SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
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, 2002
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
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]
1
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(Title of class)
----------------------
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. [ ]
At the close of our second quarter, March 31, 2002, 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
$50,445,000 based upon the closing sales price of $5.05 for such Common Stock on
March 29, 2002 as reported by NASDAQ National Market. At the close of our fiscal
year, September 30, 2002, 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 $28,424,000 based upon the
average closing sales price of $2.90 for such Common Stock on said date as
reported by NASDAQ National Market. On February 3, 2003 there were 15,771,986
shares outstanding of Common Stock of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
[Cover Page 2 of 2 Pages]
2
EXPLANATORY NOTE
This amendment on Form 10-K/A amends TeamStaff, Inc.'s annual report on Form
10-K for the fiscal year ended September 30, 2002, as initially filed with the
Securities and Exchange Commission on February 10, 2003, and is being filed to
reflect certain revisions to the consolidated financial statements
The significant effects on these revisions are presented in the section entitled
"Revenue Recognition and Change in Policy", found in the Note 2 "Summary of
Significant Accounting Policies" section of Notes to Consolidated Financial
Statements. This change has no gross profit or net income effect on the income
statement and no balance sheet effect. This amendment incorporates certain
revisions to historical financial data, but is not intended to update other
information presented in this annual report as originally filed, except where
specifically noted.
The following Items of the Original Filing are amended by this filing:
Part I, Item 1. Business. Amendments have been made to the sections
entitled "Services: Professional Employer Organization (PEO)" and
"Competition".
Part I, Item 6. Selected Financial Data.
Part I, Item 7. Managements' Discussion and Analysis of Financial
Condition and Results of Operations. Amendments have been made to the
sections entitled "Revenue Recognition and Change in Policy", "Fiscal Year
2002 as Compared to Fiscal Year 2001 As Restated", and "Fiscal Year 2001
As Restated as Compared to Fiscal Year 2000"
Part II, Item 8. Financial Statements and Supplementary Data. Amendments
have been made to Report of Independent Public Accountants. Amendments
have been made to "Consolidated Statements Of Income and Comprehensive
Income For The Years Ended September 30, 2002, 2001 and 2000". Amendments
have been made to Note 2 "Revenue Recognition and Change in Policy", Note
5 "Sale of El Paso Regional Office", Note 9 "Segment Reporting", and Note
10 "Quarterly Financial Data" of the "Notes to the Consolidated Financial
Statements."
Unaffected items have not been repeated in this filing.
3
PART I
ITEM 1. BUSINESS
SERVICES
II. PROFESSIONAL EMPLOYER ORGANIZATION (PEO)
TeamStaff's largest business unit, from a revenue perspective, is its PEO
services business. During the fiscal year ended September 30, 2002, this unit
generated $101,008,000 of revenue. When a client utilizes TeamStaff's PEO
services, the client administratively transfers all or essentially all of its
employees to TeamStaff. TeamStaff thereby becomes a co-employer of the client's
employees and is responsible for all human resource functions, including
payroll, benefits administration, tax reporting and personnel record keeping.
The client still manages the employees, determines compensation rates and
assigns duties in the same fashion as any employer. The client is, however,
relieved of certain reporting and tax filing requirements and other
administrative tasks associated with employment. Moreover, because of economies
of scale, TeamStaff is frequently able to negotiate favorable terms on workers'
compensation coverage, 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, TeamStaff can offer the following benefits to its
clients' employees:
COMPREHENSIVE MAJOR MEDICAL PLANS - Management 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 clients' employees a variety of health coverage
plans from traditional indemnity plans to Health Maintenance Organizations
(HMO), Preferred Provider Organizations (PPO), and Point of Service Plans (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, a client of
TeamStaff can usually obtain these benefits for their employees.
LIFE INSURANCE - Affordable basic coverage is available.
SECTION 125 PREMIUM CONVERSION PLAN (Cafeteria Plan) - Employees can pay for
benefits with pre-tax earnings, reduce their taxable income and FICA payments,
and increase their take-home pay. Plans of this nature are typically not offered
by small employers.
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. TeamStaff enables small business owners to offer their
employees retirement programs comparable to those of major corporations. Such
plans can be used to increase morale, productivity and employee loyalty.
CREDIT UNION - TeamStaff provides an opportunity for employees to join a credit
union, which may offer more attractive interest rates than offered at most
banks.
PAYROLL SERVICES - With comprehensive PEO services, clients no longer incur the
separate expense of payroll processing either through in-house staff or outside
service. TeamStaff's PEO services include all payroll and payroll tax
processing.
UNEMPLOYMENT COMPENSATION COST CONTROL - TeamStaff provides an unemployment
compensation cost control program to aggressively manage unemployment claims and
control employer costs.
HUMAN RESOURCES MANAGEMENT SERVICES - TeamStaff provides clients with expertise
in areas such as personnel policies and procedures, hiring and firing, training,
compensation and performance evaluation.
4
WORKERS' COMPENSATION PROGRAM - TeamStaff has a national workers' compensation
policy, which can provide TeamStaff with a significant advantage in marketing
its services, particularly in jurisdictions where workers' compensation policies
are difficult to obtain at reasonable costs. TeamStaff also provides its
clients, where applicable, with independent safety analyses and risk management
services to reduce workers' injuries and claims along with reducing fraudulent
claims.
Relieved of most employment related administrative tasks, TeamStaff's clients
are able to focus on their core business. The client is also offered a broader
benefits package for its assigned employees, a professionally managed workers'
compensation insurance program, and savings in time and paperwork previously
required in connection with personnel administration. These offerings improve
employee retention and help control costs.
COMPETITION
The PEO industry consists of approximately 800 companies, most of which serve a
single market or region. TeamStaff believes that there are several PEOs with
annual revenues that exceed $500 million on a gross revenue basis, four of which
are publicly traded companies. Management believes, based on industry sources,
that the largest PEO, in terms of revenue, is Administaff, Inc., with revenue in
excess of $4 billion on a gross revenue basis. TeamStaff 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 purchased PEOs in
Florida, are its major competitors. TeamStaff 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 TeamStaff's medical staffing business the primary competitors are CompHealth,
Aureous, Resources On Call, Cross Country, Inc., AMN Healthcare Services, Inc.
and Medical Staffing Network Holdings, Inc.
TeamStaff competes with these companies by offering customized products,
personalized service, competitive prices and specialized personnel to satisfy a
client's particular employee requirements. Management 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
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, TeamStaff is establishing itself as a
professional employer organization that will assist companies, small and large,
with all of their human resource management challenges.
5
ITEM 6. SELECTED FINANCIAL DATA
2002(4) 2001(3) 2000(2) 1999(1) 1998
As Restated(5)
------------- -------------- ------------- ------------- -------------
Revenues As Amended(5) $ 180,823,000 $ 165,969,000 $ 115,965,000 $ 78,851,000 $ 55,339,000
Direct Expenses As Amended(5) 147,178,000 137,872,000 95,209,000 62,315,000 45,651,000
Gross Profit 33,645,000 28,097,000 20,756,000 16,536,000 9,688,000
Selling, General & Administrative
Expenses (includes Depreciation
and Amortization) 29,734,000 24,819,000 18,338,000 13,305,000 8,050,000
Income From Operations 3,911,000 3,278,000 2,418,000 3,231,000 1,638,000
Income Before Extraordinary Item 3,075,000 1,702,000 951,000 1,776,000 2,703,000
Extraordinary Item Net of Tax -- (354,000) -- -- --
Net Income $ 3,075,000 $ 1,348,000 $ 951,000 $ 1,776,000 $ 2,703,000
Earnings per share - Basic
Income before extraordinary item $ .19 $ .20 $ .12 $ .25 $ .49
Extraordinary item -- (.04) -- -- --
Net Income $ .19 $ .16 $ .12 $ .25 $ .49
Earnings per share - Diluted
Income before extraordinary item $ .19 $ .19 $ .12 $ .25 $ .49
Extraordinary item -- (.04) -- -- --
Net Income $ .19 $ .15 $ .12 $ .25 $ .49
Weighed average shares outstanding:
Basic 16,013,546 8,693,243 7,954,176 7,127,806 5,506,256
Diluted 16,183,466 8,907,282 7,990,912 7,145,390 5,543,799
BALANCE SHEET DATA:
Assets $ 93,966,000 $ 91,860,000 $ 49,514,000 $ 36,382,000 $ 16,648,000
Liabilities 29,227,000 30,717,000 31,455,000 19,417,000 8,774,000
Long-Term Liabilities 1,418,000 1,197,000 6,222,000 4,502,000 2,981,000
Working Capital 15,976,000 12,740,000 3,065,000 2,968,000 3,319,000
Shareholders' Equity $ 64,739,000 $ 61,143,000 $ 18,059,000 $ 16,965,000 $ 7,874,000
(1) On January 25, 1999, the Company acquired 10 entities operating
under the tradename "TeamStaff Companies" through the issuance of
2,352,381 shares of our common stock and $3.2 million in cash in
exchange for all capital stock of the TeamStaff Companies and for
the repayment of debt.
(2) On April 8, 2000, the Company acquired the assets of the Synadyne
division of Outsource International, Inc. for $3,500,000.
6
(3) On August 31, 2001, the Company acquired BrightLane through the
issuance of approximately 8,066,522 shares of our common stock for
all capital stock of BrightLane.
(4) January 2, 2002, the Company acquired the assets of Corporate
Staffing Concepts, LLC for a down payment of $275,000 and an earnout
payment on January 10, 2003, of $250,000 in cash and 27,500 shares
of TeamStaff common stock.
(5) Refer to Notes 2 and 12 in the Notes to Consolidated Financial
Statements for explanation of the restatement and amendment.
ITEM 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING AND CAUTIONARY STATEMENTS
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 TeamStaff to do so. Forward-looking statements included
in this report involve known and unknown risks, uncertainties, and other factors
which could cause TeamStaff'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 managements 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,
increased insurance costs and required payments, risks from employer/employee
related suits such as discrimination or wrongful termination, risks associated
with payroll and employee related taxes which may require unanticipated payments
by TeamStaff, liabilities associated with TeamStaff's status under certain
federal and state employment laws as a co-employer, effects of competition,
TeamStaff's ability to implement its internet based business and 4technological
changes, and dependence upon key personnel.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
TeamStaff believes the accounting policies below represent its critical
accounting policies due to the significance or estimation process involved in
each.
REVENUE RECOGNITION AND CHANGE IN POLICY
TeamStaff operates three different lines of business from which it derives
substantially all of its revenue: professional employer organization (PEO),
temporary staffing and payroll services.
TeamStaff accounts for its revenues in accordance with EITF 99-19, Reporting
Revenues Gross as a Principal Versus Net as an Agent. TeamStaff's professional
employer organization division revenues historically had been derived from its
PEO division gross billings, which were based on: (i) the payroll cost of its
worksite employees; and (ii) associated payroll taxes, benefit costs, workers'
compensation charges and administrative fees. The gross billings are invoiced to
clients concurrently with each periodic payroll of its worksite employees.
Historically, TeamStaff has included both components of its PEO gross billings
in revenues (gross method) due primarily to the assumption of significant
contractual rights and obligations and other liabilities TeamStaff assumes as an
employer, regardless of whether it actually collects its gross billings. After
discussions with Securities and Exchange Commission staff, and with the
concurrence of its auditors, TeamStaff has determined to change its presentation
of PEO revenues from the gross method to an approach that presents its revenues
net of worksite employee payroll costs (net method) primarily because TeamStaff
is not generally responsible for the output and quality of work performed by the
worksite employees. This change in accounting method reduced both the revenue
and direct costs for fiscal years ended September 30, 2002, 2001, and 2000 by
$485,142,000, $483,758,000 and $331,778,000, respectively, but had no effect on
gross profit, operating income or net income (loss). Consistent with this change
in revenue recognition policy, TeamStaff's PEO division direct costs do not
include the payroll costs of its worksite employees. TeamStaff's PEO division
direct costs associated with its revenue generating activities are comprised of
7
all other costs related to its worksite employees, such as the employer portion
of payroll-related taxes, employee benefit plan premiums and contributions and
workers' compensation insurance premiums.
TeamStaff 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, TeamStaff's revenue, and therefore its gross margin, will
fluctuate based on its client mix.
The temporary staffing revenue is recognized as service is rendered. TeamStaff
bills its clients based on an hourly rate. The hourly rate is intended to cover
TeamStaff'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 temporary staffing are commissions from permanent placements.
Commissions from permanent placements result from the successful placement of a
temporary employee to a customer's workforce as a permanent employee.
In accordance with Emerging Issues Task Force (EITF) No. 99-19 "Reporting
Revenue Gross as a Principal versus Net as an Agent," TeamStaff recognizes all
amounts billed to its temporary staffing customers as gross revenue because,
among other things, TeamStaff is the primary obligor in the temporary staffing
arrangement, TeamStaff has pricing latitude, TeamStaff selects temporary
employees for a given assignment from a broad pool of individuals, TeamStaff is
at risk for the payment of its direct costs, whether or not TeamStaff's
customers pay TeamStaff on a timely basis or at all, and TeamStaff assumes a
significant amount of other risks and liabilities as an employer of its
temporary employees, and therefore, is deemed to be a principal in regard to
these services. TeamStaff also recognizes as gross revenue and as unbilled
receivables, on an accrual basis, any such amounts that relate to services
performed by temporary employees which have not yet been billed to the customer
as of the end of the accounting period.
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.
Direct costs of services are reflected in TeamStaff's Statement of Operations as
"direct expenses" and are reflective of the type of revenue being generated. PEO
direct costs of revenue include employment related taxes, costs of health and
welfare benefit plans and workers' compensation insurance costs. Direct costs of
the temporary 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.
GOODWILL AND INTANGIBLE ASSETS
Beginning October 1, 2001, with the adoption of Statement of Accounting
Standards No. 142, Goodwill and Other Intangible Assets, TeamStaff no longer
amortizes goodwill or indefinite life intangible assets. Based upon the new
standard, TeamStaff will review its goodwill and other intangible assets for
possible impairment or loss of value. TeamStaff determined that no impairment of
goodwill or intangible assets existed as of the date of adoption or for the
fiscal year ended September 30, 2002.
WORKERS' COMPENSATION
As of March 22, 2002, TeamStaff's insurance provider is Zurich American
Insurance Company and the program is managed by Cedar Hill Insurance Agency,
Inc. This policy covers 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 TeamStaff.
The Zurich program covers the period March 22, 2002 through April 1, 2003,
inclusive. The program contains a large deductible feature of $500,000 for each
claim, with no maximum liability cap. The premium for the program is paid on a
monthly basis based on estimated payroll for the year and is subject to a
year-end audit. The Zurich deductible program is collateralized by a letter of
credit, inuring to the benefit of Zurich American Insurance Company, and cash
held in a trust account with a third party. The letter of credit for $4,150,000
has been secured
8
through Fleet National Bank, as part of TeamStaff's line of credit Payments will
be made to the trust on a monthly basis based on projected claims for the year.
Interest on all assets held in the trust is credited to TeamStaff. Payments for
claims and claims expenses will be made from the trust. Payments to the trust
may be adjusted from time to time based on program experience. Claims handling
services are provided by a third party administrator assigned by Cedar Hill.
Additionally, TeamStaff has outsourced its underwriting and program management
for the Zurich program to Cedar Hill Insurance Agency, Inc. and The Hobbs Group,
the Company's workers' compensation insurance broker. At September 30, 2002, the
Company has a prepaid current asset of $2,341,000 for the premium and the
prepayments made to the trust.
TeamStaff's primary workers' compensation insurance provider from January 22,
2001 through March 21, 2002, was Continental Assurance (CNA). This policy
covered 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.
The CNA policy originally covered the period from January 22, 2001, through
January 21, 2002, but was extended to March 21, 2002. It was a large deductible
program ($250,000 for each claim) with a maximum liability cap. The premium for
the policy was paid monthly based upon estimated payroll for the year and was
subject to a year-end audit by the provider. TeamStaff also maintained a
separate policy insuring a portion of the maximum deductible cap, which it may
be required to pay if claims exceed a determined number. The policy, including
the extension, insures payment of the maximum cap in excess of the first
$2,093,000, which TeamStaff pays, up to $8,663,000. Once the $8,663,000 is
exceeded, TeamStaff pays 89.5% of paid claims up to $12,133,000. If the claims
and fixed costs under the policy are less than the amounts TeamStaff paid, plus
investment returns thereon, the insurer will refund the difference to TeamStaff.
As part of the two-month extension, which was negotiated in January 2002,
TeamStaff was required to pay $495,000, which CNA asserted was owed to cover
costs for claims incurred during the policy years 1997 - 1999. As previously
disclosed, TeamStaff had received a release for those periods from CNA in
January 2001, when TeamStaff accepted CNA as its new insurance carrier.
TeamStaff has denied CNA's claim and to date, has received $224,000 back from
the original $495,000 payment. It is TeamStaff's belief that the remaining
funds, as well as certain policy issuance charges, should be returned as well.
Should TeamStaff be unsuccessful in receiving a refund of all monies paid, it
will be required to absorb these claims. However, TeamStaff has a liability on
its books for the estimated claims for the two-month extension, which exceeds
the $271,000 disputed amount. Accordingly, TeamStaff plans to offset this amount
from any monies owed CNA. On January 27, 2003, the Company filed a complaint of
unfair or deceptive acts or practices in the business of insurance against CNA
with the New Jersey Division of Insurance.
TeamStaff maintained a separate policy for certain of the business of its
subsidiary, HR2, Inc., which had provided that TeamStaff was only responsible
for the audited premium for each policy period. This policy ended on December
31, 2001. From January 1, 2002 through March 21, 2002, these employees were
covered under the CNA policy.
On August 7, 2002, TeamStaff entered into an agreement with a prior workers'
compensation and employer's liability insurance carrier fully and finally
settling all loss and expense charges for four years of coverage, from 1996 to
2000, through the insurance carrier in exchange for an immediate payment by
TeamStaff. Pursuant to the agreement, the insurance carrier agreed that no more
recalculations would be done for any of TeamStaff's workers' compensation
programs with the carrier. As a result of the final adjustment, TeamStaff
reduced its reserve for workers' compensation, which resulted in a decrease in
direct expenses of $2,661,000.
TeamStaff records in direct expenses a monthly charge based upon its estimate of
the year's ultimate fully developed claims 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 TeamStaff's insurers,
internal analysis and its insurance broker. TeamStaff's internal analysis
includes quarterly review of open claims and review of historical claims related
to the workers' compensation programs. While management uses available
information, including nationwide loss ratios, to estimate ultimate claims,
future adjustments may be necessary based on actual claims. Since the recorded
ultimate expense is based upon a ten-year projection of actual claims payment
and the timing of these payments, as
9
well as the interest earned on TeamStaff's prepayments, TeamStaff relies on
actuarial tables to estimate its ultimate expense.
TeamStaff'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 TeamStaff's assessment of the costs
of providing workers' compensation to the client. If TeamStaff'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, TeamStaff is
unable to recover these excess charges from the clients. TeamStaff 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 or when workers' compensation rates are increased by state agencies.
As of September 30, 2002, the adequacy of the workers' compensation reserves was
determined, in management's opinion, to be reasonable. However, since these
reserves are for claims that have not been sufficiently developed due to their
relatively young age, and such variables as timing of payments and investment
returns thereon are uncertain or unknown, actual results may vary from current
estimates. TeamStaff 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 TeamStaff's prepayments and adjust the
reserves as deemed appropriate.
EMPLOYEE PENSION PLAN
Effective October 1, 2000, TeamStaff adopted a non-qualified, supplemental
executive retirement plan. As of September 30, 2002, only two officers were
covered under the SERP plan. TeamStaff records annual amounts relating to this
plan in accordance with calculations which include various actuarial
assumptions, such as discount rates and assumed rates of return. TeamStaff
reviews its actuarial assumptions on an annual basis and makes modifications to
the assumptions based on current rates and trends when it is deemed appropriate
to do so.
DEFERRED TAXES
TeamStaff accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets are reflected on the balance sheet when it is
determined that it is more likely than not that the asset will be realized.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to pay its service fees. The
Company believes that the success of its PEO business is heavily dependent on
its ability to collect these service fees for several reasons, including (i) the
large volume and dollar amount of transactions processed by the Company, (ii)
the periodic and recurring nature of payroll, upon which the service fees are
based, and (iii) the fact that the Company is at risk for the payment of its
direct costs regardless of whether its clients pay their service fees. To
mitigate this risk, the Company has established very tight credit policies. The
Company generally requires its clients to pay their service fees no later than
one day prior to the applicable payroll date. In addition, the Company maintains
the right to terminate its Client Service Agreement and associated worksite
employees or to require prepayment, letters of credit or other collateral upon
deterioration in a client's financial position or upon nonpayment by a client.
As a result of these efforts, the outstanding balance of accounts receivable and
subsequent losses related to customer nonpayment have historically been very low
as a percentage of revenues. However, if the financial condition of the
Company's customers were to deteriorate rapidly, resulting in nonpayment, the
Company's accounts receivable balances could grow and the Company could be
required to provide for additional allowances, which would decrease net income
in the period that such determination was made.
FISCAL YEAR 2002 AS COMPARED TO FISCAL YEAR 2001 AS RESTATED
The results below reflect a restatement of the balance sheet and statement of
income for the September 30, 2001 fiscal year end. As discussed in Note 12 of
the financial statements included in this Form 10-K, the restatement has been
required in order to properly reflect certain footnote disclosures and
adjustments regarding the Company's supplemental executive retirement plan
adopted on October 1, 2000.
10
TeamStaff's revenues for the fiscal years ended September 30, 2002 and 2001 were
$180,823,000 and $165,969,000 respectively, which represents an increase of
$14,854,000 or 8.9%. While our Medical Staffing business continued its strong
growth, growing $10,419,000, or 16.2%, over last year, PEO revenues grew
$4,093,000, or 4.2%, over the same period last year. The modest growth in
revenue in PEO is principally the result of two factors: the sale of our El Paso
based PEO business in September 2001 and the loss of a major customer. In fiscal
2001, the El Paso business accounted for approximately $4,800,000 in PEO
revenue. In addition, a large customer in our Boca Raton, Florida PEO region
filed for bankruptcy protection in the fourth quarter of fiscal 2001 and we
ceased providing services to the entity effective in July 2001. This resulted in
a loss in revenue of approximately $3,600,000. Our PEO revenue growth is also
being affected in part by the program, begun in the second fiscal quarter of
2002, to review the profitability of all PEO clients and effect price increases
where appropriate to meet a targeted level of profitability. This loss in
business was somewhat offset by revenue generated by our acquisition of the
assets of Corporate Staffing Concepts in January of 2002, which generated
revenue of $3,100,000.
Direct expenses were $147,178,000 for the fiscal year ended September 30, 2002
and $137,872,000 for the comparable period last year, representing an increase
of $9,306,000 or 6.7%. As a percentage of revenue, direct expenses for 2002 and
2001 were 81.4% and 83.1%, respectively. This decrease is due primarily to the
settlement of approximately four years of workers' compensation programs with
one of our former insurance carriers resulting in a reduction of direct expense
by $2,661,000. In addition, the Medical Staffing business made up a larger
percentage of TeamStaff's consolidated revenue this year versus fiscal 2001,
with its lower direct expenses as a percentage of its revenue. In the fiscal
year ended September 30, 2002, the Medical Staffing business made up 41.4% of
TeamStaff's consolidated revenue versus 38.8% in the fiscal year ended September
30, 2001.
Included in fiscal 2002 direct expenses is a charge of approximately $760,000,
incurred in the fourth fiscal quarter, to increase the workers' compensation
reserves for the CNA policy period from January 22, 2001 to March 21, 2002. In
the third fiscal quarter ended June 30, 2002,TeamStaff took a $200,000 charge to
increase its workers' compensation reserves for the same policy period. At that
time, we believed that TeamStaff's reserves for this policy period were adequate
to cover future loss development. However, in the fourth fiscal quarter, we
determined that CNA had not been reflecting actual losses from claims on its
monthly reports on a timely basis. As a result, based upon the loss runs
received from CNA in the fourth calendar quarter, TeamStaff was required to
increase its reserves to cover the more current exposure. We have attempted,
unsuccessfully, to get any response from CNA management to resolve this issue.
On January 27, 2003, TeamStaff filed a complaint of unfair or deceptive acts or
practices in the business of insurance against CNA with the New Jersey Division
of Insurance. Although TeamStaff has increased its workers' compensation loss
reserves to reflect this potential liability, we presently do not plan to fund
the losses until the matter is resolved with CNA. In the fiscal year ended
September 30, 2001, TeamStaff recorded a $582,000 workers' compensation charge
to increase our workers' compensation reserve for the policy period covering
August 1, 1999 to January 21, 2001. This coverage was with another insurer with
whom TeamStaff settled all liability for future adjustments in August 2002.
Gross profit was $33,645,000 and $28,097,000 for the fiscal years ended
September 30, 2002 and 2001, respectively, representing an increase of
$5,548,000 or 19.8%. Gross profit, as a percentage of revenue, was 18.6% and
16.9% for the fiscal years ended September 30, 2002 and 2001, respectively. The
increase in the gross profit percentage is primarily due to the $2,661,000
insurance settlement previously mentioned offset by the $960,000 charge
mentioned above, the continued growth in the Medical Staffing business and the
increased profitability in the PEO business. As previously stated, TeamStaff
reflected a $582,000 workers' compensation charge in the third fiscal quarter of
2001, to increase reserves to the maximum limit for the policy periods from
August 1, 1999 through January 21, 2001 based upon the increased development of
incurred losses.
Selling, general and administrative (SG&A) expenses for the fiscal years ended
September 30, 2002 and 2001 were $28,321,000 and $23,395,000, respectively,
representing an increase of $4,926,000 or 21.1%. As a percentage of revenue,
SG&A expenses increased to 15.7% in the fiscal year ended September 30, 2002
versus 14.1% in the fiscal year ended September 30, 2001. Of this increase,
$1,815,000 was due to the acquisition of BrightLane, while $352,000 was due to
the acquisition of certain assets from Corporate Staffing Concepts LLC . The
SG&A expenses in the Medical Staffing business grew by $1,135,000, in order to
support its growing business. Corporate overhead grew by $2,035,000 which was
mainly due to: $159,000 in acquisition costs incurred in two aborted PEO
acquisition efforts; $400,000 in staff additions; $175,000 due to a bonus given
to the Chief Executive Officer upon the successful negotiation of TeamStaff's
new workers' compensation policy; $240,000 due to investment banking fees
11
and related costs incurred with respect to the analysis of strategic
alternatives associated with the Medical Staffing business; $283,000 in higher
corporate insurance associated with the growth of TeamStaff as well as due to
much higher rate increases throughout the insurance market; and $329,000 in
costs associated with TeamStaff's year-end accounting issues associated with the
restatement of 2001 and the hiring of new auditors. Excluding the SG&A expenses
from the acquisition of Corporate Staffing Concepts, PEO SG&A expenses were
$389,000 lower than last year.
Depreciation and amortization for the fiscal years ended September 30, 2002 and
2001 were $1,413,000 and $1,424,000, respectively, representing a decrease of
$11,000 or 0.8%. As a result of implementing SFAS No.142 as of October 1, 2001,
TeamStaff has ceased amortizing any indefinite life intangible assets and
goodwill. In the fiscal year ended September 30, 2001, we amortized $948,000 in
intangible assets and goodwill. This decrease was substantially offset by
depreciation expense from the software and hardware acquired in the BrightLane
transaction.
Interest and other income for the fiscal years ended September 30, 2002 and 2001
were $1,117,000 and $959,000, respectively, representing an increase of $158,000
or 16.5%. Of this increase, $218,000 relates to increased late payment fee
income in the Medical Staffing business, and $60,000 reflects the referral fees
TeamStaff is receiving as a result of the referral to a third party of certain
of the former Medical Staffing business when we closed our Houston Medical
Staffing service office in April 2002. This was reduced somewhat by lower
interest rates on overnight investments.
Interest and other expense were $168,000 in the fiscal year ended September 30,
2002 as compared to $1,274,000 in fiscal year ended September 30, 2001,
representing a decrease of $1,106,000 or 86.8%. These decreases were due to the
retirement of our debt facility with FINOVA Capital effected August 31, 2001.
Income tax expense, before the impact of an extraordinary item, for the fiscal
year ended September 30, 2002 was $1,785,000 versus $1,261,000 fiscal 2001. The
fiscal 2002 and 2001 income tax expenses were reduced by $239,000 and $218,000,
respectively, in tax credits that are available to us. TeamStaff's effective tax
rate was 36.7% and 42.6% for the fiscal years ended September 30, 2002 and 2001,
respectively. The decrease in the effective tax rate relates primarily to
non-deductible goodwill, which, as of October 1, 2001, is no longer amortized as
a result of implementing SFAS No. 142.
Income before extraordinary item for the fiscal years ended September 30, 2002
and 2001 were $3,075,000 and $1,702,000, respectively, representing an increase
of $1,373,000 or 80.7%. As mentioned above, this favorable improvement was due
to the favorable settlement of workers' compensation claims offset by an
increase in our CNA workers' compensation reserves. In addition, TeamStaff
incurred additional one-time selling, general and administrative costs as
discussed above. All business units' profitability increased over last year as
reported in TeamStaff's Segment Reporting disclosure.
The extraordinary item net of taxes pertains to the unamortized financing costs
and fees, associated with the FINOVA loans, written off when these loans were
retired early in April and August 2001. These loans had a remaining life at the
time of payment of approximately two years (April 2003).
Net income for the fiscal year ended September 30, 2002 was $3,075,000, or $0.19
per fully diluted share, as compared to $1,348,000, or $0.15 per fully diluted
share, for the fiscal year ended September 30, 2001.
FISCAL YEAR 2001 AS RESTATED AS COMPARED TO FISCAL YEAR 2000
The results below reflect a restatement of the balance sheet and statement of
income for the September 30, 2001 fiscal year end. As discussed in Note 12 in
the financial statements included in this Form 10-K, the restatement has been
required in order to properly reflect certain footnote disclosures and
adjustments regarding the Company's supplemental executive retirement plan
adopted on October 1, 2000.
Our revenues for the fiscal year ended September 30, 2001 were $165,969,000 as
compared to fiscal year 2000 of $115,965,000, which represents an increase of
$50,004,000 or 43.1%. Driving this growth was the performance of our "TeamStaff
SB" division (formerly operated as the "Synadyne" division) and our HR2
subsidiary that were acquired in April and October 2000, respectively, and
therefore not fully included in the prior year's figures. These two acquisitions
accounted for $22,068,000 and $8,000,000 of the revenue growth for the year.
Internal growth
12
accounted for the remaining $19,936,000 increase in revenue, representing an
increase of 17.2% over fiscal 2000. Our TeamStaff Rx division accounted for
$22,000,000 of this growth increase and again experienced a strong year.
Direct expenses for fiscal 2001 were $137,872,000 as compared to $95,209,000 for
fiscal 2000, which represents an increase of $42,663,000 or 44.8%, in line with
our revenue growth. As a percentage of revenue, direct expenses for the fiscal
years 2001 and 2000 were 83.1% and 82.1% respectively.
Gross profits were $28,097,000 and $20,756,000 for fiscal years 2001 and 2000,
respectively, representing an increase of $7,341,000 or 35.4%. Gross profits, as
a percentage of revenue, were 16.9% and 17.9% for the fiscal years 2001 and
2000, respectively. Workers' compensation profit increased slightly over last
year, despite recording a $582,000 charge in this year's third fiscal quarter to
increase our loss reserves to the maximum liability for the policy periods
ending July 31, 2000 and January 21, 2001. Additionally, due to administrative
challenges and difficulties associated with multiple software platforms, we
failed to terminate benefit coverage for worksite employees of the PEO
operations on a timely basis. This resulted in unrecoverable benefit losses of
approximately $500,000.
Selling, general and administrative expenses ("SG&A") for fiscal 2001 increased
$6,390,000, or 37.6%. This increase is attributed to the Synadyne acquisition
($2,544,000), the HR2 acquisition ($683,000), the BrightLane acquisition
($288,000), the $142,000 in expenses incurred in an aborted acquisition and the
$72,000 in costs incurred in our listing with the Nasdaq National Market. After
adjusting for these aforementioned increases, SG&A increased $2,661,000, or 15.7
% over the same period last year. Of this increase, $1,172,000 was due to our
medical staffing business, which grew revenue by approximately $22,000,000. SG&A
expenses as a percentage of revenue were 14.1% and 14.7% for the fiscal years
2001 and 2000 respectively.
Depreciation and amortization increased $91,000, or 6.8%, in fiscal 2001
primarily due to amortization of goodwill from the acquisitions of the assets of
Synadyne in April 2000 and the stock of HR2 in October 2001, offset by a
reduction in depreciation expense from assets that were fully depreciated in
fiscal 2001.
Interest income in fiscal 2001 increased $327,000, or 56%, due to increased late
payment fees, as well as the continuing increase in TeamStaff's cash flow.
Interest expense in fiscal 2001 decreased $327,000,or 20.4%, due to retirement
of the FINOVA debt in April and August 2001.
Income tax expense, before the impact of an extraordinary item, for fiscal 2001
was $1,261,000 versus $428,000 in fiscal 2000. The higher expense is associated
with the higher level of earnings. The fiscal 2001 and 2000 income tax expenses
were reduced by $218,000 and $ 374,000, respectively, in tax credits that are
available to us. TeamStaff's effective tax rate for fiscals 2001 and 2000 were
42.5% and 31.0% respectively. The lower effective tax rate in fiscal 2000 is
attributed to the tax credits that made up a larger percentage of income tax
expense in fiscal 2000 then in fiscal 2001.
Income before extraordinary item was $1,702,000 versus $951,000 in fiscal 2000,
representing a growth of $751,000, or 79%. The performance of our temporary
staffing and payroll services business continues to drive the earnings of
TeamStaff. Income before taxes and extraordinary items for the temporary
staffing and payroll services businesses were $7,697,000 and $1,794,000,
respectively. PEO continues to be the major growth area and one in which we
continue to concentrate our efforts. The loss before income taxes for PEO, as
reflected in the Segment Reporting Note 9 contained in our financial statements,
was $9,000. Included in this loss is the $200,000 in losses suffered by our El
Paso office (sold in September 2001), as well as the unrecoverable benefit
losses discussed above.
The extraordinary item net of taxes pertains to the unamortized financing costs
and fees, associated with the FINOVA loans, written off when these loans were
retired early in April and August 2001. These loans had a remaining life at the
time of payment of approximately two years (April 2003).
Net income for fiscal 2001 was $1,348,000 versus $951,000 in fiscal 2000,
representing a growth of $397,000, or 41.8%. This increase in earnings is
attributable to the reasons elaborated above.
13
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the fiscal year 2002 was
$1,176,000 compared to $3,871,000 during fiscal 2001. The decrease in cash from
operations compared to last year relates primarily to timing of payments in this
period versus the same period last year in accounts payable, accrued payroll and
expenses. 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. In addition there
was an increase in other current assets of $3,545,000 primarily resulting from
prepayments to our workers' compensation insurance carrier and a lower increase
in accounts receivable than the prior period due to the change in payment terms
in a market segment of the PEO business, offset to some extent by the continued
earnings improvement of the Company.
Cash used in investing activities of $2,910,000 was primarily related to: costs
incurred for the licensing of the Lawson financial system amounting to $814,000;
capitalized internally developed software of $566,000; other computer hardware
and software acquisitions of $408,000; and capital additions associated with the
move to our new PEO location in Boca Raton, Florida of $246,000. Cash invested
in acquisitions of $727,000 was due to the purchase of the assets of Corporate
Staffing Concepts amounting to $282,000 and additional charges to goodwill
associated with the acquisition of BrightLane of $440,000, which were related to
adjustments of estimates for professional services and employment contracts.
The cash provided by financing activities of $464,000 included the tax benefit
resulting from stock options exercised in connection with the acquisition of
BrightLane, recorded as additional paid in capital, offset substantially by the
repurchase of $1,146,000 of the Company's stock.
As of September 30, 2002, the Company had cash and cash equivalents of
$12,455,000 and net accounts receivable of $24,569,000.
Management of the Company believes that its existing cash will be sufficient to
support cash needs for the next twelve months. The amount of available cash
includes cash held for future payroll and other related taxes payable on a
quarterly basis.
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. Since inception
through September 30, 2002, the Company has repurchased 330,256 shares at an
average cost of $4.99 per share. These share repurchases are reflected as
treasury shares in the Company's financial statements and will eventually be
retired. During the fiscal year ended September 30, 2002, 242,945 shares were
purchased at a cost of $1,146,000. In November 2002, the Board of Directors
authorized an additional purchase of up to $1,000,000 in stock.
On April 9, 2002, the Company entered into a revolving loan facility with Fleet
National Bank (Fleet). The total outstanding loan amount cannot exceed at any
one time the lesser of $7,000,000 or the sum of 85% of qualified accounts
receivable, less an amount reserved by Fleet to support ACH processing exposure.
The interest rate is either the Fleet prime rate or LIBOR, at the discretion of
the Company, and is currently 4.25%. The facility is collateralized by
substantially all of the assets of the Company, including its accounts
receivables. The facility is subject to certain covenants including, but not
limited to, interest rate coverage of 2.0 to 1.0, total liabilities to tangible
net worth ratio of 2.0 to 1.0, and minimum working capital of $10,000,000. As of
September 30, 2002, there was no amount outstanding on the credit facility. The
Company has an outstanding letter of credit of $4,150,000 under the facility for
the Company's workers' compensation policy, as previously mentioned.
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.
RECENTLY ISSUED 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
14
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
indefinite life intangible assets 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. The Company's intangible
assets consist primarily of the TeamStaff trade name and the First
Union/Wachovia Relationship. This relationship requires First Union/Wachovia to
promote TeamStaff's services to its banking customers throughout the United
States. The Company's First Union relationship and TeamStaff tradename have
indefinite lives and are no longer being amortized effective October 1, 2001
because they are expected to generate cash flows indefinitely. The effect of not
amortizing goodwill and intangible assets on income before income taxes and net
income for the fiscal year ended September 30, 2002 is $948,000 and $778,000,
respectively. The Company estimates that net income and diluted earnings per
share after extraordinary items would have been approximately $2,126,000 and
$0.24, respectively, for the fiscal year ended September 30, 2001 had the
provisions of the new standard been applied as of October 1, 2000. The Company
estimates that net income and diluted earnings per share would have been
approximately $1,680,000 and $0.21, respectively, for the fiscal year ended
September 30, 2000 had the provisions of the new standard been applied as of
October 1, 1999. The Company tested its intangible assets during the first
quarter of fiscal year 2002, as required by SFAS No. 142, and there was no
impairment. The Company has tested its goodwill for impairment during the second
quarter of fiscal 2002 as required by SFAS No. 142 and there is no impairment.
The Company again tested its intangibles and goodwill as of September 30, 2002,
and there is no impairment. As of September 30, 2002, total goodwill was
$27,167,000 consisting of $25,462,000 and $1,705,000 for the PEO and Medical
Staffing segments respectively. Goodwill for the fiscal year ended September 30,
2002 increased $726,000. The increase, all of which related to PEO operations,
resulted primarily from the acquisition of Corporate Staffing Concepts, LLC and
additional costs associated with the BrightLane acquisition.
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 the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supersedes 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.
On May 1, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 is effective for the Company's fiscal year beginning October 1,
2002. The Company anticipates no impact from this standard on the Company's
financial statements.
On July 30, 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"), that is applicable to exit or disposal activities initiated after
December 31, 2002. This standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This standard does not
apply where SFAS 144 is applicable.
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" ("SFAS 148"), that is applicable to financial statements issued for
fiscal years ending after December 15, 2002. In addition, interim disclosure
provisions are applicable for financial statements issued for interim periods
beginning after December 15, 2002. This standard amends SFAS 123 and
15
provides guidance to companies electing to voluntarily change to the fair value
method of accounting for stock-based compensation. In addition, this standard
amends SFAS 123 to require more prominent and more frequent disclosures in
financial statements regarding the effects of stock-based compensation.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
TeamStaff, Inc.
Somerset, NJ:
We have audited the accompanying balance sheet of TeamStaff, Inc. as of
September 30, 2002, and the related consolidated statements of income and
comprehensive income, shareholders' equity, and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in Part
IV, Item 15. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the financial position of TeamStaff, Inc. as of
September 30, 2002, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
The financial statements of TeamStaff, Inc. as of September 30, 2001, and for
the years ended September 30, 2001 and 2000, before the restatement described in
Note (12), were audited by other auditors who have ceased operations and whose
report dated January 11, 2002, expressed an unqualified opinion on those
statements. We audited the adjustments described in Note (12) that were applied
to restate the 2001 financial statements, and in our opinion, such adjustments
are appropriate and have been properly applied. However, we were not engaged to
audit or apply any procedures to the 2001 financial statements of the Company,
other than with respect to such adjustments and, accordingly we do not express
an opinion or any other form of assurance on the 2001 financial statements taken
as a whole.
Lazar, Levine & Felix, LLP
New York, NY
January 30, 2003, except for items
relevant to the fourth paragraph of
Note 2, the date of which is May 14, 2003.
17
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002 AND 2001
Page 1 of 2
ASSETS 2001
2002 As Restated
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 12,455,000 $ 13,725,000
Restricted cash 129,000 129,000
Accounts receivable, net of allowance for doubtful accounts
of $262,000 and $549,000 at September 30, 2002 and 2001 24,569,000 25,149,000
Deferred tax asset 1,791,000 2,241,000
Other current assets 4,841,000 1,016,000
------------ ------------
Total current assets 43,785,000 42,260,000
------------ ------------
EQUIPMENT AND IMPROVEMENTS:
Equipment 3,321,000 3,114,000
Computer equipment 2,411,000 2,038,000
Leasehold improvements 358,000 290,000
------------ ------------
6,090,000 5,442,000
Less - accumulated depreciation and amortization (4,289,000) (3,607,000)
------------ ------------
1,801,000 1,835,000
------------ ------------
DEFERRED TAX ASSET 6,680,000 6,984,000
AMORTIZED INTANGIBLE ASSETS, net of accumulated amortization of
$822,000 and $187,000 at September 30, 2002 and 2001
2,375,000 1,570,000
INDEFINITE LIFE INTANGIBLE ASSETS 11,109,000 11,109,000
GOODWILL 27,167,000 26,441,000
OTHER ASSETS 1,049,000 1,661,000
------------ ------------
$ 93,966,000 $ 91,860,000
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
18
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002 AND 2001
Page 2 of 2
LIABILITIES AND SHAREHOLDERS' EQUITY 2001
2002 As Restated
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 59,000 $ 70,000
Accounts payable 4,252,000 7,072,000
Accrued payroll 17,034,000 14,013,000
Accrued expenses and other current liabilities 6,464,000 8,365,000
------------ ------------
Total current liabilities 27,809,000 29,520,000
LONG-TERM DEBT, net of current portion 147,000 193,000
ACCRUED PENSION LIABILITY 1,271,000 1,004,000
------------ ------------
Total liabilities 29,227,000 30,717,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.10 par value; authorized 5,000,000 shares; 0 issued
and outstanding -- --
Common stock, $.001 par value; authorized 40,000,000 shares;
issued 16,237,142 and 16,196,942; outstanding 15,906,886 and
16,109,631, respectively 16,000 16,000
Additional paid-in capital 65,200,000 63,544,000
Accumulated retained earnings (deficit) 1,313,000 (1,762,000)
Receivable from shareholder -- (90,000)
Accumulated comprehensive losses (142,000) (63,000)
Treasury stock, 330,256 and 87,311 shares at cost, respectively (1,648,000) (502,000)
------------ ------------
64,739,000 61,143,000
------------ ------------
$ 93,966,000 $ 91,860,000
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
19
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended September 30,
-------------------------------------------------------
2001
2002 As Restated 2000
------------- ------------- -------------
REVENUES AS AMENDED $ 180,823,000 $ 165,969,000 $ 115,965,000
DIRECT EXPENSES AS AMENDED 147,178,000 137,872,000 95,209,000
------------- ------------- -------------
Gross profit 33,645,000 28,097,000 20,756,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 28,321,000 23,395,000 17,005,000
DEPRECIATION AND AMORTIZATION 1,413,000 1,424,000 1,333,000
------------- ------------- -------------
Income from operations 3,911,000 3,278,000 2,418,000
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 1,057,000 911,000 584,000
Interest expense (168,000) (1,274,000) (1,601,000)
Other income (expense) 60,000 48,000 (22,000)
------------- ------------- -------------
949,000 (315,000) (1,039,000)
------------- ------------- -------------
Income before income taxes and extraordinary item 4,860,000 2,963,000 1,379,000
INCOME TAX EXPENSE (1,785,000) (1,261,000) (428,000)
------------- ------------- -------------
Income before extraordinary item 3,075,000 1,702,000 951,000
EXTRAORDINARY ITEM - EARLY EXTINGUISTMENT OF DEBT, NET OF TAX
BENEFIT OF $256,000 -- (354,000) --
------------- ------------- -------------
Net income 3,075,000 1,348,000 951,000
OTHER COMPREHENSIVE EXPENSE:
Minimum pension liability adjustment, net of tax (79,000) (63,000) --
------------- ------------- -------------
COMPREHENSIVE INCOME $ 2,996,000 $ 1,285,000 $ 951,000
============= ============= =============
EARNINGS PER SHARE - BASIC
Income before extraordinary item $ 0.19 $ 0.20 $ 0.12
Extraordinary item -- (0.04) --
------------- ------------- -------------
Net Income $ 0.19 $ 0.16 $ 0.12
============= ============= =============
EARNINGS PER SHARE - DILUTED
Income before extraordinary item $ 0.19 $ 0.19 $ 0.12
Extraordinary item -- (0.04) --
------------- ------------- -------------
Net Income $ 0.19 $ 0.15 $ 0.12
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 16,013,546 8,693,243 7,954,176
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND EQUIVALENTS 16,183,466 8,907,282 7,990,912
OUTSTANDING - DILUTED ============= ============= =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
20
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Accumulated
Common Stock Additional Retained Receivable
------------------------------ Paid-In Earnings/ From
Shares Amount Capital (Deficit) Shareholder
------------ ------------ ------------ ------------ ------------
BALANCE,
September 30, 1999 7,980,718 $ 8,000 $ 21,093,000 $ (4,061,000) $-
Exercise of stock 887 -- 4,000 -- --
options
Common stock
repurchased -- -- -- -- --
Non-cash compensation
expense related to
warrants -- -- 200,000 -- --
Net income -- -- -- 951,000 --
------------ ------------ ------------ ------------ ------------
BALANCE,
September 30, 2000 7,981,605 8,000 21,297,000 (3,110,000) --
Common stock
repurchased -- -- -- -- --
Exercise of stock
options 16,775 -- 16,000 -- --
Exercise of stock
warrants 73,570 -- 179,000 -- --
Common stock issued
in connection with
the acquisition of
BrightLane 8,066,522 8,000 41,892,000 -- --
Common stock issued
in connection with
the acquisition of HR2 89,224 -- 300,000 -- --
Settlement of certain
escrow shares (54,996) -- (340,000) -- --
Stock sold to director 10,114 -- 40,000 -- --
Receivable from
shareholder in
connection with
option exercise 14,128 -- 90,000 -- (90,000)
Non-cash compensation
expense related to
warrants -- -- 70,000 -- --
Minimum pension
liability adjustment
Net income, as restated -- -- -- 1,348,000 --
------------ ------------ ------------ ------------ ------------
BALANCE,
September 30, 2001
As Restated 16,196,942 16,000 63,544,000 (1,762,000) (90,000)
Common stock
repurchased -- -- -- -- --
Exercise of stock
options 36,914 -- 129,000 -- --
Exercise of stock
warrants 3,286 -- 14,000 -- --
Repayment of loan
to Shareholder -- -- -- -- 90,000
Income tax benefit
from stock options
exercised -- -- 1,513,000 -- --
Minimum pension
liability adjustment -- -- -- -- --
Net income -- -- -- 3,075,000 --
------------ ------------ ------------ ------------ ------------
BALANCE,
September 30, 2002 16,237,142 $ 16,000 $ 65,200,000 $ 1,313,000 $-
============ ============ ============ ============ ============
Treasury Stock Other Total
------------------------------ Comprehensive Shareholders
Shares Amount Loss Equity
------------ ------------ ------------- ------------
BALANCE,
September 30, 1999 18,300 $ (75,000) $- $ 16,965,000
Exercise of stock
options -- -- -- 4,000
Common stock
repurchased 17,100 (61,000) -- (61,000)
Non-cash compensation
expense related to
warrants -- -- -- 200,000
Net income -- -- -- 951,000
------------ ------------ ------------ ------------
BALANCE,
September 30, 2000 35,400 (136,000) -- 18,059,000
Common stock
repurchased 51,911 (366,000) -- (366,000)
Exercise of stock
options -- -- -- 16,000
Exercise of stock
warrants -- -- -- 179,000
Common stock issued
in connection with
the acquisition of
BrightLane -- -- -- 41,900,000
Common stock issued
in connection with
the acquisition of HR2 -- -- -- 300,000
Settlement of certain
escrow shares -- -- -- (340,000)
Stock sold to director -- -- -- 40,000
Receivable from
shareholder in
connection with
option exercise -- -- -- --
Non-cash compensation
expense related to
warrants -- -- -- 70,000
Minimum pension
liability adjustment (63,000) (63,000)
Net income, as restated -- -- -- 1,348,000
------------ ------------ ------------ ------------
BALANCE,
September 30, 2001
As Restated 87,311 (502,000) (63,000) 61,143,000
Common stock
repurchased 242,945 (1,146,000) -- (1,146,000)
Exercise of stock
options -- -- -- 129,000
Exercise of stock
warrants -- -- -- 14,000
Repayment of loan
to Shareholder -- -- -- 90,000
Income tax benefit
from stock options
exercised -- -- -- 1,513,000
Minimum pension
liability adjustment -- -- (79,000) (79,000)
Net income -- -- -- 3,075,000
------------ ------------ ------------ ------------
BALANCE,
September 30, 2002 330,256 $ (1,648,000) $ (142,000) $ 64,739,000
============ ============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
21
TEAMSTAFF, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30,
----------------------------------------------------
2001
2002 As Restated 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,075,000 $ 1,348,000 $ 951,000
Adjustments to reconcile net income to net
cash provided by operating activities, net of acquired
businesses:
Deferred income taxes 1,173,000 123,000 73,000
Depreciation and amortization 1,413,000 1,424,000 1,333,000
Provision for doubtful accounts 546,000 526,000 162,000
Non-cash write-off of deferred financing cost -- 435,000 --
Loss on disposal of equipment -- -- 24,000
Non-cash compensation expense related to warrants -- 70,000 200,000
Gain on sale of regional office -- (50,000) --
Changes in operating assets and liabilities, net of acquired businesses:
Decrease (increase) in accounts receivable 34,000 (4,977,000) (7,905,000)
(Increase) decrease in other current assets (3,545,000) 449,000 (220,000)
(Increase) decrease in other assets (87,000) (1,901,000) 197,000
(Decrease)increase in accounts payable, accrued
expenses and other current liabilities (1,700,000) 5,174,000 9,040,000
Decrease (increase) in restricted cash -- 246,000 (13,000)
Increase in pension liability 267,000 1,004,000 --
------------ ------------ ------------
Net cash provided by operating activities 1,176,000 3,871,000 3,842,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (2,183,000) (589,000) (486,000)
Proceeds from sale of regional office -- 500,000 --
Acquisition of businesses, net of cash acquired (727,000) 10,283,000 (3,314,000)
------------ ------------ ------------
Net cash (used in) provided by investing activities (2,910,000) 10,194,000 (3,800,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on long-term debt -- -- 4,000,000
Principal payments on long-term debt -- (6,983,000) (1,055,000)
Payments on revolving line of credit -- (899,000) (559,000)
Net proceeds from issuance of preferred stock -- 3,500,000 --
Repayments on capital leases obligations (57,000) (49,000) (34,000)
Net proceeds from issuance of common stock, net of expenses -- 40,000 --
Net proceeds from the exercise of stock options and warrants 144,000 195,000 4,000
Common shares repurchased (1,146,000) (366,000) (61,000)
Repayment of loan from Shareholder 90,000 -- --
Net comprehensive expense on pension (79,000) (63,000) --
Income tax benefit on stock options exercised 1,512,000 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities 464,000 (4,625,000) 2,295,000
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,270,000) 9,440,000 2,337,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,725,000 4,285,000 1,948,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,455,000 $ 13,725,000 $ 4,285,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for-
Interest $ 168,000 $ 1,892,000 $ 1,242,000
============ ============ ============
Income taxes $ 1,190,000 $ 797,000 $ 489,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Borrowings under capital leases -- -- $ 272,000
Fair value of escrow shares received in settlement -- 340,000 --
Note receivable in connection with sale of regional office (El 125,000 425,000 --
Paso)
Retirement of preferred stock -- 3,500,000 --
Receivable from shareholder in connection with option exercised -- 90,000 --
============ ============ ============
During fiscal 2001 the Company issued common stock valued at $41.9 million in
connection with the acquisition of BrightLane.com and HR2.
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
22
TEAMSTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS:
TeamStaff, Inc. (the "Company"), formerly Digital Solutions, Inc. ("DSI") a New
Jersey Corporation, with its subsidiaries, provides a broad spectrum of human
resource services including professional employer services, payroll processing,
human resource administration and placement of temporary and permanent
employees. The Company has regional offices in Somerset, New Jersey; Houston,
Texas; Northampton, Massachusetts; and Clearwater and Boca Raton, Florida and
sales service centers in New York, New York; Houston, Texas; Boca Raton and
Clearwater, Florida; Woburn and Northampton, Massachusetts; Alpharetta, Georgia;
and Somerset, New Jersey.
Effective April 8, 2000, the Company acquired substantially all of the assets of
the professional employer organization division of Outsource International, Inc.
("Outsource") which had operated under the trade name "Synadyne". The Company
operates these assets, which were comprised mostly of PEO contracts, as part of
its TeamStaff SB division.
Effective October 2, 2000, the Company acquired all the stock of the
professional employer organization ("PEO") business of HR(2).
Effective August 31, 2001, the Company acquired all the stock of BrightLane.com,
inc. (BrightLane).
Effective January 1, 2002, TeamStaff acquired the accounts and related assets of
Corporate Staffing Concepts LLC., a PEO entity operating primarily in western
Massachusetts and Connecticut.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION-
The accompanying consolidated financial statements include the accounts of
TeamStaff, Inc. and its subsidiaries, all of which are wholly owned. 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.
The financial statements related to fiscal year 2001 contained in these
financial statements have been restated to reflect certain adjustments which are
described in detail in Note 12.
USE OF ESTIMATES-
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 AND CHANGE IN POLICY-
TeamStaff accounts for its revenues in accordance with EITF 99-19, Reporting
Revenues Gross as a Principal Versus Net as an Agent. TeamStaff's professional
employer organization division revenues historically had been derived from its
PEO division gross billings, which were based on: (i) the payroll cost of its
worksite employees; and (ii) associated payroll taxes, benefit costs, workers'
compensation charges and administrative fees. The gross billings are invoiced to
clients concurrently with each periodic payroll of its worksite employees.
Historically, TeamStaff has included both components of its PEO gross billings
in revenues (gross method) due primarily to the assumption of significant
contractual rights and obligations and other liabilities TeamStaff assumes as an
employer, regardless of whether it actually collects its gross billings. After
discussions with Securities and Exchange Commission staff, and with the
concurrence of its auditors, TeamStaff has determined to change its presentation
of PEO revenues from the gross method to an approach that presents its revenues
net of worksite employee payroll costs (net method) primarily
23
because TeamStaff is not generally responsible for the output and quality of
work performed by the worksite employees. This change in accounting method
reduced both the revenue and direct costs for fiscal year end September 30,
2002, 2001, and 2000 by $485,142,000, $483,758,000, and $331,778,000
respectively, but had no effect on gross profit, operating income or net income
(loss). Consistent with this change in revenue recognition policy, TeamStaff's
PEO division direct costs do not include the payroll costs of its worksite
employees. TeamStaff's PEO division direct costs associated with its revenue
generating activities are comprised of all other costs related to its worksite
employees, such as the employer portion of payroll-related taxes, employee
benefit plan premiums and contributions and workers' compensation insurance
premiums.
TeamStaff 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, TeamStaff's revenue, and therefore its gross margin, will
fluctuate based on its 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 staffing 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.
In accordance with Emerging Issues Task Force (EITF) No. 99-19 "Reporting
Revenue Gross as a Principal versus Net as an Agent," TeamStaff recognizes all
amounts billed to its temporary staffing customers as gross revenue because,
among other things, TeamStaff is the primary obligor in the temporary staffing
arrangement, TeamStaff has pricing latitude, TeamStaff selects temporary
employees for a given assignment from a broad pool of individuals, TeamStaff is
at risk for the payment of its direct costs, whether or not TeamStaff's
customers pay TeamStaff on a timely basis or at all, and TeamStaff assumes a
significant amount of other risks and liabilities as an employer of its
temporary 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 a accrual basis, any such amounts which relate to services
performed by worksite and temporary employees which have not yet been billed to
the customer as of the end of the accounting period. Unbilled receivables
totaled $16,552,000 and $13,693,000 as of September 30, 2002 and 2001
respectively. All such amounts are expected to be realized in the subsequent
year.
In December 2000, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 (or "SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The adoption of SAB 101 in fiscal 2001 did not have any impact on the
consolidated financial statements.
CONCENTRATIONS OF CREDIT RISK-
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company
maintains substantially all its cash balances in a limited number of financial
institutions. The balances are insured by the Federal Deposit Insurance
Corporation up to $100,000. TeamStaff monitors the financial health of these
banking institutions.
The Company's customer base consists of over 3,000 client companies,
representing approximately 46,000 employees (including payroll services
employees) as of September 30, 2002. The Company's client base is broadly
distributed throughout a wide variety of industries; however, more than 75% 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.
Credit, when given, is generally granted on an unsecured basis.
CASH EQUIVALENTS-
24
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.
RESTRICTED CASH-
This is cash restricted in connection with BrightLane's office lease.
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to pay its service fees. The
Company believes that the success of its PEO business is heavily dependent on
its ability to collect these service fees for several reasons, including (i) the
large volume and dollar amount of transactions processed by the Company, (ii)
the periodic and recurring nature of payroll, upon which the service fees are
based, and (iii) the fact that the Company is at risk for the payment of its
direct costs regardless of whether its clients pay their service fees. To
mitigate this risk, the Company has established very tight credit policies. The
Company generally requires its clients to pay their service fees no later than
one day prior to the applicable payroll date. In addition, the Company maintains
the right to terminate its Client Service Agreement and associated worksite
employees or to require prepayment, letters of credit or other collateral upon
deterioration in a client's financial position or upon nonpayment by a client.
As a result of these efforts, the outstanding balance of accounts receivable and
subsequent losses related to customer nonpayment have historically been very low
as a percentage of revenues.
FAIR VALUE-
The Company has financial instruments, none of which is held for trading
purposes. The Company estimates that the fair value of all financial instruments
at October 31, 2002 and 2001, does not differ materially from the aggregate
carrying values of these financial instruments recorded in the accompanying
balance sheets. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. Considerable judgment is necessarily required in interpreting
market data to develop the estimates of fair value, and, accordingly, the
estimates are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
EQUIPMENT AND IMPROVEMENTS-
Equipment and improvements are stated at cost. Depreciation and amortization are
provided using the 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.
ACQUIRED INTANGIBLE ASSETS-
AS OF SEPTEMBER 30, 2002
Gross Carrying Accumulated
Amount Amortization Net
------ ------------ ---
Amortized intangible assets
Software $2,468,000 $ (705,000) $ 1,763,000
Pension 729,000 (117,000) 612,000
---------- ---------- -----------
Total $3,197,000 $ (822,000) $ 2,375,000
========== ========== ===========
AS OF SEPTEMBER 30, 2001
Gross Carrying Accumulated
Amount Amortization Net
------ ------------ ---
Amortized intangible assets
Software $ 1,028,000 $ (129,000) $ 899,000
Pension 729,000 (58,000) 671,000
----------- ---------- ---------
Total $ 1,757,000 $ (187,000) $ 1,570,000
=========== ========== ===========
25
Aggregate Amortization Expense
For year ended 9/30/02 $635,000
Estimated Amortization Expense
For year ended 9/30/03 $506,000
For year ended 9/30/04 397,000
For year ended 9/30/05 387,000
For year ended 9/30/06 373,000
For year ended 9/30/07 301,000
Indefinite life intangible assets
(decribed below):
Tradenames $4,710,000
First Union Relationship 6,399,000
-----------
Total $11,109,000
===========
GOODWILL-
Medical
PEO Staffing Total
--- -------- -----
Balance as of September 30, 2001 $ 24,736,000 $1,705,000 $26,441,000
Goodwill acquired during year 726,000 - 726,000
------------ ---------- -----------
Balance as of September 30, 2003 $ 25,462,000 $1,705,000 $27,167,000
============ ========== ===========
Beginning October 1, 2001, with the adoption of the newly required accounting
standard (SFAS 142), the Company no longer amortizes goodwill or indefinite life
intangible assets. The Company will also continue to review annually its
goodwill and other intangible assets for possible impairment or loss of value.
The Company determined that no impairment of goodwill or intangible assets
existed as of the date of adoption or at September 30, 2002. (See recently
adopted accounting standard SFAS 142 below)
The goodwill acquired during the year includes $282,000 related to the purchase
of Corporate Staffing Concepts and $444,000 in additional charges associated
with the acquisition of BrightLane which were mostly related to adjustments of
estimates of professional services, employment contracts and taxes.
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.
WORKERS' COMPENSATION-
The Company applies loss-development factors to its open years' workers'
compensation incurred losses in order to estimate fully developed losses
as well as other formula driven methodologies supplied by its current
third party administrator. (See Note 7)
INCOME TAXES-
TeamStaff accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect
26
for the year in which the differences are expected to reverse. Deferred tax
assets are reflected on the balance sheet when it is determined that it is more
likely than not that the asset will be realized.
RECLASSIFICATIONS-
Certain reclassifications have been made to prior years amounts to conform to
the current year presentation.
STOCK-BASED COMPENSATION-
Stock-based compensation for employees and directors is recognized using the
intrinsic value method under APB No. 25. The Company uses the fair value method
for options issued to non-employees. For disclosure purposes, pro forma net
income (loss) impacts are provided as if the fair market value method has been
applied.
EARNINGS PER SHARE-
Basic earnings per share 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 is calculated by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period adjusted to reflect potentially
dilutive securities.
In accordance with SFAS 128, the following table reconciles income before
extraordinary item and share amounts used to calculate basic and diluted
earnings per share before extraordinary item:
Years Ended September 30,
2001
2002 As Restated 2000
---- ----------- ----
Numerator:
Income before extraordinary item $ 3,075,000 $ 1,702,000 $ 951,000
=========== =========== ===========
Denominator:
Weighted average number of common shares
outstanding - Basic 16,013,546 8,693,243 7,954,176
Incremental shares for assumed conversions
of stock options/warrants 169,920 214,039 36,736
----------- ----------- -----------
Weighted average number of common and
equivalent shares outstanding-Diluted 16,183,466 8,907,282 7,990,912
========== ========= =========
Earnings per share before extraordinary item - Basic $ 0.19 $ 0.20 $ 0.12
=========== =========== ===========
Earnings per share before extraordinary item - Diluted $ 0.19 $ 0.19 $ 0.12
=========== =========== ===========
Stock options and warrants outstanding at September 30, 2002, 2001, and 2000 to
purchase 257,298, 157,006, and 276,961 shares of common stock respectively were
not included in the computation of Diluted EPS as they were antidilutive.
REVERSE STOCK SPLIT-
Effective June 2, 2000 the Company effected a reverse stock split at a rate of
one (1) new share for each existing 3.5 shares of TeamStaff common stock. All
common shares and per share amounts in the accompanying financial statements
have been adjusted retroactively to effect the reverse stock split.
27
COMPREHENSIVE INCOME(LOSS):
The Company has comprehensive losses resulting from its Supplemental Executive
Retirement Plan (SERP) (Refer to Note 11 and 12). When the Company's SERP
obligations were measured at September 30, 2002, the amount of the Projected
Benefits Obligation (PBO) exceeded the recorded SERP liability. This was due to
the fact that rates earned on fixed income investments steadily decreased. The
discount rates used in the PBO calculations dropped from 8% in September 2000 to
7.5% in September 2001, and to 6.5% in September 2002. These changes resulted in
a comprehensive loss net of tax in fiscal year 2002 of $79,000 and in fiscal
year 2001 of $63,000. No other sources of comprehensive gains or losses
occurred.
RECENT ACCOUNTING STANDARDS:
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 changed 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
indefinite life intangible assets 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
was allowed and the Company 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. The Company's intangible
assets consist primarily of the TeamStaff trade name and the First
Union/Wachovia Relationship. This relationship requires First Union/Wachovia to
promote TeamStaff's services to its banking customers throughout the United
States. The Company's First Union relationship and TeamStaff tradename have
indefinite lives and are no longer being amortized effective October 1, 2001
because they are expected to generate cash flows indefinitely. The effect of not
amortizing goodwill and intangible assets on income before income taxes and net
income for the fiscal year ended September 30, 2002 is $948,000 and $778,000,
respectively. The Company estimates that net income and diluted earnings per
share would have been approximately $2,126,000 and $0.24, respectively, for the
fiscal year ended September 30, 2001 had the provisions of the new standard been
applied as of October 1, 2000. The Company estimates that net income and diluted
earnings per share would have been approximately $1,680,000 and $0.21,
respectively, for the fiscal year ended September 30, 2000 had the provisions of
the new standard been applied as of October 1, 1999. The Company tested its
intangible assets during the first quarter of the current fiscal year, as
required by SFAS No. 142, and there was no impairment. The Company tested its
goodwill for impairment during the second quarter of fiscal 2002 as required by
SFAS No. 142 and there was no impairment. The Company retested intangible assets
and goodwill at September 30, 2002 and there was no impairment. As of September
30, 2002, total net goodwill was $27,167,000 consisting of $25,462,000 and
$1,705,000 for the PEO and Medical Staffing segments respectively. Goodwill for
the fiscal year ended September 30, 2002 increased $726,000. The increase, all
of which related to PEO operations, resulted primarily from the acquisition of
Corporate Staffing Concepts, LLC and additional cost associated with the
BrightLane acquisition.
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 the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes 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.
28
On May 1, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 is effective for the Company's
fiscal year beginning October 1, 2002. The Company is in the process of
evaluating what impact, if any, this standard will have on the Company's
financial statements.
On July 30, 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"), that is applicable to exit or disposal activities initiated after
December 31, 2002. This standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This standard does not
apply where SFAS 144 is applicable
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" ("SFAS 148"), that is applicable to financial statements issued for
fiscal years ending after December 15, 2002. In addition, interim disclosure
provisions are applicable for financial statements issued for interim periods
beginning after December 15, 2002. This standard amends SFAS 123 and provides
guidance to companies electing to voluntarily change to the fair value method of
accounting for stock-based compensation. In addition, this standard amends SFAS
123 to require more prominent and more frequent disclosures in financial
statements regarding the effects of stock-based compensation. TeamStaff will
implement SFAS 148 in the first fiscal quarter 2003.
(3) INCOME TAXES:
At September 30, 2002, the Company has available operating loss carryforwards of
approximately $22,000,000 to reduce future periods' taxable income.
Substantially all of the operating loss carryforwards were acquired in
connection with the acquisition of BrightLane on August 31, 2001 (See Note 5).
The carryforwards expire in various years beginning in 2004 and extending
through 2021. The Company also has tax credits available of approximately
$653,000 to reduce future taxable income that begin to expire in 2020. In
accordance with IRS regulations, the utilization of operating losses acquired
from BrightLane are limited to approximately $2.1 million per year.
The Company has recorded an $8,471,000 and a $9,225,000 deferred tax asset at
September 30, 2002 and 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 bases of certain assets and liabilities, for which management
believes utilization to be more likely than not. In fiscal 2002, 2001 and 2000,
the Company reduced its tax provision by $239,000, $218,000 and $374,000
respectively for certain tax credits which were available to the Company. In
2000, the Company's income tax expense was reduced by a $400,000 tax benefit
reflecting the elimination of a valuation allowance.
In order for the Company to realize the operating loss carryforward and the tax
credits, the Company would have to generate approximately $23,000,000 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 the
past five years of profitability and its ability to meet its operating plan.
An analysis of the Company's deferred tax asset is as follows-
2001 As
2002 Restated
---- --------
Net operating loss carry forwards $ 8,162,000 $ 7,764,000
and tax credits
Workers' compensation reserves (227,000) 1,122,000
Allowance for doubtful accounts 101,000 187,000
Depreciation expense (12,000) 170,000
Professional fees 172,000 0
Pension 142,000 76,000
Other items, net 133,000 (94,000)
----------- -----------
Deferred income tax asset $ 8,471,000 $ 9,225,000
=========== ===========
29
The components of the income tax expense for income taxes are summarized
as follows-
Years Ended September 30,
2001
As
2002 Restated 2000
---- -------- ----
Current expense $ 612,000 $1,138,000 $ 355,000
Deferred expense 1,173,000 123,000 73,000
---------- ---------- ----------
Total expense $1,785,000 $1,261,000 $ 428,000
========== ========== ==========
The following table indicates the significant elements contributing to the
difference between the Federal statutory rates and the Company's effective tax
rate-
Years Ended September 30,
2001
2002 As Restated 2000
---- ----------- ----
Federal statutory rate 34% 34% 34%
State taxes, net of federal income tax benefit 8 8 8
Tax credits (6) (9) (28)
Goodwill amortization 0 7 13
Other 1 3 4
-- -- --
37% 43% 31%
== == ==
The tax benefits associated with the exercise of non-qualified stock options
reduce taxes currently payable by $1,513,000 for 2002. Such benefits are
credited to additional paid-in capital.
(4) DEBT:
On April 9, 2002, the Company entered into a revolving loan facility with Fleet
National Bank, (Fleet). The total outstanding loan amount cannot exceed at any
one time the lesser of $7,000,000 or the sum of 85% of qualified accounts
receivable, less an amount reserved by Fleet to support direct debit processing
exposure. The annual interest rate is either the Fleet prime rate or LIBOR, at
the discretion of the Company, and is currently 4.25%. The facility is
collateralized by substantially all of the assets of the Company, including its
accounts receivable. The facility is subject to certain covenants including, but
not limited to, interest rate coverage of 2.0 to 1.0, total liabilities to
tangible net worth ratio of 2.0 to 1.0, and minimum working capital of
$10,000,000. As of September 30, 2002, there was no amount outstanding on the
credit facility. The Company has an outstanding letter of credit of $4,150,000
under the facility for the Company's workers' compensation policy. (See Note 7)
During fiscal years 2001 and 2000 the Company had a long-term credit facility
from FINOVA Capital Corporation totaling $12.5 million. Substantially all assets
of the Company secured the credit facility. The facility was comprised of (i)
two three-year term loans each for $2.5 million, with a five-year amortization,
at prime plus 3%; (ii) a three-year term loan for $4.0 million, with a five-year
amortization, at prime plus 3% and (iii) a $3.5 million revolving line of credit
at prime plus 1% secured by certain accounts receivable of the Company. The
credit facility was subject to success fees for each of the $2.5 million term
loans in the amounts of $200,000, $225,000 and $250,000 due on the anniversary
dates of the loan. In addition the $4.0 million term loan was subject to annual
success fees at the beginning of each loan year in the amount of $500,000. The
credit facility was 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.
In connection with the BrightLane acquisition, TeamStaff repaid approximately
$8,289,000 of total outstanding debt (including interest and related financing
fees) owed to FINOVA Capital Corporation during 2001. The loan facility with
FINOVA was terminated. Of this amount approximately $3,800,000 was paid in April
2001 and the remaining $4,489,000 was paid in September 2001. As a result, the
Company wrote off $435,000 of unamortized financing costs and paid additional
fees of $175,000. This has been recorded as an extraordinary loss on the early
extinguishment of debt of $354,000, net of tax benefit of $256,000 in fiscal
year 2001.
30
Long-term debt at September 30, 2002 and 2001 consists of the following-
2001
2002 As Restated
---- -----------
Capital leases $206,000 $263,000
Less- Current portion (59,000) (70,000)
-------- --------
$147,000 $193,000
======== ========
Maturities of long-term debt as of September 30, 2002 are as follows-
Year Ending
September 30,
-------------
2003 $ 59,000
2004 53,000
2005 94,000
--------
$206,000
========
(5) BUSINESS COMBINATIONS/DISPOSITIONS
ACQUISITION OF CORPORATE STAFFING CONCEPTS-
Effective January 2, 2002, TeamStaff acquired the accounts and related assets of
Corporate Staffing Concepts LLC, a PEO entity operating primarily in western
Massachusetts and Connecticut. The agreement provided that TeamStaff acquire the
PEO related accounts of Corporate Staffing Concepts for $275,000 paid at
closing, and stock, which would be paid in connection with an earn out in one
year, based upon the number of worksite employees remaining from the accounts
being acquired. Subsequent to the balance sheet date, on January 10, 2003, by
mutual agreement, the Company fully settled its earn out obligations to
Corporate Staffing Concepts LLC by agreeing to pay the sum of $250,000 in cash
and to issue 27,500 shares of the Company's Common Stock, for a total purchase
price of $603,100.
ACQUISITION OF BRIGHTLANE.COM-
Effective August 31, 2001, TeamStaff acquired BrightLane.com, Inc., a technology
company founded in 1999 that provided an online business center. Focusing on the
small business segment, BrightLane developed several patent-pending information
exchange and transaction oriented software solutions to facilitate access across
a variety of essential and Internet deliverable administrative products and
services.
Under the terms of the purchase agreement, TeamStaff acquired all the stock of
BrightLane.com through the issuance of 8,066,522 shares of TeamStaff common
stock, valued at approximately $41,900,000. TeamStaff also incurred $2,705,000
of certain legal, accounting and investment banking expenses, resulting in a
total purchase price of $44,605,000. 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:
Cash acquired $12,325,000
Deferred tax asset 7,400,000
Investment in TeamStaff preferred
stock 3,500,000
Other assets acquired, net 1,538,000
First Union/Wachovia relationship 6,900,000
Tradename 10,000
Goodwill 12,932,000
-----------
Total $44,605,000
===========
Prior to the acquisition, the Company sold to BrightLane $3.5 million of
preferred stock and used the proceeds to
31
pay down a portion of the FINOVA debt. The preferred stock was cancelled in
connection with the acquisition on August 31, 2001.
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 $1,047,000 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. As of September 30, 2002,
approximately $654,000 of these loans has been repaid or forgiven and $393,000
remains outstanding. All loans must be repaid in cash with the exception of one
loan. Under the terms of the Company's employment agreement with an executive
officer of the Company's BrightLane subsidiary, the loan ($131,000) is to be
forgiven over a two-year period of time as long as the officer remains employed
by the Company.
ACQUISITION OF HR2, INC.-
Effective October 2, 2000, the Company acquired HR2, Inc. in a stock purchase
transaction. The Company acquired all of the capital stock of HR2 in exchange
for an aggregate of 89,224 shares of the Company's common stock and $100,000 in
cash for a total purchase price of $400,000. HR2, Inc. is a professional
employer organization that operates primarily in Massachusetts, Rhode Island,
and New Hampshire. The acquisition of HR2 Inc. was not material to the Company's
consolidated financial statements.
ACQUISITION OF SYNADYNE ASSETS-
Effective April 8, 2000, TeamStaff, Inc. pursuant to an Asset Purchase Agreement
acquired substantially all of the assets of the professional employer
organization business of Outsource International, Inc. ("Outsource"), which had
operated under the tradename "Synadyne". TeamStaff acquired all of the customer
contracts of the former Synadyne business. The Company operates these assets,
which were comprised mostly of PEO contracts, through its subsidiaries as part
of its TeamStaff SB division. Under the terms of the Asset Purchase Agreement,
TeamStaff paid an aggregate purchase price of $3,500,000 which includes the
assumption of approximately $200,000 in liabilities. The Company also incurred
approximately $100,000 for acquisition related expenses. The agreement also
provides for an additional potential payment of up to $1,250,000 provided that
the former clients of Outsource have at least 9,500 worksite employees as of
March 31, 2002. In the event there are less than 9,500 employees, the amount of
the earnout will be reduced by a pre-determined formula. The Company calculated
that at March 31, 2002 there were 5,879 employees employed by the Company
represented by the former Synadyne business and therefore no payment is due to
Outsource under the terms of the earnout. However, based on an estimate provided
by Outsource, the earnout payment would be approximately $553,000. Under the
terms of the agreement, Outsource had a period of 90 days, (which expired on
July 19, 2002), to audit the records related to the employees and accounts to
determine the earnout. Outsource filed for protection under Chapter 11 of the
U.S. Bankruptcy Code on June 11, 2002 in the Central District of California. The
Company is unable to predict the impact of Outsource's bankruptcy on the
potential earnout. Any subsequent payment would be accounted for as additional
purchase price and would be recorded as an increase to goodwill when and if
made.
Under the original acquisition related agreements, TeamStaff had been providing
PEO services to the corporate employees of Outsource. The parties had entered
into a court-approved stipulation in the bankruptcy action that TeamStaff would
continue to provide these services. Subsequently, the parties mutually agreed to
terminate the original service agreement effective July 2002.
SALE OF EL PASO REGIONAL OFFICE-
In September 2001, the Company sold its regional PEO office in El Paso, Texas.
The business was sold for $925,000: $500,000 in cash at closing and $425,000 to
be paid in 17 equal monthly installments from October 2001 until February 2003.
The gain on sale of this transaction was $50,000. Operations of the El Paso
office were immaterial and therefore not reflected as discontinued operations.
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 and dispositions had occurred at the beginning of the earliest
reported period October 1, 1999.
32
Fiscal Years Ended September 30,
-----------------------------------------------
2001
2002 As Restated 2000
---- ----------- ----
Revenues As Amended $ 181,811,000 $ 160,969,000 $ 111,255
Income (Loss) before
extraordinary item $ 3,080,000 $ (3,236,000) $ (13,990,000)
Net income (loss) $ 3,080,000 $ (3,846,000) $ (13,990,000)
Earnings/(Loss) per share -
basic and diluted $ .19 $ (.24) $ (.87)
33
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities at September 30, 2002 and 2001
consist of the following-
2001
2002 As Restated
---------- ----------
Workers' compensation insurance $1,673,000 $3,300,000
Bank overdraft 1,874,000 3,237,000
Other 2,917,000 1,828,000
---------- ----------
$6,464,000 $8,365,000
========== ==========
(7) COMMITMENTS AND CONTINGENCIES:
LEASES-
Minimum payments under noncancellable lease obligations at September 30, 2002
are as follows-
Year Ending
September 30,
- -------------
2003 $2,046,000
2004 2,077,000
2005 1,618,000
2006 686,000
2007 523,000
----------
$6,950,000
==========
Rent expense under all operating leases was $1,796,000 in 2002, $1,233,000 in
2001, $988,000 in 2000.
WORKERS' COMPENSATION POLICY-
As of March 22, 2002, TeamStaff's insurance provider is Zurich American
Insurance Company (Zurich) and the program will be managed by Cedar Hill
Insurance Agency, Inc (Cedar Hill). ). This policy covers 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.
The Zurich program will cover the period March 22, 2002 through April 1, 2003,
inclusive. The program contains a large deductible feature of $500,000 for each
claim, with no maximum liability cap. The premium for the program is paid on a
monthly basis based on estimated payroll for the year and is subject to a
year-end audit. The Zurich deductible program is collateralized by a letter of
credit, inuring to the benefit of Zurich American Insurance Company, and cash
held in a trust account with a third party. The letter of credit for $4,150,000
has been secured through Fleet National Bank (Fleet), as part of the Company's
line of credit. Payments will be made to the trust on a monthly basis based on
projected claims for the year. Interest on all assets held in the trust is
credited to TeamStaff. Payments for claims and claims expenses will be made from
the trust. Payments to the trust may be adjusted from time to time based on
program experience. Claims handling services will be provided by a third party
administrator assigned by Cedar Hill. Additionally, TeamStaff has outsourced its
underwriting and program management for the Zurich program to Cedar Hill
Insurance Agency, Inc. and The Hobbs Group, the Company's workers' compensation
insurance broker. At September 30, 2002, the Company has a prepaid current asset
of $2,341,000 for the premium and the prepayments made to the trust.
TeamStaff's primary workers' compensation insurance provider from January 22,
2001 through March 21, 2002, was Continental Assurance (CNA). This policy
covered 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.
34
The CNA policy originally covered the period from January 22, 2001, through
January 21, 2002, but was extended to March 21, 2002. It was a large deductible
program ($250,000 for each claim) with a maximum liability cap. The premium for
the policy was paid monthly based upon estimated payroll for the year and is
subject to a year-end audit by the provider. TeamStaff also maintained a
separate policy insuring a portion of the maximum deductible cap, which it may
be required to pay if claims exceed a determined number. 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, the Company pays 89.5% of paid claims up to $12,133,000. If the claims
and fixed costs under the policy are less than the amounts TeamStaff paid, plus
investment returns thereon, the insurer will refund the difference to TeamStaff.
As part of the two-month extension, which was negotiated in January 2002, the
Company was required to pay $495,000 which CNA asserted was owed to cover costs
for claims incurred during the policy years 1997 - 1999. As previously
disclosed, the Company had received a release for those periods from CNA in
January 2001, when the Company accepted CNA as its new insurance carrier. The
Company has denied CNA's claim and to date, has received $224,000 back from the
original $495,000 payment. It is the Company's belief that the remaining funds
should be returned as well. Should the Company be unsuccessful in receiving a
refund of all monies paid, it will be required to absorb these claims. However,
the Company has a liability on its books for the estimated claims for the
two-month extension, which exceeds the $271,000 disputed amount. Accordingly,
the Company plans to offset this amount from any monies owed CNA. On January 27,
2003, subsequent to the balance sheet date, the Company filed a complaint of
unfair or deceptive acts or practices in the business of insurance against CNA
with the New Jersey Division of Insurance.
TeamStaff maintained a separate policy for certain of the business of its
subsidiary, HR2, Inc., which had provided that TeamStaff was only responsible
for the audited premium for each policy period. This policy ended on December
31, 2001. From January 1, 2002 through March 21, 2002, these employees were
covered under the CNA policy.
On August 7, 2002, the Company entered into an agreement with a prior workers'
compensation and employer's liability insurance carrier fully and finally
settling all loss and expense charges for four years of coverage, from 1996 to
2000, through the insurance carrier in exchange for an immediate payment by the
Company. Pursuant to the agreement, the insurance carrier agreed that no more
recalculations would be done for any of the Company's workers' compensation
programs with the carrier. As a result of the final adjustment, the Company
reduced its reserve for workers' compensation, which resulted in a decrease in
direct expenses of $2,661,000.
The Company records in direct expenses a monthly charge based upon its estimate
of the year's ultimate fully developed claims 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 related
to the workers' compensation programs. While management uses available
information, including nationwide loss ratios, to estimate ultimate claims,
future adjustments may be necessary based on actual claims. 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 also relies on actuarial tables to estimate
its ultimate expense.
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 or when workers compensation rates are increased by state agencies
As of September 30, 2002, the adequacy of the workers' compensation
reserves was determined, in management's opinion, to be reasonable. However,
since these reserves are for claims that have not been sufficiently developed
due to their relatively young age, 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
35
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.
PAYROLL TAXES-
TeamStaff has received notices from the IRS concerning misapplication of payroll
tax payments between its legal entities, which if not resolved favorably, may
result in interest and penalties. To date, TeamStaff has been working with the
IRS to resolve these discrepancies and has had some interest and penalties
abated. TeamStaff believes that after the IRS applies all the funds correctly,
all significant interest and penalties will be abated.
LEGAL PROCEEDINGS-
In July 2000, TeamStaff made claims for indemnification against the selling
shareholders of the TeamStaff Companies (the Sellers), which were acquired by
TeamStaff in January 1999. The claims consisted of various potential liabilities
and expenses incurred based on breaches of representations and warranties
contained in the acquisition agreement. The Sellers disputed these claims and
attempted to assert claims of their own. On January 12, 2001, TeamStaff entered
into a settlement agreement with the Sellers. Under the settlement agreement,
the Sellers agreed to be liable and responsible for certain potential
liabilities estimated at approximately $540,000 and agreed that 55,000 shares of
TeamStaff common stock, which had been held in escrow since the acquisition,
were to be cancelled and TeamStaff agreed to release 29,915 escrow shares to the
Sellers. TeamStaff retains 75,000 shares in escrow to provide security for the
Seller's obligations. Each party agreed to release each other from all other
claims under the acquisition agreements. No third parties have contacted
TeamStaff seeking payment in the last fiscal year for these potential
liabilities. In the event that TeamStaff incurs liability to third parties with
respect to the claims, TeamStaff would declare an event of default under the
settlement agreement and seek collection from the Sellers.
TeamStaff's subsidiary, BrightLane, is party to a suit brought by one of its
former shareholders (Atomic Fusion, Inc. v. BrightLane.com, Inc. Civil Action No
ONS02246OE, 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
in payment of services were inadequate to pay for the alleged agreed upon value
of services. TeamStaff and BrightLane intend to defend themselves vigorously in
this matter and believes that they have meritorious and valid defenses to
plaintiff's claims. In addition, the former shareholders of BrightLane have
placed approximately 158,000 shares in escrow to provide indemnification for any
claims made by TeamStaff under the acquisition agreement, subject to a $300,000
threshold. In the event the threshold is reached, some or all of these shares
may be canceled in an amount equal to the amount of any claim or expense in
excess of the threshold. Under the terms of the agreements between TeamStaff and
BrightLane, the value of the shares held in escrow is $8.10/share. It is
possible that an award in favor of Atomic Fusion would result in monetary
damages against TeamStaff, which could not be recovered under the
indemnification provisions because cancellation of the shares in escrow is the
sole method of satisfying these indemnification obligations.
As a commercial enterprise and employer and in connection with its businesses as
a professional employer organization, payroll services and temporary and
permanent staffing, TeamStaff is engaged in litigation from time to time during
the ordinary course of business in connection with employee suits, workers'
compensation and other matters. Generally, TeamStaff is entitled to
indemnification or repayment from its PEO clients for claims brought by worksite
employees related to their employment. However, there can be no assurance that
the client employer will have funds or insurance in amounts to cover any damages
or awards, and as co-employer, TeamStaff may be subject to liability.
TeamStaff is engaged in no other litigation, the effect of which would be
anticipated to have a material adverse impact on TeamStaff's financial
conditions or results of operations.
EMPLOYMENT AGREEMENTS-
TeamStaff entered into a new employment agreement with Mr. Donald Kappauf,
TeamStaff's President and Chief Executive Officer effective April 2, 2001 and
terminating on September 30, 2003, unless extended. If the Company fails to
notify Mr. Kappauf prior to six months before the date of termination that it
does not intend to negotiate a renewal of the employment of Mr. Kappauf, then
the agreement will be automatically extended for a period of one
36
year.
Under the terms of this agreement, Mr. Kappauf's base compensation was initially
$230,000, increasing to $300,000 commencing September 1, 2001, and subject to
yearly increases thereafter at the discretion of the compensation committee. For
the fiscal year ended September 30, 2002, Mr. Kappauf received a base salary of
$300,000. Mr. Kappauf is also entitled to 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 as are provided to all other executives, a car allowance in the amount
of $1,000 per month, participation in the supplemental executive retirement plan
and a split dollar life insurance arrangement. The agreement also provided for
the grant of 300,000 stock options, which vested in annual increments of one
third commencing on the date of the agreement. TeamStaff also entered into a
severance agreement with Mr. Kappauf which governs the termination of his
employment and certain other events including a change of control of the
Company.
TeamStaff entered into a new employment agreement with Mr. Donald Kelly,
TeamStaff's former Chief Financial Officer, effective April 2, 2001 and
terminating on September 30, 2003, unless extended. If the Company fails to
notify Mr. Kelly prior to six months before the date of termination that it does
not intend to negotiate a renewal of the employment of Mr. Kelly, then the
agreement will be automatically extended for a period of one year.
Under the terms of this agreement, Mr. Kelly's base compensation was initially
$170,000, increasing to $200,000 commencing September 1, 2001, and subject to
yearly increases thereafter at the discretion of the compensation committee. For
the fiscal year ended September 30, 2002, Mr. Kelly received a base salary of
$200,000. Mr. Kelly is also entitled to a bonus based on the achievement of
certain performance criteria as determined by the compensation committee.
In addition, Mr. Kelly receives certain other benefits including insurance
benefits as are provided to all other executives, a car allowance in the amount
of $800 per month, participation in the supplemental executive retirement plan
and a split dollar life insurance arrangement. The agreement also provided for
the grant of 150,000 stock options, which vested in annual increments of one
third commencing on the date of the agreement.
TeamStaff's future commitment under these employee's contracts totals
approximately $522,000.
TeamStaff also entered into a severance agreement with Mr. Kelly which governs
the termination of his employment and certain other events including a change of
control of the Company. Pursuant to the severance agreement with Mr. Kelly, in
the event he is terminated by the Company for cause, he will be entitled only to
his accrued compensation, which means his base salary, reimbursement of business
expenses, vacation pay and earned but unpaid bonuses to the date of termination.
"Cause" is defined to include conviction of a felony, an intentional and
continual failure to substantially perform his duties or an intentional failure
to follow or perform a lawful direction of the Board of Directors. If Mr. Kelly
is terminated for disability or death, he will be entitled to his accrued
compensation and certain other payments such as the pro rata bonus amount. The
pro rata bonus amount is defined as the amount equal to the greater of the most
recent annual bonus amount paid or the annual bonus paid or payable for the full
fiscal year ended prior to the termination, in either case pro-rated through the
date of death or disability. In the event that Mr. Kelly's employment terminates
for any other reason, the agreement provides for payment of his accrued
compensation, a pro rata bonus amount, a bonus amount allocated to the remainder
of the term of his employment agreement, his base salary through the remainder
of the term of his employment agreement, a severance payment equal to one year's
base compensation, a payment equal to the cost of health and other similar
benefits for a period of two years and costs associated with outplacement
services. In the event of a change of control of the Company, and after such
event Mr. Kelly's employment is terminated (either by him or by the Company
within 24 months of the event), he is entitled to his base salary, reimbursement
of business expenses, vacation pay and earned but unpaid bonuses to the date of
termination, as well as an additional severance payment equal to a cash payment
of three times the amount of his five year average gross income and all options
held by him are deemed vested. A change of control is defined to mean (i) an
acquisition by a person (as defined under Section 13(d) of the Securities and
Exchange Act of 1934) of 20% or more of the voting stock of the Company (ii) if
the persons who comprise the Board of Directors as of May 22, 2002 cease to
constitute two-thirds of the Board at any date, except a change of control does
not occur if the nomination for election of new board members is approved by
two-thirds of the existing board or (iii) the stockholders of the Company
approve a merger or consolidation of the Company and the pre
37
transaction stockholders fail to own 85% of the post transaction combined voting
power. Further, if the Company is merged with, or sells substantially all of its
assets prior to May 24, 2004, Mr. Kelly is entitled, in addition to the other
compensation payable upon a change of control, to a success fee equal to
$1,000,000; provided that if the value to shareholders in connection with the
sale is greater than $9.00 per share, the fee will be increased by the sum of
$25,000 for each $.10 per share that exceeds $9.00.
Until December 10, 2002, Mr. Kelly held the positions of Chief Financial
Officer, Vice President, Finance and Secretary of the Company. In light of the
circumstances regarding the removal of Mr. Kelly from his duties, Mr. Kelly may
have reason to terminate his employment with the Company for "good reason" and
exercise his rights under the severance agreement. The term good reason includes
"a change in the [e]xecutive's status, title, position or responsibilities . . .
.." Additionally, the removal of Mr. Kelly from his duties may have caused his
benefits under the SERP to become fully vested. The Board of Directors has not
made a final determination whether to reinstate Mr. Kelly to his position, and
is reviewing the opinions expressed, and findings by TeamStaff's current
independent auditors, in connection with the most recent audit and the
evaluation of internal controls. The Board of Directors has not made a
determination whether Mr. Kelly would be entitled to terminate his employment
and exercise these rights pursuant to the severance agreement and be entitled to
certain potential payments. In the event that Mr. Kelly exercises these rights,
such termination is deemed proper, and Mr. Kelly is eligible to receive all
potential compensation under the severance agreement and the SERP, the Company
may be required to pay a sum, either directly to Mr. Kelly, in the case of the
severance agreement, or to a trust, in the case of any payments to be made
pursuant to the SERP, totaling approximately $1.1 million.
NASDAQ POTENTIAL DELISTING-
On January 16, 2003, TeamStaff received notice from the NASDAQ Stock Market that
an "E" would be appended to its symbol at the opening of business on January 21,
2003 due to the belated filing of TeamStaff's annual report on Form 10-K for
fiscal year 2002. NASDAQ further advised TeamStaff that its Common Stock would
be delisted from trading on the NASDAQ National Market at the opening of
business on January 27, 2003 unless TeamStaff requested a hearing before the
NASDAQ Stock Market. TeamStaff requested and was granted a hearing before a
NASDAQ panel, which will be held on February 14, 2003. Any potential action on
the listing of its stock will be postponed until a decision of the panel has
been reached. TeamStaff anticipates that the NASDAQ panel will reach a decision
shortly after the hearing. There can be no assurance that NASDAQ will agree to
continue the listing of TeamStaff common stock.
(8) SHAREHOLDERS' EQUITY:
During 2002, 2001 and 2000, the Company repurchased 242,945, 51,911 and 17,100
shares respectively of its common stock for $1,146,000, $366,000 and $61,000
respectively. Subsequent to September 30, 2002, the Company purchased 137,900
shares of its common stock for $431,000.
STOCK WARRANTS-
The following is a summary of the outstanding warrants to purchase the Company's
common stock at September 30, 2002:
Exercise Period Exercise Price Number of Shared of
Exercise Period From To Per Common Share Common Stock Reserved
- -------------------- --------------- ---------------- ---------------------
February 1998 February 2003 7.20 7,143
January 1999 January 2004 5.25 21,428
November 1999 November 2002 4.15 51,714
December 2000 January 2005 3.20 10,000
August 2001 August 2006 5.16 16,000
-------
106,285
=======
During the fiscal year ending September 30, 2002, the Company granted no
warrants and no warrant expired
38
unexercised. During 2002, 3,286 warrants were exercised for net proceeds of
$14,000. During the fiscal year ended September 30, 2001, the Company granted
26,000 additional warrants and 69,140 warrants expired unexercised. During 2001,
73,570 warrants were exercised for net proceeds of $179,000. During the fiscal
year ended September 30, 2000, the Company granted 100,000 additional warrants
and 2,257 warrants expired unexercised. During 2000, no warrants were exercised.
For warrants issued to third parties for services, the Company utilizes the
Black-Scholes option pricing model to determine fair value and compensation
expense. The fair value of the grants issued in 2001 and 2000 and other stock
based compensation was determined to be $70,000 and $200,000 respectively, and
was included in selling, general and administrative expenses in the accompanying
statements of income for the years ended September 30, 2001 and September 30,
2000 respectively.
STOCK OPTION PLANS -
The 1990 Employees Stock Option Plan (the "1990 Plan") provided for the grant of
options to purchase up to 285,714 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 Non-Executive Director Stock Option Plan (the "Director Plan") provided
for issuance of a maximum of 142,857 shares of common stock upon the exercise of
stock options arising under the Director Plan.
The 1990 Senior Management Incentive Plan (the "Management Plan") provided for
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. A total of 1,428,571 shares of common stock
were reserved for issuance under the Management Plan.
The forgoing plans have expired and options are no longer being granted under
these plans.
2001 EMPLOYEE STOCK OPTION PLAN
During 2001, the Board of Directors and shareholders approved the adoption of
the 2001 Employees Stock Option Plan (the "2001 Plan") to provide for the grant
of options to purchase up to 1,714,286 shares of the Company's common stock to
all employees, including senior management. The 2001 Plan replaces the 1990
Employee Plan and Senior Management Plans, both of which expired. Under the
terms of the 2001 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 2001 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, subject to
applicable law; 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 2001 Plan and to establish and amend rules and regulations
relating thereto.
Under the 2001 Plan, the exercise price of an option designated as an ISO shall
not be less than the fair 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, 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 the exercise price or any taxes that may arise in connection
with the exercise or cancellation of an option. The Compensation Committee can
also permit the payment of the exercise price in the common stock of the
Corporation held by the optionee for at least six months prior to exercise.
NON-EXECUTIVE DIRECTOR PLAN
39
In fiscal 2001, the Board of Directors and stockholders approved the adoption of
the 2001 Non-Executive Director Stock Option Plan (the "Director Plan") to
provide for the grant of options to non-employee directors of the Company. Under
the terms of the Director Plan, 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 Director Plan replaced the previous Director Plan that
expired in April 2001.
Under the Director Plan, 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, 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 Compensation Committee has no discretion to determine
which non-executive director 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.
The following tables summarize the activity in the Company's stock option plans
for the years ended September 30, 2002, 2001 and 2000:
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE FAIR VALUE
--------- -------------- ----------
Options outstanding, September 30, 1999 254,714 $5.57
Granted 144,543 $4.44 $2.49
Exercised (887) $4.51
Cancelled (46,829) $6.36
--------- -----
Options outstanding, September 30, 2000 351,541 $5.00
--------- -----
Granted 597,785 $4.75 $2.77
Exercised (46,009) $4.56
Cancelled (28,048) $6.01
--------- -----
Options outstanding, September 30, 2001 875,269 $4.82
--------- -----
Granted 256,430 $5.87 $3.47
Exercised (38,210) $3.39
Cancelled (100,845) $6.85
--------- -----
Options outstanding, September 30, 2002 992,644 $4.94
========= =====
As of September 30, 2002, 2001, and 2000, 666,642, 440,762 and 211,973 options,
respectively, were exercisable.
WEIGHTED WEIGHTED WEIGHTED
RANGE OF OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 9/30/02 LIFE PRICE AT 9/30/02 PRICE
------ ---------- ---- ----- ---------- -----
$2.27 - 4.55 228,096 2.1 $ 3.75 193,094 $ 3.77
$4.55 - 6.82 724,548 3.6 $ 5.14 443,548 $ 5.06
$6.82 - 9.10 25,000 3.9 $ 8.01 15,000 $ 8.18
$9.10 - 11.37 15,000 3.9 $ 10.18 15,000 $ 10.18
40
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; dividend yield of 0%, risk-free
interest rate of 4.16%, 4.59% and 5.73% in 2002, 2001 and 2000 respectively, and
expected option life of 4 years. Expected volatility was assumed to be 72%, 74%
and 69% in 2002, 2001 and 2000, 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:
2001
(Thousands of dollars except per share amounts) 2002 As Restated 2000
----------------------------------------------- ------- ----------- -----
Net income as reported $ 3,075 $ 1,348 $ 951
Estimated fair value of option grants, net of tax (627) (655) (206)
------- ------- -----
Net income adjusted $ 2,448 $ 693 $ 745
======= ======= =====
Adjusted earnings per share - Basic $ 0.15 $ 0.08 $0.09
======= ======= =====
Adjusted earnings per share - Diluted $ 0.15 $ 0.08 $0.09
======= ======= =====
During 2001, an executive of the Company exercised stock options. In connection
with that exercise, the Company issued a full recourse loan to the employee of
$90,000. This amount has been recorded as a reduction to shareholders equity in
2001. The loan has been repaid in 2002.
(9) 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
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 temporary and permanent 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.
Through its Payroll Services business segment, the Company provides basic
payroll services to its clients, approximately 75% 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),
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, which included
voucher-processing services, a small amount of PEO services and temporary
staffing services, had been previously reported in temporary staffing. The
voucher processing service business is now managed and reported in the 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 provides information technology to the entire company. Prior year
figures have been adjusted to conform to the 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.
41
The following table represents the financial results for each of the Company's
segments:
Professional
Employer Medical Payroll
Services Staffing Services Corporate Consolidated
-------- -------- -------- --------- ------------
2002
Revenues As Amended $ 101,008,000 $ 74,861,000 $ 4,954,000 $ -- $ 180,823,000
Depreciation and amortization 292,000 141,000 12,000 968,000 1,413,000
Income/(loss) from operations 3,895,000 7,652,000 2,057,000 (9,693,000) 3,911,000
Interest income -- 886,000 -- 171,000 1,057,000
Interest expense (26,000) (15,000) -- (127,000) (168,000)
Other income -- 60,000 -- -- 60,000
Income/(loss) before income taxes 3,869,000 8,583,000 2,057,000 (9,649,000) 4,860,000
Capital spending 485,000 184,000 6,000 1,508,000 2,183,000
Total assets $ 39,921,000 $ 16,873,000 $ 3,969,000 $ 33,203,000 $ 93,966,000
2001 AS RESTATED
Revenues As Amended $ 96,915,000 $ 64,442,000 $ 4,612,000 $ -- $ 165,969,000
Depreciation and amortization 279,000 270,000 64,000 811,000 1,424,000
Income/(loss) from operations 5,000 7,262,000 1,830,000 (5,819,000) 3,278,000
Interest income 88,000 669,000 -- 154,000 911,000
Interest expense (150,000) (234,000) (36,000) (854,000) (1,274,000)
Other income 48,000 -- -- -- 48,000
Income/(loss) before income taxes
and extraordinary item (9,000) 7,697,000 1,794,000 (6,519,000) 2,963,000
Capital spending 464,000 88,000 -- 37,000 589,000
Total assets $ 35,858,000 $ 10,561,000 $ 2,794,000 $ 42,647,000 $ 91,860,000
2000
Revenues As Amended $ 69,408,000 $ 42,500,000 $ 4,057,000 $ -- $ 115,965,000
Depreciation and amortization 262,000 220,000 124,000 727,000 1,333,000
Income/(loss) from operations 766,000 4,884,000 1,378,000 (4,610,000) 2,418,000
Interest income -- 473,000 -- 111,000 584,000
Interest expense -- -- -- (1,601,000) (1,601,000)
Other income (22,000) -- -- -- (22,000)
Income/(loss) before income taxes 744,000 5,357,000 1,378,000 (6,100,000) 1,379,000
Capital spending 147,000 232,000 -- 107,000 486,000
Total assets $ 16,683,000 $ 11,676,000 $ 661,000 $ 20,494,000 $ 49,514,000
The Company has no revenue derived outside of the United States.
42
(10) QUARTERLY FINANCIAL DATA (UNAUDITED):
First Second Third
Quarter Quarter Quarter Fourth
As Restated As Restated As Restated Quarter
----------- ----------- ----------- -------
Fiscal 2002
Net Revenues As Amended $44,195,000 $45,028,000 $46,874,000 $ 44,726,000
Gross profit 7,974,000 7,514,000 10,910,000 7,247,000
Net income 626,000 445,000 2,038,000 (34,000)
Earnings per share - Basic and
Diluted $ 0.04 $ 0.03 $ 0.13 $ 0.00
First Quarter Second Quarter Third Quarter Fourth Quarter
Fiscal 2001 As Restated As Restated As Restated As Restated
- ----------- ----------- ----------- ----------- -----------
Net Revenues As Amended $38,489,000 $40,312,000 $ 42,682,000 $ 44,486,000
Gross profit 6,991,000 6,503,000 7,112,000 7,491,000
Income before extraordinary item 622,000 282,000 543,000 255,000
Extraordinary item net of tax -- -- (143,000) (211,000)
Net income 622,000 282,000 400,000 44,000
Earnings per share - Basic and
Diluted
Before extraordinary item $ 0.07 $ 0.03 $ 0.06 $ 0.03
Extraordinary item -- -- (0.02) (0.02)
Earnings per share-Basic and
Diluted $ 0.07 $ 0.03 $ 0.04 $ 0.01
(11) EMPLOYEE BENEFIT PLANS
TeamStaff maintains two defined contribution pension plans for the benefit of
its non-worksite employees. The first, the Digital Solutions, Inc. and
Affiliated Corporations 401(k) Savings Plan, was "frozen" by the Company as of
January 1, 1999. TeamStaff plans to terminate this plan in accordance with the
provisions of Rev. Proc. 2002-21, providing a method for the termination of
single employer plans maintained by professional employer organizations. No
deferrals or other contributions currently are made to that plan.
TeamStaff also maintains The TeamStaff Retirement Savings Plan. The TeamStaff
Plan is designed to qualify as a multiple employer plan as described in Section
413(c) of the Internal Revenue Code. Additionally, because plan participants
have their own account, manage their own plan investments and make their own
investment decisions from a broad range of investment options, TeamStaff
believes that it is afforded protection from liability for participants'
investment decisions under Section 404(c) of the Code. Any TeamStaff corporate
employee (including its medical and technical staffing employees), is eligible
for participation in the TeamStaff Plan upon completing three months of service
with TeamStaff. TeamStaff provides a discretionary matching contribution of 25%
of each of the first 4% of a participant's elective contributions under the
TeamStaff Plan. TeamStaff recorded expense for this matching of $58,000 in
fiscal 2002 and $55,000 in fiscal 2001. A participant is always fully vested in
his elective contributions. A participant's interest in TeamStaff discretionary
matching contributions vests in accordance with the following schedule:
Years of Service: Vested Interest:
- ----------------- ----------------
Less than 1 Year of Service 0%
1 Year, but less than 2 Years 25%
2 Years, but less than 3 Years 50%
3 Years, but less than 4 Years 75%
4 Years or more 100%
43
TeamStaff received a favorable determination letter regarding the TeamStaff
Plan's tax qualified status on June 25, 1999. The TeamStaff Plan, and the frozen
Digital Solutions Plan, both were audited by independent auditors for the plan
years ended December 31, 2001 and December 31, 2000, in connection with their
required From 5500 Annual Reports filed with the Pension and Welfare Benefits
Administration for the plan year ended December 31, 2001.
Effective October 1, 2000, the Company adopted a non-qualified, supplemental
retirement plan covering certain corporate officers of the Company (the "SERP").
Under the terms of the SERP, a participant receives a benefit sufficient to
provide lump sum annual payments equal to approximately one-third of the
participant's base salary on the date the participant becomes a participant.
Payment of benefits commences when the participant reaches 65 years of age. The
benefit under the SERP is subject to a seven-year vesting schedule
(0%,0%,20%,40%, 60%, 80%, 100%), based on the participant's original date of
employment with the Company and contingent on the participant's reaching age 55;
provided, however, a participant's benefit becomes fully vested upon a change of
control, as defined in the SERP, if within two years of the change of control
there is a material change in the participant's job title or responsibilities or
if the participant's employment is terminated by the Company for any reason
other than conviction for theft or embezzlement from the Company. Additionally,
if a participant retires by means of total disability (as defined in the SERP),
the participant's benefit becomes fully vested and benefit payments commence as
of the disability retirement date. The SERP does not provide a death benefit.
The Company's Chief Executive Officer and its former Chief Financial Officer are
the only SERP participants.
SERP participants also are provided with a split dollar life insurance policy
("Policy"), insuring the life of the participant until the participant reaches
age 65. Although the participant is the owner of the Policy, the Company pays
all Policy premiums. Each participant has collaterally assigned the Policy to
the Company to secure repayment of the premiums through either its cash
surrender value or the Policy proceeds. The participant's right to the Policy
vests in accordance with the same schedule as the SERP and with similar change
of control provisions. Upon the participant's 65th birthday (and in certain
other circumstances provided by the Policy agreement), the Company will release
the collateral assignment of the Policy provided the participant releases the
Company from all obligations the Corporation may have with respect to the
participant (including those under the SERP). However, given the uncertainty
regarding the Company's ability to continue to maintain this Policy payment
arrangement in light of certain of the provisions of the Sarbanes-Oxley Act of
2002, the Company has discontinued paying Policy premiums on behalf of the Chief
Executive Officer.
The following table illustrates the Company's changes in benefit costs and
pension benefit obligations for the fiscal years ending September 30, 2002 and
September 30, 2001 under the SERP .
Fiscal Year
2002 2001
----------- -----------
Change in Benefit obligation
Benefit obligation at beginning of year $ 1,004,000 $ 729,000
Service cost 58,000 100,000
Interest Cost 77,000 66,000
Actuarial (gain)/loss 132,000 109,000
----------- -----------
Benefit obligation at end of year $ 1,271,000 $ 1,004,000
=========== ===========
Reconciliation of funded status
Funded status $(1,271,000) $(1,004,000)
Unrecognized net actuarial (gain)/loss 240,000 109,000
Unrecognized prior service cost 612,000 671,000
----------- -----------
Net amount recognized $ (419,000) $ (224,000)
=========== ===========
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability $(1,271,000) $(1,004,000)
44
Fiscal Year
2002 2001
----------- -----------
Intangible asset 612,000 671,000
Accumulated other comprehensive income 240,000 109,000
----------- -----------
Net amount recognized $ (419,000) $ (224,000)
=========== ===========
Weighted-average assumptions as of September 30:
Discount rate 6.50% 7.25%
Expected return on plan assets N/A N/A
Rate of compensation increase N/A N/A
Components of net periodic benefit cost
Service cost $ 58,000 $ 100,000
Interest cost 77,000 66,000
Amortization of prior service cost 58,000 58,000
Recognized actuarial (gain)/loss 1,000 --
----------- -----------
Net periodic benefit cost $ 194,000 $ 224,000
=========== ===========
Other disclosure items at end of year:
Projected benefit obligation $ 1,271,000 $ 1,004,000
=========== ===========
Accumulated benefit obligation $ 1,271,000 $ 1,004,000
=========== ===========
Fair value of plan assets -- --
=========== ===========
There are no plan assets.
(12) RESTATEMENT OF FINANCIAL STATEMENTS FOR FISCAL YEAR END SEPTEMBER 30, 2001
Effective October 1, 2000, The Company adopted a non-qualified, supplemental
retirement plan covering certain corporate officers of the Company (the "SERP").
SERP participants also are provided with a split dollar life insurance policy
("Policy"), insuring the life of the participant until the participant reaches
age 65. (Refer to Note 11 Employee Benefit Plans.) The Company incorrectly
accounted for the above programs and did not disclose them in the fiscal year
end September 30, 2001 financial statements. The Company expensed the
contributions made to the split dollar policies in the amount of $188,000. Had
the company properly accounted for the above plan in fiscal year 2001 an
additional $76,000 of expense would have been recognized on an after tax basis.
The chart below details items affected by the restatement:
September 30, 2001 September 30, 2001
As Reported As Restated
----------- -----------
BALANCE SHEET:
Amortized intangible assets $ 900,000 $ 1,571,000
Other assets 1,567,000 1,661,000
Accrued expenses and other current liabilities 8,466,000 8,365,000
Accrued pension liability 0 1,004,000
Accumulated comprehensive losses 0 (63,000)
Accumulated retained earnings (1,686,000) (1,762,000)
STATEMENTS OF INCOME:
Selling, general, and administrative expenses $ 23,264,000 $ 23,395,000
Income from operations 3,409,000 3,278,000
Income before income tax expense 3,094,000 2,963,000
Income tax expense 1,316,000 1,261,000
Income before extraordinary item 1,778,000 1,702,000
Net income 1,424,000 1,348,000
45
September 30, 2001 September 30, 2001
As Reported As Restated
----------- -----------
Other comprehensive expense, net of tax: minimum
pension liability adjustment 0 (63,000)
Comprehensive income 1,424,000 1,285,000
In conducting the audit for the current fiscal year ended September 30, 2002,
the auditors expanded their testing of the Company's system of internal
controls, including information technology controls, to include the prior year
ended September 30, 2001. This was done to investigate concerns regarding
controls raised by the predecessor auditor, PricewaterhouseCoopers. As a result
of this testing, it was determined that there where no material weaknesses in
the Company's system of internal controls and accordingly only an audit of the
restatement adjustment was required.
46
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/T. Kent Smith
------------------------------------
T. Kent Smith
President and Chief Executive Officer
Dated: August 1, 2003
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.
/s/T. Stephen Johnson Chairman of the Board August 1, 2003
- -----------------------------
T. Stephen Johnson
/s/Karl W. Dieckmann Vice-Chairman of the Board August 1, 2003
- -----------------------------
Karl W. Dieckmann
/s/Martin J. Delaney Director August 1, 2003
- -----------------------------
Martin J. Delaney
/s/Benjamin J. Dyer Director August 1, 2003
- -----------------------------
Benjamin J. Dyer
/s/ Donald W. Kappauf Director August 1, 2003
- -----------------------------
Donald W. Kappauf
/s/Rocco Marano Director August 1, 2003
- -----------------------------
Rocco Marano
/s/T. Kent Smith President, Chief Executive August 1, 2003
- ----------------------------- Officer and Director
T. Kent Smith
47
EXHIBIT 31.1
CERTIFICATIONS
I, T. Kent Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TeamStaff, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting. Date: August 1, 2003
/s/ T. Kent Smith
T. Kent Smith
President and Chief Executive Officer
48
EXHIBIT 31.2
CERTIFICATIONS
I, Gerard A. Romano, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TeamStaff, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 1, 2003
/s/ Gerard A. Romano
Gerard A. Romano
Controller
49
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Fiscal Year End Report of TeamStaff, Inc (the
Company) on Form 10-K/A for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, being, T. Kent Smith, Chief Executive Officer of the Company, and
Gerard A. Romano, Controller of the Company, respectfully, certify, pursuant to
18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Dated: August 1, 2003
/s/ T. Kent Smith /s/ Gerard A. Romano
- ----------------- --------------------
T. Kent Smith Gerard A. Romano
Chief Executive Officer Controller
50
