SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission File No. 0-18492
TEAMSTAFF, INC.
---------------
(Exact name of registrant as specified in its charter)
New Jersey 22-1899798
- --------------------------------------------------------------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 Atrium Drive, Somerset, NJ 08873
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732)748-1700
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 [ ]
16,252,444 shares of Common Stock, par value $.001 per share, were outstanding
as of February 10, 2002.
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TEAMSTAFF, INC. AND SUBSIDIARIES
FORM 10-Q
December 31, 2001
Table of Contents
Part I - Financial Information Page No.
- ------------------------------ --------
Item 1. Consolidated Balance Sheets as of
December 31, 2001 (Unaudited) and
September 30, 2001 3
Consolidated Statements of
Income for the three months ended
December 31, 2001 and 2000 (Unaudited) 5
Consolidated Statements of Cash Flows for the
three months ended December 31, 2001 and 2000
(Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's discussion and analysis of
financial condition and results of operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Part II - Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
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TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
ASSETS 2001 2001
----------- -----------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $11,181,000 $13,854,000
Accounts receivable, net of allowance 24,655,000 25,149,000
Deferred tax asset 2,241,000 2,241,000
Other current assets 1,235,000 1,016,000
----------- -----------
Total current assets 39,312,000 42,260,000
----------- -----------
EQUIPMENT AND IMPROVEMENTS:
Equipment 3,676,000 3,573,000
Software and computer equipment 2,908,000 2,607,000
Leasehold improvements 294,000 290,000
----------- -----------
6,878,000 6,470,000
Accumulated depreciation and amortization 4,121,000 3,735,000
----------- -----------
2,757,000 2,735,000
DEFERRED TAX ASSET 6,666,000 6,984,000
INTANGIBLE ASSETS, net of amortization 37,907,000 37,550,000
OTHER ASSETS 1,209,000 1,567,000
----------- -----------
$87,851,000 $91,096,000
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
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TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2001
------------ ------------
(unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $ 70,000 $ 70,000
Accounts payable 4,517,000 7,072,000
Accrued payroll 13,566,000 15,421,000
Accrued expenses and other current liabilities 7,900,000 7,058,000
------------ ------------
Total current liabilities 26,053,000 29,621,000
LONG-TERM DEBT, net of current portion 184,000 193,000
------------ ------------
Total liabilities 26,237,000 29,814,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; authorized 40,000,000 shares; issued
16,204,441 and 16,196,942; outstanding 16,065,784
and 16,109,631 respectively 16,000 16,000
Additional paid-in capital 63,575,000 63,544,000
Accumulated deficit (1,055,000) (1,686,000)
Receivable from shareholder (90,000) (90,000)
Treasury stock, 138,657 and 87,311 shares at cost, respectively (832,000) (502,000)
------------ ------------
Total shareholders' equity 61,614,000 61,282,000
------------ ------------
$ 87,851,000 $ 91,096,000
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
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TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the three months ended
December 31,
---------------------------------
2001 2000
------------- -------------
REVENUES $ 165,503,000 $ 164,699,000
DIRECT EXPENSES 157,529,000 157,708,000
------------- -------------
Gross profit 7,974,000 6,991,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 6,877,000 5,262,000
DEPRECIATION AND AMORTIZATION 388,000 352,000
------------- -------------
Income from operations 709,000 1,377,000
------------- -------------
OTHER (EXPENSE) INCOME:
Interest and other income 314,000 200,000
Interest expense (13,000) (481,000)
------------- -------------
301,000 (281,000)
------------- -------------
Income before income tax expense 1,010,000 1,096,000
INCOME TAX EXPENSE (379,000) (455,000)
------------- -------------
Net income $ 631,000 $ 641,000
============= =============
EARNINGS PER SHARE - BASIC & DILUTED $ 0.04 $ 0.08
============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 16,070,353 7,956,099
============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND EQUIVALENTS
OUTSTANDING - DILUTED 16,306,506 7,982,434
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended
December 31,
---------------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 631,000 $ 641,000
Adjustments to reconcile net income to net
cash (used in) provided by operating activities, net of
acquired businesses-
Deferred income taxes 318,000 350,000
Depreciation and amortization 388,000 352,000
Provision for doubtful accounts 134,000 70,000
Changes in operating assets and liabilities, net of acquired businesses
Decrease (increase) in accounts receivable 360,000 (1,283,000)
(Increase) decrease in other current assets (219,000) 341,000
Decrease in other assets 358,000 49,000
(Decrease) increase in accounts payable, accrued expenses
and other current liabilities (3,570,000) 2,264,000
------------ ------------
Net cash (used in) provided by operating activities (1,600,000) 2,784,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired (357,000) 195,000
Purchases of equipment and leasehold improvements (408,000) (252,000)
------------ ------------
Net cash used in investing activities (765,000) (57,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt -- (408,000)
Repayments on revolving line of credit -- (201,000)
Repayments on capital leases obligations (9,000) (11,000)
Net proceeds from issuance of common stock and exercise of common
stock options and warrants - net 31,000 40,000
Repurchase of common shares (330,000) --
------------ ------------
Net cash used in financing activities (308,000) (580,000)
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,673,000) 2,147,000
------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,854,000 4,285,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,181,000 $ 6,432,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $ 13,000 $ 246,000
============ ============
Income Taxes $ 378,000 $ 48,000
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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TEAMSTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION AND BUSINESS
TeamStaff, Inc., a New Jersey Corporation, and subsidiaries (referred to as the
"Company"), provides a broad spectrum of human resource services including
professional employer organization ("PEO"), payroll processing, human resource
administration and placement of temporary and permanent employees.
Effective October 2, 2000, the Company acquired all the stock of HR2, Inc. a PEO
based in Massachusetts. This acquisition is not significant to the accompanying
consolidated financial statements.
Effective August 31, 2001, the Company acquired all the stock of BrightLane.com,
Inc., an Online Business Center (OBC) and technology group providing
Internet-based solutions for growing businesses. Developed technology focused on
increasing buying power and reducing transaction costs. Other than payments for
fractional shares, the shareholders of BrightLane received an aggregate of
8,066,522 shares of TeamStaff's Common Stock in exchange for their BrightLane
Common Stock, Series A Preferred, Series B Preferred and Series C Preferred
Stock.
Effective January 1, 2002 the Company acquired the accounts and related assets
of Corporate Staffing Concepts LLC, a PEO entity operating primarily in western
Massachusetts and Connecticut. The acquisition is not reflected in the financial
statement as it was a subsequent event, and is not expected to be material to
the future consolidated financial statements.
BASIS OF PRESENTATION-
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest annual report
on Form 10-K. This financial information reflects, in the opinion of management,
all adjustments necessary (consisting only of normal recurring adjustments) to
present fairly the results for the interim periods. The results of operations
for such interim periods are not necessarily indicative of the results for the
full year.
The accompanying consolidated financial statements include those of TeamStaff
Inc., and its wholly owned subsidiaries. The results of operations of acquired
companies have been included in the consolidated financial statements from the
date of acquisition. All significant intercompany balances and transactions have
been eliminated in the consolidated financial statements.
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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING PRONOUNCEMENTS-
During June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141) and
No. 142 Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 141
changes the accounting for business combinations, requiring that all business
combinations be accounted for using the purchase method and that intangible
assets be recognized as assets apart from goodwill if they arise from
contractual or other legal rights, or if they are separable or capable of being
separated from the acquired entity and sold, transferred, licensed, rented or
exchanged. SFAS No. 141 is effective for all business combinations initiated
after June 30, 2001. SFAS No. 142 specifies the financial accounting and
reporting for acquired goodwill and other intangible assets. Goodwill and
intangible assets that have indefinite useful lives will not be amortized but
rather will be tested at least annually for impairment. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. However, early
adoption is allowed and the Company has adopted SFAS No. 142 as of October 1,
2001.
SFAS No. 142 requires that the useful lives of intangible assets acquired on or
before June 30, 2001 be reassessed and the remaining amortization periods
adjusted accordingly. Previously recognized intangible assets deemed to have
indefinite lives should be tested for impairment. All of the Company's
intangible assets have indefinite lifes and are no longer being amortized
effective October 1, 2001. The affect of not amortizing goodwill and intangible
assets is $186,000 pre-tax and $159,000 after tax for the three months ended
December 31, 2001. The Company tested its intangible assets during the first
quarter, as required by SFAS No. 142, and there is no impairment. The Company
will test its goodwill for impairment during the second quarter of fiscal 2002
as required by SFAS No. 142.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs and is
effective for the fiscal years beginning after June 15, 2002. Management does
not expect the impact of SFAS No. 143 to be material to the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 amends SFAS No. 121, Accounting for
the impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
and establishes a single accounting model for the impairment or disposal of
long-lived assets. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. Management does not expect the impact of SFAS No. 144 to be
material to the Company's consolidated financial statements.
EARNINGS PER SHARE-
Basic earnings per share ("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 earnings per share ("Diluted
EPS") is calculated by dividing income
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available to common shareholders by the weighted average number of common shares
outstanding for the period adjusted to reflect potentially dilutive securities.
The following table reconciles net income and share amounts used to calculate
basic earnings per share and diluted earnings per share:
Three Months Ended December 31,
-------------------------
2001 2000
----------- -----------
Numerator:
Net income $ 631,000 $ 641,000
Denominator:
Weighted average number of common shares
Outstanding- basic 16,070,353 7,956,099
Incremental shares for assumed conversions of
stock options/warrants
236,153 26,335
----------- -----------
Weighted average number of common and
equivalent shares outstanding- diluted 16,306,506 7,982,434
----------- -----------
Earnings per share-basic $ 0.04 $ 0.08
Earnings per share-diluted $ 0.04 $ 0.08
Stock options and warrants outstanding at December 31, 2001 to purchase 196,723
shares of common stock were not included in the computation of diluted earnings
per share as they were not dilutive.
(3) INCOME TAXES:
The Company has recorded a $8,907,000 and a $9,245,000 deferred tax asset at
December 31, 2001 and September 30, 2001, respectively. This represents
management's estimate of the income tax benefits to be realized upon utilization
of its net operating losses and tax credits as well as temporary differences
between the financial statement and tax basis of certain assets and liabilities,
for which management believes utilization to be more likely than not. Management
believes the Company's operations can generate sufficient taxable income to
realize this deferred tax asset.
(4) WORKERS' COMPENSATION
TeamStaff maintains two workers' compensation policies, which cover its
corporate employees, the worksite employees, co-employed by TeamStaff and its
PEO clients, and the temporary employees employed by TeamStaff to fulfill
various client-staffing assignments. TeamStaff does not provide workers'
compensation to non-employees of the Company. TeamStaff's primary workers'
compensation insurance provider is C N A (Continental Assurance) which provides
coverage for substantially all of TeamStaff's worksite, medical and corporate
employees.
The C N A policy originally covered the period from January 22, 2001, through
January 21, 2002, and is a large deductible program ($250,000 for each claim)
with a maximum liability cap. CNA and the Company recently agreed to an
extension of the policy to March 21, 2002. The premium for the policy is paid on
a monthly basis based upon estimated payroll for the year and is subject to a
year-end audit by the provider. Fixed costs for the extension were paid in
advance
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(approximately $670,000). TeamStaff also maintains a separate policy insuring a
portion of the maximum cap which it may be required to pay. The policy,
including the extension, insures payment of the maximum cap in excess of the
first $2,093,000, which the Company pays, up to $8,663,000. Once the $8,663,000
is exceeded then the Company pays 89.5% of paid claims up to $12,133,000. If the
losses and fixed cost under the policy are less than the amounts TeamStaff paid,
plus investment returns thereon, the insurer will refund the difference to
TeamStaff. The amount of claims incurred in any policy year may vary, and in a
year with significantly fewer claims than estimated, the amount of repayment
from this account may be significant. The Company records in direct expenses a
monthly charge based upon its estimate of the year's ultimate fully developed
losses plus the fixed costs charged by the insurance carrier to support the
program. This estimate is established each quarter based in part upon
information provided by the Company's insurers, internal analysis and its
insurance broker. The Company's internal analysis includes quarterly review of
open claims and review of historical claims and losses related to the workers'
compensation programs. While management uses available information, including
nationwide loss ratios, to estimate ultimate losses, future adjustments may be
necessary based on actual losses. Since the recorded ultimate expense is based
upon a ten-year projection of actual claims payment and the timing of these
payments, as well as the interest earned on the Company's prepayments, the
Company relies on actuarial tables to estimate its ultimate expense.
As part of the two-month extension, which was negotiated in January 2002, the
Company was required to pay $495,000 to cover claims which CNA asserted were
owed under the policy years 1997 - 1999. As previously disclosed, the Company
had received a total release for the periods from C N A in January 2001, when
the Company accepted C N A as its new insurance carrier. The Company had not
been aware C N A had been attempting to collect these funds from the Company's
previous workers' compensation insurance broker. The Company has denied C N A's
claim to date, and has received $224,000 back from the original $495,000
payment. It is the Company's understanding that more funds will be returned.
Should the Company be unsuccessful in receiving all monies from the claim, it
will be required to absorb these losses.
As stated above, the Company's primary workers' compensation policy with CNA
expires on March 21, 2002. Management is actively discussing and negotiating the
terms of new workers' compensation policies with other carriers in order to
obtain new coverage before March 22, 2002. Management has been advised by its
insurance brokers that the insurance industry in general, as well as the
workers' compensation coverage in particular, is presently undergoing
significant changes, including contractions in available coverage. These changes
in the industry may result in significant changes in the costs and type of
coverage for the Company, and new carriers may require that the Company obtain a
letter of credit or other similar means to reduce any perceived insurance risk.
These changes in the workers' compensation insurance coverage and costs may have
an adverse result on the Company's financial performance. The Company reserves
the right to increase the charges to clients for workers compensation
prospectively when the new contract is in place.
As of December 31, 2001, the adequacy of the workers' compensation reserves were
determined, in management's opinion to be reasonable. However, since these
reserves are for losses that have not been sufficiently developed due to the
relatively young age of these claims, and such variables as timing of payments
and investment returns thereon are uncertain or unknown, actual results may vary
from current estimates. The Company will continue to monitor the development
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of these reserves, the actual payments made against the claims incurred, the
timing of these payments, the interest accumulated in the Company's prepayments
and adjust the reserves as deemed appropriate.
TeamStaff maintains a separate policy for certain of the business of its
subsidiary, HR2, Inc., which currently provides that TeamStaff is only
responsible for the audited premium for each policy period.
The Company had a third policy for its PEO business in El Paso Texas. The
Company received late notification from its workers' compensation carrier, which
covered its El Paso book of business until it was sold in September 2001, of
approximately $80,000 in unreported claims. The Company is reviewing these
claims to determine if they are appropriate but has recorded these claims as an
expense during the three months ended December 3, 2001.
The Company's clients are billed at fixed rates, which are determined when the
contract is negotiated with the client. The fixed rates include charges for
workers' compensation, which are based upon the Company's assessment of the
costs of providing workers' compensation to the client. If the Company's costs
for workers' compensation for the workers' compensation policy year are greater
than the costs that are included in the client's contractual rate, the Company
is unable to recover these excess charges from the clients. The Company reserves
the right in its contracts to increase the workers' compensation charges on a
prospective basis only and may do so when its workers' compensation policy is
renewed.
(5) ACQUISITION OF BRIGHTLANE:
Effective August 31, 2001, the Company acquired BrightLane.com, Inc., an Online
Business Center and technology group providing Internet-based solutions for
growing businesses. BrightLane's developed technology had focused on increasing
buying power and reducing transaction costs for growing businesses. This
technology is now refocused to drive a new venture for the Company under the
name TeamStaff ConnXions. TeamStaff ConnXions will be a conduit to both the
clients and worksite employees of TeamStaff offering a variety of services
through strategic partners such as web page developers, a full line of insurance
and benefit products and procurement services. BrightLane integrates these
services through proprietary unified login and hub technology that offers
businesses security. BrightLane is also spearheading the technology efforts of
the Company in total, most specifically in terms of the implementation of the
newly purchased Lawson software package.
Under the terms of the purchase agreement, the Company acquired all the stock of
BrightLane.com through the issuance of 8,066,522 shares of TeamStaff stock,
valued at approximately $41,900,000. The Company also incurred $2,329,000 of
certain legal, accounting and investment banking expenses, resulting in a total
purchase price of $44,229,000. The acquisition has been accounted for under the
purchase method and the results of operations of the acquired company have been
included in the statements of income since the date of the acquisition. The
purchase price has been allocated based on the estimated fair value at the date
of the acquisition as stated below:
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Cash acquired $12,031,000
Deferred tax asset 7,400,000
Investment in TeamStaff preferred stock 3,500,000
Other assets acquired, net 1,538,000
First Union relationship 6,900,000
Tradename 10,000
Goodwill 12,850,000
-----------
Total $44,229,000
===========
In connection with the transaction, persons holding BrightLane options to
acquire approximately 2,078,000 BrightLane shares (the equivalent of
approximately 481,000 TeamStaff shares) exercised their options. TeamStaff made
recourse loans of approximately $1,025,000 principal amount to the holders of
these options to assist them in payment of tax obligations incurred with
exercise of the options. The loans are repayable upon the earlier of (i) sale of
the TeamStaff shares or (ii) three years. Prior to December 31, 2001,
approximately $252,000 of these loans have been repaid.
The following unaudited pro forma information presents a summary of consolidated
financial results of operations of the Company and acquired companies as if the
acquisitions had occurred October 1, 2000.
First Quarter Ended December 31,
------------------------------------
2001 2000
------------- -------------
Revenues $ 165,503,000 $ 164,709,000
Net Income (Loss) $ 631,000 $ (922,000)
Earnings (Loss) per share - basic
and diluted 0.04 (0.06)
(6) SEGMENT REPORTING:
The Company operates three different lines of business: professional employer
organization (PEO), medical staffing and payroll services.
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 currently provides medical staffing for medical imaging
professionals and nurses with hospitals, clinics and therapy centers. Medical
staffing enables clients to attain management and productivity goals by matching
highly trained professionals and technical personnel to specific project
requirements.
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Through its payroll services business segment, the Company provides basic
payroll services to its clients, approximately 70% of which are in the
construction industry. Services provided include the preparation of payroll
checks, filing of payroll taxes, government reports, W-2's, remote processing
directly to the client's offices and certified payrolls.
All corporate expenses, amortization of goodwill (until October 1, 2001), some
interest expense, as well as depreciation on corporate assets and miscellaneous
charges, are reflected in a separate unit called Corporate.
The Company has changed its segment reporting as of October 1, 2001. The
contract staffing business located in New York City, that included
voucher-processing services, PEO services and temporary staffing services, had
been previously reported in temporary staffing. The voucher processing service
business is now managed and reported in Payroll Services group. The PEO and
temporary staffing business is now managed and reported in PEO. BrightLane costs
have been allocated to Corporate since BrightLane is viewed as the information
technology department of the Company. Prior year figures have been adjusted to
conform to current year presentation.
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 condensed financial results for the three
months ended December 31, 2001 and 2000 for each of the Company's segments:
PROFESSIONAL
FOR THE THREE MONTHS ENDED EMPLOYER MEDICAL PAYROLL
DECEMBER 31, SERVICES STAFFING SERVICES CORPORATE CONSOLIDATED
-------------------------- ------------ ------------ ------------ ------------ ------------
2001
Revenues $144,240,000 $ 19,817,000 $ 1,446,000 $ 0 $165,503,000
Income/(Loss) before income taxes 34,000 2,503,000 721,000 (2,248,000) 1,010,000
2000
Revenues $149,394,000 $ 13,968,000 $ 1,337,000 $ 0 $164,699,000
Income/(Loss) before income taxes 677,000 1,563,000 622,000 (1,766,000) 1,096,000
The Company has no revenue derived outside of the United States.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"1995 Reform Act"). TeamStaff, Inc. desires to avail itself of certain "safe
harbor" provisions of the 1995 Reform Act and is therefore including this
special note to enable the Company to do so. Forward-looking statements included
in this report involve known and unknown risks, uncertainties, and other factors
which could cause the Company's actual results, performance (financial or
operating) or achievements to differ from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. Such future results are management's best estimates
based upon current conditions and the most recent results of operations. These
risks include, but are not limited to, risks associated with risks undertaken in
connection with acquisitions, risks from potential workers' compensation claims
and required payments, risks from employer/employee suits such as discrimination
or wrongful termination, risks associated with payroll and employee related
taxes which may require unanticipated payments by the Company, liabilities
associated with the Company's status under certain federal and state employment
laws as a co-employer, effects of competition, the Company's ability to
implement its internet based business and technological changes and dependence
upon key personnel.
The Company operates three different lines of business from which it derives
substantially all of its revenue: professional employer organization (PEO),
medical staffing and payroll services.
PEO revenue is recognized as service is rendered. The PEO revenue consists of
charges by the Company for the wages and employer payroll taxes of the worksite
employees, the administrative service fee, workers' compensation charges, and
the health and retirement benefits provided to the worksite employees. These
charges are invoiced to the client at the time of each periodic payroll. The
Company negotiates the pricing for its various services on a client-by-client
basis based on factors such as market conditions, client needs and services
requested, the client's workers' compensation experience, the type of client
business and the required resources to service the account, among other factors.
Because the pricing is negotiated separately with each client and vary according
to circumstances, the Company's revenue, and therefore its gross margin, will
fluctuate based on the Company's client mix.
The medical staffing revenue is recognized as service is rendered. The Company
bills its clients based on an hourly rate. The hourly rate is intended to cover
the Company's direct labor costs of the temporary employees, plus an estimate to
cover overhead expenses and a profit margin. Additionally included in revenue
related to medical staffing are commissions from permanent placements.
Commissions from permanent placements result from the successful placement of a
medical employee to a customer's workforce as a permanent employee.
The payroll services revenue is recognized as service is rendered and consists
primarily of administrative service fees charged to clients for the processing
of paychecks as well as preparing quarterly and annual payroll related reports.
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In accordance with Emerging Issues Task Force No. 99-19 "Reporting Revenue Gross
as a Principal versus Net as an Agent," the Company recognizes all amounts
billed to its PEO and medical staffing customers as gross revenue because the
Company is at risk for the payment of its direct costs, whether or not the
Company's customers pay the Company on a timely basis or at all, and the Company
assumes a significant amount of other risks and liabilities as a co-employer of
its worksite employees, and employer of its medical employees, and therefore, is
deemed to be a principal in regard to these services. The Company also
recognizes as gross revenue and as unbilled receivables, on an accrual basis,
any such amounts which relate to services performed by worksite and medical
employees which have not yet been billed to the customer as of the end of the
accounting period.
Direct costs of services are reflected in the Company's Statement of Income as
"direct expenses" and are reflective of the type of revenue being generated. PEO
direct costs of revenue include wages paid to worksite employees, employment
related taxes, costs of health and welfare benefit plans and workers'
compensation insurance costs. Direct costs of the medical staffing business
include wages, employment related taxes and reimbursable expenses. Payroll
services' direct costs includes salaries and supplies associated with the
processing of the payroll service.
TeamStaff maintains two workers' compensation policies, which cover its
corporate employees, the worksite employees, co-employed by TeamStaff and its
PEO clients, and the temporary employees employed by TeamStaff to fulfill
various client-staffing assignments. TeamStaff does not provide workers'
compensation to non-employees of the Company. TeamStaff's primary workers'
compensation insurance provider is C N A (Continental Assurance) which provides
coverage for substantially all of TeamStaff's worksite, medical and corporate
employees.
The C N A policy originally covered the period from January 22, 2001, through
January 21, 2002, and is a large deductible program ($250,000 for each claim)
with a maximum liability cap. CNA and the Company recently agreed to an
extension of the policy to March 21, 2002. The premium for the policy is paid on
a monthly basis based upon estimated payroll for the year and is subject to a
year-end audit by the provider. Fixed costs for the extension were paid in
advance (approximately $670,000). TeamStaff also maintains a separate policy
insuring a portion of the maximum cap which it may be required to pay. The
policy, including the extension, insures payment of the maximum cap in excess of
the first $2,093,000, which the Company pays, up to $8,663,000. Once the
$8,663,000 is exceeded then the Company pays 89.5% of paid claims up to
$12,133,000. If the losses and fixed cost under the policy are less than the
amounts TeamStaff paid, plus investment returns thereon, the insurer will refund
the difference to TeamStaff. The amount of claims incurred in any policy year
may vary, and in a year with significantly fewer claims than estimated, the
amount of repayment from this account may be significant. The Company records in
direct expenses a monthly charge based upon its estimate of the year's ultimate
fully developed losses plus the fixed costs charged by the insurance carrier to
support the program. This estimate is established each quarter based in part
upon information provided by the Company's insurers, internal analysis and its
insurance broker. The Company's internal analysis includes quarterly review of
open claims and review of historical claims and losses related to the workers'
compensation programs. While management uses available information, including
nationwide loss ratios, to estimate ultimate losses, future adjustments may be
necessary based on actual losses. Since the recorded ultimate expense is based
upon a ten-year projection
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of actual claims payment and the timing of these payments, as well as the
interest earned on the Company's prepayments, the Company relies on actuarial
tables to estimate its ultimate expense.
As part of the two-month extension, the Company was required to pay $495,000 in
monies C N A claims were owed under the policy years 1997 - 1999. As previously
disclosed, the Company had received a total release for the periods from C N A
in January 2001, when the Company accepted C N A as its new insurance carrier.
The Company had not been aware C N A had been attempting to collect these monies
from the Company's previous workers' compensation insurance broker. The Company
has denied C N A's claim and to date, has received $224,000 back from the
original $495,000 payment. It is the Company's understanding that more funds
will be returned. Should the Company be unsuccessful in receiving all monies
from the claim, it will be required to absorb these losses.
As stated above, the Company's primary workers' compensation policy with CNA
expires in March 21, 2002. Management is actively discussing and negotiating the
terms of new workers' compensation policies with other carriers in order to
obtain new coverage before March 22, 2002. Management has been advised by its
insurance brokers that the insurance industry in general, as well as the
workers' compensation coverage in particular, is presently undergoing
significant changes, including contractions in available coverage. These changes
in the industry may result in significant changes in the costs and type of
coverage for the Company, and new carriers may require that the Company obtain a
letter of credit or other similar means to reduce any perceived insurance risk.
These changes in the workers' compensation insurance coverage and costs may have
an adverse result on the Company's financial performance. The Company reserves
the right to increase the charges to clients for workers compensation
prospectively when the new contract is in place.
As of December 31, 2001, the adequacy of the workers' compensation reserves were
determined, in managements opinion to be reasonable. However, since these
reserves are for losses that have not been sufficiently developed due to the
relatively young age of these claims, and such variables as timing of payments
and investment returns thereon are uncertain or unknown, actual results may vary
from current estimates. The Company will continue to monitor the development of
these reserves, the actual payments made against the claims incurred, the timing
of these payments, the interest accumulated in the Company's prepayments and
adjust the reserves as deemed appropriate.
TeamStaff maintains a separate policy for certain of the business of its
subsidiary, HR2, Inc., which currently provides that TeamStaff is only
responsible for the audited premium for each policy period.
The Company had a third policy for its PEO business in El Paso Texas. The
Company received late notification from its workers' compensation carrier, which
covered its El Paso book of business until it was sold in September 2001, of
approximately $80,000 in unreported claims. The Company is reviewing these
claims to determine if they are appropriate but has recorded these claims as an
expense during the three months ended December 31, 2001.
The Company's clients are billed at fixed rates, which are determined when the
contract is negotiated with the client. The fixed rates include charges for
workers' compensation, which are
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based upon the Company's assessment of the costs of providing workers'
compensation to the client. If the Company's costs for workers' compensation for
the workers' compensation policy year are greater than the costs that are
included in the client's contractual rate, the Company is unable to recover
these excess charges from the clients. The Company reserves the right in its
contracts to increase the workers' compensation charges on a prospective basis
only and may do so when its workers' compensation policy is renewed.
RESULTS OF OPERATIONS
The Company's revenues for the three months ended December 31, 2001 and 2000
were $165,503,000 and $164,699,000 respectively, which represents an increase of
$804,000 or less than 1% over the prior year's first fiscal quarter. While the
Company's Medical Staffing business continued its strong growth, growing $5.8
million, or 42%, over last year's first quarter, PEO revenues were down $5.2
million, or 3%, over the same period last year. This decrease is the result of
the sale of the Company's El Paso's based PEO business in September 2001. In the
first quarter of fiscal 2001, the El Paso business accounted for approximately
$9.4 million in PEO revenue. In addition, a large customer in our Delray,
Florida PEO region filed for bankruptcy protection in the fourth fiscal quarter
of last year and we ceased providing services to the entity effective in July
2001. This resulted in a quarterly loss in revenue of approximately $7.5
million. Excluding the sale of the El Paso based business and the loss of a
large customer due to bankruptcy protection, the Company's PEO operation grew
7.9%. The Company continues to review the profitability of each of its PEO
clients to insure these clients meet the level of profitability required by the
Company.
Direct expenses were $157,529,000 for the three months ended December, 2001 and
$157,708,000 for the comparable period last year, representing a decrease of
$179,000 or less than 1%. As a percentage of revenue, direct expenses for the
three months ended December 31, 2001 and 2000 were 95.2% and 95.8%,
respectively. This decrease is due to the Company's Medical Staffing business
making up a larger percentage of the consolidated revenue of the Company in this
quarter versus the same quarter in fiscal 2000, with its lower direct expenses
as a percentage of its revenue. In the quarter ended December 31, 2001, the
Medical Staffing business made up 12% of the Company's consolidated revenue
versus 8.5% in the quarter ended December 31, 2000.
Gross profits were $7,974,000 and $6,991,000 for the quarters ended December 31,
2001 and 2000, respectively, representing an increase of $983,000 or 14.1%.
Gross profits, as a percentage of revenue, were 4.8% and 4.2 % for the quarters
ended December 31, 2001 and 2000, respectively. The decrease in the gross profit
of the PEO business, due to the lost revenue mentioned above, was more then
offset by the increase in the Company's temporary Medical Staffing business.
Selling, general and administrative ("SG&A") expenses for the quarters ended
December 31, 2001 and 2000 were $6,877,000 and $5,262,000, respectively,
representing an increase of $1,615,000 or 30.7%. As a percentage of revenue,
SG&A expenses increased to 4.2% in the quarter ended December 31,2001 versus
3.2% in the quarter ended December 31, 2000. Of this increase, $581,000, or 36%
of the increase, was due to the acquisition of BrightLane. The SG&A expenses in
the Company's Medical Staffing and Payroll businesses grew by $350,000 and
$146,000, respectively, in order to support their growing businesses. Corporate
overhead grew by $447,000 which was mainly due to $112,000 in acquisition costs
incurred in an aborted PEO
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acquisition, $115,000 in staff additions and $98,000 in corporate insurance
associated with the growth of the Company. The Company has taken steps to reduce
PEO divisional overhead costs by elimination approximately $750,000 in
employment cost on an annualized basis.
Depreciation and amortization for the quarters ended December 31, 2001 and 2000
increased by $36,000 over the similar period last year from $352,000 to
$388,000. As a result of implementing Statement of Financial Accounting Standard
No. 142 Goodwill and Other Intangible Assets (SFAS No.142) as of October 1,
2001, the Company has ceased amortizing any intangible assets with indefinite
lifes, including goodwill. In the quarter ended December 31, 2000, the Company
amortized $173,000 in intangible assets. This decrease was offset by the
addition of BrightLane's $249,000 in depreciation expense from the acquired
software and hardware assets.
Interest and other income increased $114,000 from $200,000, in the corresponding
period in 2000, to $314,000 primarily from increased late payment fees.
Interest expense decreased to $13,000 in the quarter ended December 31, 2001
from $481,000 in the quarter ended December 31, 2000 as a result of the
retirement of the Company's debt facility with FINOVA Capital effected August
31, 2001.
Income taxes for the quarter ended December 31, 2001 were $379,000 versus
$455,000 for the similar period last year. The decrease in the effective tax
rate relates to non-deductible goodwill, which as of October 1, 2001 is no
longer amortized as a result of implementing SFAS No. 142.
Net income for the quarter ended December 31, 2001 was $631,000, or $0.04 per
fully diluted share, as compared to $641,000, or $0.08 per fully diluted share
for the quarter ended December 31, 2000. Offsetting the improvement in gross
profit were the SG&A costs incurred by the Company to grow the Medical Staffing
and payroll businesses as well as the BrightLane costs that are needed to fuel
the technology upgrade of the PEO business. Diluted shares outstanding as of
December 31, 2001 doubled from 7,956,099 in the quarter ended December 31,2000,
to 16,065,784. The increased shares were due to the BrightLane acquisition in
August 2001. The Company expects to reap the benefits of this acquisition by
increasing its PEO revenue due to the Wachovia Marketing Agreement as well as
due to its implementation of a state-of-the-art Human Resource online
web-enabled operating system.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the first three months of fiscal 2002
was $1,600,000 compared to $2,784,000 provided by operating activities during
the same period of fiscal 2001. The use of cash in operating activities relates
to a decrease in accounts payable, accrued expenses and other current
liabilities of $3,570,000, which primarily resulted from the timing of payroll
tax payments surrounding the December 31 and September 30 payroll periods. The
timing and amounts of such payments can vary significantly based on various
factors, including the day of the week on which a month ends and the existence
of holidays on or immediately following a month end. This was partially offset
by net income of $631,000, deferred income taxes of $318,000, depreciation of
$388,000 and a decrease in other assets of $358,000.
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Cash used in investing activities of $765,000 was primarily related to purchases
of software fixed assets and additional charges to goodwill associated with the
acquisition of BrightLane related to adjustments of estimates for professional
services and employment contracts.
The cash used in financing activities of $308,000 included the repurchase of
$330,000 of the Company's stock offset slightly by proceeds from the exercise of
options and warrants. During the quarter ended December 31, 2001, the Company
repurchased 51,346 shares at an average price of $6.43.
As of December 31, 2001, the Company had cash and cash equivalents of
$11,181,000 and net accounts receivable of $24,976,000.
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
December 31, 2001, the Company repurchased 138,657 shares at an average cost of
$6.00. These share repurchases are reflected as treasury shares in the Company's
financial statements and will be retired.
Management of the Company believes that its existing cash will be sufficient to
support cash needs for the next twelve months.
EFFECTS ON INFLATION
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not undertake trading practices in securities or other
financial instruments and therefore does not have any material exposure to
interest rate risk, foreign currency exchange rate risk, commodity price risk or
other similar risks which might otherwise result from such practices. The
Company has no material interest rate risk and is not materially subject to
fluctuations in foreign exchange rates, commodity prices or other market rates
or prices from market sensitive instruments.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
TeamStaff subsidiary, BrightLane.com, Inc. is party to a suit brought by one of
its former shareholders (Atomic Fusion, Inc. v. BrightLane.com, Inc. Civil
Action No ONS02246OE,
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Fulton County State Court, Georgia). The plaintiff seeks damages for alleged
unpaid contractual services provided to BrightLane, alleging that the shares
(both in number and value) of BrightLane stock provided to the plaintiff's in
payment of services were inadequate to pay for the alleged agreed upon value of
services (approximately $70,000). The plaintiff claims that they should have
received BrightLane shares at $0.13 per share (approximately 538,000 BrightLane
shares, equal to approximately 116,000 TeamStaff shares). The Company intends to
defend itself vigorously in this matter and believes that it has meritorious and
valid defenses to plaintiff's claims. The former shareholders of BrightLane have
placed approximately 158,000 shares in escrow, which may be canceled in an
amount equal to the amount of any successful claim by Atomic Fusion. The escrow
shares are intended to cover the breach of any representation or warranty
contained in the acquisition agreements among the parties.
The Company is engaged in no other litigation, the effect of which would be
anticipated to have a material adverse impact on the Company's financial
conditions or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the quarter ended December 31,
2001.
The Company's Annual Meeting has been tentatively scheduled for April 24, 2002.
At the Annual Meeting, the Board of Directors presently anticipates that
shareholders will be requested to act upon the following items:
1. the election of directors;
2. such other matters as may properly be brought before the meeting.
The Company currently anticipates that its proxy statement related to the Annual
Meeting will be mailed to shareholders on or about March 15, 2002.
ITEM 5. OTHER INFORMATION
NONE
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEAMSTAFF, INC.
(Registrant)
/s/ Donald W. Kappauf
-------------------------
Donald W. Kappauf
Chief Executive Officer
/s/ Donald T. Kelly
-------------------------
Donald T. Kelly
Chief Financial Officer
Date: February 14, 2002
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