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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 ON 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE
[Cover Page 1 of 2 Pages]
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(Title of class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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.
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DOCUMENTS INCORPORATED BY REFERENCE
None
[Cover Page 2 of 2 Pages]
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PART I
ITEM 1. BUSINESS
INTRODUCTION
TeamStaff, Inc., a New Jersey corporation, was founded in 1969 as a
payroll service company and has evolved into a leading provider of outsourced
business solutions focusing on human resource services to a wide variety of
industries in 50 states. TeamStaff's wholly-owned subsidiaries include TeamStaff
Rx, Inc., DSI Staff ConnXions-Northeast Inc., DSI Staff ConnXions-Southwest
Inc., TeamStaff Solutions, Inc., TeamStaff I, Inc., TeamStaff II, Inc.,
TeamStaff III, Inc., TeamStaff IV, Inc., TeamStaff V, Inc., TeamStaff VI, Inc.,
TeamStaff Insurance Services, Inc., TeamStaff VIII, Inc., Employer Support
Services, Inc., TeamStaff IX, Inc., Digital Insurance Services, Inc., HR2, Inc.,
and BrightLane.com, Inc. When we use the term TeamStaff, sometimes we will mean
TeamStaff and its subsidiaries.
TeamStaff provides a variety of employment related services through
three business units: (1) Its TeamStaff Rx unit provides medical allied health
professionals and nurses to doctors' offices and medical facilities throughout
the United States on a temporary or permanent basis; (2) the professional
employer organization, or PEO, division provides comprehensive human resource
management and administrative services, including payroll administration and
payroll tax filing, procurement and administration of employee benefit plans,
procurement and administration of workers' compensation insurance, management of
employment related risks, and assistance in compliance with employment-related
laws and regulations; and (3) the payroll processing division provides
customized payroll management and tax filing services to select industries, such
as construction, and administers voucher disbursement programs for various
public agencies. We believe our medical staffing subsidiary is one of the top
providers in the niche medical imaging field. The PEO division currently
services over 2000 client organizations with approximately 16,000 worksite
employees and believes that it currently ranks, in terms of revenues, as one of
the top 10 professional employer organizations in the United States. The payroll
processing division processes payrolls for approximately 750 clients with more
than 30,000 employees. BrightLane, an acquired business unit that is not engaged
in the provision of employment related services, applies many of its core
competencies towards internal technology enablement and the integration of
various disparate systems used in TeamStaff's operating entities.
TeamStaff's corporate headquarters is in Somerset, New Jersey and it
has five regional offices located in Houston, Texas; Northampton, Massachusetts;
Alpharetta, Georgia; and Boca Raton and Clearwater, Florida and eight sales
service centers in New York, New York; Houston, Texas; Boca Raton and
Clearwater, Florida; Northampton and Woburn, Massachusetts; Alpharetta, Georgia;
and Somerset, New Jersey.
TeamStaff, Inc. was organized under the laws of the State of New Jersey
on November 25, 1969 and maintains its executive offices at 300 Atrium Drive,
Somerset, New Jersey 08873 where its telephone number is (732) 748-1700.
RECENT DEVELOPMENTS
CHANGE IN ACCOUNTANTS; RESTATEMENT OF FISCAL YEAR 2001
On April 10, 2002, the Board of Directors of TeamStaff and its Audit
Committee decided to change independent public accountants from Arthur Andersen
LLP to PricewaterhouseCoopers, LLP for the fiscal year ending September 30,
2002. The change was made due to the uncertainties surrounding Arthur Andersen
at the time. At a meeting held on December 10, 2002, prior to concluding their
audit for fiscal 2002, PricewaterhouseCoopers expressed its opinion to the Audit
Committee that there were material weaknesses in our system of internal
controls, including the adequacy, competency and reliability of operational and
financial information, information systems and finance personnel.
PricewaterhouseCoopers further stated that information had come to its
attention, that if further investigated may materially impact the fairness or
reliability of the previously issued financial statements for fiscal year 2001
and/or the financial statements to be issued for fiscal year 2002.
PricewaterhouseCoopers also stated that due to an accounting error in the
treatment of a supplemental executive retirement plan, a restatement and a
reaudit of fiscal 2001 would be required but it declined the engagement for the
reaudit of fiscal year 2001.
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In December 2002, PricewaterhouseCoopers further advised TeamStaff that
it believed it would be essential to employ a new Chief Financial Officer and
conditioned the continuance of its audit for fiscal 2002 on the employment of a
new Chief Financial Officer. PricewaterhouseCoopers acknowledged that in view of
the foregoing, it was likely that TeamStaff would be unable to make a timely
filing of its annual report for fiscal year 2002.
Engagement of New Accountants; Removal of CFO
In response to the advice from PricewaterhouseCoopers, TeamStaff
relieved its Chief Financial Officer, Donald T. Kelly, of his duties, and
commenced a search for a new Chief Financial Officer. In light of the need to
engage a new auditor for fiscal year 2001, the Audit Committee determined that
TeamStaff's interests were best served by engaging new independent accountants
willing to audit both fiscal 2001 and fiscal year 2002. On December 13, 2002 the
audit committee dismissed PricewaterhouseCoopers and engaged Lazar Levine &
Felix LLP to serve as TeamStaff's independent public accountants.
In conducting the audit for fiscal year ended September 30, 2002, Lazar
expanded its testing of TeamStaff's internal controls, including information
technology controls, to include the fiscal year ended September 30, 2001. This
procedure was followed since the Arthur Anderson LLP work papers were not
readily available for review by Lazar and to investigate the concerns regarding
internal controls by PricewaterhouseCoopers. As a result of this expanded
testing, no material weaknesses in the systems was revealed and, based on these
results, Lazar concluded that only an audit of one restatement adjustment, as
discussed below, was required and not a full reaudit of the fiscal 2001
consolidated financial statements.
Restatement of 2001
Prior to its dismissal, PricewaterhouseCoopers had advised the Audit
Committee that, in PricewaterhouseCoopers' opinion, TeamStaff should not have
applied pension plan accounting to its supplemental executive retirement plan
adopted on October 1, 2000, resulting in a material error requiring the
restatement of the fiscal year 2001 financial statements. This would have
resulted in an additional after-tax charge to earnings of approximately $408,000
in fiscal year 2001. TeamStaff had engaged an independent firm to design the
plan and had reviewed the plan's accounting treatment with Arthur Andersen prior
to its certification of TeamStaff's fiscal year 2001 financial statements.
Lazar has advised the Audit Committee that it has undertaken its own
analysis of the appropriate accounting treatment for the supplemental executive
retirement plan. Lazar has determined that the plan is indeed a pension plan and
TeamStaff has accounted for it as such. Nevertheless, Lazar has determined that
a restatement of TeamStaff's fiscal 2001 financial statements is appropriate due
to the omission of a note in the fiscal year 2001 consolidated financial
statements containing certain required disclosures for the plan. Further, an
adjustment in the expense calculation of the plan resulted in a reduction in net
income after-tax for fiscal 2001 of $76,000 from $1,424,000 to $1,348,000.
Reconsideration of Status of CFO
In light of the foregoing, TeamStaff determined that the conclusions
reached by PricewaterhouseCoopers concerning TeamStaff's internal controls and
financial personnel were not supported by Lazar's independent analysis or
TeamStaff's own assessment of its financial and operational systems. Mr. Kelly
has remained an employee during this period, and as a result of the
determinations made by Lazar regarding TeamStaff's internal controls and
systems, and the results of its audit and review of the issues involved with the
SERP plan and the restatement of the 2001 fiscal year, the Audit Committee and
the Board of Directors are reviewing the status of Mr. Kelly's employment and
whether the Company should reinstate Mr. Kelly or retain a new Chief Financial
Officer.
NASDAQ DELISTING NOTICE AND HEARING
On January 16, 2003, we received notice from the NASDAQ Stock Market
that an "E" would be appended to our trading symbol at the opening of business
on January 21, 2003 due to the belated filing of our annual report on Form 10-K
for fiscal year 2002. NASDAQ further advised us that TeamStaff's Common Stock
would be delisted from trading on the NASDAQ National Market at the opening of
business on January 27, 2003 unless we 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
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until a decision of the panel has been reached. We anticipate that the NASDAQ
panel will reach a decision shortly after the hearing. There can be no assurance
that NASDAQ will continue to allow for the listing of TeamStaff's common stock.
CORPORATE STAFFING CONCEPTS ACQUISITION
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, TeamStaff fully settled its earn out obligations to
Corporate Staffing Concepts LLC by agreeing to pay the sum of $250,000 in cash
and issue 27,500 shares of TeamStaff's Common Stock, for a total purchase price
of $603,100.
SERVICES
I. MEDICAL STAFFING SERVICES
TeamStaff provides medical staffing services through its wholly owned
subsidiary, TeamStaff Rx, Inc., which has more than 20 years of experience in
placing temporary and permanent employees with specialized skills and talents to
regional and national medical facilities. Temporary medical staffing enables
clients to attain management and productivity goals by matching highly trained
professional and technical personnel to specific staffing requirements.
TeamStaff Rx focuses its medical imaging and nurse staffing services in
markets where it places employees on a temporary long-term assignment or on a
permanent basis. They employ radiological technologists, diagnostic
sonographers, cardiovascular technologists, radiation therapists, registered
nurses and other medical professionals with hospitals, clinics and therapy
centers throughout the United States. Clients whose staff requirements vary
depending on the level of activity at their facility are able to secure the
services of highly qualified individuals on an interim basis.
TeamStaff Rx's clients are dependent on temporary staffing to
supplement various internal departments for staffing shortages due to vacations,
medical leaves and other causes. TeamStaff Rx fills its clients' needs by
providing qualified medical personnel on a weekly, monthly, quarterly or longer
basis, depending upon a client's particular staffing objectives. TeamStaff Rx
also provides targeted recruiting and placement for clients for permanent
employees. Additionally, if an employee placed on temporary assignment
ultimately is hired by the client on a permanent basis, TeamStaff Rx usually
receives a recruitment fee from that client.
The current unprecedented shortage in the availability of professional
medical imaging and nursing personnel has, in management's opinion, created a
strong market opportunity for TeamStaff Rx. The Company believes that TeamStaff
Rx is in a pivotal position to increase its market share based on its reputation
and experience in the temporary medical staffing industry. During the fiscal
year ended September 30, 2002, this unit generated $74,861,000 of revenue.
Our temporary staffing services provide clients the ability to "right
size"; that is, to expand or reduce their workforces in response to changing
business conditions. Management believes that these services provide numerous
benefits to the client, such as saving the costs of salary and benefits of a
permanent employee whose services are not needed throughout the year. The client
also avoids the costs, uncertainty and delays associated with searches for
qualified interim employees. TeamStaff Rx's temporary staffing services also
allow a client to avoid administrative responsibility for payroll, payroll
taxes, workers' compensation, unemployment and medical benefits for these
interim employees.
Management believes that its temporary medical staffing services
provide a client with an increased pool of qualified personnel. Since TeamStaff
Rx's temporary staffing employees have access to a wide array of benefits, such
as paid time off, health and life insurance, Section 125 premium conversion
plans, and 401(k) retirement savings plans, TeamStaff believes it will be able
to attract a sufficient pool of personnel to grow this business. These
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benefits provide temporary employees with the motivation of permanent workers
without additional benefit and administrative costs to the client.
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 $586,150,000 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.
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,
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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.
III. PAYROLL SERVICES
TeamStaff was originally established as a payroll service firm in 1969
and continues to provide payroll and tax reporting services to its clients.
During the fiscal year ended September 30, 2002, this unit generated $4,954,000
of revenue. Historically, the payroll division has provided these services
primarily to the construction industry and currently more than 75% of
TeamStaff's approximately 750 payroll service clients are in the construction
industry located in the greater New York metropolitan area. TeamStaff offers
most, if not all, of what other payroll services provide, including the
preparation of payroll checks, direct deposit, government compliance reports,
workers' compensation reports and workers' compensation audit reports as
required by New York State, quarter and year end tax reports, W-2's (including
federal and state magnetic media), and remote processing (via modem) directly
from the clients' offices as well as certified payrolls. Tax reporting services
include the impounding of tax payments, timely deposit of tax liability, filing
of payroll tax returns, distribution of quarter and year-end payroll tax
statements and timely response to agency inquiries.
TeamStaff has developed a Disbursement Management program that provides
processing and payment services for various governmental agencies and
organizations in the New York metropolitan area. This program is part of the
Payroll Services division. Disbursement Management processing and payment is
different from TeamStaff's ordinary human resource outsourcing services.
Individual recipients are not employees of the client or TeamStaff. Clients
utilizing this program make payments to individuals or entities for the
rendering of a variety of services. Ordinarily, these types of payments are made
by the client internally through accounts payable or a similar department. The
volume, frequency and complexity of these payments frequently drive a client to
outsource this type of disbursement.
BRIGHTLANE SUBSIDIARY
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.
Since the acquisition, BrightLane has applied its core competencies
mainly toward internal technology enablement and the integration of various
disparate systems in TeamStaff's operating entities. Significant savings and
operational efficiencies will be obtained by leveraging BrightLane's experienced
technical staff and relationship with a state-of-the-art, highly secure data
center to consolidate TeamStaff's numerous legacy operating platforms into the
ScorPEO operating platform integrated into Lawson's finance and accounting
system. Implementation efforts have begun and the project is anticipated to be
complete during fiscal year 2003.
TeamStaff has leveraged Brightlane's technology and expertise as part
of TeamStaff ConnXions, a new online business center for the exclusive use of
TeamStaff's client companies and their employees. This service will aggregate
the collective buying power of all of TeamStaff's clients to reduce operating
expenses and negotiate purchase discounts generally unattainable on an
individual basis and is intended to afford TeamStaff an ongoing revenue stream.
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:
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Cash acquired $ 12,325,000
Deferred tax asset 7,400,000
Investment in TeamStaff preferred stock 3,500,000
Other assets acquired 1,538,000
First Union relationship 6,900,000
Tradename 10,000
Goodwill 12,932,000
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Total $ 44,605,000
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CUSTOMERS
TeamStaff's customer base consists of over 3,000 client companies,
representing over 46,000 employees (including client employees who receive
payroll services and are not considered TeamStaff co-employees) as of September
30, 2002. TeamStaff's client base is broadly distributed throughout a wide
variety of industries; however, more than 75% of the customers in the payroll
division are in the construction industry and substantially all of the customers
of our TeamStaff Rx, Inc. subsidiary are engaged in the healthcare industry.
TeamStaff intends to maintain diversity within its client base to lower
its exposure to downturns or volatility in any particular industry and help
insulate it to some extent from general economic cycles. All prospective PEO
customers are also evaluated individually on the basis of workers' compensation
risk, group medical history, unemployment history and operating stability. No
single client in any operating unit constitutes more than 5% of that unit's
revenues.
SALES AND MARKETING
TeamStaff maintains sales and marketing personnel in all of its
locations, which currently include New Jersey, New York, Texas, Florida,
Georgia, and Massachusetts. Our sales and marketing personnel travel throughout
the United States in an effort to expand our business.
TeamStaff and First Union Corporation (renamed Wachovia), a leading
financial services company, have signed, effective August 31, 2001, an agreement
to market TeamStaff's professional employer services to Wachovia's small
business customers. The agreement calls for a two-year, extendable relationship
in which TeamStaff will be an authorized marketer of professional employer
services to Wachovia's business banking customers. This agreement presents
TeamStaff with a significant opportunity to market its services to Wachovia's
extensive customer base of over one million small businesses. At the same time
it presents Wachovia an opportunity to offer a comprehensive outsourced human
resource package to its clients. Wachovia owns approximately 20% of TeamStaff's
stock.
TeamStaff has also formed a strategic alliance with Fleet Insurance
Services, a Fleet Boston Financial company, effective November 1, 2002, to
promote TeamStaff's PEO business in the Northeast. Fleet Insurance Services,
headquartered in Cranford, New Jersey, is one of the largest regional insurance
brokerage firms, with over 300 insurance professionals in 12 offices throughout
Connecticut, Delaware, New Jersey, New York and Pennsylvania. Through the
alliance, Fleet's insurance professionals will refer their small and mid-sized
business clients and prospective clients to TeamStaff's PEO division. Fleet
serves thousands of businesses that fit TeamStaff's PEO client profile.
Management anticipates that this new relationship will generate substantial
additional revenue in its Northeastern market. Fleet's insurance professionals
will benefit from the alliance by being able to offer a comprehensive suite of
human resource management services to their clients and prospective clients.
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, 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.
TeamStaff considers its primary competition to be these large national and
regional PEO providers, as well as the traditional form of employment of
employees.
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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.
INDUSTRY/GOVERNMENT REGULATION
INTRODUCTION
TeamStaff's operations are affected by numerous federal and state laws
relating to labor, tax and employment matters. By entering into a co-employer
relationship with employees who work at client company locations (sometimes
referred to as "worksite employees") as part of its PEO business, TeamStaff
assumes certain obligations and responsibilities of an employer under these
federal and state laws. Many of these federal and state laws were enacted prior
to the development of nontraditional employment relationships, such as
professional employer organizations, temporary employment, and outsourcing
arrangements, and do not specifically address the obligations and
responsibilities of nontraditional employers. In addition, the definition of
"employer" under these laws is not uniform. Accordingly, the application of
these laws to our business cannot be assured.
Some governmental agencies that regulate employment and labor laws have
developed rules that specifically address labor and employment issues raised by
the relationship among clients and PEOs. Existing regulations are relatively new
and, therefore, their interpretation and application by administrative agencies
and federal and state courts are limited or non-existent. The development of
additional regulations and interpretations of existing regulations can be
expected to evolve over time. The Company cannot predict with certainty the
nature or direction of the development of federal, state and local regulations.
As an employer, TeamStaff is subject to all federal statutes and
regulations governing its employer-employee relationships.
FEDERAL AND STATE EMPLOYMENT TAXES
TeamStaff assumes the sole responsibility and liability for the payment
of federal and state employment taxes with respect to wages and salaries paid to
its employees, including worksite employees. There are essentially three types
of federal employment tax obligations: (i) withholding of income tax
requirements; (ii) obligations under FICA; and, (iii) obligations under the
Federal Unemployment Tax Act.
Under these statutes, employers have the obligation to withhold and
remit the employer portion and, where applicable, the employee portion of these
taxes. There is still considerable uncertainty as to the status of leased
employees in relation to these statutes. While TeamStaff believes that it can
assume the client company's withholding obligations, in the TeamStaff fails to
meet these obligations, the client company may be held jointly and severally
liable for these payments. These interpretive uncertainties may have an impact
on our PEO business.
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EMPLOYEE BENEFIT PLANS
TeamStaff offers various employee benefit plans to its full-time
employees, including its worksite employees. These plans include a 401(k) Plan
(a profit-sharing plan with a cash or deferred arrangement, or CODA, under Code
Section 401(k)), a Section 125 plan, group health plans, dental insurance, a
group life insurance plan and a group disability insurance plan. Generally,
employee benefit plans are subject to provisions of both the Code and the
Employee Retirement Income Security Act.
In order to qualify for favorable tax treatment under the Code, the
plans must be established and maintained by an employer for the exclusive
benefit of its employees. In addition to the employer/employee threshold,
pension and profit-sharing plans, including plans that offer CODAs under Code
Section 401(k) and matching contributions under Code Section 401(m), must
satisfy certain other requirements under the Code. These other requirements are
generally designed to prevent discrimination in favor of highly compensated
employees to the detriment of non-highly compensated employees with respect to
both the availability of, and the benefits, rights and features offered in
qualified employee benefit plans.
Employee pension and welfare benefit plans are also governed by ERISA.
ERISA defines "employer" as "any person acting directly as an employer, or
indirectly in the interest of an employer, in relation to an employee benefit
plan." ERISA defines the term "employee" as "any individual employed by an
employer." A definitive judicial interpretation of "employer" in the context of
a PEO arrangement has not been established, although the Internal Revenue
Service released Rev. Proc. 2002-21 on April 24, 2002, to help clarify the
ability of PEOs to maintain multiple employer 401(k) plans (like the Company's
current active plan) for the benefit of worksite employees. If TeamStaff were
found not to be an employer for ERISA purposes, its plans may not comply with
ERISA and the level of services TeamStaff could offer may be adversely affected.
Further, as a result of such findings, TeamStaff and its plans would not enjoy
the preemption of state laws provided by ERISA and could be subject to varying
state laws and regulations, as well as to claims based upon state common laws.
In addition to ERISA and the Code provisions discussed herein, issues
related to the relationship between TeamStaff and its worksite employees may
also arise under other federal laws, including other federal income tax laws.
IRS ISSUANCE OF REV. PROC. 2002-21
In April 2002, the IRS issued Rev. Proc. 2002-21. While Rev. Proc.
2002-21 is intended to describe the steps that may be taken to ensure the
qualified status of defined contribution retirement plans maintained by PEO's
for the benefit of worksite employees, there remain uncertainties regarding the
operation and interpretation of that revenue procedure. Under Rev. Proc.
2002-21, if a PEO operates a multiple employer retirement plan in accordance
with IRS Code Section 413(c), the IRS will not disqualify the retirement plan
solely on the grounds that the plan violates or has violated the exclusive
benefit rule. TeamStaff's current, active retirement savings plan is designed,
and intended to be operated, in accordance with IRS Code Section 413(c). Rev.
Proc. 2002-21 also provides that if a PEO's retirement savings plan is not
operated as a multiple employer retirement savings plan, the plan risks
disqualification for violation of the exclusive benefit rule unless a PEO either
converts the plan to a multiple employer plan or terminates the plan by December
31, 2003 for calendar year plans. TeamStaff also maintains a "frozen" retirement
savings plan that is not a multiple employer plan. The Company anticipates that
it will terminate the "frozen" plan in accordance with Rev. Proc. 2002-21.
STATE REGULATION
As an employer, TeamStaff is subject to all statutes and regulations
governing the employer-employee relationship. Additionally, several states
regulate TeamStaff's PEO, temporary and permanent staffing operations. For
example, TeamStaff's PEO activities in the State of Texas are governed by the
Staff Leasing Services Licensing Act, which regulates PEOs in the State of
Texas. The Act, which became effective on September 1, 1993, established a
mandatory licensing scheme for PEOs and expressly recognizes a licensee as the
employer of the assigned employee for purposes of the Texas Unemployment
Compensation Act and for other purposes. A TeamStaff subsidiary possesses a
license to offer PEO services in the State of Texas.
10
While many states do not explicitly regulate PEOs, approximately 26
states have passed laws that have licensing, registration or certification
requirements for PEOs and other states are considering such regulation. Such
laws vary from state to state, but generally provide for monitoring the fiscal
responsibility of PEOs. Whether or not a state has licensing, registration or
certification requirements, the Company faces a number of other state and local
regulations that could impact its operations. TeamStaff and/or a TeamStaff
subsidiary is currently licensed, registered or certified in Arkansas, Colorado,
Florida, Georgia, Illinois, Kentucky, Louisiana, Maine, Massachusetts,
Minnesota, Nevada, New Hampshire, New Jersey, New Mexico, Rhode Island, South
Carolina, Tennessee, Texas, Vermont, Virginia and Washington.
Additionally, an increasing number of states have adopted or are
considering adopting licensing or registration requirements that affect
TeamStaff's temporary medical staffing and permanent placement business,
although fewer states require licensure or registration for TeamStaff's medical
staffing business than its PEO business. These license and registration
requirements generally provide for an evaluation of the operator's background
and integrity and periodic or ongoing monitoring of the medical staffing firm's
policies and practices. TeamStaff Rx is licensed or registered for its temporary
technical staffing services in the following jurisdictions: Florida,
Massachusetts, North Carolina and Rhode Island and has a license application
pending in the State of New Jersey. TeamStaff Rx is licensed or registered for
its temporary nursing business in California, Kentucky and North Carolina and
has license applications pending in Massachusetts and Minnesota. TeamStaff Rx is
licensed or registered for its permanent placement business in Massachusetts and
North Carolina. We continue to review applicable statutes and regulations and
prepare appropriate applications for filing.
INFORMATION AND TECHNOLOGY SYSTEMS
TeamStaff has recently completed an analysis of various human resource
and payroll system vendors, including those that are licensors of TeamStaff's
current systems, the purpose of which was to determine which provider would, in
TeamStaff's estimation, be able to assist TeamStaff in attaining its goal of
consolidating its PEO business onto a single Internet-based platform. TeamStaff
has decided to consolidate its PEO business onto the "ScorPEO" software product
licensed by F.W. Davison & Company. Three of TeamStaff's current PEO processing
centers - Boca Raton, Florida; Houston, Texas; and Northampton, Massachusetts -
currently utilize the ScorPEO product. TeamStaff plans to implement F.W. Davison
& Company's "ScorPEO Web" application to provide its PEO clients and worksite
employee's internet-based self-service capability. The Company anticipates that
this consolidation and implementation project will be completed by the close of
the second calendar quarter of 2003.
EMPLOYEES
As of December 31, 2002, TeamStaff employed 282 corporate (non
worksite) employees, both full-time and part-time, including executive officers,
a decrease from 286 during the previous fiscal year. TeamStaff also employs
approximately 16,000 worksite employees (this number excludes payroll services
employees) and approximately 700 temporary employees on client assignments.
TeamStaff believes its relationship with its employees is satisfactory. None of
TeamStaff's corporate employees is covered by a collective bargaining agreement.
RISK FACTORS
You should carefully consider the risks described below with respect to
our operations, businesses and financial condition. The risks and uncertainties
described below are not the only ones facing us. Other risks and uncertainties
that we have not predicted or assessed may also adversely affect us. Some of the
information in this filing contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"intend," "estimate," and "continue" or other similar words. You should read
statements that contain these words carefully for the following reasons:
-- the statements may discuss our future expectations;
-- the statements may contain projections of our future earnings
or of our financial condition; and
-- the statements may state other "forward-looking" information.
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SAFE HARBOR STATEMENT
Certain statements contained herein constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. TeamStaff desires to avail itself of certain "safe harbor" provisions
of the 1995 Reform Act and is therefore including this special note to enable it
to do so. Forward-looking statements included in this Report on Form 10-K
involve known and unknown risks, uncertainties, and other factors which could
cause 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 based upon management's best estimates based
upon current conditions and the most recent results of operations. These risks
include, but are not limited to, risks related to recently consummated
acquisitions as well as future acquisitions, TeamStaff's ability to increase its
revenues and produce net income, effects of competition and technological
changes, risks related to exposure to personal injury and workers' compensation
claims, risks that TeamStaff's insurers may not provide adequate coverage, risks
associated with compliance with government regulations such as ERISA, state and
local employment regulations and dependence upon key personnel.
We believe it is important to communicate our expectations to our
investors. There may be events in the future, however, that we are not
accurately able to predict or over which we have no control. The risk factors
listed below, as well as any cautionary language in this filing, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in us, you should be aware that the occurrence of
any of the events described in the risk factors below, elsewhere in this filing
and other events that we have not predicted or assessed could have a material
adverse effect on our earnings, financial condition or business. In such case,
the price of our securities could decline and you may lose all or part of your
investment.
WE MAY ACQUIRE ADDITIONAL COMPANIES, WHICH MAY RESULT IN ADVERSE EFFECTS ON OUR
EARNINGS.
We may at times become involved in discussions with potential
acquisition candidates. Any acquisition that we may consummate may have an
adverse effect on our liquidity and earnings and may be dilutive to our
earnings. In the event that we consummate an acquisition or obtain additional
capital through the sale of debt or equity to finance an acquisition, our
shareholders may experience dilution in their shareholders' equity. We have
historically obtained growth through acquisitions of other companies and
businesses. Under Statements of Financial Accounting Standards No.141, Business
Combinations (SFAS No.141) and No. 142 Goodwill and Other intangible Assets
implemented in June 2001, we are required to periodically review goodwill and
indefinite life intangible assets for possible impairment. In the event that we
are required to write down the value of any assets under these pronouncements,
it may materially and adversely affect our earnings. See the more detailed
discussion appearing as part of our Management Discussion and Analysis.
OUR FINANCIAL CONDITION MAY BE AFFECTED BY INCREASES IN HEALTH CARE AND WORKERS'
COMPENSATION INSURANCE COSTS.
Health care insurance premiums and workers' compensation insurance
coverage comprise a significant part of our PEO operating expenses. Accordingly,
we use managed care procedures in an attempt to control these costs. Changes in
health care and workers' compensation laws or regulations may result in an
increase in our costs and we may not be able to immediately incorporate such
increases into the fees charged to clients because of our existing contractual
arrangements with clients. As a result, any such increases in these costs could
have a material adverse effect on our financial condition, results of operations
and liquidity.
OUR FINANCIAL CONDITION MAY BE AFFECTED BY RISKS ASSOCIATED WITH THE HEALTH AND
WORKERS' COMPENSATION CLAIMS EXPERIENCE OF OUR CLIENTS.
Although we utilize only fully insured plans of health care and incur
no direct risk of loss under those plans, the premiums that we pay for health
care and workers' compensation insurance are directly affected by the claims
experience of our clients. If the experience of the clients is unfavorable, the
premiums that are payable by us will increase or coverage may become unavailable
altogether. We may not be able to pass such increases onto our clients, which
may reduce our profit margin. Increasing health care and workers' compensation
premiums could also place us at a disadvantage in competing for new clients. In
addition, periodic reassessments of workers' compensation
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claims of prior periods may require an increase or decrease to our reserves, and
therefore may also affect our present and future financial condition.
OUR FINANCIAL CONDITION MAY BE AFFECTED BY INCREASES IN HEALTH INSURANCE
PREMIUMS, UNEMPLOYMENT TAXES AND WORKERS' COMPENSATION RATES.
Health insurance premiums state unemployment taxes and workers'
compensation rates are in part determined by our claims experience and comprise
a significant portion of our direct costs. If we experience a large increase in
claim activity, our unemployment taxes, health insurance premiums or workers'
compensation insurance rates could increase. Although we employ internal and
external risk management procedures in an attempt to manage our claims
incidence, estimate claims expenses and structure our benefits contracts to
provide as much cost stability as possible, we may not be able to prevent
increases in claim activity, accurately estimate our claims expenses or pass the
cost of such increases on to our clients. Since our ability to incorporate such
increases into service fees to our clients is constrained by contractual
arrangements with clients, a delay could result before such increases could be
reflected in service fees. As a result, such increases could have a material
adverse effect on our financial condition or results of operations.
SIGNIFICANT GROWTH THROUGH ACQUISITIONS MAY ADVERSELY AFFECT OUR MANAGEMENT AND
OPERATING SYSTEMS.
We completed three significant acquisitions during the past four
calendar years and may continue to pursue a strategy of acquiring compatible
businesses in the future. Our growth is making significant demands on our
management, operations and resources, including working capital. If we are not
able to effectively manage our growth, our business and operations will be
materially harmed. To manage growth effectively, we will be required to continue
to improve our operational, financial and managerial systems, procedures and
controls, and hire and train new employees while managing our current operations
and employees. Historically, our cash flow from operations has been insufficient
to expand operations. Sufficient capital may not be available in the future.
OUR PAYROLL BUSINESS MAY BE ADVERSELY AFFECTED IF THERE IS AN ECONOMIC DOWNTURN
IN THE CONSTRUCTION BUSINESS.
Although we have expanded our services to a number of industries, our
payroll service business continues to rely to a material extent on the
construction industry in the greater New York City metropolitan area. During the
last fiscal year, construction related business accounted for more than 75% of
our payroll service business' total customers. Accordingly, if there is a
slowdown in construction activities in this area, it will affect our revenues
and profitability. Management believes its reliance on the construction business
will continue to decline as its customer base expands and becomes more
diversified.
OUR BUSINESS MAY BE ADVERSELY AFFECTED DUE TO ECONOMIC CONDITIONS IN SPECIFIC
GEOGRAPHIC MARKETS.
While we have offices located in seven markets in five different
states, the majority of our revenues are derived through our Florida, New Jersey
and Texas operations. While we believe that our market diversification will
eventually lessen this risk in addition to generating significant revenue
growth, we may not be able to duplicate in other markets the revenue growth and
operating results experienced in our Florida, New Jersey and Texas markets.
UNFAVORABLE INTERPRETATIONS OF GOVERNMENT LAWS MAY HARM OUR PEO OPERATIONS.
Our PEO operations are affected by many federal, state and local laws
relating to labor, tax, insurance and employment matters and the provision of
managed care services. Many of the laws related to the employment relationship
were enacted before the development of alternative employment arrangements, such
as those that we provide, and do not specifically address the obligations and
responsibilities of non-traditional employers. The unfavorable resolution of
unsettled interpretive issues concerning our relationship could have a material
adverse effect on our results of operations, financial condition and liquidity.
Uncertainties arising under the Internal Revenue Code of 1986 include, but are
not limited to, the qualified tax status and favorable tax status of certain
benefit plans we and other alternative employers provide. In addition, new laws
and regulations may be enacted with respect to its activities, which may also
have a material adverse effect on our business, financial condition, results of
operations and liquidity.
13
IF GOVERNMENT REGULATIONS REGARDING PEOS, TEMPORARY AND PERMANENT STAFFING ARE
IMPLEMENTED, OR IF CURRENT REGULATIONS ARE CHANGED, OUR BUSINESS COULD BE
HARMED.
Because many of the laws related to the employment relationship were
enacted prior to the development of professional employer organizations and
other staffing businesses, many of these laws do not specifically address the
obligations and responsibilities of non-traditional employers. Our operations
are affected by numerous federal, state and local laws and regulations relating
to labor, tax, insurance and employment matters. By entering into an employment
relationship with employees who work at client locations, we assume obligations
and responsibilities of an employer under these laws. Uncertainties arising
under the Internal Revenue Code of 1986, include, but are not limited to, the
qualified tax status and favorable tax status of certain benefit plans provided
by our company and other alternative employers. The unfavorable resolution of
these unsettled issues could have a material adverse effect on results of
operations and financial condition. While many states do not explicitly regulate
PEOs, approximately one-half of the states have enacted laws that have
licensing; registration or certification requirements for PEOs, and several
additional states are considering such laws. Such laws vary from state to state
but generally provide for the monitoring of the fiscal responsibility of PEOs
and specify the employer responsibilities assumed by PEOs. Additionally, many
states require licensure or registration of entities providing temporary health
care or nursing services as well as those offering permanent placement services.
There can be no assurance that we will be able to comply with any such
regulations, which may be imposed upon us now or in the future, and our
inability to comply with any such regulations could have a material adverse
effect on our results of operations and financial condition. In addition, there
can be no assurance that existing laws and regulations which are not currently
applicable to us will not be interpreted more broadly in the future to apply to
our existing activities or that new laws and regulations will not be enacted
with respect to our activities. Either of these changes could have a material
adverse effect on our business, financial condition, results of operations and
liquidity.
WE MAY NOT BE ABLE TO OBTAIN ALL OF THE LICENSES AND CERTIFICATIONS THAT WE NEED
TO OPERATE.
State authorities extensively regulate the PEO, temporary medical
staffing and permanent placement industry and some states require us to satisfy
operating, licensing or certification requirements. If we are unable to obtain
or maintain all of the required licenses or certifications that we need, we
could experience material adverse effects to our results of operations,
financial condition and liquidity.
HEALTH CARE OR WORKERS' COMPENSATION REFORM COULD IMPOSE UNEXPECTED BURDENS ON
OUR ABILITY TO CONDUCT OUR BUSINESS.
Regulation in the health care and workers' compensation fields
continues to evolve, and we cannot predict what additional government
regulations affecting our business may be adopted in the future. Changes in any
of these laws or regulations may adversely impact the demand for our services,
require that we develop new or modified services to meet the demands of the
marketplace, or require that we modify the fees that we charge for our services.
Any such changes may adversely impact our competitiveness and financial
condition.
IF WE LOSE OUR QUALIFIED STATUS FOR CERTAIN TAX PURPOSES, OUR BUSINESS WOULD BE
ADVERSELY AFFECTED.
The Internal Revenue Service established an Employee Leasing Market
Segment Group for the purpose of identifying specific compliance issues
prevalent in certain segments of the PEO industry. One issue that arose in the
course of these reviews is whether PEOs should be considered the employers of
worksite employees under Internal Revenue Code provisions applicable to employee
benefit plans, which would permit PEOs to offer benefit plans that qualify for
favorable tax treatment to worksite employees. If the IRS concludes that PEOs
are not employers of worksite employees for purposes of the Internal Revenue
Code, we would need to respond to the following adverse implications:
- - the tax-qualified status of our 401(k) plan could be revoked and our
Cafeteria Plan may lose its favorable tax status;
- - worksite employees would not be able to continue to participate in such
plans or in other employee benefit plans;
- - we may no longer be able to assume the client company's federal
employment tax withholding obligations;
14
- - if such a conclusion were applied retroactively, then employees' vested
account balances in the 401(k) plan would become taxable immediately,
we would lose our tax deduction to the extent contributions were not
vested, the plan trust would become a taxable trust and penalties, and
additional taxes for prior periods could be assessed.
In such a circumstance, we would face the risk of client
dissatisfaction as well as potential litigation, and our financial condition;
results of operations and liquidity could be materially adversely affected.
In April 2002, IRS issued Rev. Proc. 2002-21. While Rev. Proc. 2002-21
is intended to describe the steps that may be taken to insure the qualified
status of defined contribution retirement plans maintained by PEOs for the
benefit of worksite employees, there remain uncertainties regarding the
operation and interpretation of that revenue procedure. Under Rev. Proc.
2002-21, if a PEO operates a multiple employer retirement plan in accordance
with IRS Code Section 413(c), the IRS will not disqualify the retirement plan
solely on the grounds that the plan violates or has violated the exclusive
benefit rule. TeamStaff's current active retirement savings plan is designed,
and intended to be operated, in accordance with IRS Code Section 413(c). Rev.
Proc. 2002-21 also provides that if a PEO's retirement savings plan is not
operated as a multiple employer retirement savings plan, the plan risks
disqualification for violation of the exclusive benefit rule unless a PEO either
converts the plan to a multiple employer plan or terminates the plan by December
31, 2003 for calendar year plans. TeamStaff also maintains a "frozen" retirement
savings plan that is not a multiple employer plan. TeamStaff anticipates that it
will terminate the "frozen" plan in accordance with Rev. Proc. 2002-21. If
TeamStaff is unable to complete termination of that plan in accordance with Rev.
Proc. 2002-21, we could face the risk of client dissatisfaction as well as
potential litigation, and our financial condition, results of operations and
liquidity could be materially adversely affected.
WE ARE LIABLE FOR THE COSTS OF WORKSITE EMPLOYEE PAYROLL AND BENEFITS AND BEAR
THE RISK IF SUCH COSTS EXCEED THE FEES PAYABLE TO US BY OUR CLIENTS.
Under our standard client service agreement, we become a co-employer of
worksite employees and assume the obligations to pay the salaries, wages and
related benefit costs and payroll taxes of such worksite employees. We assume
these obligations as a principal, not merely as an agent, of the client company.
If a client company does not pay us, or if the costs of benefits provided to
worksite employees exceeds the fees paid by a client company, our ultimate
liability for worksite employee payroll and benefits costs could have a material
adverse effect on our financial condition or results of operations. Our
obligations include responsibility for
- - payment of the salaries and wages for work performed by worksite
employees, regardless of whether the client company makes timely
payment to us of the associated service fee; and
- - periodic reassessments of workers' compensation claims of prior periods
may require an increase or decrease to our reserves, and therefore may
also affect our present and future financial conditions; and
- - providing benefits to worksite employees even if the costs we incur to
provide those benefits exceed the fees paid by the client company.
WE BEAR THE RISK OF NONPAYMENT FROM OUR CLIENTS AND THE POSSIBLE EFFECTS OF
BANKRUPTCY FILINGS BY CLIENTS.
To the extent that any client experiences financial difficulty, or is
otherwise unable to meet its obligations as they become due, our financial
condition and results of operations could be adversely affected. For work
performed prior to the termination of a client agreement, we may be obligated,
as an employer, to pay the gross salaries and wages of the client's worksite
employees and the related employment taxes and workers' compensation costs,
whether or not our client pays us on a timely basis, or at all. A significant
increase in our uncollected account receivables may have a material adverse
effect on our earnings and financial condition.
To the extent that TeamStaff extends credit to its clients under its
client service agreements, or is liable for employee payroll and related
expenses, and the client files for protection under the bankruptcy laws,
TeamStaff may be unable to collect the funds owed to it from the client. As a
result, TeamStaff may be required to pay payroll and related expenses without
reimbursement. In addition, although TeamStaff believes that its client service
agreements should be terminable by it once a client enters bankruptcy, there is
a risk that a bankruptcy court may not agree and
15
would require TeamStaff to continue to perform services for such client, thereby
increasing the risk that TeamStaff would be unable to collect funds from the
client. Therefore, the filing for bankruptcy by a significant client, or a
number of clients, may have a material adverse effect upon TeamStaff's financial
condition.
WE MAY BE HELD LIABLE FOR THE ACTIONS OF OUR CLIENTS AND EMPLOYEES AND THEREFORE
INCUR UNFORESEEN LIABILITIES.
A number of legal issues with respect to the co-employment arrangements
among PEOs and temporary staffing firms, their clients and worksite employees
remain unresolved. These issues include who bears the ultimate liability for
violations of employment and discrimination laws. As a result of our status as a
co-employer, we may be liable for violations of these or other laws despite
contractual protections. While our client service agreements generally provide
that the client is to indemnify us for any liability caused by the client's
failure to comply with its contractual obligations and the requirements imposed
by law, we may not be able to collect on such a contractual indemnification
claim and may then be responsible for satisfying such liabilities. In addition,
worksite employees may be deemed to be our agents, which could make us liable
for their actions.
OUR STAFFING OF HEALTHCARE PROFESSIONALS EXPOSES US TO POTENTIAL MALPRACTICE
LIABILITY.
Through our TeamStaff Rx subsidiary, we engage in the business of
providing temporary healthcare professionals. The placement of such employees
increases our potential liability for negligence and professional malpractice of
those employees. Although we are covered by Professional Malpractice liability
insurance, which we deem reasonable under the circumstances, not all of the
potential liability we face will be fully covered by insurance. Any significant
adverse claim, which is not covered by insurance, may have a material adverse
effect on us.
WE MAY BE LIABLE FOR THE ACTIONS OF PEO WORKSITE EMPLOYEES OR CLIENTS AND OUR
INSURANCE POLICIES MAY NOT BE SUFFICIENT TO COVER SUCH LIABILITIES.
Our PEO client services agreement establishes a contractual division of
responsibilities between our company and each client for various human resource
matters, including compliance with and liability under various governmental laws
and regulations. However, we may be subject to liability for violations of these
or other laws despite these contractual provisions, even if we do not
participate in such violations. Although such client agreements generally
provide that the client indemnify us for any liability attributable to the
client's failure to comply with its contractual obligations and to the
requirements imposed by law, we may not be able to collect on such a contractual
indemnification claim, and thus may be responsible for satisfying such
liabilities. In addition, worksite employees may be deemed to be our agents,
subjecting us to liability for the actions of such worksite employees. As an
employer, we, from time to time, may be subject in the ordinary course of our
business to a wide variety of employment-related claims such as claims for
injuries, wrongful death, harassment, discrimination, wage and hours violations
and other matters. Although we carry $2 million of general liability insurance,
with no deductible, and carry $3 million of employment practices liability
insurance, with a deductible that varies in accordance with a client's size,
there can be no assurance that any such insurance we carry will be sufficient to
cover any judgments, settlements or costs relating to any present or future
claims, suits or complaints. There also can be no assurance that sufficient
insurance will be available to us in the future and, if available, on
satisfactory terms. If the insurance we carry is not sufficient to cover any
judgments, settlements or costs relating to any present or future claims, suits
or complaints, then our business and financial condition could be materially
adversely affected.
OUR CLIENTS MAY BE HELD LIABLE FOR EMPLOYMENT TAXES, WHICH COULD DISCOURAGE SOME
COMPANIES FROM TRANSACTING BUSINESS WITH US.
Pursuant to the PEO client service agreement, we assume responsibility
and liability for the payment of federal employment taxes imposed under the
Internal Revenue Code with respect to wages and salaries paid to our worksite
employees as well as various state payroll tax obligations. While the client
service agreement provides that we have the sole legal responsibility for making
these tax contributions, the Internal Revenue Service or applicable state taxing
authority could conclude that such liability cannot be completely transferred to
us. Accordingly, in the event that we fail to meet our tax withholding and
payment obligations, the client company may be held jointly and severally
liable. There are essentially three types of federal employment tax obligations:
- - income tax withholding requirements;
16
- - obligations under the Federal Income Contribution Act; and
- - obligations under the Federal and States Unemployment Tax Acts.
While this interpretive issue has not, to our knowledge, discouraged clients
from enrolling with us, it is possible that a definitive adverse resolution of
this issue would not do so in the future.
WE MAY NOT BE FULLY COVERED BY THE INSURANCE WE PROCURE.
Although we carry liability insurance, the insurance we purchase may
not be sufficient to cover any judgments, settlements or costs relating to any
present or future claims, suits or complaints. In addition, sufficient insurance
may not be available to us in the future on satisfactory terms or at all. If the
insurance we carry is not sufficient to cover any judgments, settlements or
costs relating to any present or future claims, suits or complaints, our
business, financial condition, results of operations and liquidity could be
materially adversely affected.
IF WE WERE NOT ABLE TO RENEW ALL OF THE INSURANCE PLANS, WHICH COVER WORKSITE
EMPLOYEES, OUR BUSINESS WOULD BE ADVERSELY IMPACTED.
The maintenance of health and workers' compensation insurance plans
that cover worksite employees is a significant part of our business. If we were
unable to secure such renewal contracts, our business would be adversely
affected. The current health and workers' compensation contracts are provided by
vendors with whom we have an established relationship and on terms that we
believe to be favorable. While we believe that renewal contracts could be
secured on competitive terms without causing significant disruption to our
business, there can be no assurance in this regard.
OUR BUSINESS WILL SUFFER IF OUR SERVICES ARE NOT COMPETITIVE.
Each of the payroll, temporary employee placement and the professional
employer industries are characterized by vigorous competition. Since we compete
with numerous entities that have greater resources than us in each of our
business lines, our business will suffer if we are not competitive with respect
to each of the services we provide. We believe that our major competitors with
respect to payroll and tax services are Automatic Data Processing, Inc.,
Ceridian Corp. and Paychex, Inc. Our major competitors with respect to temporary
medical staffing resources are Aureous and Comp Health. Our major competitors
with respect to professional employer services are ADP Total Source, Gevity HR
and Administaff, Inc. These companies may have greater financial and marketing
resources than we. We also compete with manual payroll systems and computerized
payroll services provided by banks, and smaller independent companies.
IF WE CANNOT OBTAIN SUFFICIENT LEVELS OF TEMPORARY EMPLOYEES, OUR BUSINESS MAY
BE AFFECTED.
TeamStaff Rx is a temporary employment agency, which depends on a pool
of qualified temporary employees willing to accept assignments for our clients.
Its business is materially dependent upon the continued availability of such
qualified medical temporary personnel. Our inability to secure temporary medical
personnel would have a material adverse effect on our business.
OUR CLIENT AGREEMENTS ARE TERMINABLE AND IF A SIGNIFICANT NUMBER OF CLIENTS DO
NOT RENEW THEIR CONTRACTS, OUR BUSINESS MAY SUFFER.
Our standard PEO client agreement provides for successive one-year
terms, subject to termination by us or by the client upon 60 days' written
notice prior to the expiration of the then-current one-year term. A significant
number of terminations by clients could have a material adverse effect on our
financial condition, results of operations and liquidity.
IF WE ARE UNABLE TO RENEW OR REPLACE CLIENT COMPANIES, OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS WILL BE ADVERSELY AFFECTED.
Our standard PEO client service agreement is subject to non-renewal on
60 days notice by either us or the client. Accordingly, the nature of the client
service agreement makes us vulnerable to potential cancellations by
17
existing clients, which could materially and adversely affect our financial
condition and results of operations. In addition, our results of operations are
dependent in part upon our ability to retain or replace our client companies
upon the termination or cancellation of the client service agreement. Clients
may determine to cancel their relationship with us for numerous reasons,
including economic factors. It is possible that the number of contract
cancellations will increase in the future.
SINCE WE HAVE NOT PAID DIVIDENDS ON OUR COMMON STOCK, YOU CANNOT EXPECT DIVIDEND
INCOME FROM AN INVESTMENT IN OUR COMMON STOCK.
We have not paid any dividends on our common stock since our inception
and do not contemplate or anticipate paying any dividends on our common stock in
the foreseeable future. Future potential lenders may prohibit us from paying
dividends without its prior consent. Therefore, holders of our common stock may
not receive any dividends on their investment in us. Earnings, if any, will be
retained and used to finance the development and expansion of our business.
WE HAVE OUTSTANDING SHARES OF RESTRICTED STOCK, WHICH IF SOLD IN THE OPEN
MARKET, MAY ADVERSELY AFFECT ITS STOCK PRICE.
Of the 15,771,986 shares outstanding as of February 3, 2003, the
Company has outstanding 6,125,764 shares, which may be deemed "restricted
stock." All of these "restricted shares" are presently eligible for resale under
Rule 144 or in connection with registration statements that have been filed by
the Company to allow for the resale of the securities. These restricted shares
include the 3,334,117 shares owned by Wachovia (First Union Private Capital) and
the 2,256,488 shares owned by Nationwide Insurance, both of which acquired the
shares in connection with TeamStaff's acquisition of BrightLane in August, 2001.
Possible or actual sales of the Company's common stock by its present
shareholders under Rule 144 or registration statements may have a depressing
effect on the price of the TeamStaff's common stock in the open market.
WE MAY ISSUE PREFERRED STOCK WITH RIGHTS SENIOR TO OUR COMMON STOCK, WHICH MAY
ADVERSELY IMPACT THE VOTING AND OTHER RIGHTS OF THE HOLDERS OF OUR COMMON STOCK.
Our certificate of incorporation authorizes the issuance of "blank
check" preferred stock with such designations, rights and preferences as may be
determined from time to time by our board of directors up to an aggregate of
5,000,000 shares of preferred stock. Accordingly, our board of directors is
empowered, without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights, which would adversely affect
the voting power or other rights of the holders of our common stock. In the
event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of our company, which could have the effect of discouraging bids for our
company and thereby prevent stockholders from receiving the maximum value for
their shares. Although we have no present intention to issue any shares of our
preferred stock, in order to discourage or delay a change of control of our
company, we may do so in the future. In addition, we may determine to issue
preferred stock in connection with capital raising efforts.
ANTI-TAKEOVER PROVISIONS IN OUR ARTICLES OF INCORPORATION MAKE A CHANGE IN
CONTROL OF OUR COMPANY MORE DIFFICULT.
The provisions of our articles of incorporation and the New Jersey
Business Corporation Act, together or separately, could discourage potential
acquisition proposals, delay or prevent a change in control and limit the price
that certain investors might be willing to pay in the future for our common
stock. Among other things, these provisions:
- - require certain supermajority votes;
- - establish certain advance notice procedures for nomination of
candidates for election as directors and for shareholders' proposals to
be considered at shareholders' meetings; and
- - divide the board of directors into three classes of directors serving
staggered three-year terms.
18
Pursuant to our articles of incorporation, the board of directors has
authority to issue up to 5,000,000 preferred shares without further shareholder
approval. Such preferred shares could have dividend, liquidation, conversion,
voting and other rights and privileges that are superior or senior to our common
stock. Issuance of preferred shares could result in the dilution of the voting
power of our common stock, adversely affecting holders of our common stock in
the event of its liquidation or delay, and defer or prevent a change in control.
In certain circumstances, such issuance could have the effect of decreasing the
market price of our common stock. In addition, the New Jersey Business
Corporation Act contains provisions that, under certain conditions, prohibit
business combinations with 10% shareholders and any New Jersey corporation for a
period of five years from the time of acquisition of shares by the 10%
shareholder. The New Jersey Business Corporation Act also contains provisions
that restrict certain business combinations and other transactions between a New
Jersey corporation and 10% shareholders.
ITEM 2. PROPERTIES
OPERATION AND FACILITIES
TeamStaff currently has processing centers in Somerset, New Jersey;
Houston, Texas; Northampton, Massachusetts; and Clearwater and Boca Raton,
Florida. TeamStaff also has sales service centers that are located in New York,
New York; Somerset, New Jersey; Clearwater and Boca Raton Florida; Alpharetta,
Georgia; Houston, Texas; and Woburn and Northampton, Massachusetts. A sales
service center is an office used primarily or partially for sales efforts and
client services.
TeamStaff leases its 19,883 square foot corporate headquarters in
Somerset, New Jersey, as well as offices in Clearwater and Boca Raton, Florida;
Alpharetta, Georgia; Houston, Texas; New York City; and Woburn and Northampton,
Massachusetts. The facilities provide sufficient capacity to meet demands for
the foreseeable future. In the fiscal year ended September 30, 2002, TeamStaff's
total lease expenses were $1,796,000.
Although TeamStaff's offices are equipped with various software and
computer systems, TeamStaff is currently evaluating all systems including
hardware and will upgrade accordingly.
The following is summary information on TeamStaff's facilities:
APPROXIMATE EXPIRATION
----------- ----------
LOCATION SQUARE FEET DATE TERMS
- -------- ----------- ---- -----
2 Northpoint Drive 4,610 7/31/04 $ 7,107 per month
Suite 760
Houston, TX
1901 Ulmerton Road 32,405 5/31/05 $ 60,652 per month
Suite 800/450
Clearwater, FL
Corporate Headquarters 15,244 9/30/07 $ 26,677 per month
300 Atrium Drive
Somerset, NJ
Corporate Headquarters 4,639 5/30/04 $ 5,000 per month
300 Atrium Drive
Somerset, NJ
245 Fifth Avenue, Suite 701 3,560 7/31/06 $ 12,502 per month
New York, NY
2650 N. Military Trail 10,823 7/31/07 $ 12,176 per month
Suite 300
Boca Raton, FL 33431
800 West Cummings Park 1,900 9/14/05 $ 4,533 per month
Suite 1500
Woburn, MA
19
3650 Mansell Road 11,848 11/15/04 $ 22,848 per month
Suite 200
Alpharetta, GA
136 West Street 3,148 9/30/05 $ 2,890 per month
Northampton, MA
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders in the fourth fiscal quarter
2002.
PART II
ITEM 5. MARKET OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
20
A. PRINCIPAL MARKET
TeamStaff's Common Stock is traded in the over-the-counter market and
included in the National Market System of the National Association of Securities
Dealers, Inc. ("NASDAQ") under the symbol "TSTF." Effective June 2, 2000
TeamStaff 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 reflected in this report in the accompanying financial statements have
been adjusted retroactively to affect the reverse stock split. TeamStaff started
trading on the National Market in June 2001. Prior to that date, TeamStaff was
trading on the SmallCap market system.
B. MARKET INFORMATION
The range of high and low sales prices for TeamStaff's Common Stock for
the periods indicated below are:
COMMON STOCK
FISCAL YEAR 2000 HIGH LOW
- ---------------- ---- ---
1st Quarter $ 5.03 $ 2.62
2nd Quarter 7.66 4.38
3rd Quarter 7.33 3.50
4th Quarter 3.81 2.25
FISCAL YEAR 2001 HIGH LOW
- ----------------- ---- ---
1st Quarter 6.12 2.41
2nd Quarter 6.19 4.50
3rd Quarter 8.69 4.59
4th Quarter 10.34 5.75
FISCAL YEAR 2002 HIGH LOW
- ----------------- ---- ---
1st Quarter 7.49 5.16
2nd Quarter 6.35 3.88
3rd Quarter 6.85 4.60
4th Quarter 7.64 2.66
FISCAL YEAR 2003 HIGH LOW
- ---------------- ---- ---
1st Quarter 4.05 2.47
The above quotations, reported by NASDAQ, represent prices between
dealers and do not include retail mark-ups, markdowns or commissions. Such
quotations do not necessarily represent actual transactions. On February 3,
2003, TeamStaff's Common Stock had a closing price of $3.07 per share.
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.
C. DIVIDENDS
TeamStaff has not declared any cash dividends on its common stock since
inception, and has no present intention of paying any cash dividends on its
common stock in the foreseeable future.
21
D. APPROXIMATED NUMBER OF EQUITY SECURITY HOLDERS
Effective August 31, 2001, TeamStaff acquired all of the capital stock
of BrightLane. As contemplated under the agreements governing the transaction,
TeamStaff agreed to issue 8,216,522 shares of its Common Stock in exchange for
all of the outstanding capital stock of BrightLane. The issuance of 8,216,522
shares includes the issuance of 158,000 shares into escrow to provide for
potential indemnification to TeamStaff for claims against Brightlane covered by
the acquisition agreements and is before deduction for fractional shares, which
were paid in cash. As of February 3, 2003, not all of the BrightLane
shareholders had submitted their capital stock for exchange.
As of February 3, 2003, there were 15,771,986 shares outstanding held
of record by 301 persons. TeamStaff believes it has approximately 2,900
beneficial owners of its common stock.
E. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
TeamStaff has five equity compensation plans, all of which were
approved by its Board of Directors and its shareholders. There are no equity
based plans, which have not been approved by shareholders. All option grants
made to executive officers and directors, including those to the Chief Executive
Officer under employment agreements, are made under the plans referenced below.
The stock option plans under which options are outstanding are:
The 1990 Employee Stock Option Plan
The 1990 Non-Executive Director Option Plan
The 1990 Senior Management Plan
The 2000 Employee Stock Option Plan
The 2000 Non-Executive Director Option Plan
Options are no longer being issued under the 1990 Employee Stock Option Plan,
the 1990 Non-Executive Director Option Plan or the 1990 Senior Management Plan
and no options were issued under these plans during the fiscal years ended
September 30, 2001 or 2002.
EQUITY COMPENSATION PLAN INFORMATION
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHED AVERAGE EXERCISE FUTURE ISSUANCES UNDER
BE ISSUED UPON EXERCISE PRICE OF OUTSTANDING EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS REFLECTED IN COLUMN (a))
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans 1,098,926 $ 4.97 904,106
Approved by Security Holders
- ----------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans Not 0 0 0
Approved by Security Holders
- ----------------------------------------------------------------------------------------------------------------------
22
ITEM 6. SELECTED FINANCIAL DATA
2001(3)
2002(4) As Restated 2000(2) 1999(1) 1998
----------------------------------------------------------------------------------------
Revenues $665,965,000 $649,727,000 $447,743,000 $244,830,000 $139,435,000
Direct Expenses 632,320,000 621,630,000 426,987,000 228,294,000 129,747,000
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.
23
(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) On 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.
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
technological 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
TeamStaff operates three different lines of business from which it
derives substantially all of its revenue: medical staffing, professional
employer organization (PEO) and payroll services.
The medical staffing revenue is recognized as service is rendered.
TeamStaff Rx bills its clients based on an hourly rate. The hourly rate is
intended to cover direct labor costs of the temporary employees, plus an
estimate to cover overhead expenses and a profit margin. Additionally, included
in revenue related to medical staffing are commissions from permanent
placements. Commissions from permanent placements result from the successful
placement of a medical employee to a customer's workforce as a permanent
employee.
PEO revenue is recognized as service is rendered. The PEO revenue
consists of charges by TeamStaff for the wages and employer payroll taxes of the
worksite employees, the administrative service fee, workers' compensation
charges, and the health and retirement benefits provided to the worksite
employees. These charges are invoiced to the client at the time of each periodic
payroll. 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
varies according to circumstances, TeamStaff's revenue, and therefore its gross
margin, will fluctuate based on TeamStaff's client mix.
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 and tax services.
24
In accordance with Emerging Issues Task Force No. 99-19 "Reporting
Revenue Gross as a Principal versus Net as an Agent," TeamStaff recognizes all
amounts billed to its PEO and medical staffing customers as gross revenue
because TeamStaff is at risk for the payment of its direct costs, whether or not
its customers pay TeamStaff on a timely basis or at all. TeamStaff assumes a
significant amount of other risks and liabilities as a co-employer of its
worksite employees, and employer of its medical employees, and therefore, is
deemed to be a principal in regard to these services. TeamStaff also recognizes
as gross revenue and as unbilled receivables, on an accrual basis, any such
amounts that relate to services performed by worksite and medical employees
which have not yet been billed to the customer as of the end of the accounting
period.
Direct costs of services are reflected in TeamStaff's Statement of
Income as "direct expenses" and are reflective of the type of revenue being
generated. PEO direct costs of revenue include wages paid to worksite employees,
employment related taxes, costs of health and welfare benefit plans, and
workers' compensation insurance costs. Direct costs of the medical staffing
business include wages, employment related taxes and reimbursable expenses.
Payroll services' direct costs includes salaries and supplies associated with
the processing of the payroll service.
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 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
25
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 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
26
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.
TeamStaff's revenues for the fiscal years ended September 30, 2002 and
2001 were $665,965,000 and $649,727,000 respectively, which represents an
increase of $16,238,000 or 2.5%. While our Medical Staffing business continued
its strong growth, growing $10,419,000, or 16.2%, over last year, PEO revenues
grew $5,477,000, or 0.9%, 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 $27,700,000 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 $23,900,000. 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 $17.9 million.
Direct expenses were $632,320,000 for the fiscal year ended September
30, 2002 and $621,630,000 for the comparable period last year, representing an
increase of $10,690,000 or 1.7%. As a percentage of revenue, direct expenses for
2002 and 2001 were 95.0% and 95.7%, 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
27
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 11.2% of TeamStaff's
consolidated revenue versus 9.9% 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 5.1% and 4.3%
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 4.3% in the fiscal year ended September
30, 2002 versus 3.6% 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 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
28
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
$649,727,000 as compared to fiscal year 2000 of $447,743,000, which represents
an increase of $201,984,000 or 45.1%. 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 $111,932,000 and $37,206,000 of the revenue growth
for the year. Internal growth accounted for the remaining $52,846,000 increase
in revenue, representing an increase of 11.8% 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 $621,630,000 as compared to
$426,987,000 for fiscal 2000, which represents an increase of $194,643,000 or
45.6%, in line with our revenue growth. As a percentage of revenue, direct
expenses for the fiscal years 2001 and 2000 were 95.7% and 95.4% 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 4.3% and 4.6% 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%.
29
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 3.6% and 3.8% 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.
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
30
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
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
31
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 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.
ITEM 7a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not undertake trading practices in securities or other
financial instruments and therefore does not have any material exposure to
interest rate risk, foreign currency exchange rate risk, commodity price risk or
other similar risks, which might otherwise result from such practices. The
Company has no material interest rate risk, except with respect to our workers'
compensation programs, and is not materially subject to fluctuations in foreign
exchange rates, commodity prices or other market rates or prices from market
sensitive instruments. In connection with TeamStaff's workers' compensation
programs, prepayments of future claims are deposited into trust funds for
possible future payments of these claims in accordance with the policies. The
interest income resulting from these prepayments is for the benefit of
TeamStaff, and is used to offset workers' compensation expense. If interest
rates in these future periods decrease, TeamStaff's workers' compensation
expense would increase because TeamStaff would be entitled to less interest
income on the deposited funds.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See attached Financial Statements beginning on page F-1 attached to
this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
TeamStaff has previously reported on Forms 8-K under the Securities and
Exchange Act of 1934 changes in its independent public accountants during the
fiscal year ended September 30, 2002 and a subsequent change on December 13,
2003, which is part of the current fiscal year ending September 30, 2003.
These reports on Form 8-K reflected:
1. On April 10, 2002, the Board of Directors of TeamStaff and its Audit
Committee decided to no longer engage Arthur Andersen LLP as TeamStaff's
independent public accountants and engaged PricewaterhouseCoopers, LLP to serve
as its independent public accountants for the fiscal year ending September 30,
2002.
2. On December 13, 2002, the Audit Committee of TeamStaff dismissed
PricewaterhouseCoopers LLP as the Company's independent public accountants and
subsequently engaged Lazar Levine & Felix LLP to serve as the Company's
independent public accountants.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of TeamStaff as of February 3,
2003 are as follows:
NAME AGE OFFICE
- --------------------------------------------------------------------------------------------------------
T. Stephen Johnson 53 Chairman of the Board of Directors Class 1
Karl W. Dieckmann 74 Vice-Chairman Class 2
Martin Delaney 59 Director Class 3
Benjamin J. Dyer 54 Director Class 2
Rocco J. Marano 74 Director Class 3
Elizabeth Hoaglin 57 President, TeamStaff Rx, Inc.
Donald W. Kappauf 56 President, Chief Executive Officer, Director Class 2
Edmund Kenealy 40 Vice President, General Counsel
Wayne Lynn 58 Chief Operating Officer, PEO Division
Gerard A. Romano 45 Corporate Controller
- --------------------------------------------------------------------------------------------------------
Our board is classified into three classes which are each elected in
staggered three year terms.
Martin J. Delaney joined the Board of Directors in July 1998. Mr.
Delaney is an attorney and a prominent healthcare executive who began his
hospital management career in 1971 as an Assistant Administrator at Nassau
County Medical Center. He has been a director of a large regional Health
Maintenance Organization on Long Island, the Hospital Association of New York
State, the Greater New York Hospital Association, and chairman of the
Nassau-Suffolk Hospital Council. He has been President, CEO and a director of
Winthrop University Hospital, Winthrop South Nassau University Health Care
Systems, and the Long Island Health Network. He has a graduate degree in health
care management from The George Washington University and a law degree from St.
John's University. He has been admitted to practice in New York State and
federal courts.
Karl W. Dieckmann, a Director of the Company since April 1990, had been
Chairman of the Board from November 1991 until September 2001 and has been Vice
Chairman since September 2001. From 1980 to 1988, Mr. Dieckmann was the
Executive Vice President of Science Management Corporation and managed the
Engineering, Technology and Management Services Groups. From 1948 to 1980, Mr.
Dieckmann was employed by the Allied Signal Corporation (now Honeywell
Corporation) in various capacities including President, Semet Solvay Division;
Executive Vice President, Industrial Chemicals Division; Vice President
Technical -- Fibers Division; Group General Manager -- Fabricated Products
Division; and General Manager -- Plastics Division, as well as various positions
with the Chemicals Division.
Benjamin J. Dyer joined the Board of Directors in December 2002. Mr.
Dyer is currently a general partner of Cordova Intellimedia Ventures and is
President of Innovations Publishing, LLC, an Atlanta based company, which
provides a subscription-based online catalog of emerging technology ventures. He
also chairs the editorial boards of Catalyst and Business-to-Business magazines
in Atlanta. In the 1980s Mr. Dyer served as chairman and CEO of Comsell, Inc., a
pioneering multimedia development firm and was president and a director of the
de novo Enterprise National Bank. Mr. Dyer founded Intellimedia Sports, Inc. in
1992 to create the ESPN-branded sports instruction
34
category in the CD-ROM industry. He was earlier a founder of Peachtree
Software, Inc. and served as its President from 1977 to September 1983. He
currently serves on a number of private boards including eBroadcasters, PMFM,
Quellan and FundRaisingInfo.com. He concentrates his community activities on
higher education and has been president of the Georgia Tech Alumni Association,
a director of the Georgia Tech Foundation and chairman of the Alumi Advisory
Board for Tech's School of Industrial & Systems Engineering. He is currently
Chairman of the Georgia Tech Research Corporation and serves on the advisory
boards of the Georgia Tech Research Institute and Georgia State University's
Robinson College of Business. Mr. Dyer holds a Bachelors degree in Industrial
Engineering from Georgia Tech and an MBA in finance from Georgia State
University
Elizabeth L. Hoaglin joined the Company as President of the TeamStaff
Rx Division in 1994, when the Company acquired RADS Technology, Inc. ("RADS"),
of which she was President and founder. Ms. Hoaglin established RADS in 1980 in
Clearwater, FL. This was the first temporary staffing firm that specialized in
placing radiology professionals. In 1983, RADS began providing traveler
technologists to hospitals and clinics nationwide. In 1984, RADS began staffing
radiation therapy, providing a niche market for Therapists, Dosimetrists and
Medical Physicists. Prior to starting RADS, Ms. Hoaglin was a Radiological
Technologist herself, graduating from Saint Anthony's Hospital in St.
Petersburg, Florida. Ms. Hoaglin worked as a technologist for major hospitals
and physicians office for over fifteen years. Ms. Hoaglin is active in numerous
professional, business and civic organizations and frequently writes articles
for publication in the radiology industry's journals.
T. Stephen Johnson has been Chairman of the Board of TeamStaff since
September 2001. He has served as Chairman of T. Stephen Johnson & Associates,
Inc., financial services consulting firm, and its related entities since
inception in 1986. Mr. Johnson is a long-time banking consultant and Atlanta
entrepreneur who has advised and organized dozens of community banks throughout
the Southeast. He is Chairman Emeritus and a Director of Netbank, the largest
and most successful Internet-only bank, as well as Chairman and principal owner
of Bank Assets, Inc., a provider of benefit programs for directors and officers
of financial institutions. Mr. Johnson is Chairman of the Board of Directo,
Inc., a company specializing in providing financial services for unbanked
individuals and Vice Chairman of Florida Bank.
Donald W. Kappauf became President and Chief Executive Officer of the
Company on December 16, 1997. Mr. Kappauf joined the Company in 1990 and has
held several senior management positions including Division President and
Executive Vice President. From 1988 to 1990, Mr. Kappauf was President of Perm
Staff/Temp Staff in Princeton, New Jersey. He was Assistant Vice President of
SMC Engineering and then President of SMC Personnel Support.
Edmund C. Kenealy has been Vice President, General Counsel of the
Company since November 2001. Mr. Kenealy joined the Company as Vice President,
Legal & Regulatory Affairs (PEO Division) in October 2000 upon its acquisition
of HR2, Inc., where he was Vice President, General Counsel and Vice President,
Operations. Prior to joining HR2, Inc. in April 1998, Mr. Kenealy was Assistant
General Counsel of ManagedComp, Inc. from 1993 to 1998. He was previously
associated with the Boston offices of Nutter, McClennen & Fish and Skadden,
Arps, Slate, Meagher & Flom. He is a graduate of Dartmouth College and the
Vanderbilt University School of Law. He is admitted to practice in Massachusetts
and the District of Columbia.
Wayne R. Lynn joined the Company as Area Vice President in October
2000, when the Company acquired HR2, Inc., of which he was Chief Executive
Officer and a principal owner. In March 2002, Mr. Lynn was appointed Chief
Operating Officer of the Company's PEO Division. Prior to his 7-year involvement
in the PEO industry, Mr. Lynn was engaged in the insurance industry for more
than 20 years. He served as President and CEO of Founders Financial Corporation,
a publicly owned insurance holding company, from 1981 to 1987 and as President
and CEO of Capital Investors Life Insurance Company from 1987 to 1994. He also
served on the Board of Directors of Gulf/Bay Bank of Tampa, Florida, and South
Trust Bank of Florida. Mr. Lynn is a graduate of the U.S. Naval Academy, the
U.S. Navy Supply Corps School, and the U.S. Navy Transportation Management
School. Mr. Lynn has also completed numerous graduate level business management
courses at the California State University at Hayward, California. He has held
licenses to sell Life, Health, and Property/Casualty Insurance, Variable
Annuities and Securities. He is currently licensed as an insurance third-party
administrator.
Rocco Marano served as member of the Board of Directors from July 1999
thru September 2001. He rejoined the Board of Directors in November 2002. Mr.
Marano, a prominent telecommunications executive, is the retired chairman and
President of Bellcore, Inc. a Bell Communications research and engineering
entity formerly owned by the
35
seven Bell regional communications companies. His present additional board
affiliations include computer Horizons Corp. He has also served as Chairman of
Horizon Blue Cross/Blue Shield of New Jersey.
Gerard A. Romano has been Corporate Controller of TeamStaff since he
joined the Company in September 2001. Prior to joining TeamStaff, he was Vice
President of Administration at Jet Aviation from December of 2000 to September
of 2001. Prior to Jet Aviation, he was employed by the PQ Corporation from
January of 1980 through December of 2000, where he held various positions
including Vice President and Chief Financial Officer of PQ's European Joint
Venture, Akzo-PQ Silica, Director of Corporate Development and Director of
Financial Planning and Analysis. He is a graduate of William Paterson
University.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Steven Johnson, Karl W. Dieckmann and Martin J. Delaney served on the
Compensation Committee during the last fiscal year ended September 30, 2002.
There are no interlocks between TeamStaff's Directors and Directors of other
companies.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
During the fiscal year ended September 30, 2002, the Board of Directors
met on 8 occasions, one of which was by telephone conference call.
The Board of Directors has four committees: Audit, Compensation,
Executive and Nominating Committees.
For the fiscal year ended September 30, 2002, the members of the
committees, and a description of the duties of the Committees were as follows:
Audit Committee. TeamStaff's audit committee acts to:(i) review with
management the finances, financial condition and interim financial statements of
TeamStaff; (ii) review with TeamStaff's independent auditors the year-end
financial statements; and (iii) review implementation with the independent
auditors and management any action recommended by the independent auditors and
the retention and termination of the Company's independent auditors. During the
fiscal year ended September 30, 2002, the audit committee met on six occasions.
The audit committee adopted a written charter governing its actions
effective June 14, 2000. During the fiscal year, the members of the audit
committee were Donald McLeod, Martin Delaney and Susan Wolken. All three of
these members of TeamStaff's audit committee were "independent" within the
definition of that term as provided by Rule 4200(a)(14) of the listing standards
of the National Association of Securities Dealers. Donald McCleod and Susan
Wolken have resigned from the Board and are no longer members of the audit
committee. Audit committee members as of February 3, 2003 are Martin Delaney,
Karl W. Dieckmann, T. Stephen Johnson, and Rocco J. Marano. Martin Delaney was
elected as its chairman.
Compensation Committee. The compensation committee functions include
administration of TeamStaff's 2000 Employee Stock Option Plan and Non-Executive
Director Stock Option Plan and negotiation and review of all employment
agreements of executive officers of the Company. The compensation committees'
members are Karl W. Dieckmann, T. Stephen Johnson and Martin J. Delaney. Karl W.
Dieckmann was elected as its chairman. During the fiscal year ended September
30, 2002, the committee met on 4 occasions.
Nominating Committee. The nominating committee functions include the
review of all candidates for a position on the board of directors including
existing directors for renomination and reports its findings with
recommendations to the Board. The nominating committee solicits candidates on
behalf of TeamStaff to fill any vacancy on the Board. The nominating committee
performs such other duties and assignments as directed by the Chairman or the
Board but shall have no power to add or remove a director without the approval
of the Board. During the fiscal year, the nomination committee members were
Donald W. Kappauf and Susan A. Wolken. During the fiscal year ended September
30, 2002, the committee did not meet. Susan Wolken has resigned from the Board
and is no longer a member of the nominating committee. Nominating committee
members as of December 30, 2002 are Karl W. Dieckmann, T. Stephen Johnson and
Donald W. Kappauf. Karl W. Dieckmann was elected it's chairman.
36
Executive Committee. The Board of Directors created an Executive
Committee effective September 4, 2001. The members are T. Stephen Johnson, Karl
W. Dieckmann and Donald W. Kappauf. T. Stephen Johnson serves as its chairman.
This committee met 4 times via telephone during the fiscal year ended September
30, 2002.
No member of the Board of Directors or any committee failed to attend
or participate in fewer than 75% of the meetings of the Board or committee on
which such member serves.
37
ITEM 11. EXECUTIVE COMPENSATION
The following provides certain summary information concerning
compensation during the years ended September 30, 2002, 2001 and 2000 paid to or
earned by TeamSaff's Chief Executive Officer and each of the executive officers
and key employees of the Company who received in excess of $100,000 in
compensation during the last fiscal year.
LONG TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSTION YEAR SALARY BONUS OTHER OPTIONS/SAR'S
- -----------------------------------------------------------------------------------------------------------------------------
Donald W. Kappauf, 2002 $300,000 $477,500 $26,163 -0-
Chief Executive Officer 2001 $267,130 $200,000 $46,268 300,000
2000 $230,126 -0- $17,251 57,143
Donald T. Kelly (1) 2002 $200,000 $151,250 $18,205 -0-
Chief Financial Officer 2001 $177,247 $100,000 $18,172 150,000
2000 $165,000 -0- $12,231 14,286
Elizabeth Hoaglin 2002 $114,250 $149,289 $3,600 50,000
2001 $ 95,159 $173,885 $3,600 10,000
2000 $ 86,662 $ 92,050 $3,600 4,286
Edmund Kenealy 2002 $135,000 $25,000 $15,859 50,000
2001 $100,000 $15,000 $15,859 10,000
2000 -0- -0- -0- -0-
Wayne R. Lynn 2002 $139,615 $30,000 $15,589 50,000
2001 $117,949 $ 5,000 $15,589 22,500
2000 -0- -0- -0- -0-
(1) Donald T. Kelly was relieved of his responsibilities as Vice
President, Chief Financial Officer and Secretary effective December 10, 2002. Mr
Kelly continues to be a TeamStaff employee. In light of the determinations made
by Lazar regarding the Company's internal controls and systems, and the results
of its audit and review of the issues involved with the SERP plan and the
restatement of the 2001 fiscal period the Audit Committee and the Board of
Directors are reviewing the status of Mr. Kelly's employment.
The Company provides normal and customary life and health insurance
benefits to all of its employees including executive officers. The Company has a
401(k) plan that is voluntary.
COMPENSATION OF DIRECTORS
During the fiscal year ended September 30, 2002, the Chairman and
Vice-Chairman of the Board each receive $2,500 per month. Non-Employee Directors
receive $1,500 per board meeting and $1,000 per non-board meeting, related
travel expenses, and $600 for each committee meeting attended. Directors may
also receive $1,000 per meeting with executives, which do not constitute Board
or Committee meetings. 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.
38
Effective November 19, 2002, the board amended the new compensation
terms for the members of the Board and committees. The Chairman and
Vice-Chairman of the Board each receive $3,000 per month. The Chairman of the
Audit Committee receives $2,500 per month. All other independent Directors
receive $1,667 per month, and $1,500 for each board meeting attended, $600 for
each committee meeting attended, plus related travel expenses. The Chairman of
all other committees receives $1,000 for each committee meeting attended.
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 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, as described below, 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 also
entered into a severance agreement with Mr. Kelly, as described below, which
governs the termination of his employment and certain other events including a
change of control of the Company.
The split dollar life insurance agreements and supplemental executive
retirement plan were approved by the Compensation Committee of the Board during
the 2000 fiscal year and implemented effective October 1, 2000. 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
39
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. Mr. Kappauf and Mr. Kelly are the only SERP
participants at the present time.
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.
Pursuant to the severance agreement with Mr. Kappauf, 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. Kappauf 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. Kappauf'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. Kappauf'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 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. Kappauf is entitled, in addition to the other
compensation payable upon a change of control, to a success fee equal to
$2,000,000; 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
$50,000 for each $.10 per share that exceeds $9.00.
The severance agreement with Mr. Kelly has terms which are
substantially similar to those described above for Mr. Kappauf. The success fee
payable to Mr. Kelly under his severance agreement is initially set at
$1,000,000 and may be increased by the sum of $25,000 for each $.10 per share
that the value obtained by shareholders 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, Lazar, TeamStaff's current independent
auditors, in connection with this 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
40
exercise these rights pursuant to the severance agreement and be entitled to
certain potential payments similar to those described above for Mr. Kappauf. 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.
TeamStaff entered into a two year employment agreement with Edmund C.
Kenealy effective October 2, 2000 under which Mr. Kenealy currently serves as
Vice President, General Counsel, at an annual salary of $135,000 effective as of
October 1, 2001. In addition, Mr. Kenealy is entitled to receive: (i) a yearly
increase in annual compensation; and (ii) a bonus to be determined based on the
achievement of certain performance criteria determined as of the commencement of
each fiscal year. Mr. Kenealy receives certain other benefits granted to other
members of the Company's senior management, including health and other insurance
benefits, as well as a car allowance of $500 per month and three weeks annual
vacation. The Company currently is negotiating the terms of a new employment
agreement with Mr. Kenealy.
TeamStaff entered into a two year employment agreement with Wayne R.
Lynn effective October 2, 2000 under which Mr. Lynn currently serves as Chief
Operating Officer of the Company's PEO Division, at an annual salary of $150,000
effective as of March 19, 2002. In addition, Mr. Lynn is entitled to receive:
(i) a yearly increase in annual compensation; and (ii) a bonus to be determined
based on the achievement of certain performance criteria determined as of the
commencement of each fiscal year. Mr. Lynn receives certain other benefits
granted to other members of the Company's senior management, including health
and other insurance benefits, as well as a car allowance of $500 per month and
three weeks annual vacation. The Company currently is negotiating the terms of a
new employment agreement with Mr. Lynn.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report is submitted by the compensation committee of the Board of
Directors of TeamStaff. During the fiscal year ended September 30, 2002, the
compensation committee was responsible for reviewing TeamStaff's stock plans and
reviewing and approving compensation matters concerning the executive officers.
Overview and Philosophy. TeamStaff uses its compensation program to
achieve the following objectives:
- To provide compensation that attracts, motivates and retains
the talented, high caliber officers and employees necessary to
achieve TeamStaff's strategic objectives, as determined by the
compensation committee;
- To align the interest of officers with the success of
TeamStaff;
- To align the interest of officers with stockholders by
including long-term equity incentives; and
- To increase the long-term profitability of TeamStaff and,
accordingly, increase stockholder value.
Compensation under the executive compensation program is comprised of
cash compensation in the form of base salary, bonus compensation and long-term
incentive awards, generally in the form of options to purchase common stock. In
addition, the compensation program includes various other benefits, including
medical and insurance plans, TeamStaff's 401(k) Plan and the employee stock
option incentive plans, which plans are generally available to all employees of
TeamStaff. In addition, the committee considers the eligibility of certain
executive officers in a supplemental executive retirement plan ("SERP") as
discussed below.
The principal factors which the compensation committee considered with
respect to each officer's compensation package for fiscal year ended September
30, 2002 are summarized below. The compensation committee may, however, in its
discretion, apply different or additional factors in making decisions with
respect to executive compensation in future years.
Base Salary. Compensation levels for each of TeamStaff's officers,
including the Chief Executive Officer,
41
are generally set within the range of salaries that the compensation committee
believes are paid to officers with comparable qualifications, experience and
responsibilities at similar companies. In setting compensation levels, the
compensation committee takes into account such factors as (i) TeamStaff's past
performance and future expectations, (ii) individual performance and experience
and (iii) past salary levels. The compensation committee does not assign
relative weights or ranking to these factors, but instead makes a determination
based upon the consideration of all of these factors as well as the progress
made with respect to TeamStaff's long-term goals and strategies. Base salary,
while reviewed annually, is only adjusted as deemed necessary by the
compensation committee in determining total compensation for each officer. Base
salary levels for each of TeamStaff's officers, other than the Chief Executive
Officer, were also based in part upon evaluations and recommendations made by
the Chief Executive Officer. Additionally, certain executives, including
Donald Kappauf, the Chief Executive Officer, Donald Kelly, the former Chief
Financial Officer, have existing employment agreements with TeamStaff which set
forth certain levels of base salary and bonus compensations.
Equity Incentives. The compensation committee believes that stock
participation aligns officers' interests with those of the stockholders. In
addition, the compensation committee believes that equity ownership by officers
help to balance the short-term focus of annual incentive compensation with a
longer-term view and may help to retain key executive officers. Long-term
incentive compensation, generally granted in the form of stock options, allows
the officers to share in any appreciation in the value of TeamStaff's common
stock.
In making stock option grants, the compensation committee considers
general corporate performance, individual contributions to TeamStaff's
financial, operational and strategic objectives, the Chief Executive Officer's
recommendations, level of seniority and experience, existing levels of stock
ownership, previous grants of restricted stock or options, vesting schedules of
outstanding restricted stock or options and the current stock price. With
respect to the compensation determination for the fiscal year ended September
30, 2002, the compensation committee believes that the current stock ownership
position of the executive officers was sufficient to achieve the benefits
intended by equity ownership. During the fiscal year ended September 30, 2002,
the compensation committee approved the grant of 256,430 options, 150,000 of
which were granted to executive officers.
Other Benefits. TeamStaff also has various broad-based employee benefit
plans. Executive officers participate in these plans on the same terms as
eligible, non-executive employees, subject to any legal limits on the amounts
that may be contributed or paid to executive officers under these plans.
TeamStaff offers a stock incentive plan and a 401(k) plan, which allows
employees to invest in a wide array of funds on a pre-tax basis. TeamStaff also
maintains insurance and other benefit plans for its employees, including
executive officers of TeamStaff.
The compensation committee determined that the 401(k) plan did not
provide sufficient retirement benefits to its top executive officers, including
its Chief Executive Officer and Chief Financial Officer. Accordingly, during the
fiscal year ended September 30, 2001, the compensation committee created the
supplemental executive retirement plan or SERP to provide retirement benefits
comparable with plans offered executives in comparable positions at other
companies. Each corporate executive whose eligibility is specifically approved
by the Compensation Committee will receive a benefit sufficient to provide lump
sum annual payments equal to approximately one-third of the participant's base
salary in effect on the date the participant enters the Plan for a period of 15
years, and a death benefit payable to the participant's beneficiaries. Payment
of benefits commences upon the executive's reaching 65 years of age. The
commencement of benefit payments is accelerated in the event the participant
becomes totally disabled prior to retirement. A split dollar life insurance
policy also is in place for each participant. The split dollar life insurance
policy is designed to provide either a death benefit if the employee dies prior
to retirement age, or, if the employee attains retirement age, the funds
necessary for the payment of the SERP retirement benefit at retirement through
the application of the policy's cash surrender value. At the present time,
Donald Kappauf and Donald Kelly are the only participants in the SERP. The SERP
plan became effective on October 1, 2000.
Chief Executive Officer Compensation. In the fiscal year ended
September 30, 2002, Mr. Donald Kappauf, Chief Executive Officer, received a
salary of $300,000, which represents an increase of approximately 12% from the
prior year. In the fiscal year ended September 30, 2001, Mr. Kappauf received a
base salary of $267,130, which represents a 16% increase from his base salary in
the fiscal year ended September 30, 2000. The base salary is believed by the
compensation committee to be consistent with the range of salary levels received
by executives in a similar capacity in companies of comparable size. In
addition, Mr. Kappauf received a bonus of $302,500 during the fiscal year ended
September 30, 2002. The terms of Mr. Kappauf's employment compensation are
determined
42
primarily pursuant to his employment agreement, which was entered into in April
2001. Among other things, the employment agreement provides for the payment of
certain bonuses based upon performance by TeamStaff, including earnings per
share. The bonus payment was made in accordance with the employment agreement
terms. Mr. Kappauf also received a special bonus of $175,000, to reward Mr.
Kappauf for the extraordinary efforts and success in securing a new workers'
compensation policy for the Company.
Additionally, in May 2002, the Committee approved severance agreements
for each of Mr. Kappauf, the Chief Executive, and Mr. Kelly, the Chief Financial
Officer during the fiscal year ended September 30, 2002. The Committee
determined that these officers were essential to the Company, and that their
continued retention, especially in the event of a threat of a change of control
of the Company, necessitated that these executives be eligible for added
compensation under certain conditions. The Committee believed that several
factors out of the control of the Company and management made a potential change
of control possible. These factors included the falling stock market generally,
and the falling price of the Company's stock, even though the financial
condition and performance of the Company had improved over prior years. The
severance agreements also provide for additional financial and employment
security under other conditions, such as termination without cause.
Tax Deductibility of Executive Compensation. Section 162(m) of the Code
limits the tax deduction to TeamStaff to $1 million for compensation paid to any
of the executive officers unless certain requirements are met. The compensation
committee has considered these requirements and the regulations. It is the
compensation committee's present intention that, so long as it is consistent
with its overall compensation objectives, substantially all executive
compensation be deductible for United States federal income tax purposes. The
compensation committee believes that any compensation deductions attributable to
options granted under the employee stock option plan currently qualify for an
exception to the disallowance under Section 162(m). Future option grants to
executive officers under each of the TeamStaff employee stock option plans will
be granted by the compensation committee.
By the Compensation Committee of
of the Board of Directors of TeamStaff,
Inc.
T. Stephen Johnson
Karl W. Dieckmann
Martin Delaney
43
OPTION/SAR GRANTS IN LAST FISCAL YEAR
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Percentage of
No. of Securities Total Options/
Underlying Options Granted in Fiscal Exercise of Base
Name Granted Year Price Per Share Expiration Date
- ------------------------------------------------------------------------------------------------------------------
Donald Kappauf 0 0% - -
Donald Kelly 0 0% - -
Elizabeth Hoaglin 50,000 19% $6.15 10/02/2007
Edmund Kenealy 50,000 19% $6.60 10/01/2007
Wayne Lynn 50,000 19% $5.36 03/19/2007
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
The following table sets forth information with respect to the named
executive officers concerning exercise of stock options and SARs during the last
fiscal year and the value of unexercised options and SARs held as of the year
ended September 30, 2002.
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS OPTIONS AS OF
ACQUIRED SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- --------------------------------------------------------------------------------------------------------
Donald W. Kappauf 0 $0 285,871/100,000 $0/$0
Donald T. Kelly 0 $0 142,855/50,000 $0/$0
Elizabeth Hoaglin 0 $0 67,142/0 $0/$0
Edmund Kenealy 0 $0 5,000/55,000 $0/$0
Wayne Lynn 0 $0 11,250/61,250 $0/$0
(1) Based upon a closing bid price of the Common Stock at $2.82 per share
on September 30, 2002.
STOCK OPTION PLANS
In April 1990, the Board of Directors adopted the 1990 Employees Stock
Option Plan (the "1990 Plan"), which was approved by shareholders in August
1990. The 1990 Plan 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").
In April 1990, the Board of Directors adopted the Non-Executive
Director Stock Option Plan (the "Director Plan"), which was approved by
shareholders in August, 1991 and amended in March 1996. The Director Plan
provided for issuance of a maximum of 142,857 shares of common stock upon the
exercise of stock options arising under the Director Plan.
In April 1990, the Board of Directors adopted and in August, 1990, the
Company's shareholders approved
44
the Senior Management Incentive Plan (the"Management Plan") for use in
connection with the issuance of stock, options and other stock purchase rights
to executive officers and other key employees and consultants who render
significant services to the Company and its subsidiaries.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.
2000 EMPLOYEE STOCK OPTION PLAN
In the fiscal year 2000, the Board of Directors and shareholders
approved the adoption of the 2000 Employees Stock Option Plan (the "2000 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 2000
Plan replaces the 1990 Employee Plan and Senior Management Plans, both of which
expired. Under the terms of the approved 2000 Plan, options granted there under
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 2000 Plan is administered by the Compensation Committee designated
by the Board of Directors. The Compensation Committee has the discretion to
determine the eligible employees to whom, and the times and the price at which,
options will be granted; whether such options shall be ISOs or Non-ISOs; the
periods during which each option will be exercisable; and the number of shares
subject to each option. The Committee has full authority to interpret the 2000
Plan and to establish and amend rules and regulations relating thereto.
Under the 2000 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 in the 2000 Plan), such
exercise price shall be at least 110% of such fair market value. Exercise prices
of Non-ISO options may be less than such fair market value.
The aggregate fair market value of shares subject to options granted to
a participant, which are designated as ISOs and which become exercisable in any
calendar year shall not exceed $100,000.
The Compensation Committee may, in its sole discretion, grant bonuses
or authorize loans to or guarantee loans obtained by an optionee to enable such
optionee to pay 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
In fiscal 2000, the Board of Directors and stockholders approved the
adoption of the 2000 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 2000.
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 in the Stock Option Plan, the
exercise price of options granted under the Director Plan must be paid at the
time of exercise, either in cash, by delivery of shares of common stock of the
Company or by a combination of each. The term of each option commences on the
date it is granted and unless terminated sooner as provided in the Director
Plan, expires five (5) years from the date of grant. The Committee has no
discretion to determine which non-executive director or advisory board member
will receive options or the number of shares subject to the option, the term of
the option or the exercisability of the option. However, the Committee will make
all determinations of the interpretation of the Director Plan. Options granted
under the Director Plan are not qualified for incentive stock option treatment.
45
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
Set forth herein is a line graph comparing the total returns (assuming
reinvestment of dividends) of the Company's common stock, the Standard and Poor
Industrial Average, and an industry composite consisting of a group of four peer
issuers selected in good faith by the Company. The Company's common stock is
listed for trading in the NASDAQ National market and is traded under the symbol
"TSTF".
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
ASSUMES INITIAL INVESTMENT OF $100
SEPTEMBER 2002
[COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN CHART]
Teamstaff, Inc. S & P 500 Peer Group
35673 100 100 100
36038 49.98 109.0450001 83.16589207
36403 51.484398 139.3660525 45.60111503
36769 46.23144484 157.8794395 104.56833340
NOTES
(1) Assumes that the value of the investment in the Company's Common Stock and
each index was $100 on September 30, 1997 and that dividends were
reinvested at years ended September 30th.
(2) Industry composite includes Administaff, Gevity HR, and Team America Corp.
The industry composite has been determined in good faith by management to
represent entities that compete with the Company in certain of its
significant business segments. Management does not believe there are any
publicly held entities that compete with all the Company's business
segments.
46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of February 3, 2003
with respect to each director, each of the named executive officers as defined
in Item 402(a)(3), and directors and executive officers of the Company as a
group, and to the persons known by the Company to be the beneficial owner of
more than five percent of any class of the Company's voting securities. At
February 3, 2003, the Company had 15,771,986 outstanding.
Number of Shares Percent of Company's
Name of Shareholder Currently Owned(1) Outstanding Stock
- -----------------------------------------------------------------------------------------
Martin J. Delaney (2) 65,448 0.4%
C/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
Karl W. Dieckmann (3) 98,780 0.6%
C/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
Benjamin J Dyer (4)
C/o TeamStaff, Inc. 16,664 0.1%
300 Atrium Drive
Somerset, NJ 08873
Elizabeth Hoaglin (5)
C/o TeamStaff, Inc. 42,428 0.3%
300 Atrium Drive
Somerset, NJ 08873
T. Stephen Johnson (6) 269,011 1.7%
C/o T. Stephen Johnson & Associates, Inc.
3650 Mansell Road, Suite 200
Alpharetta, GA 30022
Donald W. Kappauf (7) 408,352 2.6%
C/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
Edmund Kenealy (8) 43,031 0.3%
C/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
Wayne Lynn (9) 62,120 0.4%
C/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
Rocco Marano (10) 2,000 0.0%
C/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
Gerard A. Romano (11) 10,000 0.1%
C/o TeamStaff, Inc.
300 Atrium Drive
Somerset, NJ 08873
First Union Private Capital (12) 3,334,117 21.0%
301 South College Street
NC0009, Suite 4000
Charlotte, NC 28288
Nationwide Financial Services (13) 2,256,488 14.2%
One Nationwide Plaza
Mail Stop 01-12-13
Columbus, OH 43215
All officers and directors as a group 1,017,834 6.4%
(10) persons (2,3,4,5,6,7,8,9,10,11)
- --------------------------------------------------------------------------------
(1) Ownership consists of sole voting and investment power except as otherwise
noted.
(2) Includes options to purchase 13,213 shares of Company's common stock and
excludes unvested options to purchase 5,000 shares of common stock. Also
includes warrants to purchase 10,000 shares of common stock.
(3) Includes options to purchase 12,586 shares of Company's common stock and
excludes unvested options to purchase 5,000 shares of common stock.
(4) Excludes unvested options to purchase 5,000 shares of common stock.
(5) Includes options to purchase 42,142 shares of Company's common stock and
excludes unvested options to purchase 25,000 shares of common stock.
(6) Includes an aggregate of 147,790 shares owned by or on behalf of certain
of the holder's family members and as to which shares the listed holder
expressly disclaims beneficial ownership. Includes options to purchase
5,000 shares of Company's common stock, and excludes unvested options to
purchase 5,000 shares of common stock.
(7) Includes options to purchase 285,870 shares of Company's common stock and
excludes unvested options to purchase 100,000 shares of common stock.
(8) Includes options to purchase 35,000 shares of Company's common stock and
excludes unvested options to purchase 25,000 shares of common stock.
(9) Includes options to purchase 30,000 shares of Company's common stock and
excludes unvested options to purchase 50,000 shares of common stock.
(10) Includes warrants to purchase 2,000 shares of common stock and excludes
unvested options to purchase 5,000 shares of common stock.
(11) Includes options to purchase 10,000 shares of Company's common stock and
excludes unvested options to purchase 20,000 shares of common stock.
(12) First Union Private Capital, an affiliate of First Union Corporation (now
known as Wachovia Corporation), obtained these shares in connection with
the acquisition of BrightLane completed as of August 31, 2001.
(13) Nationwide Financial Services obtained these shares in connection with the
acquisition of BrightLane completed as of August 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning employment and severance agreements with,
and compensation of, the Corporation's executive officers and directors, see
"Executive Compensation". The Directors' Plan provides that directors, upon
joining the Board, and for one 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.
Effective August 31,2001, TeamStaff, Inc. completed its acquisition of
BrightLane. As a result of a reverse subsidiary merger with a subsidiary of
TeamStaff, BrightLane is now a wholly owned subsidiary of TeamStaff.
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 $654,000.00 of these loans has been repaid or forgiven. 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.
First Union Corporation, through an affiliate held all of the
BrightLane Series B Preferred stock, and therefore owns 3,334,117 shares of
TeamStaff's Common Stock (approximately 21%). In addition, Nationwide Financial
Services, Inc. held all of the BrightLane Series C Preferred stock, and
therefore owns 2,256,488 shares of TeamStaff's Common Stock (approximately 14%).
The Company and First Union Corporation (renamed Wachovia), a leading
financial services company, have signed, effective August 31, 2001, an agreement
to market the Company's professional employer services to Wachovia's small
business customers. The agreement calls for a two-year, extendable relationship
in which the Company will be an authorized marketer of professional employer
services to Wachovia's business banking customers. This agreement presents the
Company with a significant opportunity to market its services to Wachovia's
extensive customer base of over one million small businesses. At the same time
it presents Wachovia an opportunity to offer a comprehensive outsourced human
resource package to its clients. Wachovia owns approximately 21% of the
Company's stock.
Under the terms governing the transaction, certain option holders were
restricted from selling TeamStaff shares acquired from the exercise of their
BrightLane options for a period of up to two years. T. Stephen Johnson and his
spouse, Mary Johnson, also a former director of BrightLane, were the only option
holders who exercised their options and who were subject to these lockup
provisions. Due to the significant rise in the Company's stock
48
price and the significant increase in the amount of the tax loans to be made to
T. Stephen Johnson and Mary Johnson, the Board of Directors of TeamStaff
concluded it would be more appropriate to allow Mr. and Mrs. Johnson to sell a
portion of their TeamStaff shares to cover their tax liability rather than
carry a large loan receivable on the Company's financial statements. The Board
therefore agreed to allow the sale of up to 40% of Mr. and Mrs. Johnson's option
shares(approximately 56,230 TeamStaff shares) as an exempt transaction under SEC
Rule 16(b)(3).
Under the terms of the agreements governing the BrightLane transaction,
TeamStaff agreed to register for resale shares obtained by former BrightLane
shareholders who would be deemed "affiliates" under SEC rules and regulations.
The registration statement includes 6,096,946 shares of common stock owned by
these persons. Certain former shareholders of BrightLane, who are selling
security holders, including First Union Corporation, Nationwide Financial
Services and T Stephen Johnson agreed to the terms of a "lockup" agreement
whereby they have agreed that the shares of TeamStaff obtained by them may only
be sold as follows: commencing on the first anniversary of the transaction
(August 31, 2002) 50% of the acquired shares may be sold and commencing on the
second anniversary the remaining shares may be sold. The Board of Directors has
reserved the right to release all of part of the shares from the lockup prior to
its expiration.
In addition, three persons who served as directors of TeamStaff, namely
John H. Ewing, Rocco J. Marano and Charles R. Dees, Jr. agreed to step down as
directors upon consummation of the transaction with BrightLane. Effective
September 4, 2001, these persons resigned as directors. In connection with the
termination of their services, these individuals received 1,000 warrants for
each year of service on the TeamStaff Board of Directors (an aggregate of 16,000
warrants). The grant of the warrants was approved by the Board of Directors as
an exempt transaction under SEC Rule 16(b)(3).
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:
Our management, under the supervision and with the participation of our
chief executive officer and controller, conducted an evaluation of our
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 Rules 13a-14(c)) within 90 days of the filing date of this Annual Report
on Form 10-K. Based on their evaluation, our chief executive officer and
controller have concluded that as of the Evaluation Date, our disclosure
controls and procedures are effective to ensure that all material information
required to be filed in this Annual Report on Form 10-K has been made known to
them.
CHANGES IN INTERNAL CONTROLS:
TeamStaff replaced Arthur Andersen, LLP with PricewaterhouseCoopers
LLP as its independent auditors in April 2002. As previously stated,
PricewaterhouseCoopers advised our Audit Committee at its December 10, 2002
meeting that it believed there were material weaknesses in TeamStaff's internal
controls including, among other things, the competency of its financial
personnel. PricewaterhouseCoopers also advised that it believed it would be
essential for the Company to employ a new Chief Financial Officer, who would
need to gain sufficient familiarity with TeamStaff's system of internal controls
and financial reporting to enable such individual to certify the fiscal year
2002 consolidated financial statements. PricewaterhouseCoopers further
conditioned the continuance of its audit on the employment of a new Chief
Financial Officer. PricewaterhouseCoopers acknowledged that in view of the
foregoing, it was likely that we would be unable to make a timely filing of our
annual report for fiscal year 2002. In response to PricewaterhouseCoopers'
concerns, among other actions, the Audit Committee recommended that Mr. Kelly be
relieved of his responsibilities as Chief Financial Officer. The Board of
Directors accepted the Audit Committee's recommendation. TeamStaff's new
auditor, Lazar Levine & Felix LLP has conducted a review of our internal
controls in connection with its audit of the fiscal year 2002 consolidated
financial statements and the restatement of fiscal year 2001. In conducting the
audit for fiscal year ended September 30, 2002, Lazar expanded its testing of
Teamstaff's internal controls, including Information Technology controls, to
include the fiscal year ended September 30, 2001. This was done since the Arthur
Anderson LLP work papers were not readily available for review by Lazar and to
investigate the concerns regarding internal controls by PricewaterhouseCoopers.
As a result of its expanded testing, no material weaknesses in the systems were
found.
49
Additionally, in response to the passage of the Sarbanes-Oxley Act of
2002, TeamStaff, among other actions, formed a Disclosure Committee comprised of
various members of our management team. The Disclosure Committee is charged
with, among other things, reviewing and developing policies and procedures to
enhance our disclosure controls and procedures as well as with reviewing our
periodic reports and other public disclosures. Other than as described above,
there have been no significant changes, including corrective actions with regard
to significant deficiencies or material weaknesses in our internal controls or
in other factors that could significantly affect these controls subsequent to
the Evaluation Date set forth above.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K(a)
1. Financial Statements
The financial statements and schedules of the Company are included in
Part II, Item 8 of this report beginning on page F-1 and including page
S-1.
2. All other schedules have been omitted since the required information
is not applicable or because the information required is included in
the Consolidated Financial Statements or the notes thereto.
3. Exhibit List
The exhibits designated with an asterisk (*) are filed herewith. All
other exhibits have been previously filed with the Commission and,
pursuant to 17 C.F.R. Secs. 20l.24 and 240.12b-32, are incorporated by
reference to the document referenced in brackets following the
descriptions of such exhibits.
EXHIBIT
NO. DESCRIPTION
- -------- -----------
2.1 --Plan and Agreement of Merger and Reorganization dated as of October
29, 1998 among the Company, the merger corporations (as defined), the
TeamStaff Entities and certain individuals and trusts as shareholders
of the TeamStaff entities (filed as Exhibit A to Proxy Statement of
Digital Solutions, Inc, dated November 12, 1998).
2.2 --Form of Asset Purchase Agreement dated as of April 7, 2000 by and
between TeamStaff, Inc.,TeamStaff V, Inc. Outsource International, Inc.
, and Synadyne I, Inc., Synadyne II, Inc.,Synadyne III, Inc., Synadyne
IV, Inc., Synadyne V, Inc., Guardian Employer East LLC and Guardian
Employer West LLC.
2.3 --Agreement and Plan of Merger by and among TeamStaff, Inc., TeamSub,
Inc and BrightLane.com, Inc., dated as of March 6, 2001, as amended by
Amendment No. 1 dated as of March 21, 2001 and Amendment No. 2 dated as
of April 6, 2001 (filed as Appendix A to the Proxy Statement/prospectus
filed on August 7, 2001, SEC File no. 333-61730, as part of Registrant's
Registration Statement on Form S-4).
3.1 --Amended and Restated Certificate of Incorporation (filed as Exhibit A
to Definitive Proxy Statement dated May 1, 2000 as filed with the
Securities and Exchange Commission).
3.2 --Form of Form of Certificate of Designation of Series A Preferred
Stock (filed as Exhibit 3.1 to Form 8-K dated April 6, 2001).
3.3 --Amended By-Laws of Registrant adopted as of May 15, 2001 (filed as
Exhibit 3.4 to the Registration Statement on Form S-4 File No.
333-61730).
3.4 --Amended and restated by-laws of Registrent adopted as of August 29,
2001 (filed as Exhibit 3,5 to the Registrant's Form S-3 filed on
December 19,2001)
50
4.1 --Form of the Common Stock Certificate (Exhibit 4.1 to Registration
Statement on Form S-18, File No. 33-46246-NY).
4.2 --2000 Employee Stock Option Plan (filed as Exhibit B to the Proxy
Statement dated as of March 8, 2000 with respect to the Annual meeting
of Shareholders held on April 13, 2000).
4.3 --2000 Non-Executive Director Stock Option Plan (filed as Exhibit B to
the Proxy Statement dated as of March 8, 2000 with respect to the
Annual meeting of Shareholders held on April 13, 2000).
10.1 --Form of Employment Agreement between TeamStaff, Inc. and Donald
Kappauf dated as of April 2, 2001 (filed as Exhibit 10.1 to the
Registrants Proxy Statement/Prospectus on form S-4 File No. 333-61730)
10.2 --Form of Employment Agreement between TeamStaff, Inc. and Donald Kelly
dated as of April 2,2001(filed as Exhibit 10.2 to the Registrants Proxy
Statement/Prospectus on form S-4 File No.333-61730)
10.3 --Lease dated May 30, 1997 for office space at 300 Atrium Drive,
Somerset, New Jersey (Exhibit 10.6.1 to Form 10-K for the fiscal year
ended September 30, 1997).
10.4 --Form of Agreement between TeamStaff and Donald & Co. Securities, Inc
. (filed as Exhibit 10.27 to Form S-3/A dated June 28, 2000).
10.5 --Employment Agreement dated October 1, 1999 between our company and
Donald Kappauf (filed as Exhibit 10.32 to Form S-3/A dated June 28,
2000).
10.6 --Employment Agreement dated October 1, 1999 between our company and
Donald Kelly (filed as Exhibit 10.33 to Form S-3/A dated June 28, 2000).
10.7 --Form of Stock Purchase Agreement dated as of April 6, 2001 between
TeamStaff, Inc. and BrightLane.com, Inc. with respect to purchase of
Series A Preferred Stock (filed as Exhibit 10.1 to Form 8-K dated April
6, 2001).
10.8 --Form of Registration Rights Agreement dated as of April 6, 2001
between TeamStaff, Inc. and BrightLane.com, Inc. (filed as Exhibit 10.2
to Form 8-K dated April 6, 2001).
10.9 --Form of Marketing Agreement dated as of April 11, 2001 between First
Union Corporation and TeamStaff, Inc.
10.10 --Form of Voting Agreement provided by BrightLane Shareholders as
provided in the Agreement and Pla of Merger by and among TeamStaff,
Inc., TeamSub, Inc., and BrightLane.com, Inc., dated as of March 6,
2001 as amended by Amendment No. 1 dated as of March 21, 2001 and
Amendment No. 2 dated as of April 6, 2001.
10.11 --Form of Escrow Agreement between TeamStaff, Inc. and BrightLane
Shareholders with respect to the placement of 150,000 shares into
escrow by the BrightLane shareholders (filed as Appendix B to the proxy
statement/prospectus filed on August 7, 2001 SEC File No. 333.61730).
10.12* --Form of Severance Agreement dated as of May 22, 2002 between the
Registrant and Donald Kappauf.
10.13* --Form of Severance Agreement dated as of May 22, 2002 between the
Registrant and Donald Kelly.
10.14* --Form of Loan and Security Agreement dated as of April 9, 2002 by
and among the Registrant, its subsidiaries and Fleet National Bank
10.15* --Form of Master Note dated as of April 9, 2002 by and by and among
the Registrant, its subsidiaries and Fleet National Bank.
51
21.0 * --Subsidiaries of Registrants.
23.1* --Consent of Lazar Levine and Felix LLP.
99.1* --Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the fourth fiscal quarter
(c) Exhibits. See Item (a)(3) above.
(d) Valuation of qualifying accounts. See Schedule I annexed to the
financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEAMSTAFF, INC.
/s/Donald W. Kappauf
--------------------
Donald W. Kappauf
President and Chief
Executive Officer
Dated: February 3, 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 February 3, 2003
- ---------------------------------
T. Stephen Johnson
/s/Karl W. Dieckmann Vice-Chairman of the Board February 3, 2003
- --------------------------------
Karl W. Dieckmann
/s/Martin J. Delaney Director February 3, 2003
- ----------------------------------
Martin J. Delaney
/s/Benjamin J. Dyer Director February 3, 2003
- ---------------------------------
Benjamin J Dyer
/s/Rocco Marano Director February 3, 2003
- -----------------------------
Rocco Marano
/s/Donald W. Kappauf President, Chief Executive February 3, 2003
- ------------------------------- Officer and Director
Donald W. Kappauf
52
ANNEX A
CERTIFICATIONS*
I, Donald W. Kappauf, certify that:
1. I have reviewed this annual report on Form 10-K of TeamStaff, Inc;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-14 and 15d- 14) for the registrant and have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, 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 in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Donald W. Kappauf
Date: February 3, 2003 ____________________________________
President and Chief Executive Officer
53
CERTIFICATIONS*
I, Gerard A. Romano, certify that:
1. I have reviewed this annual report on Form 10-K of TeamStaff, Inc;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-14 and 15d- 14) for the registrant and have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, 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 in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 3, 2003
/s/ Gerard A. Romano
_____________________
Corporate Controller
54
TEAMSTAFF, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report Of Independent Public Accountants F-2
Report Of Predecessor Independent Public Accountants F-3
Consolidated Balance Sheets As Of September 30, 2002 and 2001 F-4
Consolidated Statements Of Income and Comprehensive Income For The Years Ended
September 30, 2002, 2001 and 2000 F-6
Consolidated Statements Of Shareholders' Equity For The Years Ended
September 30, 2002, 2001 and 2000 F-7
Consolidated Statements Of Cash Flows For The Years Ended
September 30, 2002, 2001 and 2000 F-8
Notes To Consolidated Financial Statements F-9
Schedule I -- Valuation And Qualifying Accounts For The Years Ended
September 30, 2002, 2001 and 2000 S-1
Schedules other than those listed above have been omitted as they are either not
required or because the related information has been included in the notes to
consolidated financial statements
F-1
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
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
TeamStaff, Inc.:
We have audited the accompanying consolidated balance sheets of TeamStaff, Inc.
and subsidiaries as of September 30, 2001 and 2000, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended September 30, 2001. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TeamStaff, Inc. and
subsidiaries as of September 30, 2001 and 2000, and the results of their
operations and their cash flows for the three years in the period ended
September 30, 2001 in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to the financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a required part of the
basic consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
December 31, 2001 (except for Note 11, as to which the date in January 1, 2002
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSON LLP IN
CONNECTION WITH TEAMSTAFF, INC.'S FILING ON FORM 10-K FOR THE YEAR ENDED
SEPTEMBER 30, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN
LLP IN CONNECTION WITH THIS FILING ON FORM 10-K.
F-3
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002 AND 2001
Page 1 of 2
2001
2002 As Restated
------------------------ ----------------------
ASSETS
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.
F-4
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002 AND 2001
Page 2 of 2
2001
2002 As Restated
----------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
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.
F-5
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended September 30,
2001
2002 As Restated 2000
-------------- -------------- --------------
REVENUES $ 665,965,000 $ 649,727,000 $ 447,743,000
DIRECT EXPENSES 632,320,000 621,630,000 426,987,000
-------------- -------------- --------------
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
OUTSTANDING - DILUTED 16,183,466 8,907,282 7,990,912
============== ============== ==============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-6
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Accumulated
Additional Retained Receivable
Common Stock 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 options 887 - 4,000 - -
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 -0-
========================================================================
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
F-7
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)
Decrease (increase) 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 Paso) 125,000 425,000 -
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.
F-8
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-
The Company recognizes revenue in connection with its
professional employer organization program ("PEO") as service is
rendered. The PEO revenue consists of charges by the Company for the
wages and employer payroll taxes of the worksite employees, the
administrative service fee, workers' compensation charges, and the
health and retirement benefits provided to the worksite employees.
These charges are invoiced to the client at the time of each periodic
payroll. The Company negotiates the pricing for its various services on
a client-by-client basis based on factors such as market conditions,
client needs and services requested, the client's workers' compensation
experience, the type of client business and the required resources to
service the account, among other factors. Because the pricing is
negotiated separately with each client and vary according to
circumstances, the Company's revenue, and therefore its gross margin,
will fluctuate based on the Company's client mix.
The Medical Staffing revenue is recognized as service is
rendered. The Company bills its clients based on an hourly rate. The
hourly rate is intended to cover the Company's direct labor costs of
the temporary employees, plus an estimate to cover overhead expenses
and a profit margin. Additionally, included in revenue related to
medical staffing are
F-9
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) Issue No.
99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent,"
the Company recognizes all amounts billed to its PEO and temporary
staffing customers as gross revenue because the Company is at risk for
the payment of its direct costs, whether or not the Company's customers
pay the Company on a timely basis or at all, and the Company assumes a
significant amount of other risks and liabilities as a co-employer of
its worksite employees, and employer of its 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-
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-
F-10
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
============= =========== ============
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 (described below):
Tradenames $ 4,710,000
First Union Relationship 6,399,000
-------------
Total $ 11,109,000
=============
F-11
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, 2002 $ 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 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.
F-12
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.
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
F-13
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.
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 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.
F-14
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-
2002 2001 As Restated
------------- ----------------
Net operating loss carryforwards and tax credits $ 8,162,000 $ 7,764,000
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
============ ============
The components of the income tax expense for income taxes are
summarized as follows-
Years Ended September 30,
2001
2002 As 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
F-15
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.
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.
F-16
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 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.
F-17
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.
Fiscal Years Ended September 30,
---------------------------------------
- ----------------------------------------------------------------------------------------------------
2001
2002 As Restated 2000
- ----------------------------------------------------------------------------------------------------
Revenues $ 671,744,000 $ 622,356,000 $ 517,262,000
- ----------------------------------------------------------------------------------------------------
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 $ .19 $ (.24) $ (.87)
diluted
- ----------------------------------------------------------------------------------------------------
(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.
F-18
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.
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.
F-19
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 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.
F-20
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 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 employees 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 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.
F-21
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 Period Exercise Price Number of Shares of
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 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,
F-22
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
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
F-23
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
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:
F-24
- ---------------------------------------------------------------------------------------------------------------
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.
F-25
The following table represents the financial results for each
of the Company's segments:
Professional Payroll
Employer Medical -------
Services Staffing Services Corporate Consolidated
-------- -------- -------- --------- ------------
2002
----
Revenues $ 586,150,000 $ 74,861,000 $ 4,954,000 $ $ 665,965,000
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 $ 580,673,000 $ 64,442,000 $ 4,612,000 $ $ 649,727,000
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 $ 401,186,000 $ 42,500,000 $ 4,057,000 $ - $ 447,743,000
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.
F-26
(10) QUARTERLY FINANCIAL DATA (UNAUDITED):
First Second Third
Quarter Quarter Quarter Fourth
As Restated As Restated As Restated Quarter
----------------------------------------------------------------------------------
Fiscal 2002
Net Revenues $ 165,503,000 $ 161,787,000 $ 174,930,000 $ 163,745,000
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 $ 164,699,000 $ 158,371,000 $ 164,427,000 $ 162,230,000
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 $ 0.07 $ 0.03 $ 0.04 $ 0.01
Diluted
(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 qualitfy 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%
F-27
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.
F-28
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)
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.
F-29
(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
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.
F-30
SCHEDULE I
TEAMSTAFF, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(c) Additions
(b) Charged to
Balance (reversed (d) (e) Balance
at Beginning from) Costs Deductions - at End of
(a) Description of Year and Expenses Net Write-Offs Year
--------------- ------------ -------------- -------------- -----------
Allowance for doubtful
accounts, year ended-
September 30, 2002 $ 549,000 $ 546,000 $ (833,000) $ 262,000
============ ============= ============== ==============
September 30, 2001 $ 281,000 $ 526,000 $ (258,000) $ 549,000
============ ============= ============== ==============
September 30, 2000 $ 209,000 $ 162,000 $ (90,000) $ 281,000
============ ============= ============== ==============
S-1