<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
AMENDMENT No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): January 25, 1999
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
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<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITIONS OF ASSETS
As previously reported on Form 8K filed with the Commission on
February 8, 1999, effective as of January 25, 1999, TeamStaff, Inc.
(formerly Digital Solutions, Inc.) (the "Company") consummated its
acquisition of 10 entities operating under the tradename the "TeamStaff
Companies". As a result of the acquisition, the 10 TeamStaff Companies
became wholly-owned subsidiaries of the Company.
Pursuant to the terms of the acquisition, the Company issued
8,233,334 shares of common stock in exchange for all of the common
stock of the TeamStaff Companies and paid $3.2 million in cash for all
the preferred stock and for payment of outstanding debt owed by the
TeamStaff Companies to its shareholders. The Company also incurred
$1,281,000 for certain legal, accounting and investment banking
expenses. Additionally, the Company issued 312,010 shares of common
stock to its investment banking firm for services rendered in
connection with the acquisition.
Pursuant to the terms of the acquisition agreements, the
former owners of the TeamStaff Companies agreed to indemnify the
Company, subject an initial "basket" of $100,000, for claims of up to
approximately $2,000,000 for various types of claims for breaches of
representations and warranties. The former owners placed 1,471,000
shares of Common Stock into escrow in order to provide limited security
for claims of indemnification brought by the Company for breaches of
representations or warranties by the TeamStaff Companies and the former
owners.
In addition, pursuant to the acquisition agreements, the
former owners of the TeamStaff Companies have agreed to vote all shares
of the Company owned by them during the two year period following the
acquisition, in favor of management's nominees to the Board of
Directors at all special or annual meetings of the Company's
shareholders.
This Amendment to Form 8K has been filed to include certain
Financial Statements and Pro Forma Financial Information in accordance
with Form 8K reflecting the acquisition of the TeamStaff Companies.
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.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
a. Financial Statements of Business Acquired
Pursuant to Item 7 of Form 8-K, the following financial
statements of the TeamStaff Companies are annexed hereto:
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<PAGE> 3
99.1 Audited Financial Statements for the fiscal years
ended December 31, 1996 and 1997, together with
report of Grant Thornton LLP independent accountants
to the TeamStaff Companies.
99.2 Audited Financial Statements for the fiscal year
ended December 31, 1998, together with report of
Arthur Andersen LLP independent accountants to the
TeamStaff Companies.
b. Pro Forma Financial information.
Pursuant to Item 7 of Form 8-K, the Company has
annexed hereto the Pro Forma financial statements
which have been prepared as if the acquisition was
consummated as of October 1, 1997.
99.3 Pro Forma Financial Statements of TeamStaff, Inc.
(formerly Digital Solutions, Inc.)
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<PAGE> 4
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: April 7, 1999
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<PAGE> 1
EXHIBIT 99.1
TO
8K OF
TEAMSTAFF, INC.
AUDITED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED
DECEMBER 31, 1996 AND 1997, TOGETHER
WITH REPORT OF
GRANT THORNTON LLP
INDEPENDENT ACCOUNTANTS
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<PAGE> 2
Exhibit 99.1
Report of Independent Certified Public Accountants
Board of Directors
TeamStaff Companies, Inc.
and Affiliated Companies
We have audited the accompanying combined balance sheets of TeamStaff Companies,
Inc. and Affiliated Companies as of December 31, 1997 and 1996, and the related
combined statements of operations, shareholders' deficit and cash flows for the
years then ended. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of TeamStaff
Companies, Inc. and Affiliated Companies as of December 31, 1997 and 1996, and
the combined results of their operations and their combined cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Grant Thornton LLP
Tampa, Florida
April 24, 1998
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<PAGE> 3
TeamStaff Companies, Inc. and Affiliated Companies
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 861,932 $ 50,568
Accounts receivable, net of allowance for doubtful accounts of $-0- and
$45,556, respectively 2,680,260 2,035,504
Notes receivable from shareholders 338,382 321,570
Due from voluntary employees' beneficiary association -- 145,511
Deposits with workers' compensation insurer 333,703 75,000
Restricted certificate of deposit pledged to workers' compensation insurer -- 900,000
----------- -----------
Total current assets 4,214,277 3,528,153
FURNITURE, FIXTURES AND EQUIPMENT, net 239,076 171,325
NOTE RECEIVABLE FROM SHAREHOLDER 1,800,000 1,800,000
OTHER ASSETS 314,318 388,447
----------- -----------
Total assets $ 6,567,671 $ 5,887,925
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Book overdraft in bank account $ -- $ 620,182
Accounts payable and accrued expenses 795,739 164,576
Accrued salaries, wages and payroll taxes 3,447,981 2,115,042
Accrued workers' compensation claims 462,115 856,229
Current maturities of note payable 33,326 --
Current maturities of notes payable to shareholders 847,000 689,000
Other liabilities 15,310 131,000
----------- -----------
Total current liabilities 5,601,471 4,576,029
ACCRUED WORKERS' COMPENSATION CLAIMS 400,000 441,668
NOTES PAYABLE TO SHAREHOLDERS, less current portion 2,300,000 2,300,000
NOTE PAYABLE, less current portion 55,563 --
CLIENT DEPOSITS 33,850 41,546
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' DEFICIT
Preferred stock 1,800,000 1,800,000
Common stock 46,800 46,800
Additional paid-in capital 1,776,704 1,776,704
Accumulated deficit (5,446,717) (5,094,822)
----------- -----------
Total shareholders' deficit (1,823,213) (1,471,318)
----------- -----------
Total liabilities and shareholders' deficit $ 6,567,671 $ 5,887,925
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 4
TeamStaff Companies, Inc. and Affiliated Companies
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues $ 105,246,022 $ 76,026,835
Direct costs:
Salaries and wages of worksite employees 90,099,908 64,498,444
Benefits and payroll taxes 11,847,485 10,135,880
------------- -------------
Total direct costs 101,947,393 74,634,324
------------- -------------
Gross profit 3,298,629 1,392,511
Operating expenses:
Administrative personnel 1,953,141 1,686,942
General and administrative expenses 1,834,147 1,801,962
------------- -------------
Total operating expenses 3,787,288 3,488,904
------------- -------------
Loss from operations (488,659) (2,096,393)
Other income (expense):
Interest, net (46,769) (84,595)
Other 183,533 71,982
------------- -------------
Total other income (expense) 136,764 (12,613)
------------- -------------
NET LOSS $ (351,895) $ (2,109,006)
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 5
TeamStaff Companies, Inc. and Affiliated Companies
COMBINED STATEMENT OF SHAREHOLDERS' DEFICIT
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Additional
Preferred Common paid-in Accumulated
stock stock capital deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ -- $ 46,800 $ 1,776,704 $(2,985,816) $(1,162,312)
Issuance of preferred stock of
TeamStaff V, Inc. 1,800,000 -- -- -- 1,800,000
Net loss -- -- -- (2,109,006) (2,109,006)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996 1,800,000 46,800 1,776,704 (5,094,822) (1,471,318)
Net loss -- -- -- (351,895) (351,895)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 $ 1,800,000 $ 46,800 $ 1,776,704 $(5,446,717) $(1,823,213)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE> 6
TeamStaff Companies Inc. and Affiliated Companies
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Net loss $ (351,895) $(2,109,006)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 83,753 68,898
Changes in assets and liabilities:
Accounts receivable (644,756) (852,012)
Notes receivable from shareholders (16,812) (1,853,209)
Due from voluntary employees' beneficiary
association 145,511 (549,824)
Deposit with workers' compensation insurer (258,703) --
Other assets 73,281 35,066
Accounts payable and accrued expenses 631,163 (136,710)
Accrued salaries, wages and payroll taxes 1,332,939 750,747
Accrued workers' compensation claims (435,782) 682,681
Other liabilities (115,690) (16,679)
Client deposits (7,696) 10,558
----------- -----------
Net cash provided by (used in) operating
activities 435,313 (3,969,490)
Cash flows from investing activities
Purchase of furniture, fixtures and equipment (150,656) (70,787)
Restricted certificate of deposit 900,000 --
----------- -----------
Net cash provided by (used in) investing activities 749,344 (70,787)
Cash flows from financing activities:
Proceeds from notes payable to shareholders 158,000 2,308,000
Proceeds from note payable 100,000 --
Payments of notes payable to shareholders -- (186,292)
Payments of note payable (11,111) --
Net change in book overdraft in bank account (620,182) (104,770)
Proceeds from issuance of preferred stock -- 1,800,000
----------- -----------
Net cash provided by (used in) financing
activities (373,293) 3,816,938
----------- -----------
Net increase (decrease) in cash 811,364 (223,339)
Cash at beginning of year 50,568 273,907
----------- -----------
Cash at end of year $ 861,932 $ 50,568
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 276,889 $ 84,595
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 7
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE A - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TeamStaff Companies, Inc. and Affiliates (collectively referred to as "the
Company" or "TeamStaff") are professional employer organizations ("PEO") which
provide professional employer services through its service arrangements with its
clients. The Company provides human resource management services, including
payroll processing, personnel administration, employee benefits administration,
workers' compensation insurance coverage and claims management, risk management,
and other human resource services. The Company earns a fee for providing human
resource services, generally computed as a percent of gross wages of payroll
processed. The majority of the Company's clients are located in the State of
Florida.
The following are the significant accounting policies followed by the Company in
preparing its combined financial statements.
1. Principles of Combination
The accompanying combined financial statements of TeamStaff Companies, Inc. and
Affiliated Companies include the accounts of The TeamStaff Companies, Inc.,
TeamStaff, Inc., TeamStaff II, Inc., TeamStaff III, Inc., TeamStaff IV, Inc.,
TeamStaff V, Inc., TeamStaff U.S.A., Inc., TeamStaff Insurance Services, Inc.,
and Employer Support Services, Inc. All material intercompany balances and
transactions have been eliminated.
2. Use of Estimates
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The more significant estimates relate to the
Company's accrued workers' compensation claims. Actual results could differ from
those estimates.
3. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers cash in banks
and certificates of deposit with original maturities of ninety days or less to
be cash equivalents. There were no cash equivalents at December 31, 1997 and
1996.
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<PAGE> 8
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE A - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
4. Revenue Recognition
Revenues and expenses and the related receivables and payables are recognized
during the period in which the worksite employee earns wages. The Company's
client service contracts generally provide for the billing and collection of
revenues prior to or concurrent with the delivery of payrolls. Ordinarily, the
Company does not grant credit to its clients; however, credit is granted on a
case-by-case basis at the discretion of management.
Accounts receivable consists primarily of billed receivables of approximately
$430,000 and $380,000 and unbilled receivables of approximately $2,250,000 and
$1,700,000 at December 31, 1997 and 1996.
5. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost. Depreciation is computed
utilizing the straight-line method over the estimated useful lives of the
assets, principally ranging from 5-7 years.
6. Other Assets
Included in other assets and receivables is approximately $26,000 and $73,000 of
advances to a shareholder and the shareholder's family at December 31, 1997 and
1996, respectively.
7. Reserves for Workers' Compensation Claims
Client employees were covered under an insurance policy with Northbrook
Insurance Company (Northbrook) until August 1996, at which time the coverage was
changed to a policy with American International Group (AIG). The Northbrook
policy provided a specific loss limitation of $500,000 per occurrence. The AIG
policy provides for a range of premium costs depending on the claims activity
during the policy year and limits the aggregate claims exposure to a percentage
of workers' compensation payroll.
From January 1, 1991 through July 31, 1994, all client employees were covered
under fully insured policies with United States Employer Consumer Association,
Inc. Self-Insured Fund (USEC), which is currently in receivership (See Note H).
Claims for workers' compensation benefits covered through the USEC, Northbrook
and AIG policies, are administered by the respective workers' compensation
insurers (the Insurers). The Insurers evaluate all workers' compensation claims
and pay qualifying claims. The Company employs a staff of risk managers
responsible for assisting the Insurers in the review and evaluation of claims.
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<PAGE> 9
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE A - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Reserves for workers' compensation claims represent the Company's estimated
undiscounted liability for the settlement of workers' compensation claims, both
reported and incurred but not reported, as of the balance sheet date. The
Company's reserves are established based in part upon information provided by
the Company's Insurers. Management believes that the reserves for workers'
compensation claims are adequate. While management uses available information,
including historical loss ratios, to estimate reserves, future adjustments may
be necessary based on actual losses.
8. Income Taxes
All companies in the group are Subchapter S corporations, except for TeamStaff
V, Inc. which is a C-corporation. The Company's policy is to record income tax
expenses on the C-corporation financial statements based on applicable statutory
rates.
The C-corporation uses the asset and liability method to account for income
taxes. The objective of the asset and liability method is to establish deferred
tax assets and liabilities at enacted tax rates expected to be in effect when
such amounts are realized or settled. The principal temporary difference between
the basis of assets and liabilities for financial reporting and tax purposes
relates to reserves for workers' compensation and health insurance claims and
net operating loss carryforwards. Net deferred tax assets related to such
differences have been offset by a valuation allowance due to the uncertainty of
their ultimate realization. Income tax expense is not presented on the statement
of operations, as it is not material.
The Subchapter S corporations do not provide for income taxes in the
accompanying combined financial statements because those companies' results of
operations are allocated directly to their shareholders.
9. Fair Value of Financial Instruments
The carrying amounts of the Company's accounts receivable, notes receivable from
shareholders, certificate of deposit, accounts payable and accrued expenses,
accrued salaries, wages and payroll taxes, due from voluntary employees'
beneficiary association, accrued workers' compensation and notes payable at
December 31, 1997 and 1996, approximate fair value due to the short-term nature
of these items.
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<PAGE> 10
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE B - LIQUIDITY
During 1997 and 1996, the Company's net loss was $351,895 and $2,109,006,
respectively, and at December 31, 1997 and 1996 the accumulated deficit totaled
$5,446,717 and $5,094,822, respectively.
The significant reduction in the operating loss for 1997 as compared to 1996 was
primarily attributable to the Company's containment of workers' compensation
losses, which were achieved by the Company implementing a more aggressive
approach to claim management and the change in the workers' compensation
insurance carrier. Management intends to continue improving the operating
results by better controlling its health insurance-related costs and increasing
gross client revenues. Management believes that these steps will result in
economies of scale and greater contribution to net income.
The Company has also obtained a commitment from the shareholders to indemnify
the Company against any and all losses resulting from the inability of or the
failure by the Company to meet its obligations. Management believes that the
indemnification and the cash flow from operations will be sufficient to provide
the Company with the resources to continue its operations through the current
year.
NOTE C - NOTES RECEIVABLE FROM SHAREHOLDERS
The notes receivable from shareholders relate to nine notes outstanding from two
shareholders. The notes have fixed interest rates ranging from 8% to 10%,
payable quarterly or at the due date. All principle on these notes are due on
December 31, 1998 and January 31, 1999.
NOTE D - FURNITURE, FIXTURES AND EQUIPMENT
A summary of furniture, fixtures and equipment at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Computer equipment $ 331,673 $ 240,020
Furniture and fixtures 110,224 59,590
Leasehold improvements 24,866 24,866
--------- ---------
466,763 324,476
Less accumulated depreciation (227,687) (153,151)
--------- ---------
$ 239,076 $ 171,325
========= =========
</TABLE>
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<PAGE> 11
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE E - NOTES PAYABLE TO SHAREHOLDERS
A summary of notes payable to shareholders at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Note payable to shareholder, dated December 27, 1996, principal due on
January 31, 1999, interest due quarterly at 10% $ 1,800,000 $ 1,800,000
Note payable to shareholder, dated December 27, 1996, principal due on
January 31, 1999, interest due quarterly at 10% 500,000 500,000
Note payable to shareholder, dated November 15, 1994, principal due on
December 31, 1998, interest due annually at 7.25% 50,000 50,000
Note payable to shareholder, dated July 31, 1995, principal due on
December 31, 1998, interest due quarterly at LIBOR (5.97% at December 31,
1997) plus 1% 350,000 350,000
Note payable to shareholder, dated December 29, 1993, principal due on
December 31, 1998, interest due monthly at 8% 132,000 124,000
Note payable to shareholder, dated December 31, 1997, principal due on
December 31, 1998, interest due annually at 9% 50,000 --
Note payable to shareholder, dated December 29, 1993, principal due on
December 31, 1998, interest due monthly at 9% 100,000 100,000
Note payable to shareholder, dated December 31, 1997, principal due on
December 31, 1998, interest due annually at 9% 100,000 --
Note payable to shareholder, dated December 29, 1993, principal due on
December 31, 1998, interest due monthly at 9% 65,000 65,000
----------- -----------
3,147,000 2,989,000
Less current portion (847,000) (689,000)
----------- -----------
$ 2,300,000 $ 2,300,000
=========== ===========
</TABLE>
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<PAGE> 12
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE F - NOTE PAYABLE
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Note payable to a bank, dated August 5, 1997, principal due on August
5, 2000, interest due quarterly at LIBOR plus 1% (5.97% at December
31, 1997) $ 88,889
Less current portion (33,326)
--------
$ 55,563
========
</TABLE>
NOTE G- EMPLOYEE BENEFIT PLANS
Voluntary Employees' Beneficiary Association
In 1996, the Company sponsored a fully insured health plan (the Plan) covering
all full-time employees of its clients. The Plan's assets were held in a
voluntary employees' beneficiary association trust for federal income tax
purposes. The Company administered claims for benefits under the Plan. During
1996, all Plan participants were covered under traditional fully insured
policies. Payments to the plan in 1996 totaled approximately $2,260,000. The
Company terminated the Plan effective December 31, 1996.
401(k) Contribution Plan
In 1996, the Company established a deferred compensation plan (the "Plan") under
Section 401(a)(g) of the Internal Revenue Code. Generally, any employee of the
Company, including those leased to clients, is eligible to participate in the
Plan upon completion of a year of service and after attaining the age of 21
years. At its discretion, the Company may make matching contributions to the
Plan. Generally, employees become partially vested in Company contributions
after 2 years of service and are fully vested after 6 years of service. In 1997
and 1996, approximately $190,000 and $54,000, respectively, were contributed by
the Company to the Plan.
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<PAGE> 13
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE H - COMMITMENTS AND CONTINGENCIES
Pledged Certificate of Deposit
As security under the Northbrook insurance policy described previously, the
Company had pledged a certificate of deposit of $900,000 to Northbrook as of
December 31, 1996. During 1997, this certificate was transferred to Northbrook
to use for claim payments, resulting in a $258,703 deposit balance at December
31, 1997. In addition, as required under the Northbrook policy, the Company also
maintains a $75,000 deposit with the insurer, which is used to fund all claims.
Workers' Compensation Claim
The Company has a contingent liability for a potential assessment from a former
worker's compensation insurer, which is currently in receivership. The Company
used the insurer for policy years prior to 1994. The Company is a member of the
insured group and has been given an assessment of $1.1 million for its portion
of the $38 million assessed to the group. The Company is currently in litigation
for this assessment and management, after consultation with legal counsel, has
recorded approximately $400,000 of reserves for this claim. In the event that
other parties of the group are unable to satisfy their assessments, additional
assessments could be given to the Company.
Operating Leases
The Company has various operating lease agreements for their offices and
equipment. Future minimum lease payments required under these operating leases
for the years ended December 31, are as follows:
<TABLE>
<S> <C>
1998 $68,539
1999 24,674
2000 13,699
2001 11,176
Thereafter 6,519
</TABLE>
The leases provide for payment of taxes and other expenses by the Company. Rent
expense was approximately $168,000 and $164,000 for the years ended December 31,
1997 and 1996, respectively.
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<PAGE> 14
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE H - COMMITMENTS AND CONTINGENCIES - Continued
Legal Proceedings
Various legal actions and proceedings are pending or threatened against the
Company and include suits relating to its professional employer services. While
the final outcome of these matters cannot be predicted at this time and many of
them may take a number of years to resolve, management believes, after
consultations with counsel, that these proceedings are subject to meritorious
defenses, are covered by insurance, or, if not so covered, any ultimate
liability will not have a material adverse effect on the financial position,
results of operations, or liquidity of the Company.
NOTE I - CAPITAL STOCK
Preferred and common stock balances consist of the following at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
Preferred Common
Stock Stock
----- -----
<S> <C> <C>
THE TEAMSTAFF COMPANIES, INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 29,000 shares. $ -- $29,000
EMPLOYER SUPPORT SERVICES, INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 3,800 shares. -- 3,800
TEAMSTAFF II, INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 100 shares. -- 100
TEAMSTAFF III, INC.
Common stock - authorized 10,000 shares of $1.00 par value; issued and
outstanding 100 shares. -- 100
TEAMSTAFF IV, INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 100 shares. -- 100
</TABLE>
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<PAGE> 15
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE I - CAPITAL STOCK - Continued
<TABLE>
<CAPTION>
Preferred Common
Stock Stock
---------- ----------
<S> <C> <C>
TEAMSTAFF V, INC.
Preferred stock - 8% cumulative - $1,000 par value; authorized, 10,000
shares; issued and outstanding 1,800 shares. 1,800,000 --
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 100 shares. -- 100
TEAMSTAFF INSURANCE, INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 100 shares. -- 100
TEAMSTAFF U.S.A., INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 3,800 shares. -- 3,800
TEAMSTAFF, INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 9,700 shares. -- 9,700
---------- ----------
$1,800,000 $ 46,800
========== ==========
</TABLE>
All companies have authorized 10,000 shares of $1.00 preferred stock; with the
exception of those issued above, no shares are issued and outstanding.
NOTE J - RELATED PARTY TRANSACTION
In 1996, a shareholder gave the Company $1,800,000 in exchange for 10,000 shares
of preferred stock in TeamStaff V, Inc. TeamStaff V., Inc. then loaned the
$1,800,000 to the shareholder (resulting in the $1,800,000 long-term note
receivable) who in turn loaned the $1,800,000 to TeamStaff, Inc. (resulting in
the $1,800,000 note payable). The interest rates on the note receivable and note
payable are identical.
19 of 42
<PAGE> 16
NOTE K - INCOME TAXES (UNAUDITED)
The Company has been acquired in a business combination accounted for as a
purchase. Upon completion of this transaction, the S corporations included in
the Company become subject to corporate income taxes. The acquirer recognized
deferred tax benefit for cumulative temporary differences between financial and
tax reporting as of the date of the acquisition. If the acquisition had
occurred at December 31, 1997, a deferred tax benefit would have been
approximately $400,000, which principally relates to the reserves for workers'
compensation claims. Additionally, pro forma tax expense is not presented as
the benefit derived from each year's loss would have been offset by a
corresponding increase in a valuation allowance against the benefit.
20 of 42
<PAGE> 1
EXHIBIT 99.2
TO
8-K OF
TEAMSTAFF, INC.
AUDITED FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998 TOGETHER
WITH REPORT OF ARTHUR ANDERSEN LLP
INDEPENDENT ACCOUNTANTS
21 of 42
<PAGE> 2
99.2
TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998
TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
22 of 42
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Teamstaff Companies, Inc. and
Affiliated Companies
We have audited the accompanying combined balance sheet of Teamstaff Companies,
Inc. and Affiliated Companies (as defined in Note 1) as of December 31, 1998 and
the related combined statements of operations, shareholders' deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Teamstaff Companies, Inc. and
Affiliated Companies as of December 31, 1998 and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
Roseland, New Jersey
March 19, 1999
23 of 42
<PAGE> 4
TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 417,000
Accounts receivable, net of allowance for doubtful accounts of $2,000 2,249,000
Prepaid expenses and other current assets 505,000
Notes receivable from shareholders 380,000
Deposits with workers' compensation insurer 85,000
-----------
Total current assets 3,636,000
-----------
FURNITURE, FIXTURES AND EQUIPMENT:
Computer equipment 424,000
Furniture and fixtures 124,000
Leasehold improvements 25,000
-----------
Total furniture, fixtures and equipment 573,000
ACCUMULATED DEPRECIATION AND AMORTIZATION (348,000)
-----------
Total furniture, fixtures and equipment, net 225,000
-----------
NOTE RECEIVABLE FROM SHAREHOLDER 1,800,000
OTHER ASSETS 484,000
-----------
Total assets $ 6,145,000
===========
</TABLE>
The accompanying notes are an integral part of this combined balance sheet.
24 of 42
<PAGE> 5
TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 859,000
Accrued expenses 1,590,000
Accrued salaries, wages and payroll taxes 1,943,000
Income taxes payable 29,000
Current maturities of note payable 28,000
Current maturities of notes payable to shareholders 847,000
-----------
Total current liabilities 5,296,000
ACCRUED WORKERS' COMPENSATION CLAIMS 484,000
NOTE PAYABLE, less current portion 65,000
NOTES PAYABLE TO SHAREHOLDERS, less current portion 2,300,000
CLIENT DEPOSITS 45,000
-----------
Total liabilities 8,190,000
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred stock 1,800,000
Common stock 47,000
Additional paid-in capital 1,977,000
Accumulated deficit (5,869,000)
-----------
Total shareholders' deficit (2,045,000)
-----------
Total liabilities and shareholders' deficit
balance sheet. $ 6,145,000
===========
</TABLE>
The accompanying notes are an integral part of this combined balance sheet
25 of 42
<PAGE> 6
TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
REVENUES $ 113,501,000
DIRECT COSTS:
Salaries and wages of worksite employees 97,205,000
Benefits and payroll taxes 12,156,000
-------------
Total direct costs 109,361,000
-------------
GROSS PROFIT 4,140,000
-------------
OPERATING EXPENSES:
Administrative personnel 2,282,000
General and administrative expenses 2,156,000
-------------
Total operating expenses 4,438,000
-------------
LOSS FROM OPERATIONS (298,000)
-------------
OTHER INCOME (EXPENSE):
Interest expense (447,000)
Interest income 346,000
Other income 6,000
-------------
Total other income (expense) (95,000)
Loss before provision for income taxes (393,000)
PROVISION FOR INCOME TAXES (29,000)
-------------
Net loss ($ 422,000)
=============
</TABLE>
The accompanying notes are an integral
part of this combined statement.
26 of 42
<PAGE> 7
TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Accumulated
Stock Stock Capital Deficit Total
----- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997 $ 1,800,000 $ 47,000 $ 1,777,000 ($5,447,000) ($1,823,000)
Shareholder contribution -- -- 200,000 -- 200,000
Net loss -- -- -- (422,000) (422,000)
----------- ----------- ----------- ----------- -----------
Balance at December 31,
1998 $ 1,800,000 $ 47,000 $ 1,977,000 ($5,869,000) ($2,045,000)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of this combined statement.
27 of 42
<PAGE> 8
TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 422,000)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 121,000
Provision for doubtful accounts 2,000
Changes in assets and liabilities-
Accounts receivable 429,000
Prepaid expenses and other current assets (505,000)
Notes receivable from shareholders (41,000)
Deposits with workers' compensation insurer 249,000
Other assets (169,000)
Accounts payable 399,000
Accrued expenses 1,254,000
Accrued salaries, wages and payroll taxes (1,505,000)
Income taxes payable 29,000
Accrued workers' compensation claims (379,000)
Other liabilities (15,000)
Client deposits 11,000
-----------
Net cash used in operating activities (542,000)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchase of furniture, fixtures and equipment (107,000)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to shareholders 28,000
Proceeds from note payable 22,000
Payments of notes payable to shareholders (19,000)
Payments of note payable (27,000)
Shareholder contribution 200,000
-----------
Net cash provided by financing activities 204,000
-----------
Net decrease in cash (445,000)
CASH, beginning of year 862,000
-----------
CASH, end of year $ 417,000
===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 112,000
===========
</TABLE>
The accompanying notes are an integral
part of this combined statement.
28 of 42
<PAGE> 9
TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) NATURE OF THE BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
Teamstaff Companies, Inc. and Affiliated Companies (collectively referred
to as "the Company" or "Teamstaff") are professional employer
organizations ("PEO") which provide professional employer services
through its service arrangements with its clients. The Company provides
human resource management services, including payroll processing,
personnel administration, employee benefits administration, workers'
compensation insurance coverage and claims management, risk management,
and other human resource services. The Company earns a fee for providing
human resource services, generally computed as a percentage of gross
wages of payroll processed. The majority of the Company's clients are
located in the State of Florida.
The following are the significant accounting policies followed by the
Company in preparing its combined financial statements.
Principles of Combination-
The accompanying combined financial statements of Teamstaff
Companies, Inc. and Affiliated Companies include the accounts of The
Teamstaff Companies, Inc., Teamstaff, Inc., Teamstaff II, Inc.,
Teamstaff III, Inc., Teamstaff IV, Inc., Teamstaff V, Inc., Teamstaff
U.S.A., Inc., Teamstaff Insurance Services, Inc., and Employer
Support Services, Inc. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates-
In preparing the Company's financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. The more significant estimates relate to the Company's
accrued workers' compensation claims. Actual results could differ
from those estimates.
Cash and Cash Equivalents-
For purposes of the statement of cash flows, the Company considers
cash in banks and certificates of deposit with maturities of ninety
days or less at the time of purchase to be cash equivalents. There
were no cash equivalents at December 31, 1998.
29 of 42
<PAGE> 10
Revenue Recognition-
Revenues and expenses and the related receivables and payables are
recognized during the period in which the worksite employee earns
wages. The Company's client service contracts generally provide for the
billing and collection of revenues prior to or concurrent with the
delivery of payrolls. Ordinarily, the Company does not grant credit to
its clients; however, credit is granted on a case-by-case basis at the
discretion of management.
Accounts receivable consists primarily of billed receivables of
approximately $283,000 and unbilled receivables of approximately
$1,968,000 at December 31, 1998.
Furniture, Fixtures and Equipment-
Furniture, fixtures and equipment are stated at cost. Depreciation and
amortization is computed utilizing the straight-line method over the
shorter of the estimated useful lives of the assets or the remaining
lease term, principally ranging from 5-7 years.
Other Current Assets-
Included in prepaid expenses and other current assets is approximately
$45,000 of advances to a shareholder and the shareholder's family at
December 31, 1998.
Reserves for Workers' Compensation Claims-
Client employees were covered under an insurance policy with Northbrook
Insurance Company (Northbrook) until August 1996, at which time the
coverage was changed to a policy with American International Group
(AIG). The Northbrook policy provided a specific loss limitation of
$500,000 per occurrence. The AIG policy provides for a range of premium
costs depending on the claims activity during the policy year and
limits the aggregate claims exposure to a percentage of workers'
compensation payroll.
From January 1, 1991 through December 31, 1993, all client employees
were covered under fully insured policies with either United States
Employer Consumer Association, Inc. Self-insured Fund (USEC), which is
currently in receivership or Associated Industries Insurance Company,
Inc. (AIF). From January 1, 1994 through July 31, 1994, all client
employees were covered under USEC. (See Note 7)
Claims for workers' compensation benefits covered through the USEC,
Northbrook and AIG policies, are administered by the respective
workers' compensation insurers (the Insurers). The Insurers evaluate
all workers' compensation claims and pay qualifying claims. The Company
employs a staff of risk managers responsible for assisting the Insurers
in the review and evaluation of claims.
Reserves for workers' compensation claims represent the Company's
estimated undiscounted liability for the settlement of workers'
compensation claims, both reported and incurred but not reported, as of
the balance sheet date. The Company's reserves are based upon
information provided by the Company's Insurers. Management believes
that the reserves for workers' compensation claims are adequate. While
management uses available information, including historical loss ratios
to estimate reserves future adjustments may be necessary based on
actual losses.
30 of 42
<PAGE> 11
Income Taxes-
Teamstaff Companies, Inc. and Affiliated Companies are Subchapter S
corporations, except for Teamstaff V, Inc. which is a C Corporation.
The Company's policy is to record income tax expenses on the C
Corporation financial statements based on applicable statutory rates.
The C Corporation uses the asset and liability method to account for
income taxes. The objective of the assets and liability method is to
establish deferred tax assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or settled. The
principal temporary difference between the basis of assets and
liabilities for financial reporting and tax purposes relates to
reserves for workers' compensation and health insurance claims and net
operating loss carryforwards. Net deferred tax assets related to such
differences have been offset by a valuation allowance due to the
uncertainty of their ultimate realization.
The Subchapter S Corporations do not provide for income taxes in the
accompanying combined financial statements because those companies'
results of operations are allocated directly to their shareholders.
Fair Value of Financial Instruments-
The carrying amounts of the Company's accounts receivable, notes
receivable from shareholders and notes payable at December 31, 1998,
approximate fair value due to the short-term nature of these items.
(2) LIQUIDITY:
During 1998, the Company's net loss was $422,000 and at December 31, 1998
the accumulated deficit totaled $5,869,000.
Management intends to continue improving the operating results by better
controlling its health insurance-related costs and increasing gross
client revenues. Management believes that these steps will result in
economies of scale and greater contribution to net income.
Subsequent to year-end the Company was sold (see Note 11).
(3) NOTES RECEIVABLE FROM SHAREHOLDERS:
The notes receivable from shareholders relate to ten notes outstanding
from two shareholders. The notes have fixed interest rates ranging from
8% to 10%, payable quarterly or at the due date. All principal on these
notes are due on June 30, 1999, December 31, 1999 and January 31, 2000.
31 of 42
<PAGE> 12
(4) NOTES PAYABLE TO SHAREHOLDERS:
A summary of notes payable to shareholders at December 31, 1998 is as
follows-
<TABLE>
<CAPTION>
<S> <C>
Note payable to shareholder, dated December 27, 1996, principal due on January 31,
2000, interest due quarterly at 10% $1,800,000
Notes payable to shareholder, dated December 27, 1996, principal due on January 31,
2000, interest due quarterly at 10% 500,000
Note payable to shareholder, dated November 15, 1994, principal due on December 31,
1999, interest due annually at 7.25% 50,000
Note payable to shareholder, dated July 31, 1995, principal due on December 31, 1999,
interest due quarterly at LIBOR (5.10% at December 31, 1998) plus 1% 350,000
Note payable to shareholder, dated December 29, 1993, principal due on December 31,
1999, interest due monthly at 8% 132,000
Note payable to shareholder, dated December 31, 1997, principal due on December 31,
1999, interest due annually at 9% 100,000
Note payable to shareholder, dated December 29, 1993, principal due on December 31,
1999, interest due monthly at 9% 100,000
Note payable to shareholder, dated December 31, 1997, principal due on December 31,
1999, interest due annually at 9% 50,000
Note payable to shareholder, dated December 29, 1993, principal due on December 31,
1999, interest due monthly at 9% 65,000
----------
3,147,000
Less- Current portion (847,000)
----------
$2,300,000
==========
</TABLE>
The maturity dates of the above uncollateralized notes have been extended
numerous times.
(5) NOTE PAYABLE:
<TABLE>
<CAPTION>
<S> <C>
The note payable is to a bank, dated August 5, 1997 with principal due on
August 5, 2000. Interest is due quarterly at LIBOR (5.10% at December 31,
1998) plus 1% $93,000
Less- Current portion (28,000)
-------
$65,000
=======
</TABLE>
32 of 42
<PAGE> 13
(6) EMPLOYEE BENEFIT PLANS:
401(k) Contribution Plan-
In 1996, the Company established a deferred compensation plan (the
Plan) under Section 401(a)(g) of the Internal Revenue Code. Generally,
any employee of the Company, including those leased to clients, is
eligible to participate in the Plan upon completion of a year of
service and after attaining the age of 21 years. At its discretion, the
Company may make matching contributions to the Plan. Generally,
employees become partially vested in Company contributions after 2
years of service and are fully vested after six years of service. In
1998 approximately $226,000 were contributed by the Company to the
Plan.
(7) COMMITMENTS AND CONTINGENCIES:
Deposits with Workers' Compensation Insurer-
As security under the Northbrook insurance policy described previously,
the Company had pledged a certificate of deposit of $900,000 to
Northbrook. During 1997, this certificate was redeemed and the funds
were transferred to Northbrook to use for claim payments. As of
December 31, 1998 the certificate of deposit balance was $10,000. In
addition, as required under the Northbrook policy, the Company also
maintains a $75,000 deposit with the insurer, which is used to fund all
claims.
Workers' Compensation Claim-
The Company has a contingent liability for a potential assessment from
a former workers' compensation insurer, which is currently in
receivership. The Company used the insurer for policy years prior to
1994. The Company is a member of the insured group and was originally
given an assessment of $1.03 million on July 18, 1996 for its portion
of the $38 million assessed to the group. On January 15, 1999 this
amount was reassessed to $1.6 million of the revised $45 million
assessed to the group. The Company is currently in litigation regarding
this assessment and management, after consultation with legal counsel,
has recorded a reserve of approximately $484,000 based upon the
Company's original assessment of $1.03 million and the results of other
members' settlements. In the event that other parties of the group are
unable to satisfy their assessments, additional assessments could be
made against the Company as the overall assessment is joint and
several.
Operating Leases-
The Company has various operating lease agreements for their offices
and equipment. Future minimum lease payments required under these
operating leases for the years ended December 31, are as follows-
<TABLE>
<CAPTION>
<S> <C> <C>
1999 $138,000
2000 14,000
2001 11,000
2002 7,000
Thereafter 0
</TABLE>
The leases provide for payment of taxes and other expenses by the
Company. Rent expense was approximately $157,000 for the year ended
December 31, 1998.
33 of 42
<PAGE> 14
(8) COMMITMENTS AND CONTINGENCIES:
LEGAL PROCEEDINGS-
Various legal actions and proceedings are pending or threatened against
the Company and include suits relating to its professional employer
services. While the final outcome of these matters cannot be predicted
at this time and many of them may take a number of years to resolve,
management believes, after consultations with counsel, that these
proceedings are subject to meritorious defenses, are covered by
insurance, or, if not so covered, any ultimate liability will not have
a material adverse effect on the combined financial position, results
of operations, or liquidity of the Company.
(9) CAPITAL STOCK:
Preferred and common stock balances consist of the following at
December 31, 1998
<TABLE>
<CAPTION>
Preferred Common
Stock Stock
----- -----
<S> <C> <C>
The Teamstaff Companies, Inc. -- Common stock - authorized 10,000 shares of
$1.00 par value; issued and outstanding 29,000 shares $ 0 $29,000
Employer Support Services, Inc. -- Common stock - authorized 10,000 shares
of $1.00 par value; issued and outstanding 3,800 shares 0 3,800
Teamstaff II, Inc. -- Common stock - authorized 10,000 shares of $1.00 par
value; issued and outstanding 100 shares 0 100
Teamstaff III, Inc. -- Common stock - authorized 10,000 shares of $1.00 par
value; issued and outstanding 100 shares 0 100
Teamstaff IV, Inc. -- Common stock - authorized 10,000 shares of $1.00 par
value; issued and outstanding 100 shares 0 100
Teamstaff V, Inc. -- Preferred stock - 8% cumulative - $1,000 par value;
authorized 10,000 shares; issued and outstanding 1,800 shares - Common
stock - authorized 10,000 shares of $1.00 par value; issued and
outstanding 100 shares 1,800,000 100
Teamstaff Insurance, Inc. -- Common stock - authorized 10,000 shares of
$1.00 par value; issued and outstanding 100 shares 0 100
Teamstaff U.S.A., Inc. -- Common stock - authorized 10,000 shares of $1.00 par
value; issued and outstanding 3,800 shares 0 3,800
Teamstaff, Inc. -- Common stock - authorized 10,000 shares of $1.00 par
value; issued and outstanding 9,700 shares 0 9,700
---------- -------
$1,800,000 $46,800
========== =======
</TABLE>
All companies have authorized 10,000 shares of $1,000 preferred stock;
with the exception of those issued above, no shares are issued and
outstanding.
34 of 42
<PAGE> 15
(10) RELATED PARTY TRANSACTION:
In 1996, a shareholder paid the Company $1,800,000 in exchange for
10,000 shares of preferred stock in Teamstaff V, Inc. Teamstaff V, Inc.
then loaned the $1,800,000 to the shareholder (resulting in the
$1,800,000 long-term note receivable) who in turn loaned the $1,800,000
to Teamstaff, Inc. (resulting in the $1,800,000 note payable). The
interest rates on the note receivable and note payable are identical.
The preferred stock has an 8% cumulative dividend rate. Cumulative
dividend in arrears approximate $289,000 as of December 31, 1998. The
preferred stock does not give the holder any voting rights and does not
contain conversion features. In the event of liquidation, the preferred
shareholder is entitled to a liquidation preference of $1,800,000.
(11) SUBSEQUENT EVENT:
On January 25, 1999 the Company was sold to Teamstaff, Inc. (formerly
Digital Solutions, Inc.) in exchange for 8,233,334 shares of Teamstaff,
Inc.'s common stock. In addition, Teamstaff, Inc. purchased the
Company's preferred stock and repaid the note payable and the net notes
payable to (receivable from) shareholders.
35 of 42
<PAGE> 1
EXHIBIT 99.3
TO
8-K OF
TEAMSTAFF, INC.
PRO FORMA FINANCIAL
STATEMENTS OF TEAMSTAFF, INC.
36 of 42
<PAGE> 2
Exhibit 99.3
TEAMSTAFF, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
Historical
-------------------------------------
TeamStaff, Inc. TeamStaff Cos.
--------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,300,000 $ 417,000
Restricted Cash 350,000 -
Accounts receivable, net of allowance 7,139,000 2,249,000
Notes receivable from shareholder - 380,000
Other current assets 741,000 590,000
------------- ------------
Total current assets 9,530,000 3,636,000
EQUIPMENT AND IMPROVEMENTS
Equipment 3,359,000 548,000
Leasehold improvements 47,000 25,000
------------- ------------
3,406,000 573,000
Accumulated depreciation and amortization 2,682,000 348,000
------------- ------------
724,000 225,000
DEFERRED TAX ASSET 1,570,000 -
GOODWILL, net of amortization 4,035,000 -
NOTES RECEIVABLE FROM SHAREHOLDER - 1,800,000
OTHER ASSETS 1,008,000 484,000
------------- ------------
TOTAL ASSETS $ 16,867,000 $ 6,145,000
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 538,000 $ 28,000
Current portion of notes payable to shareholders - 847,000
Accounts payable 2,132,000 859,000
Accrued expenses and other current liabilities 3,333,000 3,607,000
------------- ------------
Total current liabilities 6,003,000 5,341,000
LONG-TERM LIABILITIES
Accrued workers' compensation claims - 484,000
Notes payable to shareholders, less current portion - 2,300,000
Long-term debt 2,613,000 65,000
------------- ------------
Total long-term liabilities 2,613,000 2,849,000
------------- ------------
Total Liabilities 8,616,000 8,190,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 19,000 47,000
Preferred Stock - 1,800,000
Additional paid-in capital 13,734,000 1,977,000
Accumulated deficit (5,502,000) (5,869,000)
------------- ------------
Total shareholders' equity 8,251,000 (2,045,000)
------------- ------------
TOTAL LIABILITIES AND EQUITY $ 16,867,000 $ 6,145,000
============= ============
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
---------------------------------------------
Adjustments Combined
----------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 703,000 (1)(2)(4) $ 2,420,000
Restricted Cash 350,000
Accounts receivable, net of allowance 9,388,000
Notes receivable from shareholder (282,000) (2) 98,000
Other current assets 1,331,000
------------- -------------
Total current assets 421,000 13,587,000
EQUIPMENT AND IMPROVEMENTS
Equipment 3,907,000
Leasehold improvements 72,000
------------- -------------
- 3,979,000
Accumulated depreciation and amortization 3,030,000
------------- -------------
- 949,000
DEFERRED TAX ASSET 1,570,000
GOODWILL, net of amortization 12,725,000(3)(4)(5)(6)(7) 16,760,000
NOTES RECEIVABLE FROM SHAREHOLDER (1,800,000)(2) -
OTHER ASSETS (707,000)(1)(6) 785,000
------------- -------------
TOTAL ASSETS $ 10,639,000 $ 33,651,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $1,222,000(1)(2) $ 1,788,000
Current portion of notes payable to shareholders (847,000) -
Accounts payable 2,991,000
Accrued expenses and other current liabilities 574,000(1)(6) 7,514,000
------------- -------------
Total current liabilities 949,000 12,293,000
LONG-TERM LIABILITIES
Accrued workers' compensation claims - 484,000
Notes payable to shareholders, less current portion (2,300,000)(2) -
Long-term debt 2,635,000(1)(2) 5,313,000
------------- -------------
Total long-term liabilities 335,000 5,797,000
------------- -------------
Total Liabilities 1,284,000 18,090,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock (39,000)(3)(5) 27,000
Preferred Stock (1,800,000)(4) -
Additional paid-in capital 5,325,000(3)(5)(7) 21,036,000
Accumulated deficit 5,869,000(3) (5,502,000)
------------- -------------
Total shareholders' equity 9,355,000 15,561,000
------------- -------------
TOTAL LIABILITIES AND EQUITY $ 10,639,000 $ 33,651,000
============= =============
</TABLE>
(1) Includes $3,950,000 of borrowings from a financial institution.
(2) Represents the settlement of TeamStaff shareholders' notes payable
($3,148,000) and notes receivable ($2,082,000) as well as the bank debt
of ($92,000) at the date of the merger.
(3) Represents the elimination of TeamStaff's historical equity accounts.
(4) Includes the redemption of the preferred stock for $1,800,000 in cash
and dividends of $289,000 not declared but required to be paid as part
of the merger agreement.
(5) Includes the issuance of 8,233,334 shares of TeamStaff, Inc. to
TeamStaff shareholders and the Company's investment banker (312,010
shares) at an estimated fair market value of $7,310,000 ($8,000 par
value common stock and $7,302,000 additional paid in capital).
(6) Including acquisition costs.
(7) Represents the adjustment to record goodwill related to the acquisition
and adjustments to reflect the estimated fair value of the intangibles.
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<PAGE> 3
TEAMSTAFF, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro Forma
--------------------------------
TeamStaff, Inc. TeamStaff Cos. Adjustments Combined
--------------- -------------- ----------- --------
<S> <C> <C> <C> <C>
REVENUES $ 39,699,000 $ 29,320,000 $ -- $ 69,019,000
DIRECT EXPENSES 36,705,000 28,405,000 -- 65,110,000
------------ ------------ ------------ ------------
Gross profit 2,994,000 915,000 -- 3,909,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,150,000 1,246,000 -- 3,396,000
DEPRECIATION AND AMORTIZATION 176,000 48,000 127,000(1) 351,000
------------ ------------ ------------ ------------
Income from operations 668,000 (379,000) (127,000) 162,000
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 104,000 347,000 (350,000)(2) 101,000
Interest expense (166,000) (362,000) 146,000(2)(3) (382,000)
------------ ------------ ------------ ------------
(62,000) (15,000) (204,000) (281,000)
------------ ------------ ------------ ------------
Income before tax 606,000 (394,000) (331,000) (119,000)
INCOME TAX EXPENSE (271,000) (29,000) 296,000(4) (4,000)
------------ ------------ ------------ ------------
NET INCOME $ 335,000 $ (423,000) $ (35,000) $ (123,000)
============ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.02 $ (0.00)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 19,363,511 8,545,344(5) 27,908,855
============ ============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.02 $ (0.00)
============ ============
DILUTED SHARES OUTSTANDING 19,518,235 8,545,344 28,063,579
============ ============ ============
</TABLE>
(1) Represents three months of amortization of intangible assets over 25
years.
(2) Represents the elimination of the interest expense and interest income
on the TeamStaff Companies' historical debt which was paid at the time
of merger.
(3) Represents three months of interest expense resulting from the
financing of the merger.
(4) Represents a reduction to income tax expense as a result of the
TeamStaff Companies' loss.
(5) Includes 8,233,334 common shares issued to TeamStaff Companies'
shareholders and 312,010 common shares issued to investment bankers in
connection with the acquisition.
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<PAGE> 4
TEAMSTAFF, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Pro Forma
---------------- ------------------ -----------------------------------------
TeamStaff, Inc. TeamStaff Cos. Adjustments Combined
---------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES $ 139,675,000 $ 113,501,000 $ - $ 253,176,000
DIRECT EXPENSES 129,747,000 109,361,000 - 239,108,000
---------------- ------------------ ---------------- -----------------
Gross profit 9,928,000 4,140,000 - 14,068,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,389,000 4,317,000 - 11,706,000
DEPRECIATION AND AMORTIZATION 661,000 121,000 509,000 (1) 1,291,000
---------------- ------------------ ---------------- -----------------
Income from operations 1,878,000 (298,000) (509,000) 1,071,000
---------------- ------------------ ---------------- -----------------
OTHER INCOME (EXPENSE)
Interest and other income 83,000 352,000 (354,000) (2) 81,000
Interest expense (554,000) (447,000) (409,000) (2)(3) (1,410,000)
---------------- ------------------ ---------------- -----------------
(471,000) (95,000) (763,000) (1,329,000)
---------------- ------------------ ---------------- -----------------
Income before tax 1,407,000 (393,000) (1,272,000) (258,000)
INCOME TAX (EXPENSE) BENEFIT 1,296,000 (29,000) - 1,267,000
---------------- ------------------ ---------------- -----------------
NET INCOME $ 2,703,000 $ (422,000) $(1,272,000) $ 1,009,000
================ ================== ================ =================
BASIC EARNINGS PER COMMON SHARE $ 0.14 $ 0.04
================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING 19,271,897 8,545,344(4) 27,817,241
================ ================ ================
DILUTED EARNINGS PER COMMON SHARE $ 0.14 $ 0.04
================ ================
DILUTED SHARES OUTSTANDING 19,403,298 8,545,344 27,948,642
================ ================ ================
</TABLE>
(1) Represents the amortization of intangible assets over 25 years
(2) Represents the elimination of the interest expense and interest income
on the TeamStaff Companie's historical debt which was paid at the time
of merger.
(3) Represents the increase in interest expense resulting from the
financing of the merger
(4) Includes 8,233,334 common shares issued to TeamStaff Companies
shareholders and 312,010 common shares issued to investment bankers in
connection with the acquisition.
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<PAGE> 5
TEAMSTAFF, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(1) BASIS OF PRESENTATION
On January 25, 1999 TeamStaff, Inc., formerly Digital
Solutions, Inc., completed the acquisition of the Teamstaff Companies
through the issuance of 8,233,334 shares of TeamStaff, Inc. common
stock and $3.2 million in cash for the preferred stock of the TeamStaff
Companies and for the repayment of debt. The transaction (the "Purchase
Transaction") was accounted for as a purchase by TeamStaff, Inc.
pursuant to Accounting Principle Board Opinion No. 16 "Business
Combination" ("APB 16").
The unaudited pro forma condensed combined financial
information combines the historical statements of operations of
TeamStaff, Inc. with the historical statements of operations of the
TeamStaff Companies (TeamStaff, Inc. and the TeamStaff Companies are
collectively referred to as the "Combined Company") after giving effect
to the Purchase Transaction as if the Purchase Transaction had occurred
on October 1, 1997, and the historical balance sheets of TeamStaff,
Inc. and the TeamStaff Companies as if the Purchase Transaction had
occurred on December 31, 1998. The fiscal year of TeamStaff, Inc. ends
on September 30 and the fiscal year of the TeamStaff Companies ends on
December 31. For purposes of presenting the unaudited pro forma
condensed combined statement of operations, the historical statements
of TeamStaff, Inc. for the year ended September 30, 1998 were combined
with the historical statements of the TeamStaff Companies for the year
ended December 31, 1998. In addition the unaudited historical
statements of TeamStaff, Inc. for the three months ended December 31,
1998 were combined with the unaudited statements of the TeamStaff
Companies for the same period.
The unaudited pro forma condensed combined financial
information is presented for informational purposes only. These pro
forma amounts are not necessarily indicative of the results of
operations of the Combined Company that would have actually occurred
had the Purchase Transaction been consummated on October 1, 1997 or of
the financial condition of the Combined Company had the Purchase
Transaction been consummated as of December 31, 1998 or of the future
results of operations or financial condition of the Combined Company.
The unaudited pro forma condensed combined financial information should
be read in conjunction with the historical consolidated financial
statements for TeamStaff, Inc. and the historical combined financial
statements of the TeamStaff Companies.
The unaudited pro forma condensed combined statements of
operations and the unaudited pro forma condensed combined balance sheet
do not reflect the operating results of TeamStaff, Inc. and the
Teamstaff Companies from December 31, 1998 through the
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<PAGE> 6
closing date of the Purchase Transaction (January 25, 1999) and any
cost savings the Combined Company expects to achieve as a result of the
Purchase Transaction.
(2) PURCHASE PRICE
Pursuant to the terms of the acquisition, the TeamStaff, Inc.
issued 8,233,334 shares of its common stock in exchange for all of the
common stock of the TeamStaff Companies and paid $3.2 million in cash
for all the preferred stock and for payment of outstanding debt owed by
the TeamStaff Companies to its shareholders. TeamStaff, Inc. also
incurred $1,281,000 for certain legal, accounting and investment
banking expenses. Additionally, the TeamStaff, Inc. issued 312,010
shares of common stock to its investment banking firm for services
rendered in connection with the acquisition.
Pursuant to the terms of the acquisition agreements, the
former owners of the TeamStaff Companies agreed to indemnify the
Company, subject an initial "basket" of $100,000, for claims of up to
approximately $2,000,000 for various types of claims for breaches of
representations and warranties. The former owners placed 1,471,000
shares of Common Stock into escrow in order to provide limited security
for claims of indemnification brought by the Company for breaches of
representations or warranties by the TeamStaff Companies and the former
owners.
(3) EARNINGS (LOSS) PER COMMON SHARE
The Combined Company has presented its earnings (loss) per
common share for the year ended September 30, 1998 and the three months
ended December 31, 1998 pursuant to the Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings per Share."
Basic earnings (loss) per common share was computed
by dividing net income (loss) applicable to common shareholders by the
weighted average number of shares of common stock outstanding. Diluted
earnings (loss) per common share was computed by dividing net income
applicable to common shareholders by the weighted average number of
shares of common stock outstanding, adjusted for the incremental
dilutive stock options. Diluted loss per common share is the same as
the basic loss per share as the impact of outstanding stock options is
antidilutive.
(4) PRO FORMA ADJUSTMENTS
(a) The Unaudited Pro Forma Condensed Combined
Balance Sheet reflects the application of APB 16 for the acquisition of
the TeamStaff Companies. The purchase price is $11,838,000, is
comprised of the cash payment of $1,158,000 for the payment of
outstanding debt, $2,089,000 for the preferred stock including
dividends, $1,281,000 in transaction costs, the issuance of 312,010
shares of common stock valued at $312,000 to the Company's investment
banker for acquisition services and the issuance of 8,233,334 million
shares of TeamStaff, Inc. common stock valued at $6,998,000 in exchange
for all
41 of 42
<PAGE> 7
of the common stock of the TeamStaff Companies. The estimated fair
value of the TeamStaff, Inc. common stock was based on the October 1,
1998 closing price of the stock as listed on the Small Cap Market
System of the Nasdaq, discounted for the restrictions of trading placed
on the common stock over a three year period and the fact that the
stock is thinly traded among other items (a total discount of 15% of
the listed price). The application of the purchase method of accounting
resulted in approximately $12,725,000 in excess of purchase price over
net tangible assets acquired as of December 31, 1998. Based on a
preliminary analysis by TeamStaff, Inc. the excess of the purchase
price over the net tangible assets acquired is expected to be allocated
to goodwill and other intangible assets which will be amortized up to
25 years. The Unaudited Pro Forma Condensed Combined Financial
Statements also reflect a reduction of interest income which related to
the TeamStaff Companies notes due from shareholders as well as the
corresponding interest expense relating to notes payable to
shareholders. The pro forma adjustment to interest expense also
reflects the cost of additional borrowings to finance the acquisition.
COMPUTATION OF EXCESS PURCHASE PRICE
<TABLE>
<CAPTION>
<S> <C>
Payment of cash at closing for debt, preferred stock and preferred $ 3,247,000
stock dividends
Transaction costs (included in other assets and accrued expenses) 1,281,000
Issuance of 8,233,334 shares of common stock 6,998,000
Issuance of 312,010 shares of common stock to the investment banker 312,000
------------
Pro forma purchase price $ 11,838,000
============
Pro forma purchase price $ 11,838,000
Net shareholders' deficit of the TeamStaff Companies 3,845,000
Acquisition of preferred stock (1,800,000)
Outstanding debt payment (1,158,000)
------------
Excess of pro forma purchase price over tangible assets acquired $ 12,725,000
============
PRELIMINARY ALLOCATION OF EXCESS PURCHASE PRICE
------------
Goodwill (25 year life) $ 12,725,000
============
</TABLE>
(b) The Unaudited Pro Forma Condensed Combined Statements of Operations
reflect the amortization of goodwill totaling $509,000 for the year
ended September 30, 1998 and $127,000 for the three months ended
December 31, 1998.
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