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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 ON 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 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)
NEW JERSEY 22-1899798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 ATRIUM DRIVE, SOMERSET, NEW JERSEY 08873
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (732) 748-1700
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE
[Cover Page 1 of 2 Pages]
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(Title of class)
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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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Yes x No
On January 6, 2000, the aggregate market value of the voting stock of
TeamStaff, Inc. (consisting of Common Stock, $.001 par value per share) held by
non-affiliates of the Registrant was approximately $41,462,324 based upon the
average bid and asked price for such Common Stock on said date as reported by
Nasdaq Small Cap Market. On such date, there were issued 27,932,513 shares of
Common Stock of the Registrant.
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DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 1999 Annual Meeting of Shareholders Incorporated by
Reference into Part II of this Form 10-K
[Cover Page 2 of 2 Pages]
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PART I
SAFE HARBOUR STATEMENT
Certain statements contained herein constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "1995 Reform Act"). The Company 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 on Form 10-K 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) or 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 related to recently consummated acquisitions as well as future
acquisitions, the Company's ability to increase its revenues and produce net
income, effects of competition and technological changes, risks associated with
compliance with government regulations such as ERISA, state and local
employment regulations and workers' compensation and dependence upon key
personnel.
ITEM 1. BUSINESS
INTRODUCTION
TeamStaff, Inc. (the Company), formerly Digital Solutions, Inc.
("DSI"), a New Jersey Corporation, was founded in 1969 as a payroll service
company and has evolved into a leading provider of human resource management
services to a wide variety of industries in 50 states. TeamStaff's wholly-owned
subsidiaries include TeamStaff Solutions, Inc., DSI Staff ConnXions-Northeast,
DSI Staff ConnXions-Southwest, 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. (collectively referred to, with TeamStaff, as the
"Company").
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 Company currently provides three types of services related to the
employee leasing, temporary staffing and payroll service businesses: (1)
professional employer organization ("PEO") services, such as payroll processing,
personnel and administration, benefits administration, workers' compensation
administration and tax filing; (2) employer administrative services, such as
payroll processing and tax filing; and (3) contract staffing, or the placement
of temporary and permanent employees. TeamStaff currently furnishes PEO
employees, payroll and contract staffing services to over 2,150 client
organizations with approximately 10,500 worksite PEO, 1,500 staffing employees
and processing for approximately 30,000 payroll service employees and believes
that it currently ranks, in terms of revenues and worksite employees, as one of
the top 20 professional employer organizations in the United States. The
Company's contract staffing business mainly places temporary help in hospitals
and clinics throughout the United States through its Clearwater, Florida and
Houston, Texas offices. The Company has five regional offices located in
Somerset, New Jersey; Houston and El Paso, Texas; and Tampa and Clearwater,
Florida and eight sales service centers in New York, New York; El Paso and
Houston, Texas; Tampa, Orlando and Clearwater, Florida; Atlanta, Georgia; and
Somerset, New Jersey.
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Essentially, the Company provides services that function as the
personnel department for small to medium sized companies. The Company believes
that by offering services which relieve small and medium size businesses of the
ever increasing administrative burden of employee related record keeping,
payroll processing, benefits administration, employment of temporary and
permanent specialized employees and other human resource functions, the Company
has positioned itself to take advantage of a major growth opportunity during
this decade and the next.
Recognizing the desire by many small businesses to be relieved of the
human resource administrative functions, the Company has formulated a strategy
of emphasizing PEO and "outsourcing" services. In PEO, a service provider
becomes a co-employer of the client company's employees and assigns these
employees to the client to perform their intended functions at the worksite.
Management has determined to emphasize the Company's future growth on
the PEO and outsourcing industry. The Company's expansion program will focus on
internal growth through the cross marketing of its PEO services to its entire
client base and the acquisition of compatible businesses strategically situated
in new areas or with a client base serviceable from existing facilities. As part
of its effort to expand its PEO business, management has expanded the services
of TeamStaff Rx, Inc., the Company's medical contract staffing subsidiary, to
include PEO, outsourcing and facilities management. While TeamStaff continues to
sell stand-alone employer services, such as payroll and tax filing, it will
emphasize the PEO component of its service offerings with a goal of becoming the
leading provider of PEO services in the United States. A major component of the
Company's growth strategy is the acquisition of well-situated, independent PEO
companies whose business can be integrated into the Company's operations.
However, there can be no assurance any such acquisition will be consummated by
the Company.
TeamStaff, Inc. was organized under the laws of the State of New Jersey
on November 25, 1969 and maintains its executive offices at 300 Atrium Drive,
Somerset, New Jersey 08873 where its telephone number is (732) 748-1700.
RECENT DEVELOPMENTS IN LAST FISCAL YEAR
TEAMSTAFF ACQUISITION
On January 25, 1999 TeamStaff, Inc., completed the acquisition of 10
entities operating as TeamStaff Companies through the issuance of 8,233,334
shares of common stock and $3.2 million in cash in exchange for all capital
stock of the TeamStaff Companies and for the repayment of debt. The Company 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 operations of the acquired companies have been included in the
consolidated financial statements appearing in this form 10K since the date of
the acquisition. The purchase price has been allocated based on estimated fair
values 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. The excess of the purchase price over the
net tangible assets acquired has been allocated to trade name ($4.7 million)
and the balance allocated to goodwill ($8.6 million).
FINANCING
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% (11.25% at
September 30, 1999) and a $2 million revolving line of credit secured by certain
accounts receivable of the Company at prime + 1% (9.25% at September 30, 1999).
The balance on the term loan was $1,833,328 at September 30, 1999 and the
revolving credit line balance was $1,455,200 at September 30, 1999. The credit
facility is also subject to success fees of $200,000, $225,000 and $250,000 due
on the anniversary dates of the loan beginning in April 1999.
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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% (11.25% as of
September 30, 1999) and the bridge loan bears an interest rate of 12%. 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.
SERVICES
PROFESSIONAL EMPLOYER ORGANIZATION (PEO)
The Company's core business, and the area management will continue to
emphasize, is its PEO services. When a client utilizes the Company's PEO
services, the client administratively transfers all or some of its employees to
the Company which then provides them to the client. TeamStaff thereby becomes a
co-employer and is responsible for all human resource functions, including
payroll, benefits administration, tax reporting and personnel record keeping.
The client still manages the employees and determines salary and duties in the
same fashion as any employer. The client is, however, relieved of reporting and
tax filing requirements and other administrative tasks. Moreover, because of
economies of scale, the Company is able to negotiate favorable terms on workers'
compensation insurance, health benefits, retirement programs, and other valuable
services. The client company benefits because it can then offer its employees
the same or similar benefits as larger companies, and successfully compete in
recruiting highly qualified personnel, as well as build the morale and loyalty
of its staff.
As a PEO service provider, the Company can offer the following benefits
to employees:
COMPREHENSIVE MAJOR MEDICAL PLANS - Management of the Company believes
that medical insurance costs have forced small employers to reduce coverage
provided to its employees and to increase employee contributions. TeamStaff is
able to leverage its large employee base and offer the employees assigned to
their clients a variety of health coverage plans from traditional indemnity
plans to Health Maintenance Organizations (HMO), Preferred Provider
Organizations (PPO), or a Point of Service Plan (POS).
DENTAL AND VISION COVERAGE - These types of benefits are generally
beyond the reach of most small groups. As a result of economies of scale
available, a client of the Company can obtain these benefits for the assigned
employees.
LIFE INSURANCE -- Affordable basic coverage is available.
SECTION 125 PREMIUM CONVERSION PLAN -- Employees can pay for benefits
with pre-tax earnings, reduce their taxable income and FICA payments, and
increase their take-home pay.
401(K) RETIREMENT PLANS -- Management believes that most small
employers do not provide any significant retirement benefits due to the
administrative and regulatory requirements associated with the establishment and
maintenance of retirement plans. The Company enables small business owners to
offer the assigned employees retirement programs comparable to those of major
corporations. Such plans can be used to increase morale, productivity and
promote employee loyalty.
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CREDIT UNION - The Company provides an opportunity for employees to
borrow money at lower interest than offered at most banks.
PAYROLL SERVICES -- Although ancillary to the PEO services, clients no
longer incur the expense of payroll processing either through in-house staff or
outside service. The Company's PEO services include all payroll and payroll tax
processing.
UNEMPLOYMENT COMPENSATION COST CONTROL - The Company provides an
unemployment compensation cost control program to aggressively manage
unemployment claims.
HUMAN RESOURCES MANAGEMENT SERVICES - The Company can provide clients
with expertise in areas such as personnel policies and procedures, hiring and
firing, training, compensation and performance evaluation.
WORKERS' COMPENSATION PROGRAM - The Company has a national workers'
compensation policy which can provide the Company with a significant advantage
in marketing its services, particularly in jurisdictions where workers'
compensation policies are difficult to obtain reasonable costs. The Company also
provides its clients where applicable with independent safety analysis and risk
management services to reduce workers' injuries and claims.
Relieved of personnel administrative tasks, the client is able to
focus on its core business. The client is also offered a broader benefits
package for its assigned employees, a competitive rate in workers' compensation
insurance, and savings in time and paperwork previously required in connection
with personnel administration.
PAYROLL SERVICES
The Company was established as a payroll service firm in 1969, and
continues to provide basic payroll services to its clients. Historically, the
Payroll Division provided these services primarily to the construction industry
and currently 70% of the Company's approximately 750 payroll service clients are
in the construction industry. The Company offers most, if not all, of what other
payroll services provide, including the preparation of checks, government
reports, W-2's (including magnetic tape filings), remote processing (via modem)
directly to the clients offices, and certified payrolls.
In addition, the Company offers a wide array of tax reporting services
including timely deposit of taxes, impounding of tax payments, filing of
returns, distribution of quarterly and year-end statements and responding to
agency inquiries.
TEMPORARY STAFFING SERVICES
TeamStaff provides temporary staffing services through two subsidiaries
which have, in the aggregate, more than 30 years of experience in placing
permanent and temporary employees with specialized skills and talents with
regional, national and international employers. Temporary staffing enables
clients to attain management and productivity goals by matching highly trained
professionals and technical personnel to specific project requirements.
TeamStaff focuses its temporary staffing services in two specific markets where
it places people on a temporary long term assignment, or on a permanent basis:
(1) radiologic technologist, diagnostic sonographers, cardiovascular
technologists, radiation therapist and other medical professionals with
hospitals, clinics and therapy centers throughout the 50 states and (2)
technical employees such as engineers, information systems specialists and
project managers primarily with Fortune 100 companies for specific projects.
Clients whose staff requirements vary depending on the level of current projects
or business are able to secure the services of highly qualified individuals on
an interim basis.
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The Company's temporary staffing services provide clients with the
ability to "rightsize"; that is, expand or reduce its workforce in response to
changing business conditions. Management believes that these services provide
numerous benefits to the client, such as saving the costs of salary and benefits
of a permanent employee whose services are not needed throughout the year. The
client also avoids the costs, uncertainty and delays associated with searches
for qualified interim employees. The Company also provides insurance bonding
where necessary and assumes all responsibility for payroll tax filing and
reporting functions, thereby saving the client administrative responsibility for
all payroll, workers' compensation, unemployment and medical benefits.
Management believes that its temporary staffing services provides an
employer with an increased pool of qualified applicants, since temporary
staffing employees have access to a wide array of benefits such as health and
life insurance, Section 125 premium conversion plans, and 401(k) retirement
plans. These benefits provide interim employees with the motivation of full-time
workers without additional benefit costs to the client. A client is also able to
temporarily rehire a retired employee for short-term or specialized projects
without jeopardizing their pension plan. The Company believes that it has
attained the position of being number one or two in the terms of gross revenues
for firms specializing in the placement of temporary medical imaging personnel.
ACQUISITION STRATEGY
A key component of the Company's growth strategy has been, and will
continue to be, the acquisition of compatible businesses to expand its
operations and customer base. Currently, the human resource service industry
includes numerous small companies seeking to develop services, operations and
customer base similar to those developed by the Company. The Company has
acquired companies in the human resource industry in the past. However, with the
business and strategy of the Company further developed, acquisitions in the
future will be concentrated in the PEO and outsourcing business. The Company
believes that with a limited number of key acquisitions of regional PEO
companies who possess a strong customer base and regional reputation, the
Company will be able to grow into an industry leader, in not only revenue size,
but in scope of services offered.
A prospective acquisition candidate may be either a public or private
company, but will be required to meet certain financial criteria and growth
potential established by the Company. The Company evaluates acquisition
candidates by analyzing the company's management, operations and customer base,
which must complement or expand the Company's operations and financial
stability, including the company's profitability and cash flow. The Company's
long-term plan is to expand sales and income potential by achieving economies of
scale as it expands and regionalizes its revenue base. There can be no
assurance, however, that the Company will be able to successfully identify,
acquire and integrate into the Company operations compatible PEO companies.
CUSTOMERS
The Company's customer base consists of over 2,150 client companies,
representing approximately 42,000 employees (including payroll services) as of
September 30, 1999. The Company's client base is broadly distributed throughout
a wide variety of industries; however, more than 70% of the customers in the
payroll processing area are in the construction industry and substantially all
of the customers of the Company's subsidiary TeamStaff Rx, Inc. are employed in
the healthcare industry.
The Company intends to maintain diversity within its client base to
lower its exposure to downturns or volatility in any particular industry and
help insulate the Company to some extent from general economic cycles. All
prospective customers are also evaluated individually on the basis of workers'
compensation risk, group medical history, unemployment history and operating
stability.
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SALES AND MARKETING
The Company maintains sales and marketing personnel in all of its
locations, which presently include New Jersey, New York, Texas, Florida and
Georgia.
Sales personnel offer to customers a full array of the Company's
services, professional employment, payroll and contract staffing, which supports
the cross-marketing of TeamStaff's products and enables the sales representative
to employ a professional consultative approach to satisfying clients needs
rather than forcing a single solution.
The Company has also implemented several focused marketing activities
to increase sales opportunities. The Company has been licensed by the various
state Boards of Accountancy to hold continuing professional education seminars
for CPAs. In addition, the Company and its management has become an active
participant in many trade and community associations and chambers of commerce.
COMPETITION
The PEO industry consists of approximately 2,500 companies, most of
which serve a single market or region. The Company believes that there are
several PEOs with annual revenue exceeding $500 million. The largest PEO is
Staff Leasing of Bradenton, Florida with revenue in excess of $2 billion. While
there are several other large PEOs among the approximately 2,500 companies, many
are located in Florida and other states in the Sunbelt. The Company considers
its primary competition to be these large national and regional PEO providers,
as well as the traditional form of employment of employees.
The payroll services industry is characterized by intense competition.
The principal competitive factors are price and service. Management believes
that Automatic Data Processing, Inc., and Paychex, Inc., which have recently
purchased PEOs in Florida, will be major competitors in the future. The Company
also competes with manual payroll systems sold by numerous companies, as well as
other providers of computerized payroll services including banks, and smaller
independent companies. Some companies have in-house computer capability to
generate their own payroll documents and reports. The increasing availability of
personal computers at low cost may result in additional businesses acquiring
such capabilities. In the area of providing temporary technical personnel, the
Company competes with companies such as Volt Information Services, Butler Arde,
Olsten and Tech Aid, Inc., among others. Many of these competitors have longer
operating histories and greater financial resources than the Company.
The Company competes with these companies by offering customized
products, personalized service, competitive prices and specialized personnel to
satisfy a client's particular employee requirements.
Management of the Company believes that its broad scope of human
resource management services and its commitment to quality service differentiate
it from its competition. Many companies compete in the various segments of the
human resource and financial services marketplace. Management believes that its
concentration on providing comprehensive services and moving into facilities
management or outsourcing of human resource management services will set it
apart from its competitors. While many of the PEOs entered the industry as a
result of workers' compensation or health insurance problems, the Company is
establishing itself as a professional employer organization which will assist
companies, small and large, with all of their human resource management
challenges.
Management intends to implement an internet based sophisticated human
resource management system during the current fiscal year. Management believes
that an internet based system will assist the Company's growth in the future and
grow its e-business, interacting with both our clients and employees through the
Internet. Management's belief is that the system will allow us to grow
dramatically in the future.
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INDUSTRY/GOVERNMENT REGULATION
INTRODUCTION
The Company's operations are affected by numerous federal and state
laws relating to labor, tax and employment matters. By entering into a
co-employer relationship with employees who are assigned to work at client
company locations (sometimes referred to as "worksite employees"), the Company
assumes certain obligations and responsibilities of an employer under these
federal and state laws. Many of these federal and state laws were enacted prior
to the development of nontraditional employment relationships, such as
professional employer organizations, temporary employment, and outsourcing
arrangements, and do not specifically address the obligations and
responsibilities of nontraditional employers. In addition, the definition of
"employer" under these laws is not uniform. Accordingly, the application of
these laws to the Company's business cannot be assured.
Some governmental agencies that regulate employment and labor laws have
developed rules that specifically address labor and employment issues raised by
the relationship among clients and PEOs. Existing regulations are relatively new
and, therefore, their interpretation and application by administrative agencies
and federal and state courts is limited or non-existent. The development of
additional regulations and interpretation of existing regulations can be
expected to evolve over time. The Company cannot predict with certainty the
nature or direction of the development of federal, state and local regulations.
As an employer, the Company is subject to all federal statutes and
regulations governing its employer-employee relationships.
FEDERAL EMPLOYMENT TAXES
The Company assumes the sole responsibility and liability for the
payment of federal and state employment taxes with respect to wages and salaries
paid to its employees, including worksite employees. There are essentially three
types of federal employment tax obligations: (i) withholding of income tax
requirements; (ii) obligations under FICA; and, (iii) obligations under the
Federal Unemployment Tax Act (FUTA).
Under these Code sections, employers have the obligation to withhold
and remit the employer portion and, where applicable, the employee portion of
these taxes. There is still considerable uncertainty as to the status of leased
employees in relation to these statutes. While the Company believes that it can
assume the client company's withholding obligations, in the event the Company
fails to meet these obligations, the client company may be held jointly and
severally liable for these payments. These interpretive uncertainties may have
an impact on the Company's PEO business.
EMPLOYEE BENEFIT PLANS
The Company offers various employee benefit plans to its full-time
employees, including its worksite employees. These plans include a 401(k) Plan
(a profit-sharing plan with a cash or deferred arrangement ("CODA") under Code
Section 401(k)), a Section 125 plan, group health plans, dental insurance, a
group life insurance plan and a group disability insurance plan. Generally,
employee benefit plans are subject to provisions of both the Code and the
Employee Retirement Income Security Act ("ERISA").
In order to qualify for favorable tax treatment under the Code, the
plans must be established and maintained by an employer for the exclusive
benefit of its employees. In addition to the employer/employee threshold,
pension and profit-sharing plans, including plans that offer CODAs under Code
Section 401(k) and matching contributions under Code Section 401(m), must
satisfy certain other requirements under the Code. These other requirements are
generally designed to prevent discrimination in favor of highly compensated
employees to
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the detriment of non-highly compensated employees with respect to both the
availability of, and the benefits, rights and features offered in qualified
employee benefit plans.
Employee pension and welfare benefit plans are also governed by ERISA.
ERISA defines "employer" as "any person acting directly as an employer, or
indirectly in the interest of an employer, in relation to an employee benefit
plan." ERISA defines the term "employee" as "any individual employed by an
employer." A definitive judicial interpretation of "employer" in the context of
a PEO arrangement has not been established. If the Company were found not to be
an employer for ERISA purposes, its plans would not comply with ERISA and the
level of services the Company could offer may be adversely affected. Further, as
a result of such finding, the Company and its plans would not enjoy the
preemption of state laws provided by ERISA and could be subject to varying state
laws and regulations, as well as to claims based upon state common laws.
In addition to ERISA and the Code provisions discussed herein, issues
related to the relationship between the Company and its worksite employees may
also arise under other federal laws, including other federal income tax laws.
STATE REGULATION
As an employer, the Company is subject to all statutes and regulations
governing the employer-employee relationship. For example, the Company's
activities in the State of Texas are governed by the Staff Leasing Services
Licensing Act (the "Act"), which regulates PEOs in the state of Texas. The Act,
which became effective on September 1, 1993, established a mandatory licensing
scheme for PEOs and expressly recognizes a licensee as the employer of the
assigned employee for purposes of the Texas Unemployment Compensation Act. The
Company or a subsidiary possesses a license to offer PEO services in the state
of Texas.
While many states do not explicitly regulate PEOs, approximately 21
states have passed laws that have licensing or registration requirements for
PEOs and other states are considering such regulation. Such laws vary from state
to state, but generally provide for monitoring the fiscal responsibility of
PEOs. Whether or not a state has licensing, registration or certification
requirements, the Company faces a number of other state and local regulations
that could impact its operations. A TeamStaff subsidiary is currently licensed
in Florida and New Mexico as well as Texas.
EMPLOYEES
As of December 21, 1999, the Company employed 176 employees, both
full-time and part-time, including executive officers, an increase from 121
during the previous fiscal year. A major part of this increase is a direct
result of the Company's acquisition of the TeamStaff Companies in Tampa,
Florida. The Company also employs approximately 10,500 leased employees and
1,500 temporary employees on client assignments. The Company believes its
relationship with its employees is satisfactory.
ITEM 2. PROPERTIES
OPERATION AND FACILITIES
The Company currently has processing centers in Somerset, New Jersey;
Houston and El Paso, Texas; and Clearwater and Tampa, Florida. The Company also
has sales service centers which are located in New York City, Somerset, New
Jersey; Clearwater, Tampa and Orlando, Florida; Houston and El Paso, Texas;
Atlanta, Georgia. A sales service center is an office used primarily for sales
efforts and client services. The Company's strategy is to target acquisitions in
the current areas of operation, whereby the Company will acquire a business or
business accounts and absorb these accounts into the current operations with
minimal additional overhead. The Company intends to continue its national
expansion efforts in fiscal years 2000-2001, most likely through additional
acquisitions and internal growth.
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TeamStaff leases its 15,000 square foot corporate headquarters in
Somerset, New Jersey, as well as offices in Clearwater and Tampa, Florida and
Houston, Texas. The Company also leases sales offices in New York City and El
Paso, Texas. The facilities provide sufficient capacity to meet demands for the
foreseeable future. In fiscal year ended September 30, 1999, the Company's total
lease expenses were $794,000.
Although TeamStaff's offices are equipped with software and computer
systems, the Company is currently evaluating all systems including hardware and
will upgrade accordingly. At the Company's headquarters in Somerset, New Jersey,
one high speed Xerox printer produces 200,000 plus checks monthly for its client
base. This machine, which is integrated with the software system, does all of
the printing on the checks, including the client name, the employee, dates, as
well as the "Micro Encoding".
The following is summary information on the Company's facilities:
<TABLE>
<CAPTION>
APPROXIMATE EXPIRATION
LOCATION SQUARE FEET DATE TERMS
- -------- ----------- ---- -----
<S> <C> <C> <C>
TeamStaff RX, Inc. (Houston) 3,542 7/01/02 $ 5,461 per month
2 Northpoint Drive,
Houston, TX 77060
TeamStaff RX, Inc. (Clearwater) 17,484 5/31/05 $ 31,690 per month
1901 Ulmerton Road
Clearwater, FL 33762
TeamStaff RX, Inc. (Clearwater) 2,805 5/31/00 $ 3,272 per month
601 Cleveland Street Suite 350
Clearwater, FL 34615
Staff ConnXions Southwest (El Paso) 3,126 3/31/02 $ 3,759 per month
4050 Rio Bravo, Suite 151
El Paso, TX 79902
Corporate Office 15,244 9/30/07 $ 23,819 per month
300 Atrium Drive
Somerset, NJ 08873
TeamStaff Solutions, Inc. 1,890 4/30/01 $ 3,082 per month
245 Fifth Avenue, Suite 2104
New York, NY 10016
TeamStaff, Inc. 11,834 4/30/00 $ 11,033 per month
1211 N. Westshore Blvd
Tampa, FL 33607
TeamStaff, Inc. 142 3/31/00 $ 728 per month
10151 Deerwood Park Blvd
Jacksonville, FL 32256
TeamStaff, Inc. 100 5/31/00 $ 548 per month
283 N. North Lake Suite 111
Altamonte Springs, FL 32701
</TABLE>
11
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
In October 1995, the Company entered into a note and finance agreement
with LNB Investment Corporation ("LNB") providing for the loan to the Company of
up to $3,000,000. LNB agreed not to sell or otherwise liquidate the shares
unless the Company were to default under the loan agreement and failed to cure
such default after notice. A maximum of 7,5000,000 shares were pledged as
collateral.
The Company issued 1,783,334 shares in the name of LNB and delivered
the shares to a depository to secure the first portion of the loan of
$1,000,000. In January 1996, the Company determined that the shares pledged as
collateral had been transferred and sold in violation of the loan and finance
agreement. As a result, the financing agreement was terminated and never funded.
Through the efforts of the Company, 1,258,334 of these shares were recovered and
the Company received proceeds of $229,000 for a partial payment on the 525,000
shares not recovered.
In March 1996, the Company commenced action against LNB, Donaldson,
Lufkin & Jenrette Securities Corporation and other individuals to recover
damages on account of the wrongful sale of the Company's common stock. On July
2, 1997, the Company settled the action. Without admitting or denying the
allegations in the complaint, the defendants agreed to pay $676,000 of which
$426,000 has been paid with the balance of $250,000 to be paid by LNB on or
before August 4, 1997. The payment was not made by LNB as of December 28, 1998.
The Company has commenced collection proceedings. The subsequent payment is
secured by a confession of judgment and a mortgage in the amount of $625,000.
The payments under the settlement agreement are in addition to $229,000
previously received from LNB bringing the total recovered to approximately
$905,000, assuming LNB complies with the terms of the settlement and remits the
last payment of $250,000.
The Company's subsidiary, DSI Staff Connxions-Southwest, Inc., is the
defendant in a lawsuit (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 judgement.
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 was 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). 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 denied the material allegations of the complaint. The plaintiffs had
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. To avoid further costs of litigation and without admitting any claims
of the plaintiff, the Company paid $21,500 to settle this case in September
1999.
A previously disclosed, several of the entities operating under the
trade name "The TeamStaff Companies", which were acquired by the Company in
January 1999, were 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
insolvent in 1995. The action was 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, (the "Department") as the receiver of the Fund. Because of
management's knowledge of the USEC proceedings and the amount of potential
assessments at the time of acquisition, the acquisition agreements governing
the Company's acquisition of the TeamStaff Companies provided indemnification
by the sellers in favor of the Company for damages of up to $1,222,000. The
financial statements of the TeamStaff Companies at the time of acquisition
included a reserve of $391,000 for which the Company would be responsible for.
On October 18, 1999 the Company and the former shareholders of the TeamStaff
Companies entered into an agreement with the Department that settled all
claims. The Company paid $391,000 to the Department while the former
shareholders of the TeamStaff Companies entered into a payment plan with the
Department for the remainder of the settlement amount in excess of $391,000. On
December 2, 1999 the receivership court, which had jurisdiction over the
lawsuit, approved the settlement agreement. There is no remaining liability on
this matter against the Company.
The Company is engaged in litigation from time to time during the
ordinary course of business in connection with employee suits, workers'
compensation and other matters. The Company is engaged in no other litigation,
the effect of which would be anticipated to have a material adverse impact on
the Company financial conditions or results of operations.
12
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company did not submit any matters to its shareholders for approval
during the fourth quarter ended September 30, 1999.
PART II
ITEM 5. MARKET OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
A. PRINCIPAL MARKET
The Company's Common Stock is traded in the over-the-counter market and
included in the SmallCap Market System of the National Association of Securities
Dealers, Inc. ("Nasdaq") under the symbol "TSTF".
B. MARKET INFORMATION
The range of high and low bid prices for the Company's Common Stock for
the periods indicated below, are:
COMMON STOCK
<TABLE>
<CAPTION>
FISCAL YEAR 1997 HIGH LOW
---------------- ---- ---
<S> <C> <C>
1st Quarter 6 1/4 3 1/8
2nd Quarter 3 15/16 1 13/16
3rd Quarter 2 7/16 1 9/16
4th Quarter 2 5/16 1 9/16
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998 HIGH LOW
---------------- ---- ---
<S> <C> <C>
1st Quarter 2 11/16 1 1/2
2nd Quarter 2 17/32 1 3/4
3rd Quarter 2 15/32 1 9/16
4th Quarter 1 13/16 1
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1999 HIGH LOW
---------------- ---- ---
<S> <C> <C>
1st Quarter 1 27/32 15/16
2nd Quarter 1 10/16 15/16
3rd Quarter 1 15/32 14/16
4th Quarter 1 1/2 1
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 2000 HIGH LOW
---------------- ---- ---
<S> <C> <C>
1st Quarter 1 7/16 3/4
</TABLE>
13
<PAGE> 14
The above quotations, reported by Nasdaq, represent prices between
dealers and do not include retail mark-ups, mark-downs or commissions. Such
quotations do not necessarily represent actual transactions. On January 4, 1999,
the Company's Common Stock had a closing price of $1.3125 per share.
C. DIVIDENDS
The payment of cash dividends by the Company is restricted by the
Company's debt facility provider, FINOVA. Without FINOVA'S prior written
consent, which FINOVA may withhold in its sole discretion, the Company may not
declare or pay cash dividends upon any of its stock. The Company has not
declared any cash dividends on its common stock since inception, and has no
present intention of paying any cash dividends on its common stock in the
foreseeable future.
D. APPROXIMATED NUMBER OF EQUITY SECURITY HOLDERS
The approximate number of record holders of the Company's common stock
as of January 6, 2000 was 300. Such number of record holders was determined from
the Company's stockholder records, and does not include beneficial owners of the
Company's common stock whose shares are held in the names of various security
holders, dealers and clearing agencies. The Company believes there are in excess
of 4,100 beneficial holders of the Company's common stock.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999(2) 1998 1997 1996 1995
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 244,830,000 $ 139,435,000 $ 122,559,000 $ 100,927,000 $ 73,821,000
Direct Expenses 228,294,000 129,747,000 113,894,000 92,490,000 68,530,000
Gross Profit 16,536,000 9,688,000 8,665,000 8,437,000 5,291,000
Selling, General & Administrative
Expenses (includes Depreciation
and Amortization) 13,305,000 8,050,000 11,316,000 8,801,000 7,547,000
Income (Loss) From Operations 3,231,000 1,638,000 (2,651,000) (364,000) (2,256,000)
Net Income (Loss) $1,776,000 $2,703,000 ($2,832,000) ($597,000) ($3,316,000)
Earnings (Loss) per share (1)
Basic $.07 $.14 ($.15) ($.04) ($.24)
Diluted $.07 $.14 ($.15) ($.04) ($.24)
Weighted average shares
outstanding (1)
Basic 24,947,321 19,271,897 19,070,349 16,840,371 13,595,382
Diluted 25,008,864 19,403,298 19,070,349 16,840,371 13,595,382
BALANCE SHEET DATA:
Assets $ 36,382,000 $ 16,648,000 $ 14,163,000 $ 14,800,000 $ 13,816,000
Liabilities 19,417,000 8,774,000 9,291,000 7,632,000 10,967,000
Long-Term Debt 4,502,000 2,981,000 89,000 100,000 175,000
Working Capital (Deficiency) 2,968,000 3,319,000 (1,401,000) 286,000 (4,771,000)
Shareholders' Equity $ 16,965,000 $ 7,874,000 $ 4,872,000 $ 7,168,000 $ 2,849,000
</TABLE>
(1) In accordance with Statement of Accounting Standards 128 ("SFAS"),
basic and diluted earnings (loss) per share have replaced primary
and diluted earnings (loss) per share.
(2) On January 25, 1999, the Company acquired 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.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL YEAR 1999 AS COMPARED TO FISCAL YEAR 1998
The Company's revenues for the fiscal year ended September 30, 1999
were $244,830,000 as compared to fiscal year 1998 of $139,435,000, which
represents an increase of $105,395,000 or 75.6%. Of this increase, $75,000,000
was due to the acquisition of the TeamStaff Companies (the "Acquisition") with
the balance due to internal growth. PEO services accounted for 83.7% of the
internal growth with the remainder attributable to the Company's staffing
business.
Direct expenses for fiscal year 1999 were $228,294,000 as compared to
$129,747,000 for fiscal year 1998 which represents an increase of $98,547,000 or
76%. This increase is associated with the increase in revenue due to the
Acquisition. As a percentage of revenue, direct expenses for the fiscal years
1999 and 1998 were 93.2% and 93.1%, respectively.
Gross profits were $16,536,000 and $9,688,000 for fiscal years 1999 and
1998, respectively. This represents an increase of $6,848,000 or 70.7%. Gross
profits, as a percentage of revenue, were 6.8% and 6.9% for fiscal years 1999
and 1998, respectively. Although a substantial portion of the Company's revenue
growth occurred in the PEO business, which has lower gross profit margins, the
gross profit as a percentage of revenue declined only marginally because of
improved performance and increases in the Company's staffing business.
Selling, general and administrative expenses ("SG&A") for fiscal 1999
increased $4,792,000, or 64.9%. This increase is attributable to the
Acquisition. SG&A expenses as a percentage of revenue were 5.0% and 5.3% for the
fiscal years 1999 and 1998 respectively.
Depreciation and amortization increased $463,000, or 70% in fiscal 1999
primarily due to the increase in amortization of goodwill related to the
Acquisition.
Interest income increased $169,000 in fiscal 1999 versus fiscal 1998
primarily due to an increase of late fees paid in the Company's staffing
business. Also accounting for the increase in interest income is $54,000 in
interest from a note receivable which was previously not recognized due to
collectability concerns which have since been eliminated. The Company has also
increased interest income due to the investment of its increased cash reserves.
Interest expense in fiscal 1999 increased $579,000, or 104.5%, from
$554,000 in fiscal 1998 to $1,133,000 in 1999. This increase was due to an
increase in debt financing and its effective borrowing rate associated with the
Company's new financing arrangements, effective in April 1998, as well as the
additional debt associated with the Acquisition in January 1999.
Income tax expense for fiscal 1999 was $849,000 versus a tax benefit
of $1,296,000 in fiscal 1998, the later benefit related to a reduction in the
Company's valuation allowance. Included in the second quarter of fiscal 1999 is
a $400,000 net tax benefit reflecting the elimination of the remaining deferred
tax valuation allowance. Management has determined that it 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.
Net income for fiscal 1999 was $1,776,000 versus $2,703,000 in fiscal
1998. This decrease is attributable to the recognition in fiscal 1998 of a net
tax benefit of $1,296,000. There was an increase in the Company's pre-tax
16
<PAGE> 17
income of $1,218,000 which reflects the benefit of the Acquisition as well as
the improved performance in all of the Company's business lines.
FISCAL YEAR 1998 AS COMPARED TO FISCAL YEAR 1997
The Company's revenues for the fiscal year ended September 30, 1998 were
$139,435,000 as compared to fiscal year 1997 of $122,559,000 which represents an
increase of $16,876,000 or 13.8%. This increase is due to the efforts of the
internal sales force to continually bring in new business which accounted for
all of the increase. PEO services accounted for 61% of the growth, while the
balance is attributed to the Company's staffing business.
Direct expenses for fiscal year 1998 were $129,747,000 as compared to
$113,894,000 for fiscal year 1997 which represents an increase of $15,853,000,
or 13.9%. This increase represents the corresponding higher costs associated
with higher revenues. As a percentage of revenue, direct expenses for the fiscal
year 1998 and 1997 were 93.1% and 92.9%, respectively.
Gross profits were $9,688,000 and $8,665,000 for fiscal 1998 and 1997,
respectively, for an increase of 11.8%. Gross profits, as a percentage of
revenue, were 6.9% and 7.1% for the fiscal years ended September 30, 1998 and
1997, respectively.
Selling, general and administrative costs ("SG&A") for fiscal 1998
decreased $2,917,000, or 28.3%, from $10,306,000 in fiscal 1997 to $7,389,000.
Of this decrease, $1,973,000 pertains to charges recorded in the second quarter
of fiscal 1997, $1,002,000 of which was to increase the bad debt reserve,
$300,000 to absorb miscellaneous charges, $102,000 to establish a vacation pay
accrual, $81,000 to change supplies accounting, $93,000 to establish a reserve
for severance costs and $395,000 for various other miscellaneous items. Giving
effect to these adjustments, SG&A decreased $944,000 which is attributable to
the reduction in overhead costs implemented in the fourth fiscal quarter of 1997
as well as a reevaluation by management of the bad debt reserve due to the
payments on previously non performing accounts.
Depreciation and amortization decreased $349,000 in fiscal 1998 due to
several intangible assets that have became fully amortized in the current fiscal
year. The decrease was also attributable to the writing off of $261,000 in
intangible assets of Digital Insurance Services, Inc. which ceased operations in
the fiscal year 1997.
Interest expense for fiscal year 1998 increased $177,000 to $554,000 from
$377,000 in fiscal 1997 due to an increase in debt financing and an increase in
the effective borrowing rate.
Income taxes for the fiscal year 1998 reflected a net tax benefit of
$1,296,000 primarily related to the reduction in the Company's valuation
allowance. As of September 30, 1997, the Company had established a deferred tax
valuation allowance of $2,680,000. In view of the continued earnings improvement
of the Company over the last four quarters and its current financial position
and prospects, the management determined in June of 1998 that it is more likely
than not that the majority of such valuation allowance will be realized. As of
September 30, 1998, the Company's valuation allowance approximated $400,000.
Net income for fiscal 1998 was $2,703,000 versus a net loss of ($2,832,000)
in fiscal 1997. This increase is attributed to the $3.1 million in adjustments
recorded in fiscal 1997, the net tax benefit of $1,296,000 recorded in fiscal
1998, the growth of all businesses and the overhead reductions implemented in
the fourth fiscal quarter of 1997.
FISCAL YEAR 1997 AS COMPARED TO FISCAL YEAR 1996
Operating revenues for the fiscal year ended September 30, 1997 were
$122,559,000 as compared to fiscal year 1996 of $100,927,000 which represents an
increase of $21,632,000 or 21.4%. This increase is due to the efforts of the
internal sales force to continually bring in new business which accounted for
all of the increase. PEO services
17
<PAGE> 18
accounted for 83% of the growth, while the balance is attributed to the
Company's staffing business.
Direct costs for fiscal year 1997 were $113,894,000 as compared to
$92,490,000 for fiscal year 1996 which represents an increase of $21,404,000, or
23.1%. The workers' compensation profit for the first four months of fiscal 1996
of $493,000 was recorded as a reduction of selling, general and administrative
expenses, whereas subsequent to that the revenue and direct costs for the
workers' compensation program were reflected in their respective accounts. In
addition, the first nine months of fiscal 1997 included $308,000 in
underbilled/excess charges for PEO medical expenses. After adjusting for the
treatment of the workers' compensation profit, one-time charges of $678,000
recorded in the second quarter of 1997 (primarily due to increased workers'
compensation charges) and medical expenses, direct costs increased $20,911,000
or 22.7%. As a percentage of revenue, and on an adjusted basis, direct costs for
fiscal 1997 and fiscal 1996 were 92.1% and 91.2% respectively. This increase is
attributed to the increase in the PEO business as well as the new workers'
compensation program, in which the Company is now expensing the maximum workers'
compensation exposure on a current basis.
Gross profits were $8,665,000 and $8,437,000 for fiscal 1997 and 1996,
respectively, for an increase of 2.7%. Giving effect to the previously discussed
adjustments, gross profits for fiscal 1997 and 1996 would have been $9,651,000
and $8,930,000, respectively. As a percentage of revenue, adjusted gross profits
for fiscal 1997 and 1996 would have been 7.9% and 8.8%, respectively, reflecting
the increased PEO business in fiscal 1997 which has lower margins but adds more
dollars of gross profit.
Selling, general and administrative costs ("SG&A") for fiscal 1997
increased $2,334,000, or 29%, from $7,972,000 in fiscal 1996 to $10,306,000. Of
this increase, $1,973,000 pertains to charges recorded in the second quarter of
fiscal 1997, $1,002,000 of which was to increase the bad debt reserve with the
balance for other miscellaneous items. Giving effect to these adjustments, SG&A
increased 4.5%.
Depreciation and amortization increased $181,000 in fiscal 1997 due to the
write-off of all the intangible assets of a subsidiary, Digital Insurance
Services ($261,000) recorded in the second fiscal quarter.
Net loss for fiscal 1997 was ($2,832,000) versus a net loss of ($597,000)
in fiscal 1996. The increased loss is due to $3,100,000 in adjustments recorded
in the second quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased in fiscal 1999 by
$3,249,000 from a deficit of $48,000 to $3,201,000. The increase in cash flows
from operations is attributable to the continued earnings improvement of the
Company, an increase in depreciation and amortization due to the TeamStaff
acquisition and an increase in accrued expenses associated with year end
accruals for payroll offset by an increase in accounts receivable. The net
cash provided by financing activities increased in fiscal 1999, compared to
fiscal 1998 due to the increase in financing for the TeamStaff Companies
acquisition. Cash outflow for the purchase of equipment and improvements was
$249,000 in fiscal 1999 compared to $184,000 in fiscal 1998. The Company
currently anticipates that the capital expenditures in fiscal 2000 will be
approximately $300,000. The Company spent $4,509,000 in cash as part of the
acquisition of the TeamStaff Companies. At September 30, 1999, the Company had
cash of $1,948,000, restricted cash of $362,000 and net accounts receivable of
$13,557,000.
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% (11.25%
at September 30, 1999) and a $2 million revolving line of credit secured by
certain accounts receivable of the Company at prime + 1% (9.25% at September 30,
1999). The credit facility is also subject to success fees of $200,000, $225,000
and $250,000 due on
18
<PAGE> 19
the anniversary date of the loan beginning in April, 1999. On April 27, 1999,
the Company remitted the first annual success fee of $200,000.
In January 1999 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 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.
On July 22, 1999 the Board of Directors authorized the Company to
repurchase up to 3% of the outstanding shares of the Company's common stock
subject to the approval of the Company's lenders and any regulatory approval
required. As of September 30, and December 31, 1999 the Company repuchased
64,100 and 83,600 shares at an average cost of $1.17 and $1.13, respectively.
Management of the Company believes that its existing cash and available
borrowing capacity will be sufficient to support cash needs through September
30, 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.
As of the filing of this form, the Company has not experienced any
material year 2000 issues.
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
19
<PAGE> 20
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, and accordingly the Company adopted the
provisions of SFAS 131 in the current year.
In March 1998, the AICPA issued Statement of Position 98-1 ("SOP
98-1"), "Accounting for the Costs of Computer Software Developed or Maintained
for Internal Use." SOP 98-1 provides guidance on the treatment of costs related
to internal use software. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998, at which time the Company will adopt the provisions. The
Company does not expect SOP 98-1 to have a material effect on reported results.
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP
98-5"), "Reporting on the Cost of Startup Activities". SOP 98-5 provides
guidance on the financial reporting of startup costs and organization costs and
requires that the cost of startup activities and organization costs be expensed
as incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998, at which time the Company will adopt the provisions. The Company does not
expect SOP 98-5 to have a material effect on reported results.
ITEM 8. FINANCIAL STATEMENTS
See Attached Financial Statements appearing at pages F-1 through F-18.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
20
<PAGE> 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- --------------------------------------------------------------------------------
<S> <C> <C>
Karl W. Dieckmann 71 Chairman of the Board of Directors
Rocco Marano 71 Director
Donald T. Kelly 50 Vice President, Chief Financial Officer
and Corporate Secretary
Senator John H. Ewing 79 Director
William J. Marino 56 Director
Donald W. Kappauf 53 President and Chief Executive Officer
Charles R. Dees, Jr. 59 Director
Martin J. Delaney 56 Director
Kirk A. Scoggins 40 President-PEO Division, Director
</TABLE>
On March 17, 1999, TeamStaff, Inc. (formerly Digital Solutions, Inc.)
(the "Company") held an Annual Meeting of its Stockholders in Somerset, New
Jersey. At this meeting the stockholders approved a staggered Board of Directors
consisting of three classes. Each class is elected for a three year term.
Pursuant to the agreement governing the acquisition of the TeamStaff
Companies, the former shareholders of the TeamStaff Companies, were granted the
right to have Mr. Kirk Scoggins appointed as a Director of the Company for a two
year period ending January 25, 2001. In addition, the Company agreed to consider
a second nominee of the former shareholders. No second nominee has been
proposed.
Karl W. Dieckmann, Director of the Company since April, 1990, has been
Chairman of the Board since November, 1991. From 1980 to 1988, Mr. Dieckmann was
the Executive Vice President of Science Management Corporation and managed the
Engineering, Technology and Management Services Groups. From 1948 to 1980, Mr.
Dieckmann was employed by the Allied Corporation (now Allied Signal Corporation)
in various capacities including President, Semet Solvay Division; Executive Vice
President, Industrial Chemicals Division; Vice President Technical -- Fibers
Division; Group General Manager -- Fabricated Products Division; and General
Manager-Plastics Division, as well as various positions with the Chemicals
Division.
Rocco Marano, joined the Board of Directors in July, 1999. Mr. Marano a
prominent telecommunications executive, is the retired chairman and President of
Bellcore, Inc. a Bell Communications research and engineering entity formerly
owned by the seven Bell regional communications companies. His present
additional board affiliations include: Park Place Entertainment Corp. and
Computer Horizons Corp. He has also served as Chairman of Horizon Blue Cross
Blue Shield of New Jersey.
Donald T. Kelly, has been Chief Financial Officer and Vice President of
Finance since he joined DSI on January 20, 1997. He was elected Corporate
Secretary in August of 1997. Mr. Kelly was Vice President and Chief
21
<PAGE> 22
Financial Officer of Wireless Cable International and its predecessor company,
Cross Country Wireless, Inc. from 1993 to 1997. From 1987 to 1993, he was Vice
President of Finance and Administration at Potters Industries.
Senator John H. Ewing, has been a Director of the Company since April,
1990. Senator Ewing has been a State Senator for the state of New Jersey from
1978 to 1998. From 1968 to 1977, Senator Ewing was a New Jersey State
Assemblyman. From 1940 to 1968, he was employed by Abercrombie and Fitch Co.,
New York City, and eventually rose to the position of Chairman of the Board.
William J. Marino, President and Chief Executive Officer of Blue Cross
and Blue Shield of New Jersey, joined the Board of Directors in October, 1995.
He joined Blue Cross and Blue Shield in 1992 and was named to his present post
in 1994. From 1968 to 1991, Mr. Marino held a variety of sales, marketing and
management positions with the Prudential Insurance Company of America. He is
Chairman of the Board of Trustees of the United Way of Essex and West Hudson
(NJ) and is Chairman of the Board of Directors and Executive Committee of the
Regional Business Partnership, and a Trustee of the New Jersey Network
Foundation, St. Peter's College and the Newark Museum.
Donald W. Kappauf became President and Chief Executive Officer of
Digital Solutions, Inc. on December 16, 1997. Mr. Kappauf joined Digital
Solutions, Inc. in 1990 and has held several senior management positions
including Division President and Executive Vice President. From 1988 to 1990, Mr
Kappauf was President of Perm Staff/Temp Staff in Princeton, New Jersey. He was
Assistant Vice President of SMC Engineering and then President of SMC Personnel
Support from 1968 to 1988.
Charles R. Dees, Jr. joined the Board of Directors in July, 1998. Mr.
Dees is a nationally known university administrator and former official of the
U. S. Department of Education. He is currently Senior Vice President for
Institutional Advancement of Fairleigh Dickinson University.
Martin J. Delaney also joined the Board of Directors in July, 1998. Mr.
Delaney is a prominent healthcare executive presently serving as President, CEO
and a director of the Winthrop-South Nassau University Health System, Inc., in
Long Island, New York.
Kirk A. Scoggins, the former President and Chairman of the TeamStaff
Companies, joined the Company with the acquisition as the President of the PEO
Division and a member of the Board of Directors of the Company. Mr. Scoggins is
one of the original pioneers of the PEO industry. He established one of
Florida's first employee leasing companies based in Tampa in 1985. Mr. Scoggins
is a member of the Executive Committee of the Board and immediate Past President
of the National Association of Professional Employer Organizations (NAPEO) and
is also a founding member and Past President of the Florida Association of
PEO's. Pursuant to the terms of the agreements governing the acquisition of the
TeamStaff Companies, Mr. Kirk Scoggins served as the nominee of the former
stockholders of such entities.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Karl W. Dieckmann, John H. Ewing and William J. Marino served on the
Company's Compensation Committee during the last fiscal year. There are no
interlocks between the Company's Directors and Directors of other companies.
22
<PAGE> 23
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
During the fiscal year ended September 30, 1999, the Board of Directors
met on 7 occasions and acted by unanimous written consent on 7 occasions. The
Board of Directors is comprised of 8 persons and has 3 committees. Messrs.
Dieckmann, Ewing, Delaney and Marino are members of the Board's Compensation
committee. Messrs. Dieckmann, Ewing, and Dees are members of the Board's Audit
Committee. Messrs. Dieckmann, Kappauf and Marino are members of the Board's
Nominating Committee. Messrs. Marino, Dees, Kappauf and Scoggins are members of
the Strategic Planning Committee. The Audit Committee, the Nominating Committee,
Compensation Committee and Strategic Planning Committee of the Board of
Directors met on 3, 1, 4 and 1 occasions, respectively, during the fiscal year.
No director failed to attend fewer then 75% of the Board or Committee meetings.
ITEM 11. EXECUTIVE COMPENSATION
The following provides certain summary information concerning
compensation paid or earned by the Company during the years ended September 30,
1999, 1998 and 1997 to the Company's Chief Executive Officer and each of the
executive officers of the Company who received in excess of $100,000 in
compensation during the last fiscal year.
<TABLE>
<CAPTION>
NAME AND ANNUAL COMPENSATION LONG TERM COMPENSATION
PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS/SAR'S
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Donald W. Kappauf, (1)
Chief Executive Officer 1999 $225,154 $175,500 $14,876 50,000
1998 $173,308 $ 89,670 $16,991 200,000
1997 $121,154 $ 25,000 $0 0
Donald T. Kelly, (2)
Chief Financial Officer 1999 $163,115 $ 87,800 $0 50,000
1998 $151,038 $ 45,000 $0 50,000
1997 $ 90,865 $ 20,000 $0 30,000
Kirk A. Scoggins, (3)
President-PEO Division 1999 $135,625 $0 $0 100,000
George J. Eklund, (4)
Director 1999 $100,153 $0 $0 0
1998 $210,000 $0 $0 0
1997 $210,000 $0 $0 0
</TABLE>
(1) The 1997 salary includes Mr. Kappauf's compensation for the executive
vice president position he assumed on August 27, 1997. His compensation
in 1997, prior to becoming executive vice president was $105,288. Other
compensation includes car and car insurance.
(2) Mr. Kelly was granted a sign on bonus of $20,000 at employment, on
January 20, 1997.
(3) The 1999 salary includes Mr. Scoggin's compensation for the
President-PEO Division position as of January 25, 1999.
23
<PAGE> 24
(4) Mr. Eklund's employment with the Company commenced on September 19,
1994. He assumed the position of Chief Executive Office in March 1996.
In December 1997 due to health concerns, his position changed. Mr.
Eklund remained a Director until his resignation on January 14, 1999.
The Company provides normal and customary life and health insurance
benefits to all of its employees including executive officers. The Company has
no retirement or pension plan other than a 401(k), which is voluntary.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company are not compensated for
services in such capacity except under the Director Plan, as defined below.
Non-Employee Directors receive $1,000 per board meeting and $ 500.00 per
non-board meeting, related travel expenses, and $400 for each committee meeting.
The Directors' Plan also provides that directors, upon joining the Board, and
for one (1) year thereafter, will be entitled to purchase restricted stock from
the Company at a price equal to 80% of the closing bid price on the date of
purchase up to an aggregate purchase price of $50,000.
EMPLOYMENT AGREEMENT
Effective March 12, 1996, the Company entered into a new employment
agreement with Mr. Eklund for a three year term. The employment agreement
provided for (i) annual compensation of $210,000 for the first year of the
agreement increasing at the discretion of the Company; (ii) a bonus in
accordance with a plan to be established by the Company; (iii) the award of
stock options to purchase 300,000 shares of the Company's common stock, subject
to vesting requirements; (iv) certain insurance and severance benefits; and (v)
a $700 per month automobile allowance. Effective December 16, 1997, Mr. Eklund's
position was changed for health reasons. The Company and Mr. Eklund entered into
an agreement regarding the change in his position. Pursuant to this agreement,
Mr. Eklund no longer served as President and Chief Executive Officer of the
Company. Mr. Eklund remained a Director and proformed special projects work for
compensation until January 14, 1999. Mr. Eklund received his salary and certain
other benefits as provided in his original employment agreement until March
1999.
The Company reached an agreement with Donald Kappauf on a three year
renewal of Mr. Kappauf's employment agreement effective January 3, 2000. Mr.
Kappauf will continue to serve as the Company's President and Chief Executive
Officer and will receive (i) annual compensation of $225,000 for the first year
of the agreement increasing at the discretion of the compensation committee;
and (ii) a bonus based on the achievement of certain performance criteria as
determined by the compensation committee. In addition, Mr. Kappauf receives
certain other benefits including insurance benefits and a car allowance.
24
<PAGE> 25
OPTION/SAR GRANTS IN LAST FISCAL YEAR
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
PERCENTAGE OF
NO. OF SECURITIES TOTAL OPTIONS/
UNDERLYING OPTIONS GRANTED IN FISCAL EXERCISE OF BASE
NAME GRANTED YEAR PRICE PER SHARE EXPIRATION DATE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donald Kappauf 50,000 12% $ 1.2188 01/04/2004
Donald Kelly 50,000 12% $ 1.2188 01/04/2004
Kirk Scoggins 100,000 24% $ 1.0000 04/01/2004
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table sets forth information with respect to the named
executive officers concerning exercise of stock options and SARs during the last
fiscal year and the value of unexercised options and SARs held as of the year
ended September 30, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-THE-
UNEXERCISED MONEY OPTIONS AS
SHARES OPTIONS/SARS OF SEPTEMBER 30,
ACQUIRED SEPTEMBER 30, 1999 1999
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donald W. Kappauf 0 0 250,000/100,000 $0/$0
Donald T. Kelly 0 0 80,000/50,000 $0/$0
Kirk A. Scoggins 0 0 0/100,000 $0/$109,380
</TABLE>
(1) Based upon a closing bid price of the Common Stock at $1 3/32 per share
on September 30, 1999.
STOCK OPTION PLANS
In April, 1990, the Board of Directors adopted the 1990 Employees Stock
Option Plan (the "1990 Plan") which was approved by shareholders in August,
1990. The 1990 Plan provides for the grant of options to purchase up to
1,000,000 shares of the Company's common stock. Under the terms of the 1990
Plan, options granted thereunder may be designated as options which qualify for
incentive stock option treatment ("ISOs") under Section 422A of the Code, or
options which do not so qualify ("Non-ISO's").
The 1990 Plan is administered by the Compensation Committee designated
by the Board of Directors. The Compensation Committee has the discretion to
determine the eligible employees to whom, and the times and the price at which,
options will be granted; whether such options shall be ISOs or Non-ISOs; the
periods during which each option will be exercisable; and the number of shares
subject to each option. The Committee has full authority to interpret the 1990
Plan and to establish and amend rules and regulations relating thereto.
Under the 1990 Plan, the exercise price of an option designated as an
ISO shall not be less than the fair
25
<PAGE> 26
market value of the common stock on the date the option is granted. However, in
the event an option designated as an ISO is granted to a ten percent (10%)
shareholder (as defined in the 1988 Plan), such exercise price shall be at least
110% of such fair market value. Exercise prices of Non-ISO options may be less
than such fair market value.
The aggregate fair market value of shares subject to options granted to
a participant, which are designated as ISOs and which become exercisable in any
calendar year, shall not exceed $100,000.
The Compensation Committee may, in its sole discretion, grant bonuses
or authorize loans to or guarantee loans obtained by an optionee to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.
Unless sooner terminated, the 1990 Plan will expire in April 2000.
In April 1990, the Board of Directors adopted the Non-Executive
Director Stock Option Plan (the "Director Plan") which was approved by
shareholders in August, 1991 and amended in March 1996. The Director Plan
provides for issuance of a maximum of 500,000 shares of common stock upon the
exercise of stock options arising under the Director Plan. Options may be
granted under the Director Plan until April, 2000 to: (i) non-executive
directors as defined and, (ii) members of any advisory board established by the
Company who are not full-time employees of the Company or any of its
subsidiaries. The Director Plan provides that each non-executive director is
automatically granted an option to purchase 5,000 shares upon joining the Board
and each September lst, pro rata, based on the time the director has served in
such capacity during the previous year. The Directors' Plan also provides that
directors, upon joining the Board, and for one (1) year thereafter, will be
entitled to purchase restricted stock from the Company at a price equal to 80%
of the closing bid price on the date of purchase up to an aggregate purchase
price of $50,000.
The exercise price for options granted under the Director Plan shall
be 100% of the fair market value of the common stock on the date of grant.
Until otherwise provided in the Stock Option Plan, the exercise price of
options granted under the Director Plan must be paid at the time of exercise,
either in cash, by delivery of shares of common stock of the Company or by a
combination of each. The term of each option commences on the date it is
granted and unless terminated sooner as provided in the Director Plan, expires
five (5) years from the date of grant. The Committee has no discretion to
determine which non-executive director or advisory board member will receive
options or the number of shares subject to the option, the term of the option
or the exercisability of the option. However, the Committee will make all
determinations of the interpretation of the Director Plan. Options granted
under the Director Plan are not qualified for incentive stock option treatment.
In April 1990, the Board of Directors adopted and in August, 1990, the
Company's shareholders approved the Senior Management Incentive Plan (the
"Management Plan") for use in connection with the issuance of stock, options and
other stock purchase rights to executive officers and other key employees and
consultants who render significant services to the Company and its subsidiaries.
It is contemplated that only those executive management employees (generally the
Chairman of the Board, Chief Executive Officer, Chief Operating Officer,
President and Vice Presidents of the Company or Presidents of the Company's
subsidiaries) who perform services of special importance to the Company will be
eligible to participate under the Management Plan. A total of 5,000,000 shares
of common stock will be reserved for issuance under the Management Plan. Awards
made under the Management Plan will be subject to three (3) year vesting
periods, although the vesting periods are subject to the discretion of the
Administrator.
Unless otherwise indicated, the Management Plan is to be administered
by the Board of Directors or a committee of the Board, if one is appointed for
this purpose (the Board or such committee, as the case may be, shall be referred
to in the following description as the "Administrator"). The Management Plan
generally provides that, unless the Administrator determines otherwise, each
option or right granted under a plan shall become exercisable in
26
<PAGE> 27
full upon certain "change of control" events as described in the Management
Plan. If any change is made in the stock subject to the Management Plan, or
subject to any right or option granted under the Management Plan (through
merger, consolidation, reorganization, recapitalization, stock dividend,
dividend in property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate structure or
otherwise), the Administrator will make appropriate adjustments to such plans
and the classes, number of shares and price per share of stock subject to
outstanding rights or options. The Management Plan permits awards until April,
2000.
Directors who are not otherwise employed by the Company will not be
eligible for participation in the Management Plan.
The Management Plan provides four types of awards: stock options,
incentive stock rights, stock appreciation rights (including limited stock
appreciation rights) and restricted stock purchase agreements, as described
below.
Options granted under the Management Plan may be either incentive stock
options ("ISOs") or options which do not qualify as ISOs ("non-ISOs") similar to
the options granted under the 1990 Plan.
Incentive stock rights consist of incentive stock units equivalent to
one share of common stock in consideration for services performed for the
Company. If the employment or consulting services of the holder with the Company
terminate prior to the end of the incentive period relating to the units
awarded, the rights shall thereupon be null and void, except that if termination
is caused by death or permanent disability, the holder or his heirs, as the case
may be, shall be entitled to receive a pro-rata portion of the shares
represented by the units, based upon that portion of the incentive period which
shall have elapsed prior to the death or disability.
Restricted stock purchase agreements provide for the sale by the
Company of shares of common stock at a price to be determined by the Board of
Directors, which shares shall be subject to restrictions on disposition for a
stated period during which the purchaser must continue employment with the
Company in order to retain the shares. Payment can be made in cash, a promissory
note or a combination of both. If termination of employment occurs for any
reason within six months after the date of purchase, or for any reason other
than death or by retirement with the consent of the Company after the six month
period, but prior to the time that the restrictions on disposition lapse, the
Company shall have the option to reacquire the shares at the original purchase
price.
Restricted shares awarded under the Management Plan will be subject to
a period of time designated by the Administrator (the "restricted period")
during which the recipient must continue to render services to the Company
before the restricted shares will become vested. The Administrator may also
impose other restrictions, terms and conditions that must be fulfilled before
the restricted shares may vest.
27
<PAGE> 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31,
1999 with respect to each director, each of the named executive officers as
defined in Item 402(a)(3), and directors and executive officers of the Company
as a group, and to the persons known by the Company to be the beneficial owner
of more than five percent of any class of the Company's voting securities.
<TABLE>
<CAPTION>
Number of Shares Percent of Company's
Name of Shareholder Presently Owned(1) Outstanding Stock
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Karl W. Dieckmann(2) 320,743 1.15%
c/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
Senator John H. Ewing(3) 153,125 *
76 Claremont Road
Barnardsville, NJ 07924
William J. Marino(4) 98,617 *
c/o Blue Cross/Blue Shield
of New Jersey
3 Penn Plaza East
Newark, NJ 07105
Donald W. Kappauf(5) 626,248 2.25%
c/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
Donald T. Kelly(6) 88,850 *
c/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
Charles R. Dees, Jr. Phd(7) 11,586 *
c/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
Martin J. Delaney(8) 118,073 *
c/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
Kirk Scoggins (9) 3,286,931 11.79%
c/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C>
Warren M. Cason (10) 2,220,654 7.97%
400 N. Ashley Drive, Suite 2300
Tampa, FL 33602
Warren M. Cason Jr. (11) 1,843,889 6.62%
Trustee of the Dorothy C. Cason
1997 Three Year Grantor Retained
Annuity Trust c/o Warren M. Cason
400 N. Ashley Drive, Suite 2300
Tampa, FL 33602
Dorothy Cason (11) 160,338 *
400 N. Ashley Drive, Suite 2300
Tampa, FL 33602
Mellissa C. Scoggins (12) 721,522 2.59%
Trustee of the Kirk Allan Scoggins
1997 Three Year Grantor Retained Annuity Trust
All officers and directors as a group 4,704,173 16.88%
(8)persons (2,3,4,5,6,7,8,9)
- --------------------------------------------------------------------------------
</TABLE>
* Less than 1 percent.
(1) Ownership consists of sole voting and investment power except as
otherwise noted.
(2) Includes options to purchase 20,000 shares of the Company's common
stock, and excludes unvested options to purchase 5,000 shares of common
stock.
(3) Includes options to purchase 25,000 shares of the Company's common
stock, and excludes unvested options to purchase 5,000 shares of common
stock.
(4) Includes options to purchase 40,000 shares of the Company's common
stock, and warrants to purchase 2,500 shares of common stock, and
excludes unvested options to purchase 5,000 shares of common stock.
(5) Includes options to purchase 247,500 shares of the Company's common
stock, and excludes unvested options to purchase 100,000 shares of
common stock.
(6) Includes options to purchase 80,000 shares of the Company's common
stock, and excludes unvested options to purchase 50,000 shares of
common stock.
(7) Includes options to purchase 6,250 shares of common stock, and excludes
unvested options to purchase 5,000 shares of common stock.
(8) Includes options to purchase 6,250 shares of common stock, and excludes
unvested options to purchase 5,000 shares of common stock.
29
<PAGE> 30
(9) Mr. Scoggins received these shares as a former owner of the TeamStaff
Companies which were acquired by the Company on January 25, 1999. Mr.
Scoggins also joined the Company's Board of Directors on January 25,
1999. Of the 3,286,921 shares currently owned by Mr. Scoggins, 223,442
shares have been placed in escrow to indemnify the Company for certain
representations regarding TeamStaff Companies made by the former owners
of the TeamStaff Companies. Excludes unvested options to purchase
100,000 shares.
(10) Mr. Cason received these shares as a former owner of the TeamStaff
Companies which were acquired by the Company on January 25, 1999. Of
the 2,220,654 shares currently owned by Mr. Cason, 150,957 shares have
been placed in escrow to indemnify the Company for certain
representations regarding TeamStaff Companies made by the former owners
of the TeamStaff Companies.
(11) This Trust received these shares as a former owner of the TeamStaff
Companies which were acquired by the Company on January 25, 1999. Of
the 1,843,889 shares currently owned by this Trust, 125,355 shares have
been placed in escrow to indemnify the Company for certain
representations regarding TeamStaff Companies made by the former owners
of the TeamStaff Companies.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning employment agreements with and compensation
of the Corporation's executive officers and directors, see "Executive
Compensation". The Directors' Plan provides that directors, upon joining the
Board, and for one (1) year thereafter, will be entitled to purchase restricted
stock from the Company at a price equal to 80% of the closing bid price on the
date of purchase up to an aggregate purchase price of $50,000.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements and schedules of the Company are included in
Part II, Item 8 of this report and appear as pages F-1 through F-18 and includes
page S-1.
2. All other schedules have been omitted since the required information
is not applicable or because the information required is included in the
Consolidated Financial Statements or the notes thereto.
3. Exhibit List
The exhibits designated with an asterisk (*) are filed herewith. All
other exhibits have been previously filed with the Commission and, pursuant to
17 C.F.R. Secs. 20l.24 and 240.12b-32, are incorporated by reference to the
document referenced in brackets following the descriptions of such exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
2.1 -- Agreement for purchase of Temp-Staff, Inc. (Exhibit 3 to Form 8-K dated May 17, 1990).
2.2 -- Agreement for purchase of X-L Technical Corp. (Exhibit 2a to Form 8-K dated October 31,
1990).
2.3 -- Plan and Agreement of Merger and Reorganization dated as of October 29, 1998 among the
Company, the Merger Corporations, the TeamStaff Entities and certain individuals and trusts as
</TABLE>
30
<PAGE> 31
<TABLE>
<S> <C> <C>
shareholders of the TeamStaff Entities (filed as Exhibit A to Proxy Statement of Digital Solutions,
Inc, dated November 12, 1998).
3.1 -- Amended and Restated Certificate of Incorporation of Registrant (Filed as Exhibit A to
Definitive Proxy Material dated July 20, 1990)
3.1.1 -- Form of Amendment to Amended and Restated Certificate of Incorporation (filed as Exhibit G to
the Company's Proxy Statement dated November 12, 1998 as filed with the Securities and
Exchange Commission).
3.2 -- By-Laws of Registrant (Exhibit 10.1 to Form 8-K dated March 2l, 1990)
10.2 -- Employment Agreement with Donald Kappauf (Exhibit 3 to Form 8-K dated May 17, 1990).
10.4 -- Agreement between Registrant and First Fidelity Bank, N.A. (Exhibit 10.4 to Form 10-K for fiscal
year ended September 30, 1991).
10.5 -- Agreement between Registrant and Midatlantic Banks, Inc. dated October 11, 1991 (Exhibit 10.5
to Form 10-K for fiscal year ended September 30, 1991).
10.6 -- Lease dated 10/15/91 for office space at 4041 Hadley Road, South Plainfield, New Jersey (Exhibit
10.6 to Form 10-K for fiscal year ended September 30, 1991).
10.7 -- Employment Agreement between Karl Dieckmann and the Company dated November 1, 1991
(Exhibit 10.7 to Form 10-K for fiscal year ended September 30, 1991).
10.6.1 -- Lease dated May 30, 1997 for office space at 300 Atrium, Somerset, New Jersey (Exhibit 10.6.1
to Form 10-K for the fiscal year ended September 30, 1997).
10.15.1 -- Employment agreement between George J. Eklund and the Company dated March 12, 1996
(Exhibit 10.15.1 to Form 10-K for the fiscal year ended September 30, 1997).
10.15.2 -- Amended employment agreement between George J. Eklund and the Company dated December
16, 1997 (Exhibit 10.15.2 to Form 10-K for the fiscal year ended September 30, 1997).
10.10 -- Employment Contract between David L. Clark and the Company dated January 1, 1993.
10.11 -- Bridge financing between Katie and Adam Bridge Partners, L. P. and the Company in June, 1993.
10.12 -- Sales representation agreement between Sid A. Robinson, III and the Company dated April 14, 1993.
10.13 -- Agreement between Staff Leasing of Mississippi, Inc. and the Company for the purchase of
business and assets dated November 4, 1993.
10.15 -- Employment agreement between George J. Eklund and the Company dated September 19, 1994.
10.16.1 -- Seventh Amended Loan Agreement between Registrant and Summit Bank and sixth amended
Promissory Note (Exhibit 10.16.1 to Form 10-K for the fiscal year ended September 30, 1997).
10.17 -- Loan and Security Agreement dated April 28, 1998 among Digital Solutions, Inc. and FINOVA
Capital Corporation (Filed as Exhibit 10.17 to Form 10K filed January 12, 1999).
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C> <C>
10.18 -- Secured Promissory Note in the principal amount of $2,500,000 dated April 28, 1998 in favor of
FINOVA Capital Corporation (Filed as Exhibit 10.18 to Form 10K filed January 12, 1999).
10.19 -- Stock Pledge Agreement (Security Agreement) dated April 28, 1998 between FINOVA Capital
Corporation and Digital Solutions, Inc.(Filed as Exhibit 10.19 to Form 10K filed January 12, 1999).
10.20 -- Employment Agreement between the Company and Kirk Scoggins dated January 25, 1999
(Filed as Exhibit 10.1 to Form 8K dated January 25, 1999).
10.21 -- Registration Rights Agreement between the Company and certain former shareholders of the
TeamStaff Companies dated as of January 25, 1999 (Filed as Exhibit 10.2 to Form 8K
dated January 25, 1999)
10.22 -- Amended and Restated Loan and Security Agreement between the Company and Finova
Capital Corporation dated January 25, 1999 (Filed as Exhibit 10.3 to Form 8K dated
January 25, 1999).
10.23 -- Amended and Restated Note in the principal amount of $2,166,664 dated January 25,
1999 (Filed as Exhibit 10.4 to Form 8K dated January 25, 1999).
10.24 -- Secured Note in the amount of $2,500,000 in favor of Finova Capital Corporation dated
January 25, 1999 (Filed as Exhibit 10.5 to Form 8K dated January 25, 1999).
10.25 -- Secured Note in the amount of $750,000 in favor of Finova Capital Corporation dated
January 25, 1999 (Filed as Exhibit 10.6 to Form 8K dated January 25, 1999).
10.26 -- Schedule to Amended and Restated Loan Agreement dated January 25, 1999 with Finova
Capital Corporation (Filed as Exhibit 10.7 to Form 8K dated January 25, 1999).
21.0* -- Subsidiaries of Registrant.
23.1* -- Consent of Arthur Andersen, LLP to the incorporation of its report on the Company's financial
statements into the Company's previously filed Registration Statements on Form S-3 file number
33-85526, 33-70928, 33-91700 and 33-09313.
27.0* -- Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
None
(c) Exhibits. See Item (a)(3) above.
(d) Financial Statement Schedule. See Schedule II annexed hereto and
appearing at page S-1.
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/Donald W. Kappauf
-------------------------------------
Donald W. Kappauf
President and Chief Executive Officer
Dated: January 11, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/Rocco Marano Director January 11, 2000
- -----------------------------
Rocco Marano
/s/Karl W. Dieckmann Chairman of the Board January 11, 2000
- -----------------------------
Karl W. Dieckmann
/s/John H. Ewing Director January 11, 2000
- -----------------------------
Senator John H. Ewing
/s/William J. Marino Director January 11, 2000
- -----------------------------
William J. Marino
/s/Charles R. Dees, Jr. Phd Director January 11, 2000
- -----------------------------
Charles R. Dees, Jr. Phd
/s/Martin J. Delaney Director January 11, 2000
- -----------------------------
Martin J. Delaney
/s/Kirk A. Scoggins President-PEO January 11, 2000
- ----------------------------- Director
Kirk A. Scoggins
/s/Donald W. Kappauf President & Chief January 11, 2000
- ----------------------------- Executive Officer
Donald W. Kappauf
/s/Donald T. Kelly Chief Financial Officer January 11, 2000
- ----------------------------- & Corporate Secretary
Donald T. Kelly
</TABLE>
33
<PAGE> 34
TEAMSTAFF, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report Of Independent Public Accountants F-2
Consolidated Balance Sheets As Of September 30, 1999 and 1998 F-3
Consolidated Statements Of Operations For The Years Ended
September 30, 1999, 1998 and 1997 F-5
Consolidated Statements Of Shareholders' Equity For The Years Ended
September 30, 1999, 1998 and 1997 F-6
Consolidated Statements Of Cash Flows For The Years Ended F-7
September 30, 1999, 1998 and 1997
Notes To Consolidated Financial Statements F-8
Schedule I -- Valuation And Qualifying Accounts For The Years Ended
September 30, 1999, 1998 and 1997 S-1
Schedules other than those listed above have been omitted
as they are either not required or because the related
information has been included in the notes to
consolidated financial statements
</TABLE>
F-1
<PAGE> 35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
TeamStaff, Inc.:
We have audited the accompanying consolidated balance sheets of TeamStaff, Inc.
(formerly Digital Solutions, Inc.) and subsidiaries as of September 30, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended September
30, 1999. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
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 financial statements referred to above present fairly, in
all material respects, the financial position of TeamStaff, Inc. and
subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to the financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and regulations and is not part
of the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in our audit of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
December 14, 1999
F-2
<PAGE> 36
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,948,000 $ 1,530,000
Restricted cash 362,000 0
Accounts receivable, net of allowance for doubtful accounts
of $209,000 and $284,000 at September 30, 1999 and 1998 13,557,000 6,891,000
Deferred tax asset 1,464,000 380,000
Other current assets 552,000 311,000
----------- -----------
Total current assets 17,883,000 9,112,000
----------- -----------
EQUIPMENT AND IMPROVEMENTS:
Equipment 3,748,000 3,336,000
Leasehold improvements 100,000 47,000
----------- -----------
3,848,000 3,383,000
Less - accumulated depreciation and amortization 3,023,000 2,591,000
----------- -----------
825,000 792,000
DEFERRED TAX ASSET 328,000 1,782,000
INTANGIBLE ASSETS, net of accumulated amortization of $1,680,000
and $1,082,000 at September 30, 1999 and 1998 16,798,000 4,096,000
OTHER ASSETS 548,000 866,000
----------- -----------
$36,382,000 $16,648,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-3
<PAGE> 37
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------------------------------ ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,034,000 $ 540,000
Accounts payable 2,924,000 1,792,000
Accrued expenses and other current liabilities 10,957,000 3,461,000
------------ ------------
Total current liabilities 14,915,000 5,793,000
LONG-TERM DEBT, net of current portion 4,502,000 2,981,000
------------ ------------
Total liabilities 19,417,000 8,774,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; authorized 40,000,000 shares;
issued 27,932,513 and 19,356,833; outstanding 27,868,413 and
19,356,833 at September 30, 1999 and 1998 28,000 19,000
Additional paid-in capital 21,073,000 13,692,000
Accumulated deficit (4,061,000) (5,837,000)
Treasury stock, 64,100 shares at cost (75,000) 0
------------ ------------
16,965,000 7,874,000
------------ ------------
$ 36,382,000 $ 16,648,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-4
<PAGE> 38
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended September 30,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES $ 244,830,000 $ 139,435,000 $ 122,559,000
DIRECT EXPENSES 228,294,000 129,747,000 113,894,000
------------- ------------- -------------
Gross profit 16,536,000 9,688,000 8,665,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 12,181,000 7,389,000 10,306,000
DEPRECIATION AND AMORTIZATION 1,124,000 661,000 1,010,000
------------- ------------- -------------
Income (loss) from operations 3,231,000 1,638,000 (2,651,000)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 492,000 323,000 196,000
Interest expense (1,133,000) (554,000) (377,000)
Other income 35,000 0 0
------------- ------------- -------------
(606,000) (231,000) (181,000)
------------- ------------- -------------
Income (loss) before income taxes 2,625,000 1,407,000 (2,832,000)
INCOME TAX BENEFIT (EXPENSE) (849,000) 1,296,000 0
------------- ------------- -------------
Net income (loss) $ 1,776,000 $ 2,703,000 ($2,832,000)
============= ============= =============
EARNINGS (LOSS) PER SHARE - BASIC $ 0.07 $ 0.14 ($0.15)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 24,947,321 19,271,897 19,070,349
============= ============= =============
EARNINGS (LOSS) PER SHARE - DILUTED $ 0.07 $ 0.14 ($0.15)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND EQUIVALENTS
OUTSTANDING - DILUTED 25,008,864 19,403,298 19,070,349
============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-5
<PAGE> 39
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------ Additional ---------------------
Paid-In Accumulated
Shares Amount Capital Deficit Shares Amount
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1996 18,786,609 $ 19,000 $12,857,000 ($5,708,000) - $ -
Exercise of stock options 204,471 - 53,000 - - -
Exercise of stock warrants 117,347 - 181,000 - - -
Stock issued for employee bonus 33,333 - 100,000 - - -
Proceeds related to LNB settlement,
net of expenses - - 202,000 - - -
Net loss - - - (2,832,000) - -
--------------------------------------------------------------------------------
BALANCE, September 30, 1997 19,141,760 19,000 13,393,000 (8,540,000) - -
Common stock issued in connection
with financing 156,250 - 250,000 - - -
Common stock issued 58,823 - 49,000 - - -
Net income - - - 2,703,000 - -
--------------------------------------------------------------------------------
BALANCE, September 30, 1998 19,356,833 19,000 13,692,000 (5,837,000) - -
Common stock sold 5,336 - 9,000 - - -
Common stock repurchased - - - - 64,100 (75,000)
Exercise of stock options 20,000 - 16,000 - - -
Exercise of stock warrants 5,000 - 6,000 - - -
Common stock issued in connection
with acquisition 8,545,344 9,000 7,302,000 - - -
Non-cash compensation expense
related to warrants - - 44,000 - - -
Proceeds related to LNB settlement,
net of expenses - - 4,000 - - -
Net income - - - 1,776,000 - -
--------------------------------------------------------------------------------
BALANCE, September 30, 1999 27,932,513 $ 28,000 $21,073,000 ($4,061,000) 64,100 ($75,000)
================================================================================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-6
<PAGE> 40
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended September 30,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,776,000 $ 2,703,000 ($2,832,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities, net of
acquired business-
Deferred income taxes 600,000 (1,402,000) 0
Depreciation and amortization 1,124,000 661,000 1,010,000
Provision for doubtful accounts 27,000 (247,000) 1,120,000
Stock issued for employee bonus 0 0 100,000
Non-cash compensation expense 44,000 0 0
Changes in operating assets and liabilities-
Increase in accounts receivable (4,016,000) (824,000) (602,000)
Decrease (increase) in other current assets 458,000 (289,000) (106,000)
Decrease (increase) in other assets 225,000 (249,000) 0
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 3,325,000 (1,139,000) 1,855,000
(Increase) decrease in restricted cash (362,000) 738,000 417,000
----------- ----------- -----------
Net cash provided by (used in) operating
activities 3,201,000 (48,000) 962,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (249,000) (184,000) (347,000)
Acquisition of TeamStaff Companies, net of cash acquired (4,509,000) 0 0
----------- ----------- -----------
Net cash used in investing activities (4,758,000) (184,000) (347,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit $ 1,015,000 $ 1,103,000 $ 410,000
Proceeds from borrowings on long-term debt 2,500,000 2,500,000 0
Principal payments on long-term debt (792,000) (167,000) 0
Payments on revolving line of credit (663,000) (2,697,000) (620,000)
Repayments on capital leases obligations (45,000) (117,000) 0
Net proceeds from issuance of common stock, net of expenses 9,000 299,000 0
Net proceeds from the exercise of stock options and warrants 22,000 0 234,000
Repurchase of common shares (75,000) 0 0
Proceeds from LNB settlement, net of expenses 4,000 0 202,000
----------- ----------- -----------
Net cash provided by financing activities 1,975,000 921,000 226,000
----------- ----------- -----------
Net increase in cash and cash
equivalents 418,000 689,000 841,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,530,000 841,000 0
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,948,000 $ 1,530,000 $ 841,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for-
Interest $ 790,000 $ 439,000 $ 363,000
=========== =========== ===========
Taxes $ 374,000 $ 80,000 $ 31,000
=========== =========== ===========
</TABLE>
During 1999 the Company issued common stock valued at $7.3 million in
connection with the acquisition of the TeamStaff Companies.
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-7
<PAGE> 41
TEAMSTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 and El Paso,
Texas; and Clearwater and Tampa, Florida and sales service centers
in New York, New York; El Paso and Houston, Texas; Tampa, Orlando
and Clearwater, Florida; Atlanta, Georgia; 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION-
The accompanying consolidated financial statements include those of
TeamStaff, Inc., and its wholly-owned subsidiaries. The results of
operations of acquired companies within the period reflected have
been included in the consolidated financial statements from the date
of acquisition. All significant intercompany balances and
transactions have been eliminated in the consolidated financial
statements.
USE OF ESTIMATES-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and 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. Actual results
could differ from those estimates.
REVENUE RECOGNITION-
The Company recognizes revenue in connection with its professional
employer organization program ("PEO") and its temporary placement
service program when the services have been provided. Revenues
represent the Company's billings to customers, with the
corresponding cost of providing those services reflected as direct
expenses. Payroll services, commissions and other fees for
administrative services are recognized as revenue as the related
service is provided.
CONCENTRATIONS OF CREDIT RISK-
The Company's customer base consists of over 2,150 client companies,
representing approximately 42,000 employees (including payroll
services) as of September 30, 1999. The Company's client base is
broadly distributed throughout a wide variety of industries;
however, more than 70% of the customers in the payroll processing
area are in the construction industry and substantially all of
TeamStaff-RX customers are in the healthcare industry.
CASH EQUIVALENTS-
For purposes of the statements of cash flows, the Company considers
all liquid investments purchased with a maturity of three months or
less to be cash equivalents.
EQUIPMENT AND IMPROVEMENTS-
Equipment and improvements are stated at cost. Depreciation and
amortization are provided using straight-line method over the
estimated useful asset lives (3 to 5 years) and the shorter of the
lease term or estimated useful life for leasehold improvements.
F-8
<PAGE> 42
INTANGIBLE ASSETS-
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Trade Name $ 4,700,000 $ 0
Goodwill 13,778,000 5,178,000
------------ ------------
18,478,000 5,178,000
Accumulated Amortization (1,680,000) (1,082,000)
------------ ------------
$ 16,798,000 $ 4,096,000
============ ============
</TABLE>
Goodwill represents the excess of the cost of companies acquired
over the fair value of their net assets at the acquisition date and
is being amortized on a straight line basis over 20 to 25 years.
Trade name is being amortized on a straight line basis over 25
years. Amortization expense charged to operations was approximately
$598,000 for fiscal year 1999, $247,000 for fiscal year 1998 and
$434,000 for fiscal year 1997. Amortization expense for 1997
includes a $261,000 provision for goodwill impairment associated
with the Company's decision not to remain in the insurance business.
LONG-LIVED ASSETS-
The Company reviews it long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Management of the Company
believes that no such events or changes in circumstances have
occurred. If such events or changes in circumstances are present, a
loss is recognized to the extent that the carrying value of the
asset is in excess of the sum of the undiscounted cash flows
expected to result from the use of the asset and its eventual
disposition.
INCOME TAXES-
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined
based on the differences between the financial statement and the tax
basis of assets and liabilities using enacted tax rates currently in
effect.
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.
F-9
<PAGE> 43
In accordance with SFAS 128, the following table reconciles net
income (loss) and share amounts used to calculate basic earnings per
share and diluted earnings per share:
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 1,776,000 $ 2,703,000 ($ 2,832,000)
------------ ------------ ------------
Denominator:
Weighted average number of common shares
outstanding - Basic 24,947,321 19,271,897 19,070,349
Incremental shares for assumed conversions
of stock options/warrants 61,543 131,401 0
------------ ------------ ------------
Weighted average number of common and
equivalent shares outstanding-Diluted 25,008,864 19,403,298 19,070,349
------------ ------------ ------------
Earnings (loss) per share - Basic and Diluted $ 0.07 $ 0.14 ($ 0.15)
============ ============ ============
</TABLE>
Stock options and warrants outstanding at September 30, 1999 to
purchase 883,379 shares of common stock were not included in the
computation of Diluted EPS as they were antidilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS-
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP 98-1), "Accounting for the Costs of
Computer Software Development or Obtained for Internal Use." SOP
98-1 requires that computer software costs that are incurred in the
preliminary project stage be expensed as incurred and that criteria
be met before capitalization of costs to develop or obtain computer
software for internal use. Adoption of SOP 98-1 is required for
fiscal years beginning after December 15, 1998. The Company does not
believe that the new standard will have a material impact on the
Company's consolidated financial statements. In April 1998, the
Accounting Standards Executive Committee issued SOP 98-5, "Reporting
on the Costs of Start-Up Activities." SOP 98-5 is required for
fiscal years beginning after December 15, 1998. The Company does not
believe that the new standard will have a material impact on the
Company's consolidated financial statements.
RECLASSIFICATIONS-
Certain amounts in the prior years financial statements have been
reclassified to conform to the current year presentation.
(3) INCOME TAXES:
At September 30, 1999, the Company had available operating loss
carryforwards of approximately $4,654,000 to reduce future periods'
taxable income. The carryforwards expire in various years beginning in
2004 and extending through 2012.
The Company has recorded a $1,792,000 and a $2,162,000 deferred tax
asset at September 30, 1999 and 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. During 1999 and 1998 the Company reduced its
valuation allowance by $400,000 and $2,280,000, respectively. In order
for the Company to realize a $1,792,000 deferred tax asset, the Company
would have to generate approximately $5,000,000 in future taxable
income. 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's operations in prior years.
F-10
<PAGE> 44
An analysis of the Company's deferred tax asset is as follows-
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 1,675,000 $ 2,350,000
Allowance for doubtful accounts 75,000 102,000
Other items, net 42,000 110,000
---------------------------
Gross deferred income tax asset 1,792,000 2,562,000
Valuation allowance - (400,000)
---------------------------
Deferred income tax asset $ 1,792,000 $ 2,162,000
===========================
</TABLE>
The components of the income tax expense (benefit) for income taxes
are summarized as follows-
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current expense $ 249,000 $ 106,000 $ 0
Deferred expense (benefit) 600,000 (1,402,000) 0
----------- ----------- -----------
Total expense (benefit) $ 849,000 ($1,296,000) $ 0
=========== =========== ===========
</TABLE>
The following table indicates the significant elements contributing
to the difference between the Federal statutory rates and the
Company's effective tax rate-
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 34% 34% (34%)
State taxes net of federal income tax benefit 7 5 0
Valuation allowance 0 0 34
Reversal of valuation allowance (15) (134) 0
Goodwill amortization 4 0 0
Other 2 3 0
---- ---- ----
32% (92%) 0%
==== ==== ====
</TABLE>
(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% (11.25% as of September 30, 1999) and a $2 million revolving line of
credit secured by certain accounts receivable of the Company at prime plus 1%
(9.25% as of September 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.
The credit facility was 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.
F-11
<PAGE> 45
On January 25, 1999, 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% (11.25% as of
September 30, 1999) and the bridge loan bears an interest rate of 12%. 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 revised 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.
Long-term debt at September 30, 1999 and 1998 consists of the
following-
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revolving Loan $ 1,455,000 $ 1,103,000
Term Loan 4,041,000 2,333,000
Capital leases 40,000 85,000
----------- -----------
5,536,000 3,521,000
Less- Current portion (1,034,000) (540,000)
----------- -----------
$ 4,502,000 $ 2,981,000
=========== ===========
</TABLE>
Maturities of long-term debt as of September 30, 1999 are as follows-
<TABLE>
<CAPTION>
Year Ending
September 30,
-------------
<S> <C>
2000 $1,034,000
2001 3,294,000
2002 1,208,000
----------
$5,536,000
==========
</TABLE>
(5) ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities at September 30, 1999
and 1998 consist of the following-
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Payroll and payroll taxes $ 8,626,000 $ 2,415,000
Worker's compensation insurance 1,006,000 403,000
Other 1,325,000 643,000
----------- -----------
$10,957,000 $ 3,461,000
=========== ===========
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES:
LEASES-
Minimum payments under noncancellable lease obligations at September
30, 1999 are as follows-
<TABLE>
<CAPTION>
Year Ending
September 30,
-------------
<S> <C>
2000 $730,000
2001 776,000
2002 742,000
2003 729,000
2004 742,000
Thereafter 1,246,000
----------
$4,965,000
==========
</TABLE>
Rent expense under all operating leases was $794,000 in 1999,
$630,000 in 1998 and $537,000 in 1997.
F-12
<PAGE> 46
WORKERS' COMPENSATION POLICY-
Generally accepted accounting principles require that all incurred,
but not paid claims, as well as an estimate for claims incurred,
but not reported ("IBNR"), be accrued on the balance sheet as a
current liability, although a portion of the claims may not be paid
in the following 12 months. In September 1998, the Company
negotiated and settled with Liberty Mutual Insurance Company for
its liability on all workers' compensation claims incurred during
the three year period 1995, 1996 and 1997. In return for
terminating all future exposure under the Liberty Mutual workers'
compensation policy, the Company agreed to make a one-time payment
of approximately $919,000. The settlement was funded by allocating
$738,000 of the Company's restricted cash, which had been used to
collateralize a portion of the letter of credit to Liberty Mutual
and by internal funds of $181,000.
On April 1, 1997, the Company entered into a workers' compensation
policy with a new carrier. Under the terms of the new workers'
compensation insurance program the Company is required to fund the
anticipated loss reserves on a current basis. On April 1, 1999, the
Company terminated its program with the insurance carrier and
consolidated its workers' compensation program under a new carrier
who had been the carrier for the TeamStaff Companies.
LEGAL PROCEEDINGS-
In October 1995, the Company entered into a note and finance
agreement with LNB Investment Corporation ("LNB") providing for the
loan to the Company of up to $3,000,000. The loan was for a term of
15 months and was to be secured by shares of the Company's common
stock having a market value of no less than four times the
outstanding balance of the loan. LNB agreed not to sell or otherwise
liquidate the shares unless the Company were to default under the
loan agreement and failed to cure such default after notice. A
maximum of 7,500,000 shares were pledged as collateral.
The Company issued 1,783,334 shares in the name of LNB and delivered
the shares to a depository to secure the first portion of the loan
of $1,000,000. In January 1996, the Company determined that the
shares pledged as collateral had been transferred and sold in
violation of the loan and finance agreement. As a result, the
financing agreement was terminated and never funded. Through the
efforts of the Company, 1,258,334 of these shares were recovered and
the Company received proceeds of $229,000 for a partial payment on
the 525,000 shares not recovered.
In March 1996, the Company commenced action against LNB, Donaldson,
Lufkin & Jenrette Securities Corporation and other individuals to
recover damages on account of the wrongful sale of the Company's
common stock. On July 2, 1997, the Company settled the action.
Without admitting or denying the allegations in the complaint, the
defendants agreed to pay $676,000 of which $426,000 ($202,000, net
of expenses) has been paid with the balance of $250,000 to be paid
by LNB on or before August 4, 1997. The payment was not made by LNB
as of December 28, 1998 and as a result, the Company has commenced
collection proceedings. The amount due is secured by a confession of
judgment and a mortgage in the amount of $625,000. The payments
under the settlement agreement are in addition to $229,000
previously received from LNB bringing the total recovered to
approximately $905,000, assuming LNB complies with the terms of the
settlement and remits the last payment of $250,000. The agreement
also provides that upon payment of all sums due under the settlement
agreement, LNB shall be deemed to have made full restitution to the
Company for the claims alleged in the action.
The Company's subsidiary, DSI Staff Connxions-Southwest, Inc., is
the defendant in a lawsuit 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 was a defendant in a lawsuit 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 denied the material
allegations of the complaint. The plaintiffs had submitted a
calculation of damages of $300,000 for the claims identified in the
lawsuit which included damages for clients which never became
clients of the Company. To avoid further costs of litigation and
without admitting any claims of the plaintiff, the Company paid
$21,500 to settle this case in 1999.
F-13
<PAGE> 47
As previously disclosed, several of the entities operating under the
trade name "The TeamStaff Companies", which were acquired by the
Company in January 1999, were 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 was 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, (the "Department") as the receiver of the
Fund. Because of management's knowledge of the USEC proceedings and
the amount of potential assessments at the time of acquisition, the
acquisition agreements governing the Company's acquisition of the
TeamStaff Companies provided indemnification by the sellers in favor
of the Company for damages of up to $1,222,000. The financial
statements of the TeamStaff Companies at the time of acquisition
included a reserve of $391,000 for which the Company would be
responsible for. On October 18, 1999 the Company and the former
shareholders of the TeamStaff Companies entered into an agreement
with the Department that settled all claims. The Company paid
$391,000 to the Department while the former shareholders of the
TeamStaff Companies entered into a payment plan with the Department
for the remainder of the settlement amount in excess of $391,000. On
December 2, 1999 the receivership court, which had jurisdiction
over the lawsuit, approved the settlement agreement. There is no
remaining liability on this matter against the Company.
At September 30, 1999 the Company is involved in various other legal
proceedings incurred in the normal course of business. In the
opinion of management, after consultation with its counsel, none
of these proceedings would have a material effect, if adversely
decided, on the consolidated financial position or results of
operations of the Company.
(7) SHAREHOLDERS' EQUITY:
On December 1, 1997, as a requirement of the extension of its
bank line of credit, the Company raised $250,000. These funds
were an equity investment provided by its directors, a former
director and executive officers.
During 1999, the Company purchased 64,100 shares of its common
stock for $75,000.
STOCK WARRANTS-
The following is a summary of the outstanding warrants to purchase
the Company's common stock at September 30, 1999 as a result of
various debt and equity offerings that have occurred since the
Company's inception:
<TABLE>
<CAPTION>
Number of Shares of
Exercise Period Exercise Period Exercise Price Per Common Stock
From To Common Share Reserved
- --------------- --------------- ------------------ -------------------
<S> <C> <C> <C>
October 1991 October 2001 0.75 100,000
October 1995 October 2000 2.25 25,000
December 1995 December 2000 1.56 5,000
June 1996 June 2001 2.70 219,879
February 1998 February 2003 2.06 25,000
January 1999 January 2004 1.50 75,000
-------
449,879
=======
</TABLE>
For warrants issued to third parties for services, the Company
utilizes the Black-Scholes option pricing model to determine fair
value and compensation expense.
STOCK OPTION PLANS -
In April 1990 the Company adopted three stock option plans, the 1990
Employees Stock Option Plan, the Non-Executive Director Stock Option
Plan, and the Senior Management Incentive Plan (collectively the
"1990 Plans"). The 1990 Plans will remain in effect until April 2000
or unless terminated sooner by the Board of Directors.
The 1990 Employees Stock Option Plan (the "Employee Plan") provides
for options to be granted to employees, including certain officers
of the Company, for the purchase of up to 1,000,000 shares of
common stock. Some of the options granted under the Employee Plan
are intended to qualify as incentive stock options under the
Internal Revenue Code. The exercise price of incentive stock
options granted may not be less than the fair market value of the
shares on the date of grant, or in certain circumstances, an option
price at least equal to 110% of the fair market value of the stock
at the time the option is granted. Options granted under the plan
may not be exercised more than ten years from the date of the grant
(or in certain circumstances, five years from the date of grant).
F-14
<PAGE> 48
The Non-Executive Director Stock Option Plan (the "Director Plan"),
provides for the issuance of options for the purchase of up to
500,000 shares of common stock. Eligible participants are directors
of the Company who are not employees of the Company and non-employee
directors of any advisory board established by the Company. Under
the terms of the Director Plan, the exercise price of options
granted will equal 100% of the fair market value of the common stock
at the date the options are granted. Options will be granted to
eligible participants as follows: 5,000 upon becoming non-executive
directors and 5,000 each September 1, commencing September 1, 1990
provided such person had been eligible for the preceding 12 months.
The term of each option commences on the date it is granted and
expires five years from grant date unless terminated sooner as
provided in the Director Plan. The Directors' Plan also provides
that directors, upon joining the Board, and for one (1) year
thereafter, will be entitled to purchase restricted stock from the
Company at a price equal to 80% of the closing bid price on the date
of purchase up to an aggregate purchase price of $50,000. The
Company expenses the 20% discount as compensation expense.
The Senior Management Incentive Plan (the "Management Plan")
provides for the issuance of stock, options and other stock rights
to executive officers and other key employees who render significant
services to the Company. Under the terms of the Management Plan, the
exercise price of options granted will equal 100% of the fair market
value of the common stock at the date the options are granted. A
total of 5,000,000 shares of common stock have been reserved for
issuance under the Management Plan. Awards made under the Management
Plan are generally subject to three-year vesting periods (subject to
the discretion of the Board of Directors), but may become
exercisable in full upon certain "change of control" events as
defined in the Management Plan.
The following tables summarizes the activity in the Company's stock
option plans for the years ended September 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE
OF EXERCISE FAIR
SHARES PRICE VALUE
--------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, September 30, 1996 1,297,348 $2.73
Granted 105,000 $1.88 $1.12
Exercised (204,471) $1.79
Cancelled (353,502) $3.41
------------------------------------
Options outstanding, September 30, 1997 844,375 $2.72
Granted 260,000 $1.95 $1.05
Cancelled (98,250) $2.79
------------------------------------
Options outstanding, September 30, 1998 1,006,125 $2.52
Granted 409,000 $1.10 $.60
Exercised (20,000) $.81
Cancelled (503,625) $3.09
------------------------------------
Options outstanding, September 30, 1999 891,500 $1.59
------------------------------------
</TABLE>
As of September 30, 1999 and 1998, 470,500 and 768,125 options,
respectively, were exercisable.
F-15
<PAGE> 49
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
RANGE OF OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 9/30/99 LIFE PRICE AT 9/30/99 PRICE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.75 - 1.25 495,500 3.9 $1.11 126,500 $1.18
$1.53 - 2.32 343,000 3.2 $1.93 291,000 $1.93
$2.43 - 4.00 25,000 .1 $2.54 25,000 $2.54
$4.43 - 6.50 28,000 1.9 $5.04 28,000 $5.04
</TABLE>
In accordance with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
was effective October 1, 1996, the fair value of option grants is
estimated on the date of grant using the Black-Scholes
option-pricing model for proforma footnote purposes with the
following assumptions used for options granted subsequent to October
1, 1996; dividend yield of 0%, risk-free interest rate of 5.73%,
5.73% and 6.31% in 1999, 1998 and 1997, and expected option life of
4 years. Expected volatility was assumed to be 68%, 64% and 73% in
1999, 1998 and 1997, respectively.
As permitted by SFAS 123, the Company has chosen to continue to
account for its employee stock-based compensation at their intrinsic
value in accordance with Accounting Principle Board Opinion No. 25.
Accordingly no compensation expense has been recognized for its
stock option compensation plans. Had the fair value method of
accounting been applied to the Company's stock option plans, the
tax-effected impact would be as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------- ------------------------------------
(Thousands of dollars except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C>
Net income (loss) as reported $ 1,776 $ 2,703 ($2,832)
Estimated fair value of option grants, net of tax (153) (82) (76)
------------------------------------
Net income (loss) adjusted $ 1,623 $ 2,621 ($2,908)
Adjusted earnings (loss) per share - Basic $ 0.07 $ 0.14 ( $0.15)
====================================
Adjusted earnings (loss) per share - Diluted $ 0.06 $ 0.14 ( $0.15)
====================================
</TABLE>
(8) ACQUISITION OF THE TEAMSTAFF COMPANIES:
On January 25, 1999 TeamStaff, Inc., completed the acquisition of 10 entities
operating as TeamStaff Companies through the issuance of 8,233,334 shares of
common stock and $3.2 million in cash in exchange for all capital stock of the
TeamStaff Companies and for the repayment of debt. The Company 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
operations of the acquired companies have been included in the consolidated
financial statements appearing in this form 10-K since the date of the
acquisition. The purchase price has been 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. The application of the purchase method of
accounting resulted in approximately $13.3 million in excess of purchase price
over net tangible assets acquired. The excess of the purchase price over the net
tangible assets acquired has been allocated to trade name ($4.7 million) and
goodwill ($8.6 million) which are being amortized over 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, 1996.
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Net sales $279,421,000 $252,936,000
Net income $ 1,487,000 $ 1,722,000
Earnings per common share - basic $ 0.05 $ 0.06
=============================
Earnings per common share - diluted $ 0.05 $ 0.06
=============================
</TABLE>
F-16
<PAGE> 50
(9) SEGMENT REPORTING:
During fiscal 1999, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information: ("SFAS No. 131"). SFAS No. 131 establishes standards for
reporting information about operating segments and related disclosures about
products, geographic information and major customers.
The Company operates three different lines of business: Professional Employer
Organization(PEO), temporary staffing and payroll services. Each business is
managed by individual executives.
The PEO segment provides services such as payroll processing, personnel and
administration, benefits administration, workers' compensation administration,
and tax filing services to small business owners. Essentially, in this business
segment, the Company provides services that function as the human resource
department for small to medium sized companies wherein the Company becomes a
co-employer.
The Company provides two distinctive forms of temporary staffing: one for
technical employees such as engineers, information systems specialists and
project managers and another for medical specialists, such as radiologic
technologists, diagnostic sonographers, cardiovascular technologists, radiation
therapists and other medical professionals with hospitals, clinics and therapy
centers. Temporary staffing enables clients to attain management and
productivity goals by matching highly trained professionals and technical
personnel to specific project requirements.
F-17
<PAGE> 51
Through its payroll services business segment, the Company provides basic
payroll services to its clients, 70% of whom are in the construction industry.
Services provided include the preparation of payroll checks, filing of taxes,
government reports, W-2's, remote processing directly to the client's offices
and certified payrolls.
Corporate is a separate unit which reflects all corporate expenses, amortization
of recently acquired goodwill, interest expense on all debt as well as
depreciation on corporate assets and miscellaneous charges.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The company evaluates the
performance of its business lines based on pre-tax income.
The following table represents the financial results for each of the Company's
segments:
<TABLE>
<CAPTION>
PROFESSIONAL TEMPORARY PAYROLL
1999 EMPLOYER SERVICES STAFFING SERVICES CORPORATE CONSOLIDATED
- ---- ----------------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES 204,797,000 36,421,500 3,611,500 - 244,830,000
DEPRECIATION & AMORTIZATION 265,000 208,000 122,000 529,000 1,124,000
INCOME/(LOSS) FROM OPERATIONS 2,641,000 3,324,000 1,477,500 (4,211,500) 3,231,000
INTEREST INCOME 77,000 350,000 65,000 492,000
INTEREST EXPENSE - (1,133,000) (1,133,000)
OTHER INCOME 35,000 - 35,000
INCOME/(LOSS) BEFORE INCOME TAXES 2,753,000 3,674,000 1,477,500 (5,279,500) 2,625,000
CAPITAL SPENDING 10,000 72,000 2,000 165,000 249,000
TOTAL ASSETS 11,371,000 6,651,000 660,500 17,699,500 36,382,000
1998
- ----
REVENUES 104,193,000 31,706,000 3,536,000 - 139,435,000
DEPRECIATION & AMORTIZATION 165,000 184,000 121,000 191,000 661,000
INCOME/(LOSS) FROM OPERATIONS 1,338,500 2,011,000 1,444,500 (3,156,000) 1,638,000
INTEREST INCOME 35,000 240,000 48,000 323,000
INTEREST EXPENSE - (554,000) (554,000)
OTHER INCOME - -
INCOME/(LOSS) BEFORE INCOME TAXES 1,373,500 2,251,000 1,444,500 (3,662,000) 1,407,000
CAPITAL SPENDING - 87,000 19,000 78,000 184,000
TOTAL ASSETS 4,500,000 4,559,000 598,000 6,991,000 16,648,000
1997
- ----
REVENUES
93,858,000 25,277,000 3,424,000 - 122,559,000
DEPRECIATION & AMORTIZATION 169,000 226,000 107,000 508,000 1,010,000
INCOME/(LOSS) FROM OPERATIONS (454,000) 484,000 1,460,000 (4,141,000) (2,651,000)
INTEREST INCOME 13,000 136,000 47,000 196,000
INTEREST EXPENSE - (377,000) (377,000)
OTHER INCOME - -
INCOME/(LOSS) BEFORE INCOME TAXES (441,000) 620,000 1,460,000 (4,471,000) (2,832,000)
CAPITAL SPENDING 25,000 117,000 - 205,000 347,000
TOTAL ASSETS 3,205,000 2,106,000 604,000 8,248,000 14,163,000
</TABLE>
The Company has no revenue derived outside of the United States.
F-18
<PAGE> 52
SCHEDULE I
TEAMSTAFF, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(c) Additions
Charged to
(b) (reversed (d)
Balance at from) Costs Deductions - (e) Balance
Beginning of and Net Write- at End of
(a) Description Year Expenses Offs Year
- ------------------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts, year ended-
September 30, 1999 $ 284,000 $ 27,000 ($ 102,000) $ 209,000
----------- ----------- ----------- -----------
September 30, 1998 $ 862,000 ($ 247,000) ($ 331,000) $ 284,000
=========== =========== =========== ===========
September 30, 1997 $ 339,000 $ 1,120,000 ($ 597,000) $ 862,000
=========== =========== =========== ===========
</TABLE>
S-1
<PAGE> 53
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
21.0 -- Subsidiaries of Registrant.
23.1 -- Consent of Arthur Andersen, LLP to the incorporation of its
report on the Company's financial statements into the
Company's previously filed Registration Statements on Form
S-3 file number 33-85526, 33-70928, 33-91700 and 33-09313.
27.0 -- Financial Data Schedule.
<PAGE> 1
EXHIBIT 21
TEAMSTAFF, INC.
SUBSIDIARIES OF REGISTRANT
DSI-Staff ConnXions-Northeast, Inc.
DSI-Staff ConnXions-Southwest, Inc.
TeamStaff Rx, Inc.
TeamStaff Solutions, Inc.
TeamStaff I, Inc.
TeamStaff II, Inc.
TeamStaff III, Inc.
TeamStaff IV, Inc.
TeamStaff V, Inc.
TeamStaff VI, Inc.
TeamStaff VII, Inc.
TeamStaff VIII, Inc.
TeamStaff Insurance, Inc.
TeamStaff IX, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into TeamStaff, Inc.'s previously
filed Registration Statements on Form S-3 File No. 33-85526, 33-70928,
33-91700, and 33-09313.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 11, 2000
34
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 2,310,000
<SECURITIES> 0
<RECEIVABLES> 13,348,000
<ALLOWANCES> (209,000)
<INVENTORY> 0
<CURRENT-ASSETS> 17,883,000
<PP&E> 3,848,000
<DEPRECIATION> (3,023,000)
<TOTAL-ASSETS> 36,382,000
<CURRENT-LIABILITIES> 14,915,000
<BONDS> 0
0
0
<COMMON> (28,000)
<OTHER-SE> (16,937,000)
<TOTAL-LIABILITY-AND-EQUITY> 36,382,000
<SALES> 0
<TOTAL-REVENUES> 244,830,000
<CGS> 0
<TOTAL-COSTS> 228,294,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (27,000)
<INTEREST-EXPENSE> (1,133,000)
<INCOME-PRETAX> 2,625,000
<INCOME-TAX> 849,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,776,000
<EPS-BASIC> .07<F1>
<EPS-DILUTED> .07
<FN>
<F1>* Amount reflects EPS - Basic
</FN>
</TABLE>
