<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File No. 0-18492
TEAMSTAFF, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1899798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 Atrium Drive, Somerset, NJ 08873
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 748-1700
DIGITAL SOLUTIONS, INC.
Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
27,617,241 shares of Common Stock, par value $.001 per share, were outstanding
as of February 8, 1999.
1 of 16
<PAGE> 2
TEAMSTAFF, INC. AND SUBSIDIARIES
FORM 10-Q
December 31, 1998
Table of Contents
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
Item 1. Consolidated Balance Sheets as of
December 31, 1998 (Unaudited) and
September 30, 1998 3
Consolidated Statements of
Income for the three months ended
December 31, 1998 and 1997 (Unaudited) 5
Consolidated Statements of Cash Flows for the
three months ended December 31, 1998 and 1997
(Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's discussion and analysis of
financial condition and results of operations 11
Part II - Other Information
Item 1. Legal Proceedings 14
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2 of 16
<PAGE> 3
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,300,000 $ 1,530,000
Restricted Cash 350,000 --
Accounts receivable, net of allowance 7,139,000 6,891,000
Other current assets 741,000 691,000
----------- -----------
Total current assets 9,530,000 9,112,000
EQUIPMENT AND IMPROVEMENTS
Equipment 3,359,000 3,336,000
Leasehold improvements 47,000 47,000
----------- -----------
3,406,000 3,383,000
Accumulated depreciation and amortization 2,682,000 2,591,000
----------- -----------
724,000 792,000
DEFERRED TAX ASSET 1,570,000 1,782,000
GOODWILL, net of amortization 4,035,000 4,096,000
OTHER ASSETS 1,008,000 866,000
----------- -----------
TOTAL ASSETS $16,867,000 $16,648,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
Page 3 of 16
<PAGE> 4
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
---- ----
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 538,000 $ 540,000
Accounts payable 2,132,000 1,792,000
Accrued expenses and other current liabilities 3,333,000 3,461,000
------------ ------------
Total current liabilities 6,003,000 5,793,000
LONG-TERM DEBT 2,613,000 2,981,000
------------ ------------
Total Liabilities 8,616,000 8,774,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.001 par value; authorized 40,000,000 shares;
issued and outstanding 19,383,833 at December 31, 1998
and 19,356,833 at September 30, 1998 19,000 19,000
Additional paid-in capital 13,734,000 13,692,000
Accumulated deficit (5,502,000) (5,837,000)
------------ ------------
Total shareholders' equity 8,251,000 7,874,000
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 16,867,000 $ 16,648,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
Page 4 of 16
<PAGE> 5
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
REVENUES $ 39,699,000 $ 33,662,000
DIRECT EXPENSES 36,705,000 31,060,000
------------ ------------
Gross profit 2,994,000 2,602,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,150,000 1,857,000
DEPRECIATION AND AMORTIZATION 176,000 169,000
------------ ------------
Income from operations 668,000 576,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 104,000 12,000
Interest expense (166,000) (88,000)
------------ ------------
(62,000) (76,000)
------------ ------------
Income before tax 606,000 500,000
INCOME TAX EXPENSE (271,000) --
------------ ------------
NET INCOME $ 335,000 $ 500,000
============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.02 $ 0.03
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 19,363,511 19,194,409
============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.02 $ 0.03
============ ============
DILUTED SHARES OUTSTANDING 19,518,235 19,458,078
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
Page 5 of 16
<PAGE> 6
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 335,000 $ 500,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 176,000 169,000
Provision for doubtful accounts 49,000 14,000
Deferred income taxes 212,000 --
Changes in operating assets and liabilities:
Increase (decrease) in accounts receivable (297,000) 169,000
Increase in other assets (216,000) (32,000)
Increase (decrease) in accounts payable, accrued expenses and
other current liabilities 212,000 (977,000)
Increase in restricted cash (350,000) --
----------- -----------
Net cash provided by (used in) operating activities 121,000 (157,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements (23,000) (85,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments on long term debt (125,000) --
Repayments on revolving line of credit (233,000) (130,000)
Payments under capital lease obligations (12,000) (34,000)
Proceeds from issuance of common stock and
exercise of common stock options and warrants - net 42,000 250,000
----------- -----------
Net cash provided by (used in) financing activities (328,000) 86,000
----------- -----------
Net decrease in cash (230,000) (156,000)
CASH AT BEGINNING OF PERIOD 1,530,000 841,000
----------- -----------
CASH AT END OF PERIOD $ 1,300,000 $ 685,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 89,000 $ 82,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
Page 6 of 16
<PAGE> 7
TEAMSTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION AND BUSINESS
TeamStaff, Inc., formerly Digital Solutions, Inc. (the "Company"), a New Jersey
Corporation, with its subsidiaries, provides a broad spectrum of human resource
services including professional employer services, payroll processing, human
resource administration and placement of temporary and permanent employees. The
Company has regional offices in Somerset, New Jersey; Houston, Texas; and
Clearwater, Florida and sales service centers in New York, New York; El Paso and
Houston, Texas; Clearwater, Florida; and Somerset, New Jersey.
The Company changed its name from Digital Solutions, Inc. to TeamStaff, Inc. on
February 10, 1999. Effective January 25, 1999, the Company acquired the ten
entities operating under the trade name, The Teamstaff Companies. The financial
data and discussion contained in this Form 10-Q do not reflect the acquisition
as it occurred after the end of the quarter.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION-
The consolidated financial statements included herein have been prepared by the
registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the registrant believes that the disclosures are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
annual report on Form 10-K. This financial information reflects, in the opinion
of management, all adjustments necessary to present fairly the results for the
interim periods. The results of operations for such interim periods are not
necessarily indicative of the results for the full year.
The accompanying consolidated financial statements include those of TeamStaff
Inc., a New Jersey Corporation and its wholly-owned subsidiaries; DSI Contract
Staffing, DSI Staff ConnXions - Northeast, Inc., DSI Staff ConnXions -
Southwest, Inc., and DSI Staff Rx, Inc. The results of operations of acquired
companies have been included in the consolidated financial statements from the
date of acquisition. All significant intercompany balances and transactions have
been eliminated in the consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS-
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS
Page 7 of 16
<PAGE> 8
131 establishes standards for the way public enterprises are to report
information about operating segments in interim financial statements and
requires the reporting of selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS 131 is effective for fiscal periods beginning after December 15,
1997, at which time the Company will adopt the provisions. The Company does not
expect SFAS 131 to have a material effect on reported results.
EARNINGS PER SHARE-
In February 1997, the FASB issued Statement on Financial Accounting Standards
Number 128, "Earnings Per Share" ("SFAS No. 128"), which requires the
presentation of basic earnings per share ("Basis EPS") and diluted earnings per
share ("Diluted EPS"). Basic EPS is calculated by dividing income available to
common shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is calculated by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period adjusted to reflect potentially dilutive securities.
In accordance with SFAS 128, the following table reconciles net income and share
amounts used to calculate basic earnings per share and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended December 31,
1998 1997
---- ----
<S> <C> <C>
Numerator:
Net income $ 335,000 $ 500,000
----------- -----------
Denominator:
Weighted average number of common shares
Outstanding - Basic 19,363,511 19,194,409
Incremental shares for assumed conversions
of stock options/warrants 154,724 263,669
----------- -----------
Weighted average number of common and
Equivalent shares outstanding-Diluted 19,518,235 19,458,078
----------- -----------
Earnings per share - Basic $ 0.02 $ 0.03
Earnings per share - Diluted $ 0.02 $ 0.03
</TABLE>
Stock options and warrants outstanding at December 31, 1998 to purchase
946,229 shares of common stock were not included in the computation of
Diluted EPS as they were antidilutive.
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<PAGE> 9
(3) INCOME TAXES:
At December 31, 1998, the Company had available operating loss
carryforwards of approximately $6,000,000 to reduce future periods' taxable
income. The carryforwards expire in various years beginning in 2004 and
extending through 2012.
The Company has recorded a $1,950,000 and a $760,000 deferred tax asset at
December 31, 1998 and 1997, respectively. This represents management's
estimate of the income tax benefits to be realized upon utilization of a
portion of its net operating losses as well as temporary differences
between the financial statement and tax bases of certain assets and
liabilities, for which management believes utilization to be more likely
than not. Management believes the Company's operations can generate
sufficient taxable income to realize this deferred tax asset as a result of
recent business developments, its ability to meet its operating plan as
well as the resolution of significant past problems which had adversely
affected the Company in prior years.
As of December 31, 1998 other current assets included $380,000 related to
the deferred tax asset.
(4) DEBT:
On April 29, 1998, the Company was successful in replacing the former
credit facility with a new long-term credit facility from FINOVA Capital
Corporation totaling $4,500,000. Substantially all assets of the Company
secure the credit facility. The facility includes a three-year loan for
$2,500,000, with a five year amortization, at prime + 3% (10.75% as of
December 31, 1998) and a $2 million revolving line of credit secured by
certain accounts receivable of the Company at prime + 1% (8.75% as of
December 31, 1998). The credit facility is also subject to success fees of
$200,000, $225,000 and $250,000 due on the anniversary date of the loan.
Taking these fees into consideration, and assuming the Company continuously
fully utilizes the revolver, the effective rate of interest on the total
borrowings is approximately 16.1%. The credit facility is subject to
certain covenants including but not limited to a minimum current ratio,
debt to net worth ratio, a minimum net worth and a minimum debt service
coverage ratio, as defined.
The Company received an increase of its present lending facility from
FINOVA Capital Corporation in order to fund the TeamStaff acquisition.
The facility is comprised of (i) a three-year term loan, with a five year
amortization, and a balloon payment at the end of three years, in the
amount of $2,500,000; (ii) a one year bridge loan in the amount of
$750,000 and (iii) an increase in the Company's revolving line of credit
from $2,000,000 to $2,500,000. The term loan bears an interest rate of
prime + 3%, the bridge loan bears a interest rate of prime + 1%. In
addition, the Company will incur "success" fees of $200,000, $225,000 and
$250,000 due on the anniversary dates of the loan.
(5) COMMITMENTS AND CONTINGENCIES:
In September 1998, the Company negotiated and settled with Liberty Mutual
Insurance Company its liability on all workers' compensation claims
incurred during the three year period 1995, 1996 and 1997. In return for
terminating all future exposure under the Liberty Mutual workers'
compensation policy, the Company agreed to make a one-time payment of
approximately $919,000. The settlement was funded by allocating $738,000
of the Company's restricted cash, which had been used to collateralize a
portion of the letter of credit to Liberty Mutual and by internal funds
of $181,000. On April 1, 1997, the Company entered into a workers'
compensation policy with a new carrier. Under the terms of the new
workers' compensation insurance program the Company is required to fund
the
9 of 16
<PAGE> 10
anticipated loss reserves on a current basis. During the three months
ended December 31, 1998 and 1997, the Company recognized approximately
$214,000 and $190,000, respectively, as its share of premiums collected
from customers covered by these policies in excess of claims and fees
paid by the Company.
(6) SUBSEQUENT EVENT
The Company changed its name from Digital Solutions, Inc, to Teamstaff,
Inc. on February 10, 1999. Effective January 25, 1999, the Company
acquired the ten entities operating under the trade name, The Teamstaff
Companies. The financial data and discussions contained in this Form 10-Q
do not reflect the acquisition as it occurred after the end of the
quarter.
10 of 16
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Certain statements contained herein constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "1995 Reform Act"). TeamStaff, Inc. desires to avail itself of
certain "safe harbor" provisions of the 1995 Reform Act and is therefore
including this special note to enable the Company to do so. Forward-looking
statements included in this report involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ from the future
results, performance (financial or operating) achievements expressed or implied
by such forward-looking statements. Such future results are based upon
management's best estimates based upon current conditions and the most recent
results of operations. These risks include, but are not limited to, risks
associated with the Company's risks of current as well as future acquisitions,
effects of competition and technological changes and dependence upon key
personnel.
The Company's revenues for the three months ended December 31, 1998 and
1997 were $39,699,000 and $33,662,000, respectively, which represents an
increase of $6,037,000 or 17.9%. This increase was due entirely to increased
sales through the efforts of the Company's internal sales force.
Direct expenses were $36,705,000 for the three months ended December
31, 1998 and $31,060,000 for the comparable period last year, representing an
increase of $5,645,000 or 18.2%. This increase represents the corresponding
higher costs associated with higher revenues. As a percentage of revenue, direct
expenses for the three months ended December 31, 1998 and 1997 were 92.5% and
92.3%.
Gross profits were $2,994,000 and $2,602,000 for the quarters ended
December 31, 1998 and 1997, respectively, or an increase of $392,000 or 15.1%.
Gross profits, as a percentage of revenue, were 7.5% and 7.7% for the quarters
ended December 31, 1998 and 1997, respectively.
Selling, general and administrative "SG&A" costs for the quarters ended
December 31, 1998 and 1997 were $2,150,000 and $1,857,000, respectively,
representing an increase of $293,000 or 15.8%. This increase is partially
attributed to the additional employee costs necessary to generate the increased
level of revenue and also to the increased commission expense associated with
rise in sales. Also included in the increase in SG&A are the costs of additional
office equipment leases and supplies necessary to support the increase in
business and to facilitate the corporate move.
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<PAGE> 12
Depreciation and amortization for the quarters ended December 31, 1998
and 1997 increased to $176,000 from $169,000, respectively, or $7,000. The
increase is reflective of the slight increase in depreciable assets.
Interest expense for the quarter ended December 31, 1998 increased
$78,000 to $166,000 from $88,000 in the corresponding period in 1997 due to an
increase in debt financing and an increase in the effective borrowing rate
associated with the Company's new financing arrangements effective in April,
1998.
Income taxes for the quarter ended December 31, 1998 reflected a tax
expense of $271,000 versus $0 in the same quarter last year. For the three
months ended December 31, 1998, the company decreased its valuation allowance by
$271,000 to offset the income tax provision.
Net income for the quarter ended December 31, 1998 was $335,000 versus
a net income of $500,000 for the similar period in 1997. This decrease in net
income of $165,000 reflects a tax expense of $271,000 as compared to no tax in
the similar period of 1997. The net income before tax increased $106,000 from
$500,000 to $606,000 due to the increase in the Company's revenues in all
divisions.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities improved in the first quarter
of 1999 to $122,000, from net cash used of ($157,000) in the same period of
fiscal 1998. The increase in cash flow from operations is attributable to the
continued earnings improvement of the Company. The net cash used in financing
activities increased in the quarter ended December 31, 1998, compared to the
quarter ended December 31, 1997 due to the increase in required payments on the
current line of credit as discussed below. Cash outflow for the purchases of
equipment and improvements was $23,000 in the three months ended December 31,
1998 compared to $85,000 in the three months ended December 31, 1997. The
decrease is related to the timing of capital projects during the quarters.
Capital expenditures have been relatively stable over the last three fiscal
years. At December 31, 1998, the Company had cash of $1,300,000, restricted cash
of $350,000 and accounts receivable of $7,139,000.
On April 29, 1998, the Company was successful in replacing the former
credit facility with a new long-term credit facility from FINOVA Capital
Corporation totaling $4.5 million. The credit facility includes a three-year
loan for $2.5 million, with a five-year amortization, at prime + 3% (10.75% at
December 31, 1998) and a $2 million revolving line of credit secured by certain
accounts receivable of the Company at prime + 1% (8.75% at December 31, 1998).
The credit facility is also subject to success fees of $200,000, $225,000 and
$250,000 due on the anniversary date of the loan beginning in April, 1999.
Taking these fees into consideration and assuming the Company continuously fully
utilizes the revolver, the effective rate of interest on the total borrowings is
approximately 16.1%.
The Company received an increase of its present lending facility from
FINOVA Capital Corporation in order to fund the TeamStaff acquisition. The
facility is comprised of (i) a three-year term loan, with a five year
amortization, and a balloon payment at the end of three years, in the amount of
$2,500,000; (ii) a one year bridge loan in the amount of $750,000 and (iii) an
increase in the Company's revolving line of credit from $2,000,000 to
$2,500,000. The term loan bears an interest rate of prime + 3%, the bridge loan
bears a interest rate of prime + 1%. In addition, the Company will incur
"success" fees of $200,000, $225,000 and $250,000 due on the anniversary dates
of the loan.
Management of the Company believes that its existing cash and available
borrowing capacity will be sufficient to support cash needs through September
30, 1999.
Inflation and changing prices have not had a material effect on the
Company's net revenues and results of operations in the last three fiscal years,
as the Company has been able to modify its prices to respond to inflation and
changing prices.
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<PAGE> 13
YEAR 2000 ISSUE
The year 2000 issue is the programming of computer systems to
recognize the values "00" in a date field as the year 2000 and not the year
1900. The Company began steps in 1997 to reasonably ensure that the software it
utilizes will be year 2000 compliant. The Company has evaluated the Year 2000
readiness of the hardware and software products used by the Company. The
Company's assessment covered the following phases: (1) identification of all
Products, IT Systems, and non-IT Systems, such as building security and voice
mail; (2) assessment of repair or replacement requirements; (3) testing and (4)
implementation. The assessment and the first phases of testing and
implementation were completed in fiscal 1998, and based on this, the Company
believes that, with some modifications to existing software and conversions to
new software, the year 2000 issue will not pose significant operational
problems. The replacement, final testing and implementation will be complete in
February of 1999. The costs of these modifications are not expected to have a
material impact on the Company's financial position. However, the assessment of
whether a complete system or device will operate correctly depends in large part
on the Year 2000 compliance of the product or system's other components, many of
which are supplied by parties other than the Company. The supplier of the
Company's current financial and accounting software has informed the Company
that such software is Year 2000 compliant. Further, the Company relies on
various vendors, utility companies, telecommunication service companies,
delivery service companies and other service providers who are outside of the
Company's control. There is no assurance that such parties will not suffer Year
2000 business disruption, which could impact the Company's financial condition
and results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the way public
enterprises are to report information about operating segments in interim
financial statements and requires the reporting of selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for periods
beginning after December 15, 1997, at which time the Company will adopt the
provisions. The Company does not expect SFAS 131 to have a material effect on
reported results.
In March, the AICPA issued Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Maintained for
Internal Use." SOP 98-1 provides guidance on the treatment of costs related to
internal use software. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998, at which time the Company will adopt the provisions. The
Company does not expect SOP 98-1 to have a material effect on reported results.
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP
98-5"), "Reporting on the Cost of Startup Activities". SOP 98-5 provides
guidance on the financial reporting of startup costs and organization costs and
requires that the cost of startup activities and organization costs be
13 of 16
<PAGE> 14
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, at which time the Company will adopt the provisions. The
Company does not expect SOP 98-5 to have a material effect on reported results.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's subsidiary, DSI Staff Connxions-Southwest, Inc., is the
defendant in a suit (Frederico Farias v. Thomson Consumer Electronics and DSI
Staff Connxions-Southwest, Inc.; 327th Judicial District Case No. 96-3036;
District Court of El Paso County, Texas) whereby a former leased employee of a
client obtained a judgment against the Company during August, 1998 in the amount
of $315,000 including interest. The judgment includes approximately $115,000 in
compensatory damages and $200,000 in punitive damages. The Company has posted a
bond for the full amount of the judgment and is appealing the judgment.
Management of the Company, after consultation with counsel, believes that there
is no basis for the awarding of punitive damages, and that the award of
compensatory damages was based on insufficient evidence. Although there can be
no assurances the Company will be successful in prosecuting the appeal, the
management of the Company, after consultation with counsel, believes it will
obtain a reversal of the judgment. If the Company is not successful with the
appeal, the Company would record expense of $315,000.
The Company is also a defendant in a lawsuit (ASI Group, Inc. and Terri
Munkirs v. Digital Solutions, Inc., George Eklund and Miriam H. Silverman;
Superior Court of New Jersey, Law Division, Middlesex County, Docket No.
8906-97) which is currently pending in the Superior Court of New Jersey. This
action was brought by a competitor of the Company in connection with the
transfer of several former clients of the competitor to the Company. The Company
has denied the material allegations of the complaint. Discovery in the case is
in the preliminary stages. The plaintiffs have submitted a calculation of
damages of $300,000 for the claims identified in the lawsuit which includes
damages for clients which never became clients of the Company. Although there
can be no assurances the Company will be successful in defending the claim,
management of the Company, after consultation with counsel, believes it has
meritorious defenses against the claim.
The Company is engaged in no other litigation, the effect of which
would be anticipated to have a material adverse impact on the Company.
ITEM 5. OTHER INFORMATION
Effective January 14, 1999, George Eklund resigned as a Director of the
Company due to personal reasons.
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<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amendment to amended and restated certificate of
incorporation
(b) Reports on Form 8-K
Date of Report Item Reported
12/24/98 Item 2 - Acquisition or Disposition of Assets
11/10/98 Item 5 - Other Events
15 of 16
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
TEAMSTAFF, INC.
(Registrant)
/s/ Donald W. Kappauf
-------------------------------
Donald W. Kappauf
Chief Executive Officer
/s/ Donald T. Kelly
-------------------------------
Donald T. Kelly
Chief Financial Officer
Date: February 9, 1999
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CERTIFICATE OF AMENDMENT
TO THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DIGITAL SOLUTIONS, INC.
To: Secretary of State
State of New Jersey
Pursuant to the Provisions of Section 14A:9-2(4) and Section 14A:9-4(3),
Corporations, General, of the New Jersey Statutes, the undersigned corporation
executes the following Certificate of Amendment to its Amended and Ret\stated
Certificate of Incorporation:
1. The name of the corporation is Digital Solutions, Inc.
2. The following amendment to the Amended and Restated Certificate of
Incorporation was unanimously approved by the Board of Directors and
thereafter duly adopted by a majority of the shareholders of the
corporation at a Special Meeting of Shareholders held on the 17th day
of December, 1998:
Resolved, that Article FIRST of the Amended and Restated Certificate
of Incorporation be amended to read as follows:
"FIRST: The name of the corporation is "TeamStaff, Inc."
3. The only class of securities of the corporation entitled to vote upon
the amendment was the Common Stock. The number of shares of Common
Stock entitled to vote upon the amendment was 19,356,833.
4. The number of shares voting for and against such amendment is as
follows:
Number of Shares Voting For Number of Shares Voting Against
Amendment Amendment
--------------------------- -------------------------------
12,320,088 235,640
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Amendment to the Amended and Restated Certificate of Incorporation as of the 8th
day of February, 1999.
DIGITAL SOLUTIONS, INC. DIGITAL SOLUTIONS, INC.
By: /s/ Donald W. Kappauf By: /s/ Donald T. Kelly
- ---------------------------- --------------------------
Donald W. Kappauf, President Donald T. Kelly, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,300,000
<SECURITIES> 0
<RECEIVABLES> 7,472,000
<ALLOWANCES> (333,000)
<INVENTORY> 0
<CURRENT-ASSETS> 9,530,000
<PP&E> 3,406,000
<DEPRECIATION> (2,682,000)
<TOTAL-ASSETS> 16,867,000
<CURRENT-LIABILITIES> 6,003,000
<BONDS> 0
0
0
<COMMON> (19,000)
<OTHER-SE> (8,232,000)
<TOTAL-LIABILITY-AND-EQUITY> 16,867,000
<SALES> 0
<TOTAL-REVENUES> 39,699,000
<CGS> 0
<TOTAL-COSTS> 36,705,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (49,000)
<INTEREST-EXPENSE> (166,000)
<INCOME-PRETAX> 606,000
<INCOME-TAX> 271,000
<INCOME-CONTINUING> 335,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 335,000
<EPS-PRIMARY> .02<F1>
<EPS-DILUTED> .02
<FN>
<F1>Amount reflects EPS-Basic not EPS-Primary
</FN>
</TABLE>
