<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 June 30, 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)
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
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 July 26, 1999.
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<PAGE> 2
TEAMSTAFF, INC. AND SUBSIDIARIES
FORM 10-Q
June 30, 1999
Table of Contents
<TABLE>
<CAPTION>
Part I - Financial Information Page No.
- ------------------------------ --------
<S> <C>
Item 1 Consolidated Balance Sheets as of
June 30, 1999 (Unaudited) and
September 30, 1998 3
Consolidated Statements of
Income for the three months ended
June 30, 1999 and 1998 (Unaudited) 5
Consolidated Statements of
Income for the nine months ended
June 30, 1999 and 1998 (Unaudited) 6
Consolidated Statements of Cash Flows for the
nine months ended June 30, 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 11
Part II - Other Information
- ------------------------------
Item 1. Legal Proceedings 16
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>
JUNE 30, SEPTEMBER 30,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,824,000 $ 1,530,000
Restricted Cash 350,000 --
Accounts receivable, net of allowance 9,260,000 6,891,000
Current deferred tax asset 1,008,000 380,000
Other current assets 595,000 311,000
----------- -----------
Total current assets 13,037,000 9,112,000
EQUIPMENT AND IMPROVEMENTS
Equipment 3,908,000 3,336,000
Leasehold improvements 144,000 47,000
----------- -----------
4,052,000 3,383,000
Accumulated depreciation and amortization 3,298,000 2,591,000
----------- -----------
754,000 792,000
DEFERRED TAX ASSET 714,000 1,782,000
GOODWILL, net of amortization 17,042,000 4,096,000
OTHER ASSETS 623,000 866,000
----------- -----------
TOTAL ASSETS $32,170,000 $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>
JUNE 30, SEPTEMBER 30,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,037,000 $ 540,000
Accounts payable 2,245,000 1,792,000
Accrued expenses and other current liabilities 7,546,000 3,461,000
------------ ------------
Total current liabilities 10,828,000 5,793,000
LONG-TERM DEBT 4,761,000 2,981,000
------------ ------------
Total Liabilities 15,589,000 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 June 30, 1999
and 19,356,833 at September 30, 1998
28,000 19,000
Additional paid-in capital 21,040,000 13,692,000
Accumulated deficit (4,487,000) (5,837,000)
------------ ------------
Total shareholders' equity 16,581,000 7,874,000
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 32,170,000 $ 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
JUNE 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
REVENUES $ 70,747,000 $ 35,885,000
DIRECT EXPENSES 65,971,000 33,182,000
------------ ------------
Gross profit
4,776,000 2,703,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
3,227,000 2,059,000
DEPRECIATION AND AMORTIZATION
353,000 163,000
------------ ------------
Income from operations
1,196,000 481,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income
84,000 14,000
Interest expense
(340,000) (173,000)
------------ ------------
(256,000) (159,000)
------------ ------------
Income before tax
940,000 322,000
INCOME TAX (EXPENSE) BENEFIT
(451,000) 1,470,000
------------ ------------
NET INCOME $ 489,000 $ 1,792,000
============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.02 $ 0.09
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 27,930,160 19,298,010
============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.02 $ 0.09
============ ============
DILUTED SHARES OUTSTANDING 28,017,660 19,548,671
============ ============
</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 NINE MONTHS
JUNE 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
REVENUES $ 165,694,000 $ 102,122,000
DIRECT EXPENSES 154,314,000 94,588,000
------------- -------------
Gross profit 11,380,000 7,534,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
8,245,000 5,677,000
DEPRECIATION AND AMORTIZATION
824,000 502,000
------------- -------------
Income from operations
2,311,000 1,355,000
OTHER INCOME (EXPENSE) ------------- -------------
Interest and other income
289,000 37,000
Interest expense
(803,000) (366,000)
------------- -------------
(514,000) (329,000)
------------- -------------
Income before tax
1,797,000 1,026,000
INCOME TAX (EXPENSE) BENEFIT
(446,000) 1,470,000
------------- -------------
NET INCOME $ 1,351,000 $ 2,496,000
============= =============
BASIC EARNINGS PER COMMON SHARE $ 0.06 $ 0.13
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 23,949,375 19,263,097
============= =============
DILUTED EARNINGS PER COMMON SHARE $ 0.06 $ 0.13
============= =============
DILUTED SHARES OUTSTANDING 24,136,281 19,504,058
============= =============
</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 NINE MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,351,000 $ 2,496,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 824,000 502,000
Provision for doubtful accounts 144,000 69,000
Deferred income taxes 440,000 (1,470,000)
Changes in operating assets and liabilities:
Increase in restricted cash (350,000) --
Decrease in accounts receivable 164,000 827,000
Decrease (increase) in other current assets 415,000 (499,000)
Decrease in other assets 173,000 --
Decrease in accounts payable, accrued expenses and
other current liabilities (765,000) (1,865,000)
----------- -----------
Net cash provided by operating activities 2,396,000 60,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of TeamStaff Companies (4,331,000) --
Purchase of equipment and improvements (96,000) (84,000)
----------- -----------
Net cash used in investing activities (4,427,000) (84,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt 2,500,000 2,500,000
Proceeds from revolving line of credit 1,015,000 1,100,000
Proceeds from bridge loan
750,000 --
Repayments on long term debt
(541,000) (42,000)
Repayments on revolving line of credit (663,000) (2,697,000)
Repayments on bridge loan
(750,000) --
Payments under capital lease obligations
(33,000) (122,000)
Proceeds from issuance of common stock and
exercise of common stock options and warrants
47,000 250,000
----------- -----------
Net cash provided by financing activities
2,325,000 989,000
----------- -----------
Net increase in cash
294,000 965,000
CASH AT BEGINNING OF PERIOD
1,530,000 841,000
----------- -----------
CASH AT END OF PERIOD $ 1,824,000 $ 1,806,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 469,000 $ 276,000
=========== ===========
Cash paid during the period for taxes $ 260,000 $ 12,000
=========== ===========
</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.
Effective January 25, 1999, the Company acquired the ten entities operating
under the trade name, the TeamStaff Companies. In conjunction with the
acquisition, the Company changed its name from Digital Solutions, Inc, to
TeamStaff, Inc. on February 10, 1999. The financial data and discussions
contained in this Form 10-Q reflect the acquisition for the period from January
25 to June 30, 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. and
TeamStaff IX, Inc. The results of operations of acquired companies have been
included in the consolidated financial
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<PAGE> 9
statements from the date of acquisition. All significant intercompany balances
and transactions have been eliminated in the consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS-
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 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 June 30, Nine Months Ended June 30,
---------------------------- ---------------------------
1999 1998 1999 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 489,000 $ 1,792,000 $ 1,351,000 $ 2,496,000
Denominator:
Weighted average number of common shares
outstanding- basic 27,930,160 19,298,010 23,949,375 19,263,097
Incremental shares for assumed conversions of stock
options/warrants 87,500 250,661 186,906 240,961
----------- ----------- ----------- -----------
Weighted average number of common and
equivalent shares outstanding-diluted 28,017,660 19,548,671 24,136,281 19,504,058
----------- ----------- ----------- -----------
Earnings per share-basic $ 0.02 $ 0.09 $ 0.06 $ 0.13
Earnings per share-diluted $ 0.02 $ 0.09 $ 0.06 $ 0.13
</TABLE>
9 of 18
<PAGE> 10
Stock options and warrants outstanding at June 30, 1999 to purchase 1,087,879
shares of common stock were not included in the computation of Diluted EPS as
they were antidilutive.
(3) INCOME TAXES:
At June 30, 1999, the Company had available operating loss carryforwards of
approximately $4,378,000 to reduce future periods' taxable income. The
carryforwards expire in various years beginning in 2004 and extending through
2012.
The Company has recorded a $1,722,000 and a $2,162,000 deferred tax asset at
June 30, 1999 and September 30, 1998, respectively. This represents management's
estimate of the income tax benefits to be realized upon utilization 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 as well as its
ability to meet its operating plan.
(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 term 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 June 30, 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 June 30, 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 full continuous utilization of
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. On
April 27, 1999, the Company remitted the first annual success fee of $200,000.
The Company received an increase of its present lending facility from FINOVA
Capital Corporation in order to fund the TeamStaff acquisition. The facility is
comprised of (i) a three-year term loan, with a five year amortization, and a
balloon payment at the end of three years, in the amount of $2,500,000; (ii) a
one year bridge loan in the amount of $750,000 and (iii) an increase in the
Company's revolving line of credit from $2,000,000 to $2,500,000. The term loan
bears an interest rate of prime plus 3 % (10.75% as of June 30, 1999) and the
bridge loan bears an interest
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<PAGE> 11
rate of 12% at June 30, 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. On May 27, 1999 the Company retired the
bridge loan by a cash payment of $500,000 and a $250,000 increase in TeamStaff's
revolving credit line.
(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 in exchange for
all capital 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>
Nine Months Ended June 30,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Net sales $200,285,000 $181,057,000
Net income $ 928,000 $ 2,042,000
Earnings per common share - basic $ 0.03 $ 0.07
Earnings per common share - diluted $ 0.03 $ 0.07
</TABLE>
(6) CONTINGENCIES
As previously discussed, several of the entities operating under the trade name
"the TeamStaff Companies" which were acquired by the Company in January, 1999
are part of a class of defendants in a proceeding stemming from the failure of
the United States Employer Consumer Self Insurance Fund of Florida ("USEC") in
1995. Several of the TeamStaff Companies had been members of USEC, which was a
self insurance fund for workers compensation. USEC was declared insolvent in
1995. The action is entitled In Re: The Receivership of United States Employer
Consumer Self Insurance Fund of Florida, Case No. 95-2359 (Fla 2nd Cir Ct), and
was brought by the Florida Department of Insurance as the receiver of the Fund
against all professional employer organizations and similar companies who have
been members of USEC. The class of defendants is comprised of approximately 60
companies, and the Florida Department of Insurance has alleged various
assessments against the class, and has recently claimed there are approximately
$22,000,000 in unpaid assessments against the class. Several class members,
including the TeamStaff Companies, have filed appeals in the matter disputing
the methods and calculations put forth by the Department of Insurance, as well
as the issue of joint and several liability.
Certain other members of the class of defendants have negotiated settlements
with the receiver which settlements have been settled at approximately 40%-50%
of the original assessment brought by the receiver against the individual
defendants. The original assessment brought by the receiver in 1996 against the
TeamStaff Companies was approximately $1,100,000, which the TeamStaff Companies
have disputed.
Because of management's knowledge of the USEC proceedings and amount of
potential assessments at the time of acquisition, the acquisition agreements
governing the Company's acquisition of the TeamStaff Companies provide
indemnification by the sellers in favor of the Company for damages of up to
approximately $1,222,000. The financial settlements of the TeamStaff Companies
at the time of acquisition included a reserve of approximately $390,000, which
continues on the Company's consolidated financials.
The Company is currently discussing a settlement with the receiver. The Company
and the receiver have not agreed to the terms of any settlement, and there can
be no assurance that a settlement will be agreed upon, or that the settlement
will be upon terms similar to those previously entered into by the receiver with
other class members.
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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 June 30, 1999 and
1998 were $70,747,000 and $35,885,000, respectively, which represents an
increase of $34,862,000 or 97.1%. For the nine months ended June 30, 1999 and
1998, the Company's revenues were $165,694,000 and $102,122,000, respectively,
which represents an increase of $63,572,000 or 62.3%. Of this increase,
$51,431,000 was due to the acquisition of the TeamStaff Companies with the
balance due to internal growth.
Direct expenses were $65,971,000 for the three months ended June 30,
1999 and $33,182,000 for the comparable period last year, representing an
increase of $32,789,000 or 98.8%. As a percentage of revenue, direct expenses
for the three months ended June 30, 1999 and 1998 were 93.3% and 92.5%. For the
nine months ended June 30, 1999 and 1998, direct expenses increased $59,726,000
or 63.1%, from $94,588,000 to $154,314,000, respectively. These increases
represent the increase in revenue associated with the acquisition. As a
percentage of revenue, direct expenses for the nine months ended June 30, 1999
and 1998 were 93.1% and 92.6%.
Gross profits were $4,776,000 and $2,703,000 for the quarters ended
June 30, 1999 and 1998, respectively, an increase of $2,073,000 or 76.7%. Gross
profits, as a percentage of revenue, were 6.8% and 7.5% for the quarters ended
June 30, 1999 and 1998, respectively, reflecting the increase in the PEO
business due to the acquisition. Gross profits were $11,380,000 and $7,534,000
for the nine months ended June 30, 1999 and 1998, respectively,
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<PAGE> 13
representing an increase of $3,846,000 or 51.0%. Gross profits, as a percentage
of revenue, were 6.9% and 7.4% for the nine months ended June 30, 1999 and 1998.
Although a substantial portion of our revenue growth occurred in the PEO line of
business, which has lower margins, 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 June 30, 1999 and 1998 were $3,227,000 and $2,059,000, respectively,
representing an increase of $1,168,000 or 56.7%. This increase is primarily
attributed to the TeamStaff Companies acquisition. SG&A expenses as a percentage
of revenue, were 4.6% and 5.7% for the quarters ended June 30, 1999 and 1998,
respectively. SG&A expenses for the nine months ended June 30, 1999 and 1998
were $8,245,000 and $5,677,000, respectively, representing an increase of
$2,568,000 or 45.2%. This increase is similarly attributed to the TeamStaff
Companies acquisition. SG&A expenses as a percentage of revenue, were 5.0% and
5.6% for the nine months ended June 30, 1999 and 1998, respectively.
Depreciation and amortization for the quarters ended June 30, 1999 and
1998 increased to $353,000 from $163,000, respectively, or $190,000. The
increase is reflective of the amortization of the goodwill related to the
acquisition of the TeamStaff Companies. Depreciation and amortization for the
nine months ended June 30, 1999 and 1998 increased to $824,000 from $502,000,
respectively, or $322,000. The increase is primarily attributed to the
additional amortization expense related to the acquisition of the TeamStaff
Companies.
Interest expense for the quarter ended June 30, 1999 increased
$167,000 to $340,000 from $173,000 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 nine months ended June 30, 1999 increased $437,000 to $803,000 from
$366,000 in the nine months ended June 30, 1998. This increase is due to the
same reason as the increase in the three month period.
Income taxes for the quarter ended June 30, 1999 reflected a tax
expense of $451,000 versus a tax benefit of $1,470,000 in the same quarter last
year, relating to a reduction in the Company's valuation allowance. For the nine
months ended June 30, 1999, the tax expense was $446,000 versus a tax benefit of
$1,470,000 in the nine months of the same period of last year. 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 nine quarters of
profitability as well as the current integration of the TeamStaff Companies. In
fiscal 1998, the Company reduced the valuation allowance, leaving a balance at
September 30, 1998 of $400,000.
13 of 18
<PAGE> 14
Net income for the quarter ended June 30, 1999 was $489,000 versus a
net income of $1,792,000 for the similar period in 1998. This decrease in net
income of $1,303,000 reflects a tax benefit of $1,470,000 in the 1998 period as
compared to $451,000 tax expense in the same period of 1999 as discussed above.
In addition, there was an increase in the Company's pre-tax income for the
quarter of $618,000 which reflects the improved performance in all of the
Company's business lines. Net income for the nine months ended June 30, 1999 was
$1,351,000 as compared to $2,496,000, a decrease of $1,145,000 which can be
attributed to the income tax benefit of $1,470,000 in the 1998 period as
compared to $446,000 tax expense in the same period of 1999 as discussed above.
There was an increase in the Company's pre-tax income of $771,000 which reflects
the improved performance in all of the Company's business lines.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities improved in the first nine
months of fiscal 1999 to $2,397,000 from net cash provided of $60,000 in the
same period of fiscal 1998. The increase in cash flows from operations is
attributable to the continued earnings improvement of the Company. The net cash
provided by financing activities increased in the nine months ended June 30,
1999, compared to the nine months ended June 30, 1998 due to the increase in
financing for the TeamStaff Companies acquisition. Cash outflow for the
purchases of equipment and improvements was $96,000 in the nine months ended
June 30, 1999 compared to $84,000 in the nine months ended June 30, 1998.
Capital expenditures have been relatively stable over the last three fiscal
years. At June 30, 1999, the Company had cash of $1,824,000, restricted cash of
$350,000 and net accounts receivable of $9,260,000.
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
term loan for $2.5 million, with a five-year amortization, at prime + 3% (10.75%
at June 30, 1999) and a $2 million revolving line of credit secured by certain
accounts receivable of the Company at prime + 1% (8.75% at June 30, 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 full continuous
utilization of the revolver, the effective rate of interest on the total
borrowings is approximately 16.1%. . On April 27, 1999, the Company remitted the
first annual success fee of $200,000.
The Company received an increase of its 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
14 of 18
<PAGE> 15
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. On May
27, 1999 the Company retired the bridge loan by a cash payment of $500,000 and a
$250,000 increase in TeamStaff's revolving credit line. As a result of the early
payment, the Company saved approximately $75,000 in fees and eliminated a 12 %
debt instrument.
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 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. The replacement, final testing and
implementation were completed in June of 1999. The costs of these modifications
have not had any 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
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<PAGE> 16
ITEM 1. LEGAL PROCEEDINGS
The Company's subsidiary, DSI Staff Connxions-Southwest, Inc., is the
defendant in a suit (Frederico Farias v. Thomson Consumer Electronics and DSI
Staff Connxions-Southwest, Inc.; 327th Judicial District Case No. 96-3036;
District Court of El Paso County, Texas) whereby a former leased employee of a
client obtained a judgment against the Company during August, 1998 in the amount
of $315,000 including interest. The judgment includes approximately $115,000 in
compensatory damages and $200,000 in punitive damages. The Company has posted a
bond for the full amount of the judgment and is appealing the judgment.
Management of the Company, after consultation with counsel, believes that there
is no basis for the awarding of punitive damages, and that the award of
compensatory damages was based on insufficient evidence. Although there can be
no assurances the Company will be successful in prosecuting the appeal, the
management of the Company, after consultation with counsel, believes it will
obtain a reversal of the judgment. If the Company is not successful with the
appeal, the Company would record expense of $315,000.
The Company is also a defendant in a lawsuit (ASI Group, Inc. and Terri
Munkirs v. Digital Solutions, Inc., George Eklund and Miriam H. Silverman;
Superior Court of New Jersey, Law Division, Middlesex County, Docket No.
8906-97) which is currently pending in the Superior Court of New Jersey. This
action was brought by a competitor of the Company in connection with the
transfer of several former clients of the competitor to the Company. The
parties recently agreed in principle to settle the suit. The Company will pay
ASI approximately $22,000 to avoid ongoing litigation costs. The plaintiffs
had submitted a calculation of damages of $300,000. 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.
As previously disclosed, several of the entities operating under the
trade name "the TeamStaff Companies" which were acquired by the Company in
January, 1999 are part of a class of defendants in a proceeding stemming from
the failure of the United States Employer Consumer Self Insurance Fund of
Florida ("USEC") in 1995. Several of the TeamStaff Companies had been members
of USEC, which was a self insurance fund for workers compensation. USEC was
declared insolvent in 1995. The action is entitled Case No. 95-2359 (Fla 2nd
Cir Ct), and was brought by the Florida Department of Insurance as the receiver
of the Fund against all the professional employer organizations and similar
companies who had been members of USEC. The class of defendants is comprised of
approximately 60 companies, and the Florida Department of Insurance has alleged
various assessments against the class, and has recently claimed there are
approximately $22,000,000 in unpaid assessments against the class.
16 of 18
<PAGE> 17
Several class members, including the TeamStaff Companies, have filed appeals in
the matter disputing the methods and calculations put forth by the Department
of Insurance, as well as the issue of joint and several liability.
Certain other members of the class of defendants have negotiated
settlements with the receiver which settlements have been settled at
approximately 40% - 50% of the original assessment brought by the receiver
against the individual defendants. The original assessment by the receiver in
1996 against the TeamStaff Companies was approximately $1,100,000, which the
TeamStaff Companies have disputed.
Because of management's knowledge of the USEC proceedings and amount of
potential assessments at the time of acquisition, the acquisition agreements
governing the Company's acquisition of the TeamStaff Companies provide
indemnification by the sellers in favor of the Company for damages of up to
approximately $1,222,000. The financial statements of the TeamStaff Companies
at the time of acquisition included a reserve of approximately $390,000, which
continues on the Company's consolidated financials.
The Company is currently discussing a settlement with the receiver.
The Company and the receiver have not agreed to the terms of any settlement, and
there can be no assurance that a settlement will be agreed upon, or that the
settlement will be upon terms similar to those previously entered into by the
receiver with other class members.
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
None
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: August 11, 1999
18 of 18
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<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
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0
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