<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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File 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 [ ]
27,930,160 shares of Common Stock, par value $.001 per share, were outstanding
as of May 18, 1999.
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TEAMSTAFF, INC. AND SUBSIDIARIES
FORM 10-Q
March 31, 1999
Table of Contents
<TABLE>
<CAPTION>
Part I - Financial Information Page No.
- ------------------------------ --------
<S> <C>
Item 1. Consolidated Balance Sheets as of
March 31, 1999 (Unaudited) and
September 30, 1998 3
Consolidated Statements of
Income for the three months ended
March 31, 1999 and 1998 (Unaudited) 5
Consolidated Statements of
Income for the six months ended
March 31, 1999 and 1998 (Unaudited) 6
Consolidated Statements of Cash Flows for the
six months ended March 31, 1999 and 1998
(Unaudited) 7
Notes to Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's discussion and analysis of
financial condition and results of operations 12
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings 15
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
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<PAGE> 3
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 2,088,000 $ 1,530,000
Restricted Cash 350,000 --
Accounts receivable, net of allowance of $384,000 and $284,000
in 1999 and 1998, respectively 9,282,000 6,891,000
Other current assets 1,584,000 691,000
----------- -----------
Total current assets 13,304,000 9,112,000
EQUIPMENT AND IMPROVEMENTS
Equipment 3,938,000 3,336,000
Leasehold improvements 71,000 47,000
----------- -----------
4,009,000 3,383,000
Accumulated depreciation and amortization 3,160,000 2,591,000
----------- -----------
849,000 792,000
DEFERRED TAX ASSET 1,264,000 1,782,000
GOODWILL, net of amortization of $1,303,000 and $1,082,000
in 1999 and 1998, respectively 17,186,000 4,096,000
OTHER ASSETS 685,000 866,000
----------- -----------
TOTAL ASSETS $33,288,000 $16,648,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
Page 3 of 18
<PAGE> 4
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,788,000 $ 540,000
Accounts payable 2,458,000 1,792,000
Accrued payroll 4,444,000 2,258,000
Accrued expenses and other current liabilities 3,737,000 1,203,000
------------ ------------
Total current liabilities 12,427,000 5,793,000
LONG-TERM DEBT 4,772,000 2,981,000
------------ ------------
Total Liabilities 17,199,000 8,774,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.001 par value; authorized 40,000,000 shares;
issued and outstanding 27,930,160 at March 31, 1999
and 19,356,833 at September 30, 1998 28,000 19,000
Additional paid-in capital 21,036,000 13,692,000
Accumulated deficit (4,975,000) (5,837,000)
------------ ------------
Total shareholders' equity 16,089,000 7,874,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 33,288,000 $ 16,648,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
Page 4 of 18
<PAGE> 5
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES $ 55,248,000 $ 32,575,000
DIRECT EXPENSES 51,638,000 30,346,000
------------ ------------
Gross profit 3,610,000 2,229,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,868,000 1,761,000
DEPRECIATION AND AMORTIZATION 295,000 170,000
------------ ------------
Income from operations 447,000 298,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 101,000 11,000
Interest expense (297,000) (105,000)
------------ ------------
(196,000) (94,000)
------------ ------------
Income before tax 251,000 204,000
INCOME TAX BENEFIT 276,000 --
------------ ------------
NET INCOME $ 527,000 $ 204,000
============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.02 $ 0.01
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 24,620,265 19,298,010
============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.02 $ 0.01
============ ============
DILUTED SHARES OUTSTANDING 24,783,175 19,618,273
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
Page 5 of 18
<PAGE> 6
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
MARCH 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES $ 94,947,000 $ 66,237,000
DIRECT EXPENSES 88,343,000 61,406,000
------------ ------------
Gross profit 6,604,000 4,831,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,018,000 3,618,000
DEPRECIATION AND AMORTIZATION 471,000 339,000
------------ ------------
Income from operations 1,115,000 874,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 205,000 23,000
Interest expense (463,000) (193,000)
------------ ------------
(258,000) (170,000)
------------ ------------
Income before tax 857,000 704,000
INCOME TAX BENEFIT 5,000 --
------------ ------------
NET INCOME $ 862,000 $ 704,000
============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.04 $ 0.04
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 21,958,982 19,234,889
============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.04 $ 0.04
============ ============
DILUTED SHARES OUTSTANDING 22,117,982 19,572,183
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
Page 6 of 18
<PAGE> 7
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 862,000 $ 704,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 471,000 339,000
Provision for doubtful accounts 96,000 35,000
Deferred income taxes (110,000) --
Changes in operating assets and liabilities:
Increase in restricted cash (350,000) --
Decrease in accounts receivable 190,000 485,000
Decrease (increase) in other current assets 568,000 (173,000)
Increase (decrease) in accounts payable, accrued expenses and
other current liabilities 83,000 (754,000)
----------- -----------
Net cash provided by operating activities 1,810,000 636,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of TeamStaff Companies (4,282,000) --
Purchase of equipment and improvements (53,000) (151,000)
----------- -----------
Net cash used in investing activities (4,335,000) (151,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings on long term debt 2,500,000 --
Proceeds from revolving line of credit 765,000 --
Proceeds from borrowings on bridge loan 750,000 --
Repayments on long term debt (291,000) --
Repayments on revolving line of credit (663,000) (260,000)
Payments under capital lease obligations (21,000) (72,000)
Proceeds from issuance of common stock and
exercise of common stock options and warrants 43,000 250,000
----------- -----------
Net cash provided by (used in) financing activities 3,083,000 (82,000)
----------- -----------
Net increase in cash 558,000 403,000
CASH AT BEGINNING OF PERIOD 1,530,000 841,000
----------- -----------
CASH AT END OF PERIOD $ 2,088,000 $ 1,244,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 237,000 $ 181,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
Page 7 of 18
<PAGE> 8
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 Tampa
and Clearwater, Florida and sales service centers in New York, New York; El Paso
and Houston, Texas; Tampa and 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 discussions contained in this Form 10-Q reflect the acquisition for the
period from January 25 to March 31, 1999.
(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; TeamStaff
Solutions, Inc., DSI Staff ConnXions - Northeast, Inc., DSI Staff ConnXions
Southwest, Inc., TeamStaff Rx., Inc, TeamStaff I, Inc, TeamStaff II, Inc.,
TeamStaff III, Inc., TeamStaff IV, Inc., TeamStaff V, Inc., TeamStaff VI, Inc.,
TeamStaff Insurance, Inc., TeamStaff VII, Inc., TeamStaff VIII, Inc., TeamStaff
IX, Inc. and Employer Support Services, Inc. The results of operations of
acquired companies have been included in the consolidated financial statements
from the date of acquisition. All significant
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<PAGE> 9
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 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 March 31, Six Months Ended March 31,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 527,000 $ 204,000 $ 862,000 $ 704,000
Denominator:
Weighted average number of common shares
Outstanding-basic 24,620,265 19,298,010 21,958,982 19,234,889
Incremental shares for assumed conversions of stock
options/warrants 162,910 320,263 159,000 337,294
----------- ----------- ----------- -----------
Weighted average number of common and
equivalent shares outstanding-Diluted 24,783,175 19,618,273 22,117,982 19,572,183
----------- ----------- ----------- -----------
Earnings per share-Basic $ 0.02 $ 0.01 $ 0.04 $ 0.04
Earnings per share-Diluted $ 0.02 $ 0.01 $ 0.04 $ 0.04
</TABLE>
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<PAGE> 10
Stock options and warrants outstanding at March 31, 1999 to purchase 1,042,879
shares of common stock were not included in the computation of Diluted EPS as
they were antidilutive.
(3) INCOME TAXES:
At March 31, 1999, the Company had available operating loss carryforwards of
approximately $5,100,000 to reduce future periods' taxable income. The
carryforwards expire in various years beginning in 2004 and extending through
2012.
During the three months ended March 31, 1999, the Company reduced their entire
valuation allowance resulting in the recognition of an income tax benefit of
$276,000 for the period. The Company has recorded a $2,272,000 and a $760,000
deferred tax asset at March 31, 1999 and 1998, 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 March
31, 1999 other current assets included $1,008,000 related to the deferred tax
asset.
(4) DEBT:
On April 29, 1998, the Company was successful in replacing a 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, and a balloon payment at the end of three years at prime plus
3% (10.75% as of March 31, 1999) and a $2 million revolving line of credit
secured by certain accounts receivable of the Company at prime plus 1% (8.75% as
of March 31, 1999). 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
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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 plus 3 % (10.75% as of
March 31, 1999), the bridge loan bears an interest rate of 12% at March 31,
1999. In addition, the Company will incur success fees of $200,000, $225,000 and
$250,000 due on the anniversary dates of the additional loan. The credit
facility is subject to certain covenants including but not limited to a debt to
net worth ratio, a minimum net worth and a minimum debt service coverage ratio,
as defined.
(5) ACQUISITION OF THE TEAMSTAFF COMPANIES
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.
TeamStaff, Inc. also incurred $1.3 million for certain legal, accounting and
investment banking expenses. The acquisition has been accounted for under the
purchase method and the results of the operations of the acquired companies have
been included in the consolidated financial statements since the date of the
acquisition. The purchase price is being allocated based on the estimated fair
value at the date of the acquisition. The application of the purchase method of
accounting resulted in approximately $13.3 million in excess of purchase price
over net tangible assets acquired. 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 following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and the acquired companies as if the
acquisition had occurred October 1, 1997.
<TABLE>
<CAPTION>
Six Months Ended March 31,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $129,538,000 $118,860,000
Net income $ 688,000 $ 774,000
Earnings per common share $ 0.03 $ 0.04
</TABLE>
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<PAGE> 12
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 March 31, 1999 and 1998
were $55,248,000 and $32,575,000, respectively, which represents an increase of
$22,673,000 or 69.6%. For the six months ended March 31, 1999 and 1998, the
Company's revenues were $94,947,000 and $66,237,000, respectively, which
represents an increase of $28,710,000 or 43.3%. Of this increase, 58% was due to
the acquisition of the TeamStaff Companies with the balance due to internal
growth.
Direct expenses were $51,638,000 for the three months ended March 31, 1999
and $30,346,000 for the comparable period last year, representing an increase of
$21,292,000 or 70.2%. As a percentage of revenue, direct expenses for the three
months ended March 31, 1999 and 1998 were 93.5% and 93.2%. For the six months
ended March 31, 1999 and 1998, direct expenses increased $26,937,000 or 43.9%,
from $61,406,000 to $88,343,000, respectively. These increases represent the
corresponding higher costs associated with higher revenues. As a percentage of
revenue, direct expenses for the six months ended March 31, 1999 and 1998 were
93.0% and 92.7%.
Gross profits were $3,610,000 and $2,229,000 for the quarters ended March
31, 1999 and 1998, respectively, an increase of $1,381,000 or 62.0%. Gross
profits, as a percentage of revenue, were 6.5% and 6.8% for the quarters ended
March 31, 1999 and 1998, respectively. Gross profits were $6,604,000 and
$4,831,000 for the six months ended March 31, 1999 and 1998, respectively,
representing an increase of $1,773,000 or 36.7%. Gross profits, as a percentage
of revenue, were 7.0% and 7.3% for the six months ended March 31, 1999 and 1998.
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Although a substantial portion of our revenue growth occurred in the PEO line of
business, the gross profit as a percentage of revenue declined only marginally
because of improved performance and increases in the other business lines.
Selling, general and administrative "SG&A" expenses for the quarters ended
March 31, 1999 and 1998 were $2,868,000 and $1,761,000, respectively,
representing an increase of $1,107,000 or 62.9%. This increase is primarily
attributed to the TeamStaff Companies acquisition. SG&A expenses for the six
months ended March 31, 1999 and 1998 were $5,018,000 and $3,618,000,
respectively, representing an increase of $1,400,000 or 38.7%. This increase is
similarly attributed to the TeamStaff Companies acquisition.
Depreciation and amortization for the quarters ended March 31, 1999 and
1998 increased to $295,000 from $170,000, respectively, or $125,000. The
increase is reflective of the amortization of the goodwill related to the
acquisition of the TeamStaff Companies. Depreciation and amortization for the
six months ended March 31, 1999 and 1998 increased to $471,000 from $339,000,
respectively, or $132,000. The increase is primarily attributed to the
additional amortization expense related to the acquisition of the TeamStaff
Companies.
Interest expense for the quarter ended March 31, 1999 increased $192,000
to $297,000 from $105,000 in the corresponding period in 1998 due to an increase
in debt financing and in the effective borrowing rate associated with the
Company's new financing arrangements, effective in April, 1998 as well as the
additional debt associated with the TeamStaff acquisition. Interest expense for
the six months ended March 31, 1999 increased $270,000 to $463,000 from $193,000
in the six months ended March 31, 1998. This increase is due to the same reason
as the increase in the three month period.
Income taxes for the quarter ended March 31, 1999 reflected a tax
benefit of $276,000 versus $0 in the same quarter last year. For the six months
ended March 31, 1999, the tax benefit was $5,000 versus $0 in the six months of
the same period of last year. The Company was able to reduce the valuation
allowance by $400,000 to $0 to offset the income tax provision for the period.
Included in the second quarter of fiscal 1999 is a $400,000 net tax benefit
reflecting the elimination of a deferred tax valuation allowance. Management has
determined that is more likely than not that all the deferred tax asset will be
realized in the future. Management has considered the consistent eight quarters
of profitability as well as the current integration of the TeamStaff Companies.
In fiscal 1998, the Company reduced the valuation reserve, leaving a balance at
September 30, 1999 of $400,000.
Net income for the quarter ended March 31, 1999 was $527,000 versus a net
income of $204,000 for the similar period in 1998. This increase in net income
of $323,000 reflects a tax benefit of $276,000 as compared to no tax expense in
the similar period of 1998 as discussed above as well as improved performance in
all of the Company's business lines. Net income for
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the six months ended March 31, 1999 was $862,000 as compared to $704,000, an
increase of $158,000 which can be attributed to the increase in the Company's
revenues in all business lines.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities improved in the first six months
of fiscal 1999 to $1,936,000 from net cash provided of $636,000 in the same
period of fiscal 1998. The increase in cash flow from operations is attributable
to the continued earnings improvement of the Company and the successful
refinancing of the company's short term borrowings to a long term credit
facility. The net cash provided by financing activities increased in the six
months ended March 31, 1999, compared to the six months ended March 31, 1998 due
to the increase in financing for the TeamStaff Companies acquisition. Cash
outflow for the purchases of equipment and improvements was $53,000 in the six
months ended March 31, 1999 compared to $151,000 in the six months ended March
31, 1998. 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 March 31, 1999, the Company had cash of $2,088,000, restricted
cash of $350,000 and accounts receivable, net of $9,282,000.
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
March 31, 1999) and a $2 million revolving line of credit secured by certain
accounts receivable of the Company at prime + 1% (8.75% at March 31, 1999). 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 Companies 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 March 31,
2000.
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
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modify its prices and cost structure to respond to inflation and changing
prices.
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
June 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.
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
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<PAGE> 16
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 17, 1999, TeamStaff, Inc. (formerly Digital Solutions, Inc.)
(the "Company") held an Annual Meeting of its Stockholders in Somerset, New
Jersey. Of the 27,617,241 shares of Common Stock entitled to vote as of the
Record Date of February 17, 1999, 24,760,974 shares were represented either
in person or by proxy.
The purpose of the Annual Meeting was to consider and approve the
following:
1. AMENDMENTS TO CERTIFICATE OF INCORPORATION. To amend the Company's
Certificate of Incorporation to classify the Board of Directors into three
classes and further provide that any amendment to such provision to classify the
Board of Directors be effective only upon the affirmative vote of the Board of
Directors of 66 2/3% of the issued and outstanding shares entitled to vote.
RESULTS OF VOTING
The Stockholders of the Company voted 8,968,140 shares in favor of adoption of
the amendments to the Certificate of Incorporation. Stockholders holding 129,100
shares voted against the proposal. A total of 15,600 Stockholders abstained from
voting.
16 of 18
<PAGE> 17
2. ELECTION OF DIRECTORS. To elect seven directors to the Board of Directors in
staggered terms of one to three years. The nominees for election were:
<TABLE>
<CAPTION>
Class 1 Class 2 Class 3
- ------- ------- -------
<S> <C> <C>
Karl W. Dieckmann John H. Ewing Kirk A. Scoggins
Donald W. Kappauf Charles R. Dees, Jr. Martin J. Delaney
William J. Marino
</TABLE>
The term for Class 1 directors expires at the 2002 Annual Meeting, the term for
Class 2 Directors expires at the 2001 Annual Meeting and the term for Class 3
Directors expires at the 2000 Annual Meeting.
RESULTS OF VOTING
The Stockholders voted as follows with respect to the election of Directors:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
Karl W. Dieckmann 24,233,431 527,743
Donald W. Kappauf 24,271,431 489,543
William J. Marino 24,321,531 439,443
John H. Ewing 24,293,231 467,743
Charles R. Dees, Jr. 24,353,231 407,743
Kirk A. Scoggins 24,351,231 409,743
Martin J. Delaney 24,355,731 405,243
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
17 of 18
<PAGE> 18
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: May 18, 1999
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,088,000
<SECURITIES> 0
<RECEIVABLES> 9,666,000
<ALLOWANCES> (384,000)
<INVENTORY> 0
<CURRENT-ASSETS> 13,304,000
<PP&E> 4,009,000
<DEPRECIATION> (3,160,000)
<TOTAL-ASSETS> 33,288,000
<CURRENT-LIABILITIES> 12,427,000
<BONDS> 0
0
0
<COMMON> (28,000)
<OTHER-SE> (16,061,000)
<TOTAL-LIABILITY-AND-EQUITY> 33,288,000
<SALES> 0
<TOTAL-REVENUES> 55,248,000
<CGS> 0
<TOTAL-COSTS> 51,638,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (47,000)
<INTEREST-EXPENSE> 297,000
<INCOME-PRETAX> 251,000
<INCOME-TAX> 276,000
<INCOME-CONTINUING> 527,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 527,000
<EPS-PRIMARY> .02<F1>
<EPS-DILUTED> .02
<FN>
<F1>AMOUNT REFLECTS EPS-BASIC NOT EPS-PRIMARY.
</FN>
</TABLE>
