ 2,389
============== ==============
Income Taxes $ 215,000 $ 843,000
============== ==============
</TABLE>
7
<PAGE> 8
TEAM AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Common Stock Treasury Stock Excess
------------------------ -------------------- Purchase Retained
Number Value Number Value Price Earnings Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance 4,730,716 $ 26,886,226 116,811 $ (22,013) $ (83,935) $ 1,558,966 $ 28,339,244
December 31, 1997
Acquisitions 132,717 1,412,780 - - - - - - - - 1,412,780
Net Income - - - - - - - - - - 480,968 480,968
Shares Repurchased - - - - (11,000) (57,515) - - - - (57,515)
Shares Issued upon
Exercise of
Stock Options 1,625 - - - - - - - - - - - -
------------------------------------------------------------------------------------------
Balance 4,865,058 $ 28,299,006 127,811 $ (79,528) $ (83,935) $ 2,039,934 $ 30,175,477
==========================================================================================
September 30, 1997
</TABLE>
8
<PAGE> 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, 1998 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, 1997. Since December 31, 1997, the
Company acquired PEO businesses in transactions accounted for as purchases.
Intangible assets recorded as a result of these purchases was goodwill. Goodwill
was recorded as the amount by which the consideration paid, including the value
of stock issued and liabilities assumed, exceeded the fair market value of
assets acquired. Goodwill is being amortized over a twenty-five year period.
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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------------------- -----------------------
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding 4,746,590 3,501,686 4,730,239 3,404,750
Shares issuable upon the exercise of
stock options, less shares repurchased
from the proceeds 150,028
Shares earned but still in escrow
from acquisitions 47,929 47,929
---------------------- -----------------------
Diluted shares outstanding 4,794,519 3,501,686 4,928,196 3,404,750
====================== =======================
</TABLE>
NOTE 4 -- Supplemental Disclosure of Non-cash Financing and Investing Activities
132,717 shares of unregistered TEAM America Corporation Common Stock,
valued at the closing price on the day preceding the closing date, $1,412,780 in
total, were issued as part of the consideration for four acquisitions completed
in 1998.
5,000 shares of TEAM America Corporation Common stock were issued upon
exercise of a stock option with an exercise price of $6.75. The exercise was
accomplished through the delivery of 3,375 shares of TEAM America Common Stock
owned by the option holder.
9
<PAGE> 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, 1998 and 1997 expressed
as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Direct costs:
Salaries and wages 86.3 86.6 85.6 85.7
Payroll taxes, workers'
compensation premiums,
employee benefits and other
costs 8.9 8.8 9.4 9.1
Gross profit 4.8 4.6 5 5.2
Operating Expenses:
Administrative salaries,
wages and employment taxes 2.2 2.3 2.4 2.6
Other selling general and
administrative 1.5 1.8 1.6 1.6
Depreciation and amortization 0.4 0.1 0.4 0.2
Total operating expenses 4.1 4.2 4.4 4.4
Other income 0 0.4 0 0.5
Income before taxes 0.7 0.8 0.6 1.3
Provision for income taxes 0.4 0.3 0.4 0.5
Net income 0.3 0.5 0.2 0.8
</TABLE>
10
<PAGE> 11
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES
Revenues increased 144% to $89,499,000 in the three months ended
September 30,1998 from $36,697,000 in the three months ended September 30, 1997.
Since September 8, 1997, the Company completed seven acquisitions of PEO's
including three in the first quarter of 1998, and one in the second quarter of
1998. Revenues from the acquisitions accounted for over 58% of the revenues
recorded in the third quarter of 1998.
DIRECT COSTS
Total direct costs increased 143% to $85,184,000 in the three months
ended September 30, 1998 from $35,000,000 in the three months ended September
30, 1997. Direct costs were 95.2% of total revenues in the third quarter of 1998
compared to 95.4% in the third quarter of 1997. The margin improvement derived
from lower workers' compensation costs in the non-Ohio markets in the third
quarter of 1998 as compared to the third quarter of 1997. In addition there was
some margin benefit from the drop-offs on employment- related taxes in those
regions where a flat % billing arrangement is used. Gross profit declined from
5.1% of revenues in the second quarter of 1998 to 4.8% of revenues in the third
quarter of 1998 because of workers' compensation credits received by the Ohio
operations in the second quarter which are not expected to recur in future
quarters.
EXPENSES
Administrative salaries, wages and employment taxes rose 131% to
$2,002,000 in the three months ended September 30, 1998 from $863,000 in the
three months ended September 30, 1997. These costs declined to 2.2% of total
revenues in the third quarter of 1998 from 2.3% of total revenues in the third
quarter of 1997. The increase in this expense category reflects the higher
headcount from the acquisitions. However, the acquired entities had lower
expenses as a percentage of revenues leading to the decline as a percentage of
revenues.
Other selling, general and administrative expenses increased 106% to
$1,365,000 in the three months ended September 30, 1998 from $662,000 in the
three months ended September 30, 1997. In addition to the increased costs from
the acquired companies, expenses also rose for liability and employment
practices insurance, printing for new marketing and employee benefits literature
for the acquired companies, travel and facilities costs.
11
<PAGE> 12
Depreciation and amortization expense rose to $373,000 in the three months ended
September 30, 1998 from $60,000 in the three months ended September 30, 1997.
Depreciation expense for the quarter was $107,000 in 1998 compared to $40,000 in
1997 while amortization expense was $266,000 in 1998 compared to $20,000 in the
second quarter of 1997.
The increased depreciation expense resulted from the ongoing investment in
computer equipment and software. The amortization expense is the 25 year
amortization of goodwill and other intangibles arising from the eight
acquisitions completed in 1997 and 1998.
INCOME FROM OPERATIONS
Income from operations increased 278% to $576,000 in the three months
ended September 30, 1998 from $152,000 in the three months ended September 30,
1997, primarily as a result of the expansion of the business through
acquisitions.
OTHER INCOME
Other income declined to $13,000 in the three months ended September
30, 1998 from $148,000 in the three months ended September 30, 1997. Other
income is income from the investment of the $13,000,000 of proceeds from the IPO
completed in December 1996. In the third quarter of 1997, the entire amount was
invested in interest bearing accounts. By December 31, 1997 the balance
remaining had declined to approximately $5,000,000 and had further declined to
approximately $2,100,000 at September 30, 1998 as a result of using the proceeds
to acquire other PEO's.
INCOME TAX EXPENSE
Income tax expense was $356,000 or 60% of income before taxes in the
three months ended September 30, 1998 compared to $128,000 or 42% of income
before taxes in the three months ended September 30, 1997. Income tax expense
rose as a percent of pre-tax income in 1998 because the goodwill amortization is
not a deductible expense for tax purposes. The tax provision in 1997 also
benefited from the investment income, almost half of which was from tax-free
municipal bonds.
NET INCOME AND EARNINGS PER SHARE
As a result of the higher income tax expense, higher amortization
expense and lower investment income, net income rose only 35% to $233,000 in the
three months ended September 30, 1998 from $172,000 in the three months ended
September 30, 1997.
Basic and diluted earnings per share were $0.05 in the three months
ended September 30, 1998 and $0.05 in the three months ended September 30, 1997.
Average shares outstanding were 4,795,000 in the three months ended September
30, 1998 compared to 3,502,000 in the three months ended September 30, 1997 due
to the shares issued for acquisitions.
12
<PAGE> 13
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES
Revenues increased 159% to $243,589,000 in the nine months ended
September 30, 1998 from $94,052,000 in the nine months ended September 30, 1997.
Revenues from acquisitions contributed over 50% of the revenues recorded in the
first nine months of 1998.
DIRECT COSTS
Total direct costs increased 159% to $231,532,000 in the nine months
ended September 30, 1998 from $89,143,000 in the nine months ended September 30,
1997. Direct costs increased to 95.0% of total revenues in the first nine months
of 1998 up from 94.8% in the first nine months of 1997. Costs rose as a
percentage of revenues for two reasons. First, the acquired companies have lower
fees and margins than the core business. The second factor affecting margin is
that the acquirees have more flat percentage fee arrangements with their
clients, whereas this billing method was used infrequently in the core business
where a weekly per head count fee is prevalent. The flat fee percentage results
in lower margins in the first half of the year when certain costs, such as
unemployment taxes, are highest. As these taxes reach their statutory maximums,
costs decline but the flat percentage fee continues, resulting in higher margins
in the second half of the year. Offsetting the higher costs in the acquired
companies were workers' compensation credits in the Ohio business which are not
expected to recur in the second half of 1998.
EXPENSES
Administrative salaries, wages and employment taxes rose 142% to
$5,855,000 in the nine months ended September 30, 1998 from $2,423,000 in the
nine months ended September 30, 1997. These costs declined to 2.4% of total
revenues in the 1998 period from 2.6% of total revenues in the 1997 period. The
increase in this expense category reflects the staffing at the increased number
of locations from the acquisitions. However, the acquired entities had lower
expenses as a percentage of revenues leading to the decline as a percentage of
revenues.
Other selling, general and administrative expenses increased 154% to
$3,882,000 in the nine months ended September 30, 1998 from $1,531,000 in the
nine months ended September 30, 1997. In addition to the increased costs from
the acquired companies, expenses also rose for liability and employment
practices insurance, printing for new marketing and employee benefits literature
for the acquired companies, travel, professional fees and facilities costs.
These costs are not expected to continue to increase at a greater pace than
revenues. Additional savings are also expected once the Company's new
centralized payroll, HR and accounting software package is deployed and
operating at all locations in 1999.
Depreciation and amortization expense rose to $1,081,000 in the nine
months ended September 30, 1998 from $147,000 in the nine months ended September
30, 1997. Depreciation expense increased as a result of the investment in
computer equipment and software during the past year. Amortization expense is
the 25 year amortization of goodwill and other intangibles arising from the
acquisitions.
13
<PAGE> 14
INCOME FROM OPERATIONS
Operating income rose 53% to $1,239,000 in 1998 from $808,000 in 1997.
However, EBITDA which excludes the goodwill amortization expense of $820,000 in
the 1998 period compared to only $ 33,000 in the 1997 period, increased 143% to
$2,321,000 in the nine months ended September 30, 1998 from $954,000 in the nine
months ended September 30, 1997.
OTHER INCOME
Other income declined to $92,000 in the nine months ended September 30,
1998 from $441,000 in the nine months ended September 30, 1997. Other income is
income from the investment of the $13,000,000 of IPO proceeds. Through September
30 ,1997, the entire amount was invested. By December 31, 1997, the balance
remaining had declined to approximately $5,000,000 and had further declined to
approximately $2,100,000 at September 30, 1998 as a result of using the proceeds
to acquire other PEO's.
INCOME TAX EXPENSE
Income tax expense was $850,000 or 64% of income before taxes in the
nine months ended September 30, 1998 compared to $512,000 or 41% of income
before taxes in the nine months ended September 30, 1997. Income tax expense
rose as a percent of pre-tax income in 1998 because the goodwill amortization is
not a deductible expense for tax purposes. The tax provision in 1997 also
benefited from the investment income, almost half of which was from tax-free
municipal bonds.
NET INCOME AND EARNINGS PER SHARE
As a result of the higher operating expenses, higher amortization
expense and lower investment income, net income declined to $481,000 in the nine
months ended September 30, 1998 from $736,000 in the nine months ended September
30, 1997.
Basic and diluted earnings per share were $0.10 in the nine months
ended September 30, 1998 and $0.22 in the nine months ended September 30, 1997.
Average shares outstanding increased to 4,928,000 in the nine months ended
September 30, 1998 compared to 3,405,000 in the nine months ended September 30,
1997 due to the shares issued for acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had a working capital surplus of
$2,660,000. At December 31, 1997, the working capital surplus was $3,629,000.
The change in working capital correlates with the use of funds to acquire four
PEO's in 1998.
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 $695,000 and
($196,000) for the nine month periods ended September 30, 1998 and 1997,
respectively.
14
<PAGE> 15
The Company recognizes as revenue and as unbilled receivables, on an
accrual basis, any such amounts which relate to services performed by worksite
employees as of the end of each accounting period which have not yet been billed
to the client because of timing differences between the day the Company's
accounting period ends and the billing dates for client payroll periods that
include the day the Company's accounting period ends. The amount of unbilled
receivables, as well as accrued liabilities and client deposits, have increased
with the growth of the Company.
For work performed prior to the termination of a client agreement, the
Company may be obligated, as an employer, to pay the gross salaries and wages of
the client's worksite employees and the related employment taxes and workers'
compensation costs, whether or not the Company's client pays the Company on a
timely basis or at all. The Company, however, historically has not incurred
significant bad debt expenses because the Company generally collects from its
clients all revenues with respect to each payroll period in advance of the
Company's payment of the direct costs associated therewith. The Company attempts
to minimize its credit risk by investigating and monitoring the credit history
and financial strength of its clients and by generally requiring payments be
made by wire transfer, immediately available funds or ACH transfer. With respect
to ACH transfers, the Company is obligated to pay the client's worksite
employees if there are insufficient funds in the client's bank account on the
payroll date. The Company's policy, however, is only to permit clients with a
proven credit history with the Company to pay by ACH transfer. In addition, in
the rare event of nonpayment by a client, the Company has the ability to
terminate immediately its contract with the client. The Company also protects
itself by obtaining unconditional personal guarantees from the owners of a
client and/or a cash security deposit, bank letter of credit or pledge of
certificates of deposits. As of September 30, 1998 and 1997, the Company held
cash security deposits in the amounts of $620,000 and $544,000 respectively.
Additional sources of funds to the Company are advance payments of
employment taxes and insurance premiums which the Company holds until they are
due and payable to the respective taxing authorities and insurance providers.
Net cash used in investing activities was $2,523,000 and $922,000 for
the nine month periods ended September 30, 1998 and 1997 respectively. The
principal use of cash from investing activities was the purchase of additional
computer equipment and software to support the growth of the business. Also,
during 1998, $1,430,000 was paid toward the purchase of four PEO companies. In
addition to the cash paid during the first half for acquisitions, 132,717 shares
of TEAM America Common Stock were also issued and, without either an effective
registration statement or an exemption from registration, these shares are
unregistered restricted shares and cannot be sold for a one year period from the
date of issuance.
Two acquisitions were completed in the 1997 period for total cash paid
of $2,176,000. 40,615 treasury shares and 504,000 newly issued unregistered
shares were also used in these acquisitions. Short-term investments from funds
raised in the December 1996 IPO were used for the cash portion of these
acquisitions.
In September 1998, the Company's Board of Directors approved a share
repurchase of up to 200,000 shares of TEAM America Corporation common stock. In
September 1998, 11,000 shares were repurchased at a cost of $57,000. In October
1998, an additional 46,000 shares were repurchased at a cost of $285,500.
Financing activities are not material as the Company has no debt or
significant leases.
15
<PAGE> 16
Presently, the Company has no material commitments for capital
expenditures. Primary new 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%. 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. There were no borrowings under
any revolving credit agreement thus far in 1998.
The Company believes that the net proceeds from the sale of the common
shares in December 1996 which were invested in marketable securities and
certificates of deposit, 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, or thus far in 1998,
and does not expect to pay a dividend in the foreseeable future.
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 TEAMDirect(TM).
Although this systems project was not embarked upon to address the Year 2000
issue, the result of this project is that TEAMDirect(TM) has been designed to be
Year 2000 compliant. The Company believes TEAMDirect(TM) is Year 2000 compliant
in all respects. It is written on an Oracle 8 database engine. The Company has
not specifically tested the system for Year 2000 compliance, but intends to do
so in the first half of 1999.
Since September 1997, the Company has acquired seven PEO's. 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 TEAMDirect(TM) before the year 2000.
As of November 11, 1998, substantially all of the Company's original
core business in Ohio has been converted to the new system.
16
<PAGE> 17
Integration efforts are underway in four of the seven acquired locations and are
expected to be underway in the remaining three locations by the end of November,
1998. All locations are expected to be on TEAMDirect(TM) by early 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 provider,
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 compliance 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.
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 administering 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 November 1998, 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.
17
<PAGE> 18
QUARTERLY RESULTS
The following table sets forth certain unaudited operating results of each of
the eight consecutive quarters for the period ended September 30, 1998 which
comprise all of the quarterly periods following the Company's initial public
offering of its Common Stock in December 10, 1996.
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.
<TABLE>
<CAPTION>
QUARTER ENDED
Dec. 31 Mar. 31 June 30 Sept. 30
1996 1997 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $25,762 $25,542 $31,812 $36,697
Direct Costs: 24,218 24,143 30,000 35,000
Net Income: 167 232 332 173
Earnings Per Share:
Basic $.07 $.07 $.10 $.05
Diluted $.07 $.07 $.10 $.05
</TABLE>
<TABLE>
<CAPTION>
Dec. 31 Mar. 31 June 30 Sept. 30
1997 1998 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $61,812 $70,034 $84,107 $89,499
Direct Costs: 58,402 66,624 79,777 85,184
Net Income: 193 1 246 233
Earnings Per Share:
Basic $.04 $.00 $.05 $.05
Diluted $.04 $.00 $.05 $.05
</TABLE>
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. 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, 1997 filed with the securities and Exchange Commission, as the same may be
amended from time to time.
18
<PAGE> 19
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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
None
(b) Exhibits
27 Financial Data Schedule
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TEAM AMERICA CORPORATION
/s/MICHAEL R. GOODRICH
--------------------------------------
Chief Financial Officer and Authorized
Signing Officer
November 11, 1998
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description Page #
- -------------- ----------- ------
<S> <C> <C>
27 Financial Data Schedule - -*
</TABLE>
*In SEC EDGAR-filed document only
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,982,272
<SECURITIES> 515,000
<RECEIVABLES> 15,208,573
<ALLOWANCES> 50,000
<INVENTORY> 0
<CURRENT-ASSETS> 20,039,178
<PP&E> 2,507,971
<DEPRECIATION> 790,719
<TOTAL-ASSETS> 48,185,230
<CURRENT-LIABILITIES> 17,379,313
<BONDS> 0
0
0
<COMMON> 28,299,006
<OTHER-SE> 1,876,471
<TOTAL-LIABILITY-AND-EQUITY> 48,185,230
<SALES> 0
<TOTAL-REVENUES> 243,588,670
<CGS> 0
<TOTAL-COSTS> 231,531,704
<OTHER-EXPENSES> 10,818,318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,330,968
<INCOME-TAX> 850,000
<INCOME-CONTINUING> 480,968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 480,968
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
