Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1999
Commission file number: 0-21533
TEAM AMERICA CORPORATION
(Name of registrant as specified in its charter)
OHIO 31-1209872
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 E. WILSON BRIDGE ROAD
WORTHINGTON, OHIO 43085
(Address of principal executive offices)(Zip Code)
(614) 848-3995
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
common stock, no par value
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, and (2) has been subject to the filing
requirements for at least the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
Aggregate market value of voting stock held by non-affiliates of
registrant as of March 20, 2000 was approximately $14,784,665.
There were 4,332,999 shares of the Registrant's common stock
outstanding at March 20, 2000.
2
PART I
ITEM 1. BUSINESS.
GENERAL
We are a Professional Employer Organization, or PEO, which was founded
in 1986 and incorporated in Ohio in 1987. We provide comprehensive and
integrated human resource management services to small and medium-sized
businesses. These services allow our clients to outsource their human resource
responsibilities. We offer a broad range of "back office" services, including
human resource administration, regulatory compliance management, employee
benefits administration, risk management services and employer liability
protection, payroll and payroll tax administration, and placement services. We
provide these services by becoming the legal employer of our client's employees.
While we become the legal employer for most purposes, the client remains in
operational control of its business.
We have expanded our business through acquisitions. As of December 31,
1999, we provided professional employer services to approximately 1,800 clients
and approximately 14,500 worksite employees, located in the midwestern,
northwestern/intermountain, mid-south and western regions of the United States.
This compares with 241 clients and 3,646 worksite employees, primarily all
located in Ohio, at December 31, 1996.
By becoming the legal employer of our clients' employees, we are able
to take advantage of certain economies of scale in the "business of employment"
and to pass those benefits on to our clients and worksite employees. As a
result, we are able to obtain, at an economical cost, services and expertise
similar to those provided by the human resource departments of large companies.
Our services provide substantial benefits to both the client and its worksite
employees. We believe our services assist business owners by:
o Permitting the managers of the client to concentrate on the
client's core business as a result of the reduced time and
effort that they are required to spend dealing with complex
human resource, legal and regulatory compliance issues and
employee administration; and
o Managing escalating costs associated with unemployment,
workers' compensation, health insurance coverage, worksite
safety programs and employee-related litigation.
We also believe that our worksite employees benefit from their relationship with
us by having access to better, more affordable benefits, enhanced benefit
portability, improved worksite safety and employment stability.
We believe that there are opportunities for growth in our industry.
There is an increasing trend of businesses to outsource non-core activities and
functions. However, only a relatively small percentage of businesses currently
utilize PEOs, although there is significant growth in the number of small
businesses. These factors coupled with the ever increasing complexity of the
human resource legal and regulatory framework and the costs associated with
implementing the necessary management information systems to deal with these
issues should lead to significant consolidation opportunities in the PEO
industry.
On February 4, 2000, we entered into a definitive merger agreement with
Global Employment Solutions, Inc. ("Global") whereby Global agreed to purchase
all of our outstanding shares of common stock, other than 750,000 shares which
will be converted into shares of preferred stock of Global Employment Holdings,
Inc., Global's parent company, for $7.75 per share. On April 12, 2000, Global
terminated the definitive merger agreement.
-2-
3
GROWTH STRATEGY
We intend to further strengthen our position in various U.S. markets by
pursuing the following business strategies:
Deliver High-Quality Services and Expand Client Base. By offering a
broad range of high-quality services, we believe we are attractive to employers
who are seeking a single-source solution to their human resource needs. We
intend to continue to focus on providing high-quality, value-added services as a
means to differentiate ourselves from competitors. Certain PEOs compete
primarily by offering comparatively lower-cost health and workers' compensation
coverage to high-risk industries or by providing principally basic payroll and
payroll tax administration with only limited additional services. In contrast,
we provide comprehensive and integrated human resource management to clients who
are selected after we perform a risk management assessment. We believe that our
strategy of emphasizing the quality and breadth of our services results in lower
client turnover and more consistent growth and profits than the strategy of
certain PEOs which compete by offering comparatively lower-cost coverage or
limited services.
Increase Penetration of Existing Markets. We believe that additional
market penetration in established markets offers significant growth potential.
Less than 2.0% of the total number of businesses having between 20 and 500
employees utilize a PEO. In established markets, our ability to achieve our
growth objectives is enhanced by a larger number of referrals, a higher client
retention rate, a more experienced sales force and greater momentum in the
marketing efforts than that which occurs in new markets. We intend to capitalize
on these advantages and to achieve higher penetration in our existing markets by
hiring additional sales personnel and by improving sales productivity. In
addition, we intend to continue our advertising and promotional efforts in order
to educate the market place regarding the quality and breadth of our services
and the benefits to companies of "partnering in employment" through outsourcing
the human resource function. We believe that increasing our penetration in
existing markets will allow us to leverage our current economies of scale,
thereby increasing our cost effectiveness and profit margins.
Expand Through Acquisitions. The PEO industry is highly fragmented,
with in excess of 2,500 companies providing PEO services in 1999 according to
industry sources. Accordingly, we believe significant opportunities for
additional consolidation exist in the PEO industry. This industry consolidation
will be driven by growing human resource, legal and regulatory complexities, by
increasing capital requirements, and by the significant economies of scale
available to PEOs with a regional concentration of clients. We intend to look
for opportunities to expand in our current markets by acquiring the accounts of
competitors in what we refer to as "fold in" acquisitions, and possibly to enter
selected new markets by acquiring established high-quality PEOs in order to
provide a platform for future regional consolidation. We have identified certain
fundamental attributes which characterize attractive markets such as:
o Proximity to a major metropolitan area;
o Regulatory receptivity to PEOs;
o Prior successful introduction of the PEO concept;
o Favorable economic conditions; and
o A high concentration of small to medium-sized businesses.
Develop Proprietary Information Systems. We will continue to develop
our proprietary information systems which will enable us to integrate all
aspects of the administration of payroll, human resources and employee benefits,
thereby providing a significant competitive advantage in managing costs and
delivering a full range of high-quality services. We also believe we may be able
to derive revenues from the licensing to, or as a service bureau to, other PEOs
using our proprietary system. See "Information Technology."
-3-
4
Target Selected Clients in Growth Industries. We attempt to target, and
tailor our services to meet the needs of businesses with between 5 and 500
employees in industries which we believe have the potential for significant
growth. As of December 31, 1999, our clients had an average of approximately 8
worksite employees. Our targeted businesses are likely to:
o Desire the wide range of employee benefits offered by us;
o Recognize the burden of their human resource administration
costs;
o Experience greater employment-related regulatory burdens; and
o Be more financially stable.
In addition, we believe that targeting such businesses results in
greater marketing efficiency, lower business turnover due to client business
failure, and less exposure to credit risk.
CLIENT SERVICES
Client Service Teams. We have client service directors who oversee a
service staff consisting of customer service representatives and customer
service administrators. A team consisting of a client service director, a client
service representative and a client service administrator is assigned to each
client. The client service team is responsible for administering the client's
personnel and benefits, for coordinating our response to client needs for
administrative support and for responding to any questions or problems
encountered by the client.
The client service representative acts as our principal client contact
and typically is on call and in contact with each client throughout the week.
This individual serves as the communication link between our various departments
and our on-site supervisor, who in many cases is the manager of the client's
business. Accordingly, this individual is involved in every aspect of our
delivery of services to the client. For example, the client service
representative is responsible for gathering all information necessary to process
each payroll of the client and for all other information needed by our human
resources, accounting and other departments with respect to such client and to
our worksite employees. A client service representative also actively
participate in hiring, disciplining and terminating worksite employees,
administering employee benefits, and responding to employee complaints and
grievances.
Core Activities. We provide professional employer services through six
core activities:
o Human resource administration;
o Regulatory compliance management;
o Employee benefits administration;
o Risk management services and employer liability protection;
o Payroll and payroll tax administration; and
o Placement services.
Human Resource Administration. We, as an employer, provide our clients
with a broad range of human resource services including on-going supervisory
education and training regarding risk management and employment laws, policies
and procedures. In addition, our human resource department handles sensitive and
complicated employment issues such as employee discipline, termination, sexual
harassment, and wage and salary planning and analysis. We are in the process of
expanding our human resource services to assist clients in areas such as
employee morale and worksite employee and on-site supervisor training. We
provide a comprehensive employee handbook, which includes customized,
site-specific materials concerning each worksite, to all worksite employees. In
addition, we maintain extensive files and records regarding worksite employees
for compliance with various state and federal laws
-4-
5
and regulations. This extensive record keeping is designed to substantially
reduce legal actions arising from lack of proper documentation.
Regulatory Compliance Management. We, under our standard client
agreement, assume responsibility for complying with many employment related
regulatory requirements. As an employer, we must comply with numerous federal
and state laws, including:
o Certain tax, workers' compensation, unemployment, immigration,
civil rights, and wage and hour laws;
o The Americans with Disabilities Act of 1990;
o The Family and Medical Leave Act;
o Laws administered by the Equal Employment Opportunity
Commission; and
o Employee benefits laws such as ERISA and COBRA.
We provide bulletin boards to our clients and maintain them for
compliance with required posters and notices. We also assist our clients in
their efforts as employers to comply with and understand certain other laws and
responsibilities with respect to which we do not assume liability and
responsibility. For example, while we provide significant safety training and
risk management services to its clients, we do not assume responsibility for
compliance with the Occupational Safety and Health Act because the client
controls its worksite facilities and equipment.
Employee Benefits Administration. We offer a broad range of employee
benefit programs to our worksite employees. We administer such benefit programs,
thereby reducing the administrative responsibilities of our clients for
maintaining complex and tax-qualified employee benefit plans. By combining our
multiple worksite employees, we are able to take advantage of certain economies
of scale in the administration and provision of employee benefits. As a result,
we are able to offer to our worksite employees benefit programs that are
comparable to those offered by large corporations. In fact, some programs
offered by us would not otherwise be available to the worksite employees of many
clients if such clients were the sole employers. Eligible worksite and corporate
staff employees are entitled to participate in our employee benefit programs
without discrimination. Such programs include life insurance coverage as well as
our cafeteria plan that offers a choice of different health plans and dental,
vision and prescription card coverage. In addition, we permit each qualified
employee to participate in our 401(k) retirement plan and our dependent care
assistance program. Each worksite employee is given:
o The opportunity to purchase group-discounted, payroll-deducted
auto, homeowners or renters insurance and long-term disability
insurance; and
o Access to store discount programs, free checking accounts with
participating banks, a prepaid legal services plan, and
various other employee benefits.
We believe that by offering our worksite employees a broad range of large
corporation style benefit plans and programs we are able to reduce worksite
employee turnover, which results in cost savings for our clients and us. We
perform regulatory compliance and plan administration in accordance with state
and federal benefit laws.
Risk Management Services and Employer Liability Protection. Our risk
management of the worksite includes policies and procedures designed to
proactively prevent and control costs of lawsuits, fines, penalties, judgments,
settlements and legal and professional fees. In addition, we control benefit
plan costs by attempting to prevent fraud and abuse by closely monitoring
claims. Other risk management programs include effectively processing workers'
compensation and unemployment claims and aggressively contesting any suspicious
or improper claims. We believe that such risk management efforts increase our
profitability by reducing our liability exposure and by increasing the value of
our services to our clients.
-5-
6
Many of our direct competitors in both the public and private sector
are self-insured for health care, workers' compensation and employment practices
risks. In 1999, we became self-insured for Ohio Workers' Compensation. We also
maintain insurance for employment practices risks, including liability for
employment discrimination and wrongful termination. We believe that we
historically have been able to achieve a higher level of client satisfaction and
security by being insured for such risks. We believe that being insured with
this insurance coverage has greatly reduced our liability exposure and,
consequently, the potential volatility of our income from operations because we
are not required to rely exclusively on contractual indemnification from our
clients. Many of these clients do not carry insurance which covers employment
practices liability or do not have sufficient net worth to support their
indemnification obligations. For this coverage we have arranged for a large
surplus lines insurance company rated A++ (superior) by A.M. Best Company to
provide to us, and to our clients as additional insureds, employment practices
liability insurance, However, there can be no assurance that such insurance will
be available to us in the future on satisfactory terms, or that, if available,
will be sufficient. We believe that this arrangement is better received by
clients who are seeking to reduce their employment liability exposures and also
prevents us from becoming involved in adversarial situations with our clients by
eliminating the need for us to seek indemnification. We continue to study the
possibility of becoming self-insured in the future for selected risks and
believe that significant opportunities to self-insure may arise in the future.
Payroll and Payroll Tax Administration. We provide our clients with
comprehensive payroll and payroll tax administration which substantially
eliminates client responsibility for payroll and payroll taxes beyond
verification of payroll information. Unlike traditional payroll service
providers, which do not act as employers, we, as the employer, assume liability
and responsibility for the payroll and payroll taxes of our worksite employees
and for the obligations of our client to make federal and state unemployment and
workers' compensation filings, FICA deposits, child support levies and
garnishments, and new hire reports. We receive all payroll information,
calculate, process and record all such information, and either issue payroll
checks or directly deposit the net pay of worksite employees into their bank
accounts. We deliver all payroll checks either to the on-site supervisor of the
worksite or directly to the worksite employees. As part of our strategic plan of
expanding our information technology, we are in the process of developing
client-based software interfaces to make it possible for clients to enter and
submit payroll information via computer modems.
Placement Services. As a part of our overall employment relationship,
we assist our clients in their efforts to hire new employees. As a result of our
advertising volume and contracts with newspapers and other media, we are able to
place such advertisements at significantly lower prices than are available to
our clients. In addition, in some cases, we do not have to place such
advertisements because we already have multiple qualified candidates in a job
bank or pool of candidates. We interview, screen and pre-qualify candidates
based on criteria established in a job description prepared by us with the
client's assistance and perform background checks. In addition, depending on the
needs of our client, we test worksite employees for skills, health, and drug-use
in accordance with state and federal laws. Following the selection of a
candidate, we complete all hiring paperwork and, if the employee is eligible,
enroll the employee in our benefit programs. We believe that our unique approach
in providing such services gives us a significant advantage over our
competitors. These services also enable us to reduce our administrative expenses
and employee turnover and to avoid hiring unqualified or problem employees.
CLIENTS
Our clients and we are each responsible for certain specified
employer-related obligations. While we become the legal employer for most
purposes, the client remains in operational control of its business. We appoint
an on-site supervisor for each client worksite. In many cases, such on-site
supervisor is the manager of the client's business. We require each on-site
supervisor to enter with us into a standard on-site supervisor employment
agreement, which specifies the on-site supervisor's duties, responsibilities and
limitations of authority.
Pursuant to the provisions of our standard client agreement, we are the
legal employer of the client's worksite employees for most purposes and have the
right, among other rights, to hire, supervise, terminate and set the
compensation of such worksite employees. We bill our clients on each payroll
date for:
o The gross salaries and wages, related employment taxes and
employee benefits of our worksite employees;
-6-
7
o Advertising associated with recruitment;
o Workers' compensation and unemployment service fees; and
o An administrative fee.
Our administrative fee is computed based upon either a fixed fee per
worksite employee or an established percentage of gross salaries and wages
(subject to a guaranteed minimum fee per worksite employee), which fixed fee or
percentage is negotiated at the time the client agreement is executed. Our
administrative fee varies by client and is based primarily upon the nature and
size of the client's business and our assessment of the costs and risks
associated with the employment of the client's worksite employees. Accordingly,
our administrative fee income will fluctuate based on the number and gross
salaries and wages of worksite employees and the mix of client fee arrangements
and terms. In addition to the items noted above, each client must pay a one-time
enrollment fee. Consistent with industry practice, we recognize all amounts
billed to our clients as revenue because we are at risk for the payment of our
direct costs, whether or not our clients pay us on a timely basis or at all.
At December 31, 1999, we served approximately 1,800 clients and
approximately 14,500 worksite employees resulting in an average of 8 worksite
employees per client. No single client accounted for more than 2% of our
revenues for the twelve months ended December 31, 1999. As a result of
acquisitions in 1997 and 1998, our clientele is more geographically diverse. In
1996, approximately 94% of our client base was located in Ohio. At December 31,
1999, less than 30% of the worksite employees were located in Ohio. Our client
base is broadly distributed throughout a wide variety of industries. Our
clientele is heavily weighted towards professional, service, light manufacturing
and non-profit businesses. Our exposure to higher workers' compensation claims
businesses such as construction and commercial is less than 25% of our total
business.
We have benefited from a high level of client retention, resulting in a
significant recurring revenue stream. The attrition that we have experienced has
typically been attributable to a variety of factors, including:
o Sale or acquisition of the client;
o Termination by us resulting from the client's inability to
make timely payments;
o Client business failure or downsizing; and
o Client nonrenewal due to price or service dissatisfaction.
We believe that the risk of a client terminating its relationship with
us decreases substantially after the client has been associated with us for over
one year because of the client's increased appreciation of our value-added
services and because of the difficulties associated with a client reassuming the
burdens of being the sole employer. We believe that only a small percentage of
nonrenewing clients withdraw due to dissatisfaction with our services or to
retain the services of a competitor.
SALES AND MARKETING
We market our services through a direct sales force of sales
executives. Each of our sales executives enters into an employment agreement
with us which establishes a performance-based compensation program, which
currently includes a base amount, sales commissions and a bonus for each new
worksite employee enlisted. These employment agreements contain certain
non-competition and non-solicitation provisions that prohibit the sales
executives from competing against us. We attribute the productivity of our sales
executives in part to their experience in fields related to one or more of our
core services. The background of our sales executives includes experience in
industries such as information services, health insurance, business consulting
and commercial sales. Our sales materials emphasize our broad range of
high-quality services and the resulting benefits to clients and worksite
employees.
Our sales and marketing strategy is to achieve higher penetration in
our existing markets by hiring additional sales personnel and increasing sales
productivity. Currently, we generate sales leads from the two primary sources of
-7-
8
referrals and direct sales efforts. These leads result in initial presentations
to prospective clients. Our sales executives gather information about the
prospective client and its employees, including job classification, workers'
compensation and health insurance claims history, salary and the desired level
of employee benefits. We perform a risk management analysis of each prospective
client which involves a review of such factors as the client's credit history,
financial strength, and workers' compensation, and health insurance and
unemployment claims history. Following a review of these factors, a client
proposal is prepared for acceptable clients. Stringent underwriting procedures
greatly reduce our controllable costs and liability exposure, and are, in part,
responsible for our high rate of client retention.
INFORMATION TECHNOLOGY
Our primary information-processing center is located at our corporate
headquarters. Our other offices are connected to our centralized system through
network dial-up services. We use industry-standard software to process our
payroll and other commercially available software to manage standard business
functions such as accounting and finance.
Since October 1995, we have been developing an integrated information
system based on client-server technology using an Oracle(TM) relational
database. Our system, called TEAMDirect(TM), will allow clients to enter and
submit payroll data via modem and over the Internet. The system also is used to
store and retrieve information regarding all aspects of our business, including
human resource administration, regulatory compliance management, employee
benefits administration, risk management services, payroll and payroll tax
administration, and placement services. As of December 31, 1999, all of our
locations were utilizing TEAMDirect(TM). We believe that this system will be
capable of being upgraded and expanded to meet our needs for the foreseeable
future.
CORPORATE EMPLOYEES
As of December 31, 1999, we had 184 corporate employees at our
headquarters in Worthington, Ohio and at our offices around the country.
INDUSTRY REGULATION
OVERVIEW
Our professional employer operations are subject to extensive state and
federal regulations that include operating, fiscal, licensing and certification
requirements. Adding complexity to our regulatory environment are:
o Uncertainties resulting from the non-traditional employment
relationships created by PEOs;
o Variations in state regulatory requirements; and
o The ongoing evolution of regulations regarding health care and
workers' compensation.
Many of the federal and state laws and regulations relating to labor,
tax and employment matters applicable to employers were enacted prior to the
development of non-traditional employment relationships and, accordingly, do not
specifically address the obligations and responsibilities of PEOs. Moreover, our
PEO services are regulated primarily at the state level. Regulatory requirements
regarding our business therefore vary from state to state, and as we enter new
states we will be faced with new regulatory and licensing environments. There
can be no assurance that we will be able to satisfy the licensing requirements
or other applicable regulations of any particular state in which we are not
currently operating.
The application of many laws to our PEO services will depend on whether
we are considered an employer under the relevant statutes and regulations. The
common law test of the employment relationship is generally used to determine
employer status for benefit plan purposes under Employee Retirement Income
Security Act of 1974, as amended ("ERISA") the Internal Revenue Code of 1986, as
amended (the "Code"), the workers' compensation laws of many states and various
state unemployment laws. This common law test involves an examination of
approximately 20 factors to ascertain whether an employment relationship exists
between a worker and a purported employer. By contrast, certain statutes such as
those relating to PEO licensing and federal income tax withholding use differing
or more expansive definitions of employer. In addition, from time to time, there
have been proposals to enact a statutory definition of employer for other
purposes of the Code.
-8-
9
While we cannot predict with certainty the development of federal and
state regulations, our management will continue to pursue a strategy of
educating administrative authorities as to the advantages of PEOs and assisting
in the development of regulation which appropriately accommodates their
legitimate business function.
PEO SERVICES
PEO Licensing Requirements. While many states do not explicitly
regulate PEOs, approximately one-third of the states (not including Ohio) have
enacted laws that have licensing or registration requirements for PEOs, and
several additional states, including Ohio, are considering such laws. Such laws
vary from state to state but generally provide for the monitoring of the fiscal
responsibility of PEOs. State regulation assists in screening insufficiently
capitalized PEO operations and, in our view, has the effect of legitimizing the
PEO industry generally by resolving interpretative issues concerning employee
status for specific purposes under applicable state law. However, because
existing regulations are relatively new, there is limited interpretive or
enforcement guidance available. The development of additional regulations and
interpretation of existing regulations can be expected to evolve over time. We
have actively supported such regulatory efforts, including certain proposed
legislation in Ohio that would require PEOs to be registered with the state.
Such proposed Ohio legislation would not have a material adverse effect on our
business, financial condition or results of operations. Rather, we believe that
such legislation would benefit the PEO industry and us by recognizing the status
of PEOs as legal employers.
Federal and State Employment Taxes. We assume the sole responsibility
and liability for the payment of federal and state employment taxes with respect
to wages and salaries paid to our employees, including worksite employees. There
are essentially three types of federal employment tax obligations:
o Income tax withholding requirements;
o Social security obligations under FICA; and
o Unemployment obligations under FUTA.
Under these Code sections, the employer has the obligation to withhold and remit
the employer portion and, where applicable, the employee portion of these taxes.
Employee Benefit Plans. We offer various employee benefit plans to our
worksite employees, including 401(k) plans, cafeteria plans, group health plans,
a group life insurance plan, a group disability insurance plan and an employee
assistance plan. Generally, employee benefit plans are subject to provisions of
both the Code and ERISA. In order to qualify for favorable tax treatment under
the Code, the plans must be established and maintained by an employer for the
exclusive benefit of its employees. Most of these benefit plans are also offered
to our corporate employees.
Representatives of the IRS have publicly stated that a Market Segment
Study Group established by the IRS is examining whether PEOs are the employers
of worksite employees under Code provisions applicable to employee benefit plans
and consequently able to offer to worksite employees benefit plans that qualify
for favorable tax treatment and whether client company owners are employees of
PEOs under Code provisions applicable to employee benefit plans. We have limited
knowledge of the nature, scope and status of the Market Segment Study, and the
IRS has not publicly released any information regarding the study to date. In
addition, our 401(k) plan was audited for the year ended December 31, 1992, and
as a part of that audit, the IRS regional office has asked the IRS national
office to issue a Technical Advise Memorandum ("TAM") regarding whether or not
we are the employer for benefit plan purposes. We have stated our position in a
filing with the IRS that we are the employer for benefit plan purposes. We are
unable to predict the timing or nature of the findings of the Market Segment
Study Group, the timing or conclusions of the TAM, or the ultimate outcome of
such conclusions or findings. If the IRS study were to conclude that a PEO is
not an employer of its worksite employees for plan purposes, then worksite
employees could not continue to make contributions to our 401(k) plan or
cafeteria plan. We believe that, although unfavorable to us, a prospective
application by the IRS of an adverse conclusion would not have a material
adverse effect on our financial position and results of operations. If such
conclusion were applied retroactively, then employees' vested account balances
could become taxable immediately, we would lose our tax deduction for deposits
to the plan trust which would become a taxable trust, and penalties could be
assessed. In such a scenario, we would face the risk of client dissatisfaction
as well as potential litigation. A retroactive application by the IRS of an
adverse conclusion could have a material adverse effect on our financial
position and results of operations. While we believe that a retroactive
disqualification is unlikely, there can be no assurance as to the ultimate
resolution of these issues.
The Staffing Firm Workers Benefits Act of 1997 (H.R. 1891) proposed
legislation that would have clarified who is the employer for benefit plan
purposes, thus eliminating much of the current confusion and uncertainty
-9-
10
surrounding these issues. H.R. 1891 did not become legislation in 1999. The bill
will be reintroduced in 2000 with additional support and sponsorship. It is
uncertain at this time whether this legislation will become law, and, if it
does, what changes, if any, may be required of our existing benefit plans in
order to comply with its provisions.
In addition to the employer/employee relationship issues described
above, pension and profit-sharing plans, including our 401(k) plan, must satisfy
certain other requirements under the Code. These other requirements are
generally designed to prevent discrimination in favor of highly compensated
employees to the detriment of non-highly compensated employees with respect to
both the availability of, and the benefits, rights and features offered in,
qualified employee benefit plans. We apply the nondiscrimination requirements of
the Code to ensure that our 401(k) plan is in compliance with the requirements
of the Code.
Workers' Compensation. Workers' compensation is a state mandated,
comprehensive insurance program that requires employers to fund medical
expenses, lost wages and other costs resulting from work-related injuries
illnesses and deaths. In exchange for providing workers' compensation coverage
for employees, employers are not subject to litigation by employees for benefits
in excess of those provided by the relevant state statute. In most states, the
extensive benefits coverage (for both medical cost and lost wages) is provided
through the purchase of commercial insurance from private insurance companies,
participation in state-run insurance funds or employer self-insurance. Workers'
compensation benefits and arrangements vary on a state-by-state basis and are
often highly complex. These laws establish the rights of workers to receive
benefits and to appeal benefit denials.
As a creation of state law, workers' compensation is subject to change
by the state legislature in each state and is influenced by the political
processes in each state. Several states, such as Ohio, have mandated that
employers receive coverage only from state operated funds. Although Ohio
maintains such a "state fund," it does allow employers of a sufficient size and
with sufficient ties to the state to self-insure for workers' compensation
purposes. In 1999, we became self-insured for Ohio Workers' Compensation.
Employers granted the privilege of self-insurance must be self-funded for at
least the first $50,000 of cost in every claim but may purchase private
insurance for costs in excess of that amount. Ohio also allows its "state fund"
employers who meet certain criteria as a group to band together for risk pooling
purposes. In addition, Ohio provides safety prevention program premium
discounts. Although workers' compensation in Ohio is mandatory and generally
shields employers from common law civil suits, the Ohio General Assembly has
created an exception for so-called "intentional torts." In 1995, the General
Assembly enacted a law imposing a very strict standard for plaintiffs to bring
such suits. The Ohio Supreme Court, however, struck down similar legislative
efforts in the past.
Ohio and certain other states have recently adopted legislation
requiring that all workers' compensation injuries be treated through a managed
care program. Ohio's program became effective in March 1997. We believe that
such a program will not significantly impact our operations because all Ohio
employers will be subject to such new laws and regulations.
Other Employer Related Requirements. As an employer, we are subject to
a wide variety of federal and state laws and regulations governing
employer-employee relationships, including the Immigration Reform and Control
Act, the Americans with Disabilities Act of 1990, the Family Medical Leave Act,
the Occupational Safety and Health Act, wage and hour regulations, and
comprehensive state and federal civil rights laws and regulations, including
those prohibiting discrimination and sexual harassment. The definition of
employer may be broadly interpreted under these laws.
Responsibility for complying with various state and federal laws and
regulations is allocated by agreement between our clients and us, or, in some
cases, is the joint responsibility of both. Because we act as an employer of
worksite employees for many purposes, it is possible that we could incur
liability for violations of laws even though we are not contractually or
otherwise responsible for the conduct giving rise to such liability. Our
standard client agreement generally provides that the client will indemnify us
for liability incurred both as a result of an act of negligence of a worksite
employee under the direction and control of the client and to the extent the
liability is attributable to the client's failure to comply with any law or
regulation for which it has specified contractual responsibility. However, there
can be no assurance that we will be able to enforce such indemnification, and we
may therefore be ultimately responsible for satisfying the liability in
question.
-10-
11
RISK FACTORS
Potential For Unfavorable Government Regulations. Our operations are
affected by numerous federal, state and local laws and regulations relating to
labor, tax, insurance and employment matters. By entering into an employment
relationship with employees who work at client locations ("worksite employees"),
we assume certain obligations and responsibilities of an employer under these
laws. Because many of the laws related to the employment relationship were
enacted prior to the development of alternative employment arrangements, such as
those provided by professional employer organizations and other staffing
businesses, many of these laws do not specifically address the obligations and
responsibilities of non-traditional employers. Interpretive issues concerning
such relationships have arisen and remain unsettled. Uncertainties arising under
the Internal Revenue Code of 1986, include, but are not limited to, the
qualified tax status and favorable tax status of certain benefit plans provided
by us and other alternative employers. The unfavorable resolution of these
unsettled issues could have a material adverse effect on our results of
operations and financial condition.
The application of many laws to our PEO services will depend on whether
we are considered an employer under the relevant statutes and regulations. The
common law test of the employment relationship is generally used to determine
employer status for benefit plan purposes, ERISA, the Code, the workers'
compensation laws of many states and various state unemployment laws. This
common law test involves an examination of approximately 20 factors to ascertain
whether an employment relationship exists between a worker and a purported
employer. Substantial weight is typically given to the question of whether the
purported employer has the right to direct and control the details of an
individual's work. For a discussion of certain of these factors, see "Industry
Regulation -- Overview." By contrast, certain statutes such as those relating to
PEO licensing and federal income tax withholding use differing or more expansive
definitions of employer. In addition, from time to time, there have been
proposals to enact a statutory definition of employer for other purposes of the
Code.
While many states do not explicitly regulate PEOs, approximately
one-third of the states, but not Ohio, have enacted laws that have licensing or
registration requirements for PEOs, and several additional states, including
Ohio, are considering such laws. Such laws vary from state to state but
generally provide for the monitoring of the fiscal responsibility of PEOs and
specify the employer responsibilities assumed by PEOs. There can be no assurance
that we will be able to comply with any such regulations which may be imposed
upon us in the future, and our inability to comply with any such regulations
could have a material adverse effect on our results of operations and financial
condition. See "Industry Regulation."
In addition, there can be no assurance that existing laws and
regulations which are not currently applicable to us will not be interpreted
more broadly in the future to apply to our existing activities or that new laws
and regulations will not be enacted with respect to our activities. Either of
these changes could have a material adverse effect on our business, financial
condition, results of operations and liquidity. See "Industry Regulation."
Risk of Loss of Qualified Status for Certain Tax Purposes.
Representatives of the IRS have publicly stated that the IRS is conducting a
Market Segment Study of the PEO industry, focusing on selected PEOs (not
including us), in order to examine the relationships among PEOs, worksite
employees and owners of client companies. We have limited knowledge of the
nature, scope and status of the Market Segment Study, and the IRS has not
publicly released any information regarding the study to date. In addition, our
401(k) plan was audited for the year ended December 31, 1992, and, as part of
that audit, the IRS regional office has asked the IRS national office to issue a
TAM regarding whether or not we are the employer for benefit plan purposes. We
have stated our position in a filing with the IRS that we are the employer for
benefit plan purposes. If the IRS concludes that PEOs are not "employers" of
certain worksite employees for purposes of the Code as a result of either the
Market Segment Study or the TAM, then the tax qualified status of our 401(k)
plan could be revoked and our cafeteria plan may lose its favorable tax status.
The loss of qualified status for the 401(k) plan and the cafeteria plan could
increase our administrative expenses, increase client dissatisfaction and
adversely affect the our ability to attract and retain clients and worksite
employees, and, thereby, materially adversely affect our financial condition and
results of operations. We are unable to predict the timing or nature of the
findings of the Market Segment Study Group, the timing or conclusions of the
TAM, and the ultimate outcome of such conclusions or findings. We are also
unable to predict the impact that the foregoing could have on our administrative
expenses, and whether our resulting liability exposure, if any, will relate to
past or future operations. Accordingly, we are unable to make a meaningful
estimate of the amount, if any, of such liability exposure. See "Industry
Regulation -- PEO Services (Employee Benefit Plans)."
The Staffing Firm Workers Benefits Act of 1997 (H.R. 1891) was proposed
legislation that would have clarified who is the employer for benefit plan
purposes, thus eliminating much of the confusion and uncertainty surrounding
these issues currently. H.R. 1891 did not become legislation in 1999. The bill
will be reintroduced in 2000 with additional support and sponsorship. It is
uncertain at this time whether this legislation will become law,
-11-
12
and if it does, what changes, if any, may be required of our existing benefit
plans in order to comply with its provisions.
Failure to Manage Growth and Risks Related to Growth Through
Acquisitions. We intend to continue our internal growth and to pursue an
acquisition strategy. Such growth may place a significant strain on our
management, financial, operating and technical resources. We have limited
acquisition experience, and growth through acquisition involves substantial
risks, including the risk of improper valuation of the acquired business and the
risks inherent in integrating such businesses with our operations. There can be
no assurance that suitable acquisition candidates will be available, that we
will be able to acquire or profitably manage such additional companies, or that
future acquisitions will produce returns that justify the investment or that are
comparable to our past returns. In addition, we may compete for acquisition and
expansion opportunities with companies that have significantly greater resources
than we may have. There can be no assurance that management skills and systems
currently in place will be adequate to implement our strategy of growth through
acquisitions and through increased market penetration in Ohio and its other
existing markets. The failure to manage growth effectively, or to implement its
strategy, could have a material adverse effect on our results of operations and
financial condition. We have experienced significant internal growth since our
inception; however, there can be no assurance that we will be able to sustain
our past growth rate. There also can be no assurance that the PEO industry as a
whole will be able to sustain the growth rate we have experienced in recent
years. See "Business -- Growth Strategy."
Risks Associated With Expansion Into Additional States. We have offices
in California, Florida, Idaho, Illinois, Michigan, Mississippi, Montana, Ohio,
Oregon, Tennessee, Utah, and Washington. In the event that we determine to offer
our services to prospective clients in a state in which we have not previously
operated, we, in order to operate effectively in such new state, will have to
obtain all necessary regulatory approvals, achieve acceptance in the local
market, and adapt our procedures to the state's regulatory requirements and
local market conditions. The length of time required to obtain regulatory
approval to begin operations will vary from state to state. There can be no
assurance that we will be able to satisfy licensing requirements or other
applicable regulations of any particular state in which we are not currently
operating, that we will be able to provide the full range of services currently
offered in our existing markets, or that we will be able to operate profitably
within the regulatory environment of any state in which we do obtain regulatory
approval. The absence of required licenses would require us to restrict the
services we offer. See "Industry Regulation." Moreover, as we expand into
additional states, there can be no assurance that we will be able to duplicate
in other markets the revenue growth and operating results experienced in our
Ohio market.
Risk of Loss From Client Nonpayment of Direct Costs. For work performed
prior to the termination of a client agreement, we 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
our client pays us on a timely basis, or at all. To the extent that any client
experiences financial difficulty, or is otherwise unable to meet its obligations
as they become due, our financial condition and results of operations could be
adversely affected. We attempt to minimize our credit risk by investigating and
monitoring the credit history and financial strength of our clients and by
generally requiring payments to be made by wire transfer, immediately available
funds or Automated Clearing House ("ACH") transfer. With respect to ACH
transfers, we are obligated to pay the client worksite employees if there are
insufficient funds in the client's bank account on the payroll date. Our policy,
however, is only to permit clients with a proven credit history with us to pay
by ACH transfer. In addition, in the event of nonpayment by a client, we have
the ability to terminate immediately our contract with the client. We also
protect ourselves when we deem necessary by obtaining unconditional personal
guaranties from the owners of clients and/or a cash security deposit, bank line
of credit or pledge of certificates of deposit. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Although we historically have not incurred significant bad
debt expense, in each payroll period we have a nominal number of clients who
fail to make timely payment prior to our delivery of the payroll. Our bad debt
was $0 for the year ended December 31, 1997, and $9,748 for the year ended
December 31, 1998. For the year ended December 31, 1999 we charged $150,000 to
bad debt expense and increased our reserve from $50,000 at December 31, 1998 to
$200,000 at December 31, 1999. There can be no assurance that our bad debt
expense will not increase in the future.
Risk of Loss From Increased Workers' Compensation and Unemployment
Costs. Prior to 1999, we paid premiums into the Ohio Bureau of Workers'
Compensation state fund with respect to our worksite employees located in Ohio
and maintained workers' compensation insurance, generally with a private
insurance company, for our worksite employees located outside of Ohio. In 1999,
we became self-insured for Ohio Workers' Compensation. Our worksite employees
currently work in approximately 30 states, resulting in the payment by us of
unemployment taxes in such states. We do not generally bill our clients for our
actual workers' compensation and unemployment costs, but rather bill our clients
for such costs at rates which vary by client based upon the client's claims and
rate history. The amount billed is intended:
-12-
13
o To cover payments made by us for insurance premiums and
unemployment taxes, our cost of contesting workers'
compensation and unemployment claims, and other related
administrative costs; and
o To compensate us for providing such services.
Our workers' compensation and unemployment costs could increase as a
result of many factors, including increases in the rates charged by the
applicable states and private insurance companies and changes in the applicable
laws and regulations. Although we believe that historically we have profited
from such services, our results of operations and financial condition could be
materially adversely affected in the event that our actual workers' compensation
and unemployment costs exceed those billed to our clients. We believe that this
risk is mitigated by the fact that our standard client agreement provides that
we, at our discretion, may adjust the amount billed to the client to reflect
changes in our direct costs, including, without limitation, statutory increases
in employment taxes and insurance. Any such adjustment that relates to changes
in direct costs is effective as of the date of the changes, and all other
changes require thirty days' prior notice. Such a rate increase, however, might
result in increased client dissatisfaction, which could adversely affect the
ability of us to attract and retain clients and worksite employees, and,
thereby, materially adversely affect our financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Overview."
Short Term Nature of Client Agreements. Our standard client agreement
provides for successive one-year terms, subject to termination by us or by the
client at any time upon 30 days' prior written notice. A significant number of
terminations by clients could have a material adverse effect on our financial
condition, results of operations and liquidity. See "Business -- Clients."
Liabilities For Client and Employee Actions. A number of legal issues
remain unresolved with respect to the relationship among PEOs, their clients and
worksite employees, including questions concerning the ultimate liability for
violations of employment and discrimination laws. See "Industry Regulation." Our
client agreement establishes a contractual division of responsibilities between
us and each client for various human resource matters, including compliance with
and liability under various governmental laws and regulations. However, we may
be subject to liability for violations of these or other laws despite these
contractual provisions, even if we do not participate in such violations.
Although such client agreements generally provide that the client indemnify us
for any liability attributable to the client's failure to comply with its
contractual obligations and to the requirements imposed by law, we may not be
able to collect on such a contractual indemnification claim, and thus may be
responsible for satisfying such liabilities. See "Risk Factors -- Risk of Loss
from Client Nonpayment of Direct Costs" and "Business -- Clients." In addition,
worksite employees may be deemed to be our agents, subjecting us to liability
for the actions of such worksite employees. We attempt to mitigate this risk by
maintaining employment practices liability insurance; however, there can be no
assurance that such insurance will be available to us in the future on
satisfactory terms, or, if available, will be sufficient. See "Risk Factors --
Potential Legal Liability; Insurance."
Potential Legal Liability; Insurance. As an employer, we, from time to
time, may be subject in the ordinary course of our business to a wide variety of
employment-related claims such as claims for injuries, wrongful death,
harassment, discrimination, wage and hours violations and other matters.
Although we carry $2 million of general liability insurance and carry employment
practices liability insurance in the amount of $10 million, with a $250,000
deductible, there can be no assurance that any such insurance carried by us or
our providers will be sufficient to cover any judgments, settlements or costs
relating to any present or future claims, suits or complaints. There also can be
no assurance that sufficient insurance will be available to our providers or us
in the future and, if available, on satisfactory terms. If the insurance carried
by us or our providers is not sufficient to cover any judgments, settlements or
costs relating to any present or future claims, suits or complaints, then our
business and financial condition could be materially adversely affected.
Competition and New Market Entrants. The PEO industry is highly
fragmented, with, according to industry sources, in excess of 2,500 companies
providing PEO services in 1999. We encounter competition from other PEOs and
from single-service and "fee-for-service" companies such as payroll processing
firms, insurance companies and human resource consultants. We may encounter
substantial competition from new market entrants. Some of our current and future
competitors may be significantly larger, have greater name recognition and have
greater financial, marketing and other resources than us. There can be no
assurance that we will be able to compete effectively against such competitors
in the future. See "Business -- Competition."
Control By Principal Shareholders; Voting Agreement. On January 1,
1999, Richard C. Schilg, Kevin T. Costello, Steven Cash Nickerson, Byron G.
McCurdy and Terry McCurdy (collectively, the "Voting Group") entered into a
voting agreement (the "Voting Agreement"). The Voting Agreement requires that
each member of the
-13-
14
Voting Group vote their shares of us for certain persons nominated to be our
directors. Further, the Voting Agreement restricts members of the Voting Group
from:
o Soliciting proxies in opposition to any recommendation of our
Board of Directors;
o Initiating or participating in any group which proposes,
without the support of the Board of Directors, any change in
control of us; or
o Taking any action which would hinder Kevin Costello's capacity
to operate and function as the Chief Executive Officer of us.
As of March 20, 2000, the Voting Group beneficially owned an aggregate of
2,439,208 shares of our common stock constituting approximately 56.3% of our
outstanding common stock. Accordingly, the Voting Group will be in a position to
affect the management and policies of us in general, and to influence the
outcome of corporate transactions or other matters submitted to our shareholders
for approval, including the election of directors, mergers, acquisitions,
consolidations or the sale of substantially all of our assets.
Potential Volatility of Stock Price. The market price of our common
stock could be highly volatile, fluctuating in response to factors such as
changes in the economy or the financial markets, variations in our operating
results, failure to achieve earnings consistent with analysts' estimates,
announcements of new services or market expansions by us or its competitors, and
developments relating to regulatory or other issues affecting the PEO industry.
In addition, the Nasdaq National Market generally has experienced, and is likely
in the future to experience, significant price and volume fluctuations that
could adversely affect the market price of our common stock without regard to
our operating performance.
Quarterly Fluctuations in Operating Results. Historically, our
quarterly operating results have fluctuated significantly as a result of a
number of factors, including the timing and number of new client agreements and
terminations thereof, none of which can be predicted with any degree of
certainty. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results of Operations."
Shares Eligible For Future Sale; Possible Adverse Effect on Market
Price. At March 20, 2000, we had 4,332,999 shares of our common stock
outstanding. Of these shares, 2,210,791 shares are held by nonaffiliates of us
and are freely tradable without restriction or further registration under the
Securities Act or eligible for resale under the provisions of Rule 144 under the
Securities Act. The holders of the remaining 2,122,208 shares are entitled to
resell them only pursuant to a registration statement under the Securities Act
or an applicable exemption from registration thereunder such as an exemption
provided by Rule 144 or Rule 145 under the Securities Act.
Sales of substantial amounts of these shares in the public market or
the prospect of such sales could adversely affect the market price of our common
stock.
Anti-Takeover Effect. Certain provisions of our Amended Articles of
Incorporation and Amended Code of Regulations and of the Ohio Revised Code,
together or separately, could discourage potential acquisition proposals, delay
or prevent a change in control of us and limit the price that certain investors
might be willing to pay in the future for our common stock. Among other things,
these provisions:
o Require certain supermajority votes;
o Establish certain advance notice procedures for nomination of
candidates for election as directors and for shareholders
proposals to be considered at shareholders' meetings; and
o Divide the Board of Directors into two classes of directors
serving staggered two-year terms.
Pursuant to our Amended Articles of Incorporation, our Board of
Directors has authority to issue up to 1,000,000 preferred shares without
further shareholder approval. Such preferred shares could have dividend,
liquidation, conversion, voting and other rights and privileges that are
superior or senior to our shares of common stock. Issuance of preferred shares
could result in the dilution of the voting power of our shares of common stock,
adversely affect holders of our shares of common stock in the event of our
liquidation or delay, and defer or prevent
-14-
15
a change in our control. In certain circumstances, such issuance could have the
effect of decreasing the market price of our shares of common stock.
In addition, Section 1701.831 of the Ohio Revised Code contains
provisions that require shareholder approval of any proposed "control share
acquisition" of any Ohio corporation at any of three ownership thresholds: 20%,
33 1/3% and 50%; and Chapter 1704 of the Ohio Revised Code contains provisions
that restrict certain business combinations and other transactions between an
Ohio corporation and interested shareholders. See "Description of Capital
Stock."
Future Capital Needs; Uncertainty of Additional Financing. We currently
anticipate that our available cash resources combined with funds from operations
will be sufficient to meet our presently anticipated working capital and capital
expenditures requirements. We may need to raise additional funds through public
or private debt or equity financing in order to take advantage of unanticipated
opportunities, including more rapid expansion or acquisitions or to respond to
unanticipated competitive pressures. If additional funds are raised through the
issuance of equity securities, then the percentage ownership of our then current
shareholders may be reduced, and such equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock.
There can be no assurance that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, then we may not be able to take advantage of
unanticipated opportunities, develop new or enhanced services or otherwise
respond to unanticipated competitive pressures and our business, operating
results and financial condition could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ITEM 2. PROPERTIES.
We lease office facilities in Ohio, Michigan, Florida, Illinois,
California, Idaho, Utah, Montana, Oregon, Tennessee, Washington, and
Mississippi. Our headquarters are located in a suburb of Columbus, Ohio in a
leased building that houses our executive offices and PEO operations for central
Ohio worksite employees. Our other offices are used to service our local PEO
operations and are also leased. We believe that our current facilities are
adequate for its current needs and that additional suitable space will be
available as required.
ITEM 3. LEGAL PROCEEDINGS.
TEAM America, Global Employment Solutions, and some of our officers and
directors, have been named as defendants in a purported class action lawsuit
filed in the Court of Common Pleas Franklin County, Ohio. The action is entitled
Austin v. TEAM America Corporation, et al., Case No. 99 CVH-11-9678.
The complaint in this action essentially alleges that by entering into
the merger agreement, the defendants are depriving our public shareholders of
their equity interest in us at a grossly unfair and inadequate price and are
usurping our growth and future prospects to the defendants' own benefit. The
complaint alleges that defendants have breached fiduciary duties and seeks
remedies in the nature of an injunction against the merger, an order compelling
the defendants to perform their fiduciary duties, and, if the merger is
consummated, an award of damages in an unspecified amount.
On December 21, 1999, the defendant's filed a motion to dismiss. The
parties are awaiting a ruling on that motion. We and the other defendants
believe that all of us have properly fulfilled all fiduciary duties owed to the
shareholders of the Company and that the merger was in the best interests of the
Company's shareholders. Because Global Employment Solutions terminated the
merger agreement on April 12, 2000, we expect that the complaint will be
rendered moot. We and the other defendants therefore intend to vigorously defend
against the action.
We are not involved in any other material pending legal proceedings,
other than ordinary routine litigation incidental to our business. We do not
believe that any such pending legal proceedings, individually or in the
aggregate, will have a material adverse effect on our financial results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-15-
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock was quoted on the Nasdaq National Market under the
symbol "TMAM" since the commencement of our initial public offering on December
10, 1996 until October 1, 1999, when our common stock began trading on the
Nasdaq SmallCap Market. The following table sets forth, for the periods
indicated, the high and low sales prices for our common stock, as reported on
the Nasdaq National Market and the Nasdaq SmallCap Market.
CALENDAR PERIOD COMPANY COMMON STOCK
- ------------------------------------------------- ---------------------
High Low
Fiscal 1996:
Fourth Quarter (December 10 to December 31) $12.25 $11.00
Fiscal 1997:
First Quarter $11.25 $9.25
Second Quarter $10.25 $6.75
Third Quarter $11.00 $7.13
Fourth Quarter $11.75 $9.50
Fiscal 1998:
First Quarter $17.50 $9.50
Second Quarter $14.00 $10.00
Third Quarter $10.44 $5.00
Fourth Quarter $7.50 $4.13
Fiscal 1999:
First Quarter $6.50 $4.00
Second Quarter $5.38 $4.13
Third Quarter $6.88 $4.00
Fourth Quarter $7.25 $5.25
Fiscal 2000:
First Quarter (through March 20, 2000) $7.00 $5.38
As of March 20, 2000, the number of record holders of our common stock,
was 261. The closing sales price of the common stock on March 20, 2000, was
$6.50.
We have not paid any cash dividends to holders of our common stock and
do not anticipate paying any cash dividends in the foreseeable future, but
intend instead to retain future earnings for reinvestment in our business. The
payment of any future dividends would be at the discretion of our board of
directors and would depend upon, among other things, our future earnings,
operations, capital requirements, general financial condition and general
business conditions.
-16-
17
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical financial data should be read in
conjunction with our Consolidated Financial Statements, including the Notes,
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The statement of operations data set forth below with
the respect to the years ended December 31, 1995, 1996, 1997, 1998 and 1999 and
the balance sheet data as of December 31, 1995, 1996, 1997, 1998 and 1999 are
derived from audited consolidated financial statements.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT FOR PER SHARE AND STATISTICAL DATA)
Statement of Operations Data:
Revenues $401,940 $339,958 $155,864 $95,468 $74,921
Direct costs:
Salaries and wages 350,736 291,615 134,532 81,262 63,502
Payroll taxes, workers' compensation
premiums, employee benefits and other 35,482 31,576 13,013 8,763 7,594
-------- -------- -------- ------- -------
Gross profit 15,722 16,767 8,319 5,443 3,825
Operating expenses:
Administrative salaries, wages and
employment taxes 7,717 7,756 4,201 2,741 2,013
Other selling, general and administrative expenses 6,479 5,760 2,623 1,560 1,039
Depreciation and amortization 1,771 1,483 433 125 159
-------- -------- -------- ------- -------
Total operating expenses 15,967 14,999 7,257 4,426 3,211
-------- -------- -------- ------- -------
Operating income (loss) (245) 1,768 1,062 1,017 614
Other income (expenses), net (299) 135 540 65 (77)
-------- -------- -------- ------- -------
Income (loss) before taxes (544) 1,903 1,602 1,082 537
Income tax expense (benefit) 214 1,221 672 458 247
-------- -------- -------- ------- -------
Net income (loss) $ (758) $ 682 $ 930 $ 624 $ 290
======== ======== ======== ======= =======
Earnings (loss) per common share
Basic $ (0.17) $ 0.14 $ 0.26 $ 0.29 $ 0.14
Diluted shares $ (0.17) $ 0.14 $ 0.25 $ 0.29 $ 0.14
Weighted average shares outstanding
Basic 4,410 4,733 3,641 2,160 2,130
Diluted 4,410 4,893 3,700 2,160 2,130
Statistical Data:
Average gross payroll per employee $ 24,613 $ 23,805 $ 23,396 $23,946 $21,566
Worksite employees at period end 14,500 14,000 10,500 3,646 3,141
Clients at period end 1,800 1,450 1,050 241 184
Average number of worksite employees per
client at period end 8.1 9.7 10 15.1 17.1
Gross profit margin 3.9% 4.9% 5.4% 5.7% 5.1%
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficit) $ (279) $ 2,055 $ 3,629 $13,484 $ (73)
Total Assets 47,886 47,540 41,010 19,899 4,986
Long-term obligations and
redeemable preferred stock 616 503 512 386 364
Total shareholders' equity 27,272 30,177 28,339 14,147 212
-17-
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The table below sets forth results of operations for the years ended
December 31, 1999, 1998 and 1997 expressed as a percentage of revenues:
As Percent of Revenues Year Ended December 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
REVENUES 100.0% 100.0% 100.0%
DIRECT COSTS:
Salaries and wages 87.3 85.8 86.3
Payroll taxes, worker's compensation premiums,
employee benefits and other costs 8.8 9.3 8.3
----- ----- -----
GROSS PROFIT 3.9 4.9 5.4
----- ----- -----
OPERATING EXPENSES:
Administrative salaries, wages and employment taxes 1.9 2.3 2.7
Other selling, general and administrative 1.6 1.7 1.6
Depreciation and amortization 0.5 0.4 0.3
----- ----- -----
Total operating expenses 4.0 4.4 4.6
OPERATING INCOME (0.1) 0.5 0.8
Other income (expense), net (0.1) 0.0 0.3
----- ----- -----
INCOME BEFORE TAXES (0.2) 0.6 1.1
Provision for income taxes 0.0 0.4 0.4
----- ----- -----
NET INCOME (LOSS) (0.2)% 0.2% 0.7%
===== ===== =====
OVERVIEW
Reference should be made to the Notes to Consolidated Financial
Statements for further information concerning revenue recognition and other
related information.
Our primary direct costs are salaries and wages of worksite employees,
federal and state employment taxes, workers' compensation premiums, premiums for
employee benefits and other associated costs. We may significantly affect our
gross profit margin by how we manage our employment risks, including workers'
compensation and state unemployment costs, as described below. Our risk
management of the worksite includes policies and procedures designed to
proactively prevent and control the costs of claims, lawsuits, fines, penalties,
judgments, settlements and legal and professional fees. In addition, we control
benefit plan costs by attempting to prevent fraud and abuse. Other risk
management programs include effectively processing workers' compensation and
unemployment claims and aggressively contesting suspicious or improper claims.
We also reduce our employment-related risks by procuring employment practices
liability coverage from an insurance carrier unrelated to us. The policy has a
$10,000,000 aggregate limit and a $250,000 deductible. We believe that such risk
management efforts increase our profitability by reducing our liability exposure
and by increasing the value of our services to our clients.
Workers' compensation costs include administrative costs and insurance
premiums related to our workers' compensation coverage. With respect to worksite
employees located in Ohio, we became self-insured in 1999. With respect to our
worksite employees located outside of Ohio, we maintain workers' compensation
insurance policies generally with private insurance companies in accordance with
the applicable laws of each state in which we have worksite employees. The cost
of contesting workers' compensation claims is borne by us and is not passed
through directly to our clients.
-18-
19
Our worksite employees currently reside in approximately 43 states and
the District of Columbia, resulting in the payment by us of unemployment taxes
in each of such states. Such taxes are based on rates that vary from state to
state. Employers are generally subject to established minimum rates, however,
the aggregate rates payable by an employer are affected by the employer's claims
history. We control unemployment claims by aggressively contesting unfounded
claims and by placing laid off worksite employees with other clients whenever
possible.
Our primary operating expenses are administrative personnel expenses,
other general and administrative expenses, and sales and marketing expenses.
Administrative personnel expenses include compensation and fringe benefits and
other personnel expenses related to internal administrative employees. Other
general and administrative expenses include rent, insurance, general office
expenses, legal and accounting fees and other operating expenses.
Between September 1, 1997 and April 1, 1998, we acquired seven
competitor PEO companies located outside of Ohio. A PEO located within Ohio was
acquired in March 1997 and a PEO located in San Diego, California was acquired
in December 1998. All of these acquisitions were accounted for as purchases for
accounting purposes. Accordingly, the revenues and expenses of these acquired
businesses are included in our income statements only from the date of
acquisition forward and impact comparisons of results from 1999 to 1998 and
1997.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Revenues increased 18% to $401,940,000 for the year ended December 31,
1999 from $339,958,000 for the year ended December 31, 1998. If the five
businesses acquired in 1998 had been acquired as of January 1, 1998, then our
total revenues in 1998 would have been $357,882,000, and our pro forma growth
rate for 1999 would be 12%.
DIRECT COSTS
Total direct costs increased 20% to $386,218,000 in 1999 from
$323,191,000 in 1998. Direct costs increased to 96.1% of total revenues in 1999
from 95.1% of total revenues in 1998. During 1999 we incurred approximately
$2,400,000, or .6%, in additional costs in connection with expenses primarily
related to acquired entities and not to our core business. In addition, there
were additional costs associated with medical and liability insurance programs
and with additional payroll expense and payroll tax accruals. The decline in
margin also is the result of lower fees and margins in the acquired businesses,
which constitute a larger percentage of the total revenue in 1999 than in 1998.
Our core business, located primarily in Ohio, has historically had margins in
excess of margins in the acquired businesses outside of Ohio. We continue to
view the lower fees and margins in the acquired businesses as opportunities for
future profitability improvement.
EXPENSES
Administrative salaries, wages and employment taxes declined .5% to
$7,717,000 in 1999 from $7,756,000 in 1998. These costs declined to 1.9% of
total revenues in 1999 from 2.3% of total revenues in 1998. While the decrease
in this expense category includes the staffing at all locations for an entire
year, we were able to develop additional savings from the use of our centralized
payroll, HR and accounting software package operating at all locations in 1999.
Other selling, general and administrative expense increased 12% to
$6,479,000 in 1999 from $5,760,000 in 1998. In addition to the increased costs
from the acquired companies for a full year, expenses also rose for commissions,
rent, phones, equipment leases, bank charges, computer expenses, and
professional fees. Also, in connection with the termination of the merger with
Global, we accrued $400,000 for fees associated with the merger. This accounted
for 7% of the 12% increase from 1998. These costs declined to 1.6% of revenue in
1999 from 1.7% in 1998.
Depreciation and amortization expense rose to $1,771,000 in 1999 from
$1,483,000 in 1998. Depreciation expense increased as a result of the
acquisition of computer equipment and software during the past year.
Amortization expense is the amortization of goodwill and other intangibles
arising from the acquisitions, and it increased slightly during 1999 due to a
full year of amortization for 1998 acquisitions. As a percentage of revenue both
1999 and 1998 were .4%.
-19-
20
INCOME FROM OPERATIONS
Operating income (loss) declined by $2,013,000 to $(245,000) in 1999
from $1,768,000 in 1998. Approximately $2,400,000 of additional costs in 1999
related primarily to acquired entities and not to our core business. In
addition, there were additional costs associated with medical and liability
insurance programs and additional payroll expense and payroll tax accruals. We
also accrued $400,000 at year end for fees associated with the termination of
the Global merger.
Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is defined by us as operating income plus depreciation and
amortization. EBITDA, which excludes depreciation and amortization expense of
$1,771,000 in the 1999 period compared to $1,483,000 in the 1998 period,
decreased 53% to $1,526,000 in 1999 from $3,251,000 in 1998.
OTHER INCOME (EXPENSE)
Other income (expense) is primarily net interest income or expense.
During 1999 interest expense exceeded interest income, due primarily to new
borrowings to fund a $2,500,000 purchase of treasury shares. Interest income in
1998 was primarily from the investment of the funds remaining from prior IPO
proceeds.
INCOME TAX EXPENSE
Income tax expense was $214,000 in 1999 compared to $1,221,000 in 1998.
Income tax expense occurs in 1999 because the goodwill amortization is not a
deductible expense for tax purposes; this increases taxes by approximately
$400,000 annually. In 1998 the income tax expense was 64% of pre-tax income.
NET INCOME AND EARNINGS PER SHARE
As a result of the fourth quarter charges, 1999 had a net after-tax
loss of $(758,000), or (0.2)% compared to 1998's net income of $682,000, or
0.2%.
Basic and diluted earnings (loss) per share were $(.17) in 1999 versus
$.14 in 1998. Average shares outstanding decreased to 4,410,000 in 1999 compared
to 4,893,000 in 1998 due primarily to the purchase of treasury shares in 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Revenues increased 118% to $339,958,000 for the year ended December 31,
1998 from $155,864,000 for the year ended December 31, 1997. Revenues from the
businesses acquired in 1998 and 1997 were nearly 60% of total revenues in 1998.
If the nine businesses acquired in 1997 and 1998 had been acquired as of January
1, 1997 total revenues in 1998 would have been $357,882,000 which would have
been an increase of 33% over pro forma 1997 revenues of $269,387,000.
DIRECT COSTS
Total direct costs increased 119% to $323,191,000 in 1998 from
$147,545,000 in 1997. Direct costs increased to 95.1% of total revenues in 1998
from 94.6% of total revenues in 1997. The decline in margin is the result of
lower fees and margins in the acquired businesses. Our core business, located
primarily in Ohio, has historically had margins in excess of 5%. Margins in the
acquired businesses outside of Ohio were 4% in 1998. We view the lower fees and
margins in the acquired businesses as opportunity for future profitability
improvement.
EXPENSES
Administrative salaries, wages and employment taxes rose 85% to
$7,756,000 in 1998 from $4,201,000 in 1997. These costs declined to 2.3% of
total revenues in 1998 from 2.7% of total revenues in 1997. 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 expense increased 120% to
$5,760,000 in 1998 from $2,623,000 in 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
-20-
21
greater pace than revenues. Additional savings are also expected once our new
centralized payroll, HR and accounting software package is deployed and
operating at all locations in 1999.
Depreciation and amortization expense rose to $1,483,000 in 1998 from
$433,000 in 1997. Depreciation expense increased as a result of the acquisition
of computer equipment and software during the past year. Amortization expense is
the amortization of goodwill and other intangibles arising from the
acquisitions.
INCOME FROM OPERATIONS
Operating income rose 67% to $1,768,000 in 1998 from $1,061,000 in
1997. However, EBITDA which excludes the depreciation and amortization expense
of $1,483,000 in the 1998 period compared to only $433,000 in the 1997 period,
increased 117% to $3,251,000 in 1998 from $1,495,000 in 1997.
OTHER INCOME
Other income is primarily interest income that declined to $135,000 in
1998 from $540,000 in 1997. Other income is income from the investment of the
$13,314,000 of IPO proceeds. Through December 31, 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 $1,481,000 at
December 31, 1998 as a result of using the proceeds to acquire competitors.
INCOME TAX EXPENSE
Income tax expense was $1,221,000 or 64% of income before taxes in 1998
compared to $672,000 or 42% of income before taxes in 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 higher operating expenses, higher amortization expense
and lower investment income, net income declined to $682,000 in 1998 from
$930,000 in 1997.
Basic and diluted earnings per share were $.14 in 1998. Basic earnings
per share were $.26 and diluted earnings per share were $.25 in 1997. Average
shares outstanding for diluted earnings per share increased to 4,893,000 in 1998
compared to 3,700,000 in 1997 due to the shares issued for acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had a working capital deficit of $(280,000), a
decline of $2,335,000 from the December 31, 1998 working capital surplus of
$2,055,000. The decrease in working capital correlates with the decrease in
earnings.
Our primary source of liquidity and capital resources has historically
been our internal cash flow from operations. However, in 1999, the reduction in
operating income was a major factor in a decline in cash flow from operations
from $2,627,000 in 1998 to $(942,000) in 1999.
We recognize as revenue and as unbilled receivables, on an accrual
basis, any such amounts that relate to services performed by worksite employees
as of the end of each accounting period which have not yet been billed to the
client. These occur because of timing differences between the date our
accounting period ends and the billing dates for client payroll periods that
include the day our accounting period ends. The amount of unbilled receivables,
as well as the related accrued liabilities, has increased with our growth.
For work performed prior to the termination of a client agreement, we
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 our client pays us on a timely basis, or at
all. We historically have not incurred significant bad debt expenses because we
generally collect from our clients all revenues with respect to each payroll
period in advance of our payment of the direct costs associated therewith. We
attempt to minimize our credit risk by investigating and monitoring the credit
history and financial strength of our clients and by generally requiring
payments be made by wire transfer, immediately available funds or ACH transfer.
With respect to ACH transfers, we are obligated to pay the client's worksite
employees even if there are insufficient funds in the client's bank account on
the payroll date. Our policy, however, is only to permit clients with a proven
credit history with us to
-21-
22
pay by ACH transfer. In addition, in the rare event of nonpayment by a client,
we have the ability to terminate immediately our contract with the client. We
also protect ourselves by obtaining, when we deem necessary, 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 December 31,
1999 and 1998, we held cash security deposits in the amounts of $456,000 and
$637,000 respectively.
Additional sources of funds are advance payments of employment taxes
and insurance premiums that we hold until they are due and payable to the
respective taxing authorities and insurance providers.
Net cash used in investing activities was $588,000 and $2,793,000 for
the years ended December 31, 1999 and 1998, respectively. The principal use of
cash from investing activities in 1999 was the purchase of computer equipment
and software to support the growth of the business. In 1999, $210,000 was paid
to former executives of our Oregon location for covenants not to compete in
connection with their resignation from our company. In the second quarter of
1999, $2,000,000 was borrowed from a bank and was fully collateralized by a
short-term certificate of deposit. The certificate of deposit and the related
borrowing were retired in October 1999. During 1998, $2,048,000 was paid toward
the purchase of five PEO companies. In addition to the cash paid for
acquisitions, 118,221 and 146,007 shares of our common stock were also issued in
1999 and 1998. Since these shares were issued 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.
During the first quarter of 1999, 500,000 shares of our stock were
acquired from our founder and former Chairman for $2,500,000. We borrowed
$800,000 from our bank for this stock acquisition and issued two 5.75% notes
totaling $1,700,000. Subsequently, in 1999, we borrowed an additional $700,000
from our bank and paid $800,000 of the notes to the founder and former Chairman.
In connection with an acquisition in 1997, we guaranteed the price of
68,468 shares at $10.25 for the one-year period from October 6, 1998 to October
6, 1999. In 1998, we advanced $280,727 to the holder of 27,388 shares. We were
obligated to pay the holder of the remaining 41,080 shares the difference
between $10.25 and the price realized upon sale of the shares. During 1999,
$240,567 was paid to one of the holders of these shares under this guarantee
agreement.
In September 1998, our Board of Directors approved a share repurchase
of up to 200,000 shares of our common stock. In 1998, 60,000 shares were
repurchased at a cost of $372,000. In 1998 other financing activities were not
material, as we had no debt or significant capital leases.
Presently, we have no material commitments for capital expenditures.
Primary new uses of cash may include acquisitions, the size and timing of which
cannot be predicted. However, we are limited in our ability to continue to
acquire other PEO companies unless we 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.
We believe that existing cash, cash equivalents and internally
generated funds will be sufficient to meet our presently anticipated working
capital and capital expenditure requirements, excluding acquisitions of other
PEO's for the foreseeable future. To the extent we need additional capital
resources, we believe that we will have access to existing bank financing and
other alternative sources of capital. However, there can be no assurances that
additional financing will be available on terms favorable to us, or at all.
We did not pay dividends in 1997, 1998, or 1999, and do not expect to
pay a dividend in the foreseeable future.
INFLATION
We believe the effects of inflation have not had a significant impact
on its results of operations or financial condition.
QUARTERLY RESULTS
The following table sets forth certain unaudited operating results of
each of the nine consecutive quarters in the period ended December 31, 1998
which comprise all of the quarterly periods following our initial public
offering of its common stock on 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
-22-
23
results of operations of such periods. This information should be read in
conjunction with our Consolidated Financial statements and the Notes thereto.
The 1999 results for the first three quarters have been restated to
reflect the timing of the $2,400,000 of additional costs to the 1999 financial
statements due primarily to acquired entities and not to our core business. In
addition, there were costs associated with medical and liability insurance
programs and additional payroll expenses.
QUARTER ENDED
-------------
DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
1996 1997 1997 1997 1997
---- ---- ---- ---- ----
(In thousands except per share amounts)
Revenues $25,762 $25,542 $31,812 $36,697 $61,812
Direct costs 24,218 24,143 30,000 35,000 58,402
Net Income 167 232 332 173 193
Earnings Per Share:
Basic $.07 $.07 $.10 $.05 $.04
Diluted $.07 $.07 $.10 $.05 $.04
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
1998 1998 1998 1998
---- ---- ---- ----
(In thousands except per share amounts)
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
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
1999 1999 1999 1999
---- ---- ---- ----
(Restated) (Restated) (Restated)
(In thousands except per share amounts)
Revenues $90,654 $101,379 $102,677 $107,230
Direct costs 87,121 97,659 98,717 102,721
Net Income (loss) (238) (165) (77) (278)
Earnings (loss) Per Share:
Basic $(.05) $(.04) $(.02) $(.06)
Diluted $(.05) $(.04) $(.02) $(.06)
As Reported: MAR. 31 JUNE 30 SEPT. 30
1999 1999 1999
---- ---- ----
(Original) (Original) (Original)
Revenues $90,654 $101,379 $102,677
Direct costs 86,410 96,870 98,121
Net Income (loss) 184 307 311
Earnings (loss) Per Share:
Basic .04 .07 .07
Diluted .04 .07 .07
FORWARD-LOOKING INFORMATION
Statements in the preceding discussion that indicate our or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. It is important to note our 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 our Annual
Report on Form 10-K for the year ended
-23-
24
December 31, 1999 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. Our future results and shareholder
values may differ materially from those expressed in these forward-looking
statements. Many of the factors that will determine these results and values are
based upon our ability to control or predict. Shareholders are cautioned not to
put undue reliance on forward-looking statements. In addition, we do 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, we claim the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our Consolidated Financial Statements, together with the report thereon
of Arthur Andersen LLP, are set forth on pages F-1 through F-20 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
Our Board of Directors has fixed the number of Directors at eight. The
Board of Directors currently is divided into two classes. Class I has two
members and Class II currently has three members. There are currently two
vacancies in Class I and one vacancy in Class II. The members of the two classes
are elected to serve for staggered terms of two years.
Listed below are the names of each of our Directors, their ages, the
year in which each first became a Director, their principal occupations during
the past five years and other directorships, if any, held by them in companies
with a class of equity securities registered pursuant to the Securities Exchange
Act of 1934, or otherwise subject to its periodic reporting requirements. See
"Security Ownership of Certain Beneficial Owners and Management" for information
regarding such persons' holdings of our equity securities.
-24-
25
CLASS II DIRECTORS
(NOMINEES TERMS TO EXPIRE IN 2002)
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION FOR THE PAST FIVE YEARS
- ----------------------------- --- -------- ---------------------------------------------------------
Kevin T. Costello 50 1992 Chief Executive Officer of the Corporation since 1999;
President of the Corporation since 1998; Senior Vice
President of Operations and Chief Operating Officer of
the Corporation from 1993 to 1998; Vice President of
Sales and Marketing of the Corporation from 1991 to 1993.
Charles F. Dugan II 60 1994 Secretary of the Corporation since 1999; Assistant Secretary
of the Corporation from 1992 to 1999; Outside counsel to the
Corporation since 1987. Private law practice since 1990.
Crystal Faulkner 40 1997 Principal in the accounting firm of Cooney, Faulkner &
Stevens, LLC since December, 1999. Principal in the accounting
firm of Rippe & Kingston, Cincinnati, Ohio from 1991
to December, 1999.
CLASS I DIRECTORS
(TERMS EXPIRE IN 2001)
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION FOR THE PAST FIVE YEARS
- ----------------------------- --- -------- ---------------------------------------------------------
William W. Johnston 54 1990 Chairman of the Board of Directors of the Corporation
since 1999; Secretary of the Corporation since 1990;
outside general counsel to the Corporation since 1989.
M. R. Swartz 60 1991 Restaurant owner/operator.
EXECUTIVE OFFICERS
The following table and biographies set forth information concerning
our executive officers, who are elected by the Board of Directors:
-25-
26
NAME AGE POSITION
- ---- --- --------
Kevin T. Costello 50 President, Chief Executive Officer and Director
Charles F. Dugan II 60 Secretary and Director
Thomas Gerlacher 57 Chief Financial Officer and Treasurer
William W. Johnston 54 Chairman of the Board of Directors
Byron G. McCurdy 43 Executive Vice President of Government Affairs; President of TEAM
America West, Inc. and Director
Kevin T. Costello has been a Director of the Corporation since 1992,
President since 1998 and Chief Executive Officer since 1999. Mr. Costello served
as Senior Vice President of Operations and Chief Operating Officer of the
Corporation from 1993 to 1998. From 1991 to 1993, Mr. Costello served as Vice
President of Sales and Marketing of the Corporation.
Charles F. Dugan II has been a Director of the Corporation since 1994
and served as Assistant Secretary of the Corporation since 1992 and Secretary
since 1999. Mr. Dugan has served as counsel to the Corporation since 1987. From
1970 to 1990, Mr. Dugan was a partner in the law firm of Vorys, Sater, Seymour
and Pease located in Columbus Ohio. Mr. Dugan currently practices law in his own
firm located in Columbus, Ohio.
Thomas Gerlacher was appointed Vice President of Finance, Treasurer and
Chief Financial Officer of the Corporation in March 2000. Mr. Gerlacher was Vice
President of Finance for United Magazine Company from July 1998 to February 1999
and Chief Financial Officer of United Magazine Company from December 1993 to
July 1998.
William W. Johnston has been a Director of the Corporation since 1990
and served as Secretary of the Corporation from 1990 to 1998 and as general
counsel to the Corporation since 1989. Mr. Johnston was named Chairman of the
Board in 1999. From 1982 to 1990, Mr. Johnston was a partner in the law firm of
Crabbe, Brown, Jones, Potts and Schmidt located in Columbus, Ohio. Mr. Johnston
currently practices law in his own firm located in Worthington, Ohio. From 1976
to 1982, Mr. Johnston was the Chairman of the Ohio Industrial Commission.
Byron G. McCurdy has been Executive Vice President of Government
Affairs of the Corporation and President of TEAM America West, Inc., a wholly
owned subsidiary of the Corporation, since November 1, 1997. Mr. McCurdy was the
President and founder of Aspen Consulting Group, Inc. from March 1984 until
November 1997.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act of 1934 requires our Directors and
executive officers, and persons who own more than ten percent of a registered
class of our equity securities, to file initial statements of beneficial
ownership (Form 3), and statements of changes in beneficial ownership (Forms 4
and 5), of shares of common stock of the Corporation with the Securities and
Exchange Commission. Executive officers, Directors and greater than ten-percent
shareholders are required to furnish us with copies of all such forms they file.
To our knowledge, based solely on its review of the copies of such
forms received by us, and written representations from certain reporting persons
that no additional forms were required, all filing requirements applicable to
its executive officers, Directors and greater than ten-percent shareholders were
complied with in fiscal 1999, except for late Form 4 filings for each of Messrs.
Schilg, Goodrich and Costello and Ms. Faulkner.
-26-
27
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the
annual and long-term compensation of our chief executive officer and the other
executive officers (together, the "Named Executives"), whose total salary and
bonus for the last completed fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM
COMPENSATION(1) COMPENSATION
--------------- ------------
STOCK OPTIONS ALL OTHER(3)
Name and Principal Position YEAR SALARY BONUS # GRANTED COMPENSATION
--------------------------- ---- ------ ----- --------- ------------
Kevin T. Costello, President and 1999 $351,550 (1) $63,000 -- $8,703
Chief Executive Officer 1998 $308,752 (1) -- 50,000 $8,587
1997 $266,686 (1) $60,000 125,000(2) $8,222
Michael R. Goodrich 1999 $115,500 -- -- $8,103
Chief Financial Officer (4)(5) 1998 $110,98 -- 35,000 $9,830
1997 $62,320 $30,000 55,000 $3,017
Byron G. McCurdy 1999 $162,701 -- -- $7,630
Executive Vice President (4) 1998 $150,000 -- -- $5,181
1997 $18,750 -- 159,702 $800
(1) Includes commissions in the amounts of $134,704 in 1999, $115,620 in
1998 and $90,553 in 1997 paid to Mr. Costello.
(2) Includes the replacement of 50,000 options each for Mr. Costello which
were granted in 1996 at $12.00 per share and cancelled on September 3,
1997.
(3) Represents health care insurance premiums paid by the Corporation for
the benefit of the indicated Named Executive Officer and the
compensatory value of a company provided car.
(4) Dates of employment for the Named Executives are as follows: Mr.
Goodrich, March 31, 1997; Mr. McCurdy, November 1, 1997, upon the
acquisition of Aspen Consulting Group, Inc.
(5) Mr. Goodrich's employment with us ended upon his resignation in
January 2000.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
We made no options grants during fiscal 1999.
-27-
28
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning the value
of unexercised stock options held as of December 31, 1999 by the Named
Executives. No options were exercised by such executive officers during fiscal
1999.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS