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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
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
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 whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
15,675,172 shares of Common Stock, par value $.001 per share, were outstanding
as of August 1, 2003.
1 of 31
TEAMSTAFF, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2003
TABLE OF CONTENTS
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of
June 30, 2003 (Unaudited) and
September 30, 2002 3
Consolidated Statements of
Operations and Comprehensive Income for the three months
ended June 30, 2003 and 2002 (Unaudited) 5
Consolidated Statements of
Operations and Comprehensive Income for the nine months 6
ended June 30, 2003 and 2002 (Unaudited)
Consolidated Statements of Cash Flows for the nine months
ended June 30, 2003 and 2002 (Unaudited) 7
Notes to Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's discussion and analysis of
financial condition and results of operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit 31.1 29
Exhibit 31.2 30
Exhibit 32.1 31
2 of 31
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(PAGE 1 OF 2)
JUNE 30, SEPTEMBER 30,
ASSETS 2003 2002
- ------ ---- ----
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $5,866,000 $12,455,000
Restricted cash 1,014,000 129,000
Accounts receivable, net of allowance for doubtful accounts
of $482,000 and $262,000 at June 30, 2003 and
September 30, 2002 19,207,000 24,522,000
Deferred tax asset - 1,791,000
Prepaid workers' compensation 2,802,000 2,341,000
Other current assets 2,761,000 2,547,000
----------- -----------
Total current assets 31,650,000 43,785,000
----------- -----------
EQUIPMENT AND IMPROVEMENTS:
Furniture and equipment 3,352,000 3,321,000
Computer equipment 2,521,000 2,411,000
Leasehold improvements 391,000 358,000
----------- -----------
6,264,000 6,090,000
Less accumulated depreciation and amortization (4,854,000) (4,289,000)
----------- -----------
1,410,000 1,801,000
DEFERRED TAX ASSET 12,276,000 6,680,000
AMORTIZED INTANGIBLE ASSETS, net of accumulated
amortization of $1,820,000 and $822,000 at June 30, 2003 and
September 30, 2002 2,339,000 2,375,000
INDEFINITE LIFE INTANGIBLE ASSETS 4,209,000 11,109,000
GOODWILL 7,100,000 27,167,000
OTHER ASSETS 936,000 1,049,000
----------- -----------
Total Assets $59,920,000 $93,966,000
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
3 of 31
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(PAGE 2 OF 2)
JUNE 30, SEPTEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002
- ------------------------------------ ---- ----
(unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $38,000 $59,000
Accounts payable 2,201,000 3,832,000
Accrued payroll 14,779,000 16,669,000
Accrued expenses and other current liabilities 4,877,000 6,793,000
----------- -----------
Total current liabilities 21,895,000 27,353,000
----------- -----------
LONG-TERM DEBT, net of current portion 129,000 147,000
ACCRUED PENSION LIABILITY 1,701,000 1,271,000
OTHER LONG TERM LIABILITIES 428,000 456,000
----------- -----------
Total liabilities 24,153,000 29,227,000
----------- -----------
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 16,256,642 and 16,229,142; outstanding
15,675,172 and 15,906,886 16,000 16,000
Additional paid-in capital 65,279,000 65,200,000
Retained (deficit) earnings (26,823,000) 1,313,000
Accumulated comprehensive losses (275,000) (142,000)
Treasury stock, 581,470 and 330,256 shares at cost (2,430,000) (1,648,000)
----------- -----------
Total shareholders' equity 35,767,000 64,739,000
----------- -----------
Total liabilities and shareholders' equity $59,920,000 $93,966,000
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
4 of 31
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
For the three months ended
June 30,
2002
2003 As Restated
---- -----------
REVENUES $38,478,000 $46,874,000
DIRECT EXPENSES 32,162,000 35,964,000
----------- ----------
Gross profit 6,316,000 10,910,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,935,000 7,554,000
INTANGIBLE IMPAIRMENT WRITE DOWN 1,200,000 -
DEPRECIATION AND AMORTIZATION 293,000 355,000
----------- ----------
Income (loss) from operations (3,112,000) 3,001,000
----------- ----------
OTHER INCOME (EXPENSE):
Interest & other income 136,000 299,000
Interest & other expense (11,000) (60,000)
----------- ----------
125,000 239,000
----------- ----------
Income (loss) before income taxes (2,987,000) 3,240,000
INCOME TAX BENEFIT (EXPENSE) 723,000 (1,202,000)
----------- ----------
Net income (loss) (2,264,000) 2,038,000
OTHER COMPREHENSIVE INCOME (EXPENSE):
Minimum pension liability adjustment, net of tax (70,000) (20,000)
----------- ----------
COMPREHENSIVE INCOME (LOSS) $(2,334,000) $2,018,000
=========== ==========
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $(0.14) $0.13
=========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 15,683,844 15,993,332
=========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND EQUIVALENTS
OUTSTANDING - DILUTED 15,683,844 16,201,579
=========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
5 of 31
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
For the nine months ended
June 30,
2002
2003 As Restated
---- -----------
REVENUES $118,795,000 $136,097,000
DIRECT EXPENSES 100,376,000 109,699,000
------------ ------------
Gross profit 18,419,000 26,398,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 22,408,000 21,291,000
GOODWILL IMPAIRMENT WRITE DOWN 20,396,000 -
INTANGIBLE IMPAIRMENT WRITE DOWN 6,900,000 -
DEPRECIATION AND AMORTIZATION 952,000 1,017,000
------------ ------------
Income (loss) from operations (32,237,000) 4,090,000
------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 464,000 887,000
Interest and other expense (182,000) (92,000)
------------ ------------
282,000 795,000
------------ ------------
Income (loss) before income taxes (31,955,000) 4,885,000
INCOME TAX BENEFIT (EXPENSE) 3,819,000 (1,776,000)
------------ ------------
Net income (loss) (28,136,000) 3,109,000
OTHER COMPREHENSIVE INCOME (EXPENSE):
Minimum pension liability adjustment, net of tax (133,000) (59,000)
------------ ------------
COMPREHENSIVE INCOME (LOSS) $(28,269,000) $3,050,000
============ ============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $(1.79) $0.19
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 15,742,981 16,023,712
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND EQUIVALENTS
OUTSTANDING - DILUTED 15,742,981 16,221,953
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
6 of 31
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended
June 30,
2002
2003 As Restated
---- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(28,136,000) $3,109,000
Adjustments to reconcile net (loss) income to net cash (used) provided by
operating activities, net of acquired businesses:
Deferred income taxes (1,481,000) 300,000
Depreciation and amortization 951,000 1,016,000
Pension amortization 612,000 44,000
Provision for doubtful accounts 333,000 403,000
Forgiveness of receivable from shareholder - 90,000
Changes in operating assets and liabilities, net of acquired businesses:
Decrease (increase) in accounts receivable 4,982,000 (1,023,000)
Decrease (increase) in other current assets 1,116,000 (1,279,000)
Goodwill impairment write down 20,396,000 -
Intangible impairment write down 6,900,000 -
(Increase) decrease in other assets (4,003,000) 154,000
(Decrease) in accounts payable, accrued payroll, accrued
expenses and other current liabilities (5,465,000) (438,000)
Increase in pension liability 430,000 200,000
(Increase) in restricted cash (885,000) -
------------ -----------
Net cash (used in) provided by operating activities (4,250,000) 2,576,000
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, leasehold improvements and software (1,135,000) (1,802,000)
Acquisition of businesses, net of cash acquired - (848,000)
Earn out provision on prior acquisition (250,000) -
------------ -----------
Net cash (used in) investing activities (1,385,000) (2,650,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on capital leases obligations (39,000) (39,000)
Net proceeds from the exercise of stock options and warrants - 130,000
Repurchase of common shares (782,000) (780,000)
Net comprehensive expense on pension (133,000) (59,000)
------------ -----------
Net cash (used in) financing activities (954,000) (748,000)
------------ -----------
Net (decrease) in cash and cash equivalents (6,589,000) (822,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,455,000 13,725,000
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,866,000 $12,903,000
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $119,000 $92,000
============ ===========
Income taxes $370,000 $1,034,000
============ ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
7 of 31
TEAMSTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS:
TeamStaff, Inc., 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. TeamStaff 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.
BASIS OF PRESENTATION AND CHANGE IN REVENUE RECOGNITION POLICY:
The financial statements related to the third quarter and nine months of fiscal
year 2002 contained in this Form 10-Q have been restated to reflect certain
adjustments to properly account for TeamStaff's Supplemental Retirement Plan as
well as adjusted for a change in the revenue recognition policy. See the
discussion below and at Note 6.
TeamStaff accounts for its revenues in accordance with EITF 99-19, Reporting
Revenues Gross as a Principal Versus Net as an Agent. TeamStaff's professional
employer organization ("PEO") division revenues historically had been derived
from its PEO division gross billings, which were based on: (i) the payroll cost
of its worksite employees; and (ii) associated payroll taxes, benefit costs,
workers' compensation charges and administrative fees. The gross billings are
invoiced to clients concurrently with each periodic payroll of its worksite
employees. Historically, TeamStaff has included both components of its PEO gross
billings in revenues (gross method) due primarily to the assumption of
significant contractual rights and obligations and other liabilities TeamStaff
assumes as an employer, regardless of whether it actually collects its gross
billings. After discussions with Securities and Exchange Commission staff, and
with the concurrence of its auditors, TeamStaff has changed its presentation,
effective as of September 20, 2002, of PEO revenues from the gross method to an
approach that presents its revenues net of worksite employee payroll costs (net
method) primarily because TeamStaff is not generally responsible for the output
and quality of work performed by the worksite employees. This change in
accounting method reduced both revenue and direct costs for the quarter and nine
months ended June 30, 2003 by $96,381,000 and $301,863,000, respectively, but
had no effect on gross profit, operating income or net income (loss). For the
quarter and nine months ended June 30, 2002, this method reduced both revenue
and direct costs by $128,056,000 and $366,123,000, respectively, but had no
effect on gross profit, operating income or net income (loss). Consistent with
this change in revenue recognition policy, TeamStaff's PEO division direct costs
do not include the payroll costs of its worksite employees. TeamStaff's PEO
division direct costs associated with its revenue generating activities are
comprised of all other costs related to its worksite employees, such as the
employer portion of payroll-related taxes, employee benefit plan premiums and
contributions and workers' compensation insurance premiums. All prior period
financial information has been adjusted to reflect the new revenue reporting
policy.
The consolidated financial statements included herein have been prepared by
TeamStaff, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although TeamStaff believes that the disclosures are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in TeamStaff's latest annual
report on Form 10-K. This financial information reflects, in the opinion of
management, all adjustments necessary (consisting only of normal recurring
adjustments) to present fairly the results for the interim periods. The results
of operations for such interim periods are not necessarily indicative of the
results for the full year.
The accompanying consolidated financial statements include those of TeamStaff,
Inc., and its wholly owned subsidiaries. The results of operations of acquired
companies have been included in the consolidated financial statements from the
date of acquisition. All significant intercompany balances and transactions have
been eliminated in the consolidated financial statements.
Certain prior year amounts have been reclassed to conform to current year
presentation.
8 of 31
(2) SIGNIFICANT ACCOUNTING POLICIES:
RECENTLY ADOPTED ACCOUNTING STANDARDS:
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. During the quarter and nine months ended June 30, 2003, SFAS
No. 144 has had no impact on TeamStaff'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 TeamStaff's fiscal year beginning October 1,
2002. During the quarter and nine months ended June 30, 2003, SFAS No. 145 has
had no impact on TeamStaff's consolidated financial statements.
On July 30, 2002, the FASB issued SFAS 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. Currently this
standard has not had an impact on TeamStaff's consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantee of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45's provisions for
initial recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
accounting for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. Currently this standard has not had an
impact on TeamStaff's consolidated financial statements.
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 has
implemented the additional disclosure requirements under SFAS 148 beginning in
the second fiscal quarter commencing January 1, 2003.
In January 2003, FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51," was issued. In general, a variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. FIN No. 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or is entitled to receive
a majority of the entity's residual returns or both. Currently this standard has
not had an impact on TeamStaff's consolidated financial statements.
In April 2003, FASB issued Statements of Financial Accounting Standards No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is
generally effective for contracts entered into or modified after June 30, 2003.
Currently this standard has not had an impact on TeamStaff's consolidated
financial statements.
9 of 31
In May 2003, FASB issued Statements of Financial Accounting Standards No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003. Currently
this standard has not had an impact on TeamStaff's consolidated financial
statements.
At June 30, 2003, TeamStaff has two stock-based employee compensation plans,
which are described more fully in TeamStaff's latest annual report on Form 10-K.
TeamStaff accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, as amended, to
stock-based employee compensation.
3 MONTHS ENDED 9 MONTHS ENDED
JUNE 30 JUNE 30
2003 2002 2003 2002
---- ---- ---- ----
Net income(loss), as reported $(2,264,000) $2,038,000 $(28,136,000) $3,109,000
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (152,000) (231,000) (408,000) (494,000)
----------- ---------- ------------ ----------
Pro forma net income(loss) $(2,416,000) $1,807,000 $(28,544,000) $2,615,000
=========== ========== ============ ==========
Earnings (loss) per share:
Basic & diluted-as reported $(0.14) $0.13 $(1.79) $0.19
=========== ========== ============ ==========
Basic & diluted-pro forma $(0.15) $0.11 $(1.81) $0.16
=========== ========== ============ ==========
In accordance with Statement of Financial Accounting Standards No. 123, the fair
value of option grants is estimated on the date of grant using the Black-Scholes
option-pricing model for pro forma footnote purposes with the following
assumptions; dividend yield of 0%, risk-free interest rate of 2.47% and 4.16% in
fiscal year 2003 and 2002, respectively, expected option life of 4 years, and
expected volatility of 73% and 72% in fiscal year 2003 and 2002, respectively.
EARNINGS PER SHARE:
Basic earnings per share ("Basic EPS") is calculated by dividing income
available to common shareholders by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share ("Diluted
EPS") is calculated by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period adjusted to
reflect potentially dilutive securities.
In accordance with SFAS 128, the following table reconciles net income(loss) and
share amounts used to calculate the basic and diluted earnings(loss) per share:
Three Months Ended June 30, Nine Months Ended June 30,
2002 2002
2003 As Restated 2003 As Restated
---- ----------- ---- -----------
Numerator:
Net income(loss) $(2,264,000) $2,038,000 $(28,136,000) $3,109,000
Denominator:
Weighted average number of common shares
outstanding- basic 15,683,844 15,993,332 15,742,981 16,023,712
Incremental shares for assumed conversion of
stock options/warrants - 208,247 - 198,241
Weighted average number of common
shares outstanding-diluted 15,683,844 16,201,579 15,742,981 16,221,953
----------- ---------- ------------ ----------
Earnings(loss) per share-basic and diluted $(0.14) $0.13 $(1.79) $0.19
10 of 31
Stock options and warrants outstanding at June 30, 2003 to purchase 1,112,743
shares of common stock and at June 30, 2002 to purchase 289,581 shares of common
stock were not included in the computation of diluted earnings per share as they
were antidilutive.
INCOME TAXES:
TeamStaff has recorded a $12,376,000 deferred tax asset at June 30, 2003 and
$8,471,000 at September 30, 2002. This represents management's estimate of the
income tax benefits to be realized upon utilization of its net operating losses
and tax credits as well as temporary differences between the financial statement
and tax basis of certain assets and liabilities, for which management believes
utilization to be more likely than not. Management believes TeamStaff's
operations can generate sufficient taxable income to realize this deferred tax
asset as a result of the past four years of profitability and its ability to
generate operating income in the future.
PAYROLL TAXES:
TeamStaff has received notices from the IRS claiming taxes, interest and
penalties due related to payroll taxes. Management believes that these notices
are the result of misapplication of payroll tax payments between its legal
entities. If not resolved favorably, the Company may incur interest and
penalties. TeamStaff operates through 17 subsidiaries, and management believes
that the IRS has not correctly identified payments made through certain of the
different entities, therefore leading to the notices. To date, TeamStaff has
been working with the IRS to resolve these discrepancies and has had certain
interest and penalty claims abated. TeamStaff believes that after the IRS
applies all the funds correctly, any significant interest and penalties will be
abated.
COMPREHENSIVE INCOME (LOSS):
TeamStaff has comprehensive losses resulting from its Supplemental Retirement
Plan (SERP) (see Note 6). When the SERP obligations were measured at June 30,
2003, the amount of the Projected Benefit Obligation (PBO) exceeded the recorded
SERP liability. These changes resulted in a comprehensive loss net of tax for
the quarter ended June 30, 2003 of $(70,000) and a comprehensive loss for the
nine months ended June 30, 2003 of $(133,000). The removal of the former Chief
Financial Officer from his duties as such (see Note 5) may have caused his
benefits under the SERP to become fully vested. TeamStaff has provided for this
vesting in its pension accounting calculations. The former Chief Financial
Officer resigned his employment effective as of July 1, 2003. As a result,
TeamStaff has accounted for the former Chief Financial Officer's portion of the
SERP under curtailment accounting. Additionally, TeamStaff's former President
and Chief Executive Officer relinquished his responsibilities as of June 18,
2003, but remains a TeamStaff employee. The former President and Chief Executive
Officer was already fully vested in his SERP benefit at the time he relinquished
his responsibilities. Because it is unlikely that the former President and Chief
Executive Officer will remain in TeamStaff's employ beyond September 30, 2003,
TeamStaff has accounted for the former President and Chief Executive Officer's
portion of the SERP under curtailment accounting. No other sources of
comprehensive gains or losses occurred.
WORKERS' COMPENSATION:
As of March 22, 2002, TeamStaff's insurance provider is Zurich American
Insurance Company (Zurich). The program is managed by Cedar Hill Insurance
Agency, Inc. (Cedar Hill), whose duties include underwriting analysis of
potential and current clients, loss control services, and other program
management services. In addition, TeamStaff's workers' compensation insurance
broker, The Hobbs Group, provides claims oversight and also provides certain
underwriting and claims management services. This policy covers TeamStaff's
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.
The Zurich program originally covered the period March 22, 2002 through March
31, 2003, inclusive. The program contained a large deductible feature of
$500,000 for each claim, with no maximum liability cap. The premium for the
program was paid on a monthly basis based on estimated payroll for the year and
is subject to a policy year-end audit, which is expected to be completed prior
to the end of our fiscal year end September 30, 2003. The Zurich deductible
program was collateralized by a letter of credit inuring to the benefit of
Zurich, and cash held in a trust account with a third party. The letter of
credit for $4,150,000 was secured through Fleet National Bank (Fleet), as
11 of 31
part of TeamStaff's line of credit. In connection with the renewal of this
program discussed below, Zurich released this letter of credit. Payments were
made to the trust monthly 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. Assets in the trust may be adjusted
from time to time based on program claims experience. Claims handling services
for the program is provided by a third party administrator assigned by Cedar
Hill. At June 30, 2003, TeamStaff has a prepaid current asset of $1,966,000 for
the premiums and the prepayments made to the trust.
On March 28, 2003, TeamStaff renewed its workers' compensation program with
Zurich for the period from April 1, 2003, through March 31, 2004, inclusive. The
new program contains a large deductible feature of $500,000 for each claim, with
a maximum liability cap of the greater of 104.41% of manual premium or
$15,650,000. The premium for the program is paid on a monthly basis based on
estimated payroll for the year and is subject to a policy year-end audit. The
new program is collateralized by a letter of credit inuring to the benefit of
Zurich, and cash held in a trust account with a third party. The new letter of
credit for $3.5 million was secured through Fleet National Bank (Fleet), as part
of TeamStaff's line of credit. Payments are made to the trust monthly 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. Assets in the trust may be adjusted from time to time based on
program experience. Claims handling services for the program are provided by GAB
Robins, a third party administrator. At June 30, 2003, TeamStaff has a prepaid
current asset of $837,000 for the premiums 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 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 is contractually obligated to 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. TeamStaff believes that the remaining funds
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 recorded 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 $271,000 amount from any monies potentially owed
by TeamStaff to CNA. 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. The New Jersey Division of Insurance referred
the matter to the New Jersey Compensation Rating and Inspection Bureau, which
has investigated the complaint and, subsequent to June 30, 2003, proposed a fine
against CNA and a refund of $240,000 in policy issuance costs to TeamStaff.
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 TeamStaff's insurers,
internal analysis and its insurance broker. TeamStaff's internal analysis
includes a quarterly review of open claims and a 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 incurred during the
policy period. 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 also relies on
actuarial tables to estimate its ultimate expense.
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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 June 30, 2003, the adequacy of the workers' compensation reserves was
determined, in management's opinion, to be reasonable. In determining our
reserves we rely in part upon information regarding loss data received from our
workers' compensation insurance carriers which may include loss data for claims
incurred during prior policy periods. As disclosed in our Form 10-K for the
fiscal year ended September 30, 2002, TeamStaff has encountered difficulties in
receiving timely reporting of claims from CNA. In the future, similar problems
from our insurance carriers may result in adjustments to our reserves. In
addition, 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.
NON-GOODWILL RECOGNIZED INTANGIBLES:
The following is a summary of non-goodwill intangibles:
AS OF JUNE 30, 2003
-------------------
Gross Carrying Accumulated
Amount Amortization Net
--------------- ------------ ---
Amortized intangible assets
Software $3,430,000 $1,091,000 $2,339,000
Pension 729,000 729,000 -
---------- ---------- ----------
Total $4,159,000 $1,820,000 $2,339,000
========== ========== ==========
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
========== ======== ==========
Aggregate Amortization Expense
For 9 months ended 6/30/03 $998,000
==========
Estimated Amortization Expense
For year ended 9/30/03 $1,120,000
For year ended 9/30/04 546,000
For year ended 9/30/05 535,000
For year ended 9/30/06 477,000
For year ended 9/30/07 and thereafter 659,000
Indefinite life intangible assets As of As of
(described below): June 30, 2003 September 30, 2002
------------- ------------------
Tradenames $4,209,000 $4,209,000
Wachovia Relationship - 6,900,000
---------- -----------
Total $4,209,000 $11,109,000
========== ===========
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GOODWILL:
Medical
PEO Staffing Total
--- -------- -----
Balance as of September 30, 2002 $25,462,000 $1,705,000 $27,167,000
Adjustment to purchase price due to
earn out obligation 329,000 - 329,000
Goodwill impairment loss (20,396,000) (20,396,000)
----------- ---------- -----------
Balance as of June 30, 2003 $ 5,395,000 $1,705,000 $7,100,000
=========== ========== ===========
IMPAIRMENT OF GOODWILL:
Goodwill is assigned to specific reporting units and, in accordance with SFAS
142, is reviewed for possible impairment at least annually or more frequently
upon the occurrence of an event or when circumstances indicate that a reporting
unit's carrying amount may be greater than its fair value. As of the fiscal
quarter ended December 31, 2002, TeamStaff carried a total of $27,167,000 in
goodwill. During the fiscal quarter ended March 31, 2003, TeamStaff determined
that the carrying amount of the PEO reporting segment exceeded its fair value,
which was estimated based on the present value of expected future cash inflows
and the market approach which compares TeamStaff to other comparable entities.
The decision to test for impairment was based on a variety of factors,
including, but not limited to, the overall downturn in the nation's economy, the
relatively recent substantial decrease in the number of TeamStaff PEO worksite
employees, the performance of the Wachovia marketing relationship, the reduced
valuations of individual PEOs by various market analysts and the associated
market downgrade in the PEO industry generally. Accordingly, a goodwill
impairment loss of $20,396,000, as indicated by an independent outside
valuation, was recognized in the PEO reporting unit for the fiscal quarter ended
March 31, 2003. No further goodwill impairment loss was recognized this fiscal
quarter.
IMPAIRMENT OF WACHOVIA RELATIONSHIP INTANGIBLES:
Intangible assets that are subject to amortization are reviewed for potential
impairment whenever events or circumstances indicate that carrying amounts may
not be recoverable. Assets not subject to amortization are tested for impairment
at least annually. As part of its acquisition of BrightLane, completed in August
2001, TeamStaff entered into a two-year, extendable marketing relationship with
First Union Corporation (renamed Wachovia). The Wachovia relationship provides
TeamStaff with the ability to market its PEO services to Wachovia's small
business customers through Wachovia's network of small business bankers. The
relationship has not produced the anticipated number of PEO clients or worksite
employees. During the fiscal quarter ended March 31, 2003, TeamStaff determined
that, based on estimated future cash flows, the carrying amount of the Wachovia
marketing relationship, which is assigned to TeamStaff's PEO reporting segment,
exceeded its fair value by $5,700,000; accordingly, an impairment loss of that
amount, as indicated by an independent outside valuation, was recognized and is
included in impairment of intangible assets. TeamStaff has received written
notice from Wachovia terminating the current agreement effective as of October
14, 2003. Although TeamStaff believes that the relationship ultimately will be
extended beyond October 14, 2003, TeamStaff does not anticipate that the
extension will provide it with the ability to market its services to Wachovia's
small business customers on an exclusive basis. TeamStaff has therefore
written-off the full remaining value of the Wachovia relationship, $1,200,000
during the third fiscal quarter 2003.
(3) BUSINESS COMBINATIONS:
SETTLEMENT OF CORPORATE STAFFING CONCEPTS EARN OUT OBLIGATION:
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, 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. 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 to issue 27,500 shares of TeamStaff Common Stock valued at $79,000, bringing
the total purchase price to approximately $604,000. The additional purchase
price as a result of the buyout was recorded as Goodwill.
The following unaudited pro forma information presents a summary of consolidated
financial results of operations of TeamStaff and acquired companies as if the
acquisition had occurred October 1, 2001, the beginning of the earliest period
presented.
Three Months Ended June 30 Nine Months Ended June 30
----------------------------- -----------------------------
2002 2002
2003 As Restated 2003 As Restated
---- ----------- ---- -----------
Revenues $38,478,000 $46,874,000 $118,795,000 $137,197,000
14 of 31
Net Income (2,264,000) 2,038,000 (28,136,000) 3,121,000
Earnings per share - basic and diluted $(0.14) $0.13 $(1.79) $0.19
(4) DEBT:
On April 9, 2002, TeamStaff 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 TeamStaff, and is currently 4%. The facility is collateralized
by substantially all of the assets of TeamStaff, 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.
Effective March 21, 2003, the Company and Fleet agreed to a renewal of the
revolving loan facility, which now expires on March 31, 2004. The terms of the
facility are substantially as described above, except that the total outstanding
loan amount at any one time cannot exceed the lesser of $6,000,0000 or the sum
of 85% of the qualified accounts receivable less an amount reserved by Fleet. At
June 30, 2003, the sole outstanding amount of the facility represented an
outstanding letter of credit in the amount of $3.5 million issued with respect
to TeamStaff's workers' compensation program with Zurich effective April 1, 2003
described above. TeamStaff is not in compliance with the minimum earnings before
interest and taxes covenant as of June 30, 2003 due, in part, to the accrual of
potential severance payment obligations related to TeamStaff's former President
and Chief Executive Officer in the third fiscal quarter. Fleet Bank has granted
TeamStaff a waiver for the minimum earnings before interest and taxes covenant
and has amended the agreement to delete the interest rate coverage covenant and
replace it with a minimum earnings before interest expense covenant for future
quarters. Fleet Bank has also agreed to reduce the minimum working capital
covenant from $10,000,000 to $9,750,000 for the fiscal quarter ending June 30,
2003 only.
(5) NEW PRESIDENT AND CEO:
On June 18, 2003, T. Kent Smith was appointed TeamStaff's President and Chief
Executive Officer at an initial annual base salary of $250,000. Mr. Smith was
also appointed to TeamStaff's Board of Directors. Mr. Smith is eligible to
receive a bonus of up to 50% of his base salary based on the achievement of
revenue, income and other objectives established by the Compensation Committee
of the Board of Directors. Mr. Smith also was granted an option to purchase
400,000 shares of TeamStaff common stock, one-fourth of which vested on June 18,
2003, one-fourth of which will vest one year thereafter, and the remainder of
which will vest on June 18, 2005. Mr. Smith also receives four weeks annual
vacation and is offered insurance benefits generally made available to other
members of TeamStaff's senior management. Mr. Smith and TeamStaff currently are
negotiating the specific terms of a written employment agreement that will have
an anticipated expiration date of September 30, 2005.
STATUS OF FORMER CFO AND CEO:
As previously disclosed, TeamStaff relieved its Chief Financial Officer of his
duties as such, and commenced a search for a new Chief Financial Officer. That
search is ongoing. The former Chief Financial Officer resigned from TeamStaff
effective as of July 1, 2003.
Pursuant to a May 22, 2002 severance agreement with the former Chief Financial
Officer, in the event that his employment terminates for "good reason," as that
term is defined in the agreement, he is provided with certain severance payments
and other benefits. As a result of being relieved of his duties, the former
Chief Financial Officer may have had "good reason" to terminate his employment
with TeamStaff and may have claims for the severance payments and benefits
provided by the severance agreement. The removal of the Chief Financial Officer
from his duties also may have caused his benefits under TeamStaff's SERP to
become fully vested and require that assets necessary to meet TeamStaff's
premium payment obligations under the split dollar life insurance program that
funds TeamStaff's SERP obligations be placed in an irrevocable grantor trust.
TeamStaff has provided for full vesting in its pension accounting calculation.
TeamStaff may be required to make payments into the trust totaling approximately
$636,000, which is reflected as restricted cash as of June 30, 2003.
Pursuant to a May 22, 2002, severance agreement with Donald W. Kappauf,
TeamStaff's former President and Chief Executive Officer, in the event he is
terminated 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
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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.
On June 18, 2003, Donald W. Kappauf was relieved of his positions of President
and Chief Executive Officer of TeamStaff. In light of the circumstances
regarding the relinquishment by Mr. Kappauf of his positions, Mr. Kappauf may
have reason to terminate his employment with TeamStaff 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 . .
..." In addition, TeamStaff may be required to contribute funds to an irrevocable
trust to meet the premium obligations of the split dollar life insurance policy
granted to Mr. Kappauf in connection with the SERP. TeamStaff and Mr. Kappauf
have reached an agreement in principle concerning the payment of his severance
payments and the creation of the trust. Under the proposed agreement, TeamStaff
will pay Mr. Kappauf's severance benefits over a 48 month period and contribute,
initially, two years of premiums (approximately $250,000) to the irrevocable
trust, which is reflected as restricted cash as of June 30, 2003. However, there
can be no assurance the agreement with Mr. Kappauf will be finalized on these or
any other terms. In the event the agreement is not finalized, TeamStaff may be
required to contribute $950,000 to the trust and pay the entire severance
benefit in a lump sum payment.
(6) SUPPLEMENTAL RETIREMENT PLAN:
Effective October 1, 2000, TeamStaff adopted a non-qualified, Supplemental
Retirement Plan (SERP) covering certain TeamStaff corporate officers. 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 TeamStaff 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 TeamStaff for any reason other than
conviction for theft or embezzlement from TeamStaff. Upon a change in control,
as defined in the SERP, assets necessary to fund TeamStaff's SERP obligations
are to be placed in an irrevocable grantor trust. 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. TeamStaff's former
President and Chief Executive Officer and its former Chief Financial Officer are
the only current SERP participants.
SERP participants also are provided with a split dollar life insurance policy,
insuring the life of the participant until the participant reaches age 65. Under
the terms of an agreement between each participant and TeamStaff, although the
participant is the owner of the Policy, each participant has collaterally
assigned his Policy to TeamStaff to secure repayment of the premiums through
either its cash surrender value or the Policy proceeds. Additionally, pursuant
to the agreement, the participant's right to the Policy vests and becomes
nonforfeitable 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 agreement), TeamStaff will release
the collateral assignment of the Policy provided the participant releases
TeamStaff from all obligations it may have with respect to the participant
(including those under the SERP). Under the agreement, TeamStaff is required to
pay all Policy premium costs. However, given the uncertainty of TeamStaff's
ability to continue to maintain this payment arrangement in light of certain of
the provisions of the Sarbanes-Oxley Act of 2002, TeamStaff had, with the former
President and Chief Executive Officer's consent, deferred paying Policy premiums
on his behalf. TeamStaff paid the former President and Chief Executive Officer a
bonus in the amount of Policy premiums covering the period through September 30,
2003, grossed-up to cover allocable income taxes.
(7) TREASURY STOCK AND OPTIONS:
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On July 22, 1999, the Board of Directors authorized the repurchase up to 3% of
the outstanding shares of TeamStaff's common stock. On November 19, 2002, the
Board of Directors authorized an additional repurchase of up to $1,000,000 in
common stock. Since inception through June 30, 2003, we have repurchased 581,470
shares at an average cost of $4.18 per share for a total cost of $2,430,000.
These share repurchases are reflected as treasury shares in these financial
statements and will eventually be retired. During the quarter ended June 30,
2003, 34,702 shares were purchased at a cost of $107,000. During the nine months
ended June 30, 2003, 251,214 shares were purchased at a cost of $782,000. During
the quarter ended June 30, 2003, TeamStaff granted 400,000 options at an average
price of $2.42 per share, 5,427 options expired or were cancelled unexercised
and no options were exercised. During the nine months ended June 30, 2003,
TeamStaff granted 483,000 options at an average price of $2.58, 73,558 options
expired or were cancelled unexercised, and no options were exercised. During the
quarter ended June 30, 2003, no warrants were issued or exercised, and no
warrants expired unexercised. During the nine months ended June 30, 2003, no
warrants were issued or exercised, and 58,856 warrants expired unexercised.
(8) SEGMENT REPORTING:
TeamStaff 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- and medium-sized businesses. Essentially, in
this business segment, TeamStaff provides services that function as the human
resource department for small- to medium-sized companies and TeamStaff becomes a
co-employer of its clients' employees.
TeamStaff 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, TeamStaff provides basic payroll
services to its clients, more than 75% of which are in the construction
industry. Services provided include the preparation of payroll checks, filing of
payroll taxes, government reports, W-2s, remote processing directly from the
clients' offices and certified payrolls.
All corporate expenses, interest expense, as well as depreciation on corporate
assets and miscellaneous charges, are reflected in a separate unit called
Corporate.
17 of 31
The following tables present the condensed financial results for the three and
nine months ended June 30, 2003 and 2002 for each of TeamStaff's segments:
FOR THE THREE MONTHS ENDED
JUNE 30, PROFESSIONAL MEDICAL PAYROLL
2003 EMPLOYER SERVICES STAFFING SERVICES CORPORATE CONSOLIDATED
---- ----------------- -------- -------- --------- ------------
Revenues $23,823,000 $13,566,000 $1,089,000 $ 0 $38,478,000
Income/(loss) before income taxes (724,000) 1,108,000 323,000 (3,694,000) (2,987,000)
2002
AS RESTATED
-----------
Revenues $27,477,000 $18,180,000 $1,217,000 $ 0 $46,874,000
Income/(loss) before income taxes 3,357,000 2,030,000 493,000 (2,640,000) 3,240,000
FOR THE NINE MONTHS ENDED
JUNE 30, PROFESSIONAL MEDICAL PAYROLL
2003 EMPLOYER SERVICES STAFFING SERVICES CORPORATE CONSOLIDATED
---- ----------------- -------- -------- --------- ------------
Revenues $69,308,000 $45,841,000 $3,646,000 $ 0 $118,795,000
Income/(loss) before income taxes (27,251,000) 3,424,000 1,228,000 (9,356,000) (31,955,000)
2002
AS RESTATED
-----------
Revenues $75,916,000 $56,424,000 $3,757,000 $ 0 $136,097,000
Income/(loss) before income taxes 3,601,000 6,772,000 1,610,000 (7,098,000) 4,885,000
TeamStaff has no revenue derived from outside the United States.
18 of 31
ITEM 2:
MANAGEMENT'S 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 management's best estimates
based upon current conditions and the most recent results of operations. These
risks include, but are not limited to, risks associated with risks undertaken in
connection with acquisitions, risks from potential workers' compensation claims
and required payments, risks from employer/employee suits such as discrimination
or wrongful termination, risks associated with payroll and employee related
taxes which may require unanticipated payments by 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. These and other risks are stated in detail in our Report on Form 10-K
for the fiscal year ended September 30, 2002 and other reports and filings made
by TeamStaff.
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. See Note 2 of TeamStaff's 2002 annual report on Form 10-K for a detailed
discussion on the application of these and other accounting policies.
The discussion contained in this Item 2 reflects a restatement of certain
components of our financial statements related to our Supplemental Retirement
Plan for the quarter and nine months ended June 30, 2002, as well as a change in
the revenue recognition policy. See discussion below and Note 6 in the financial
statements.
REVENUE RECOGNITION
TeamStaff operates three different lines of business from which it derives
substantially all of its revenue: professional employer organization (PEO),
temporary staffing and payroll services.
TeamStaff accounts for its revenues in accordance with EITF 99-19, Reporting
Revenues Gross as a Principal Versus Net as an Agent. TeamStaff's professional
employer organization division revenues historically had been derived from its
PEO division gross billings, which were based on: (i) the payroll cost of its
worksite employees and (ii) associated payroll taxes, benefit costs, workers'
compensation charges and administrative fees. The gross billings are invoiced to
clients concurrently with each periodic payroll of its worksite employees.
Historically, TeamStaff has included both components of its PEO gross billings
in revenues (gross method) due primarily to the assumption of significant
contractual rights and obligations and other liabilities TeamStaff assumes as an
employer, regardless of whether it actually collects its gross billings. After
discussions with Securities and Exchange Commission staff, and with the
concurrence of its auditors, TeamStaff has determined to change its
presentation, effective as of September 30, 2002, of PEO revenues from the gross
method to an approach that presents its revenues net of worksite employee
payroll costs (net method) primarily because TeamStaff is not generally
responsible for the output and quality of work performed by the worksite
employees. This change in accounting method reduced both the revenue and direct
costs for the quarter and nine months ended June 30, 2003 by $96,381,000 and
$301,863,000, respectively, but had no effect on gross profit, operating income
or net income (loss). For the quarter and nine months ended June 30, 2002, this
method reduced both revenue and direct costs by $128,056,000 and $366,123,000,
respectively, but had no effect on gross profit, operating income or net income
(loss). Consistent with this change in revenue recognition policy, TeamStaff's
PEO division direct costs do not include the payroll costs of its worksite
employees. TeamStaff's PEO division direct costs associated with its revenue
generating activities are comprised of all other costs related to its worksite
employees, such as the employer portion of payroll-related taxes, employee
benefit plan premiums and contributions and workers' compensation insurance
premiums. TeamStaff is in the process of amending prior year reports to reflect
this change in accounting methodology.
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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 may vary
according to circumstances, TeamStaff's revenue, and therefore its gross margin,
will fluctuate based on its client mix.
The temporary staffing revenue is recognized as service is rendered. TeamStaff
bills its clients based on an hourly rate. The hourly rate is intended to cover
TeamStaff's direct labor costs of the temporary employees, plus an estimate to
cover overhead expenses and a profit margin. Additionally included in revenue
related to temporary staffing are commissions from permanent placements.
Commissions from permanent placements result from the successful placement of a
temporary employee to a customer's workforce as a permanent employee.
In accordance with Emerging Issues Task Force (EITF) No. 99-19 "Reporting
Revenue Gross as a Principal versus Net as an Agent," TeamStaff recognizes all
amounts billed to its temporary staffing customers as gross revenue because,
among other things, TeamStaff is the primary obligor in the temporary staffing
arrangement, TeamStaff has pricing latitude, TeamStaff selects temporary
employees for a given assignment from a broad pool of individuals, TeamStaff is
at risk for the payment of its direct costs, whether or not TeamStaff's
customers pay TeamStaff on a timely basis or at all, and TeamStaff assumes a
significant amount of other risks and liabilities as an employer of its
temporary employees, and therefore, is deemed to be a principal in regard to
these services. TeamStaff also recognizes as gross revenue and as unbilled
receivables, on an accrual basis, any such amounts that relate to services
performed by temporary employees which have not yet been billed to the customer
as of the end of the accounting period.
The payroll services revenue is recognized as service is rendered and consists
primarily of administrative service fees charged to clients for the processing
of paychecks as well as preparing quarterly and annual payroll related reports.
Direct costs of services are reflected in TeamStaff's Statement of Operations as
"direct expenses" and are reflective of the type of revenue being generated. PEO
direct costs of revenue include employment related taxes, costs of health and
welfare benefit plans and workers' compensation insurance costs. Direct costs of
the temporary staffing business include wages, employment related taxes and
reimbursable expenses. Payroll services' direct costs includes salaries and
supplies associated with the processing of the payroll service.
GOODWILL AND INTANGIBLE ASSETS
Beginning October 1, 2001, with the adoption of accounting standard (SFAS 142),
the Company no longer amortizes goodwill or indefinite life intangible assets,
but continues to amortize software at its expected useful life. TeamStaff
continues to review its goodwill and other intangible assets for possible
impairment or loss of value at least annually or more frequently upon the
occurrence of an event or when circumstances indicate that a reporting unit's
carrying amount is greater than its fair value.
WORKERS' COMPENSATION
As of March 22, 2002, TeamStaff's insurance provider is Zurich American
Insurance Company (Zurich). The program is managed by Cedar Hill Insurance
Agency, Inc (Cedar Hill), whose duties include underwriting analysis of
potential and current clients, loss control services, and other program
management services. In addition, TeamStaff's workers' compensation insurance
broker, The Hobbs Group, provides claims oversight and also provides certain
underwriting and claims management services. This policy covers TeamStaff's
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.
The Zurich program originally covered the period March 22, 2002 through March
31, 2003, inclusive. The program contained a large deductible feature of
$500,000 for each claim, with no maximum liability cap. The premium for the
program was paid on a monthly basis based on estimated payroll for the year and
is subject to a policy year-end audit, which is expected to be completed prior
to the end of our fiscal year end September 30, 2003. The Zurich deductible
program was collateralized by a letter of credit inuring to the benefit of
Zurich, and cash held in a trust account with a third party. The letter of
credit for $4,150,000 was secured through Fleet National Bank (Fleet), as part
of TeamStaff's line of credit. In connection with the renewal of this program
discussed below, Zurich released this letter of credit. Payments were made to
the trust monthly based on projected claims for the year. Interest on all
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assets held in the trust is credited to TeamStaff. Payments for claims and
claims expenses will be made from the trust. Assets in the trust may be adjusted
from time to time based on program claims experience. Claims handling services
for the program is provided by a third party administrator assigned by Cedar
Hill. At June 30, 2003, TeamStaff has a prepaid current asset of $1,966,000 for
the premiums and the prepayments made to the trust.
On March 28, 2003, TeamStaff renewed its workers' compensation program with
Zurich for the period from April 1, 2003, through March 31, 2004, inclusive. The
new program contains a large deductible feature of $500,000 for each claim, with
a maximum liability cap of the greater of 104.41% of manual premium or
$15,650,000. The premium for the program is paid on a monthly basis based on
estimated payroll for the year and is subject to a policy year-end audit. The
new program is collateralized by a letter of credit inuring to the benefit of
Zurich, and cash held in a trust account with a third party. The new letter of
credit for $3.5 million was secured through Fleet National Bank (Fleet), as part
of TeamStaff's line of credit. Payments are made to the trust monthly 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. Assets in the trust may be adjusted from time to time based on
program experience. Claims handling services for the program are provided by GAB
Robins, a third party administrator. At June 30, 2003, TeamStaff has a prepaid
current asset of $837,000 for the premiums 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 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 is contractually obligated to 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. TeamStaff believes that the remaining funds
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 recorded 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 $271,000 amount from any monies potentially owed
by TeamStaff to CNA. 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. The New Jersey Division of Insurance referred
the matter to the New Jersey Compensation Rating and Inspection Bureau, which
has investigated the complaint and, subsequent to June 30, 2003, proposed a fine
against CNA and a refund of $240,000 in policy issuance costs to TeamStaff.
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 TeamStaff's insurers,
internal analysis and its insurance broker. TeamStaff's internal analysis
includes a quarterly review of open claims and a 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 incurred during the
policy period. 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 also 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
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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 June 30, 2003, the adequacy of the workers' compensation reserves was
determined, in management's opinion, to be reasonable. In determining our
reserves we rely in part upon information regarding loss data received from our
workers' compensation insurance carriers which may include loss data for claims
incurred during prior policy periods. As disclosed in our Form 10-K for the
fiscal year ended September 30, 2002, TeamStaff has encountered difficulties in
receiving timely reporting of claims from CNA. In the future, similar problems
from our insurance carriers may result in adjustments to our reserves. In
addition, 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.
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.
RESULTS OF OPERATIONS
The results below reflect a restatement of the statement of income and
comprehensive income for June 30, 2002 fiscal quarter and year to date and an
adjustment to TeamStaff's revenue recognition policy with respect to its PEO
division. The restatement was also required in order to properly reflect certain
footnote disclosures and adjustments regarding the Company's Supplemental
Retirement Plan adopted effective as of October 1, 2000.
TeamStaff's revenues for the three months ended June 30, 2003 and 2002 were
$38,478,000 and $46,874,000, respectively, which represents a decrease of
$8,396,000, or 17.9%, over the prior year fiscal quarter. Decreased revenues in
TeamStaff's Medical Staffing division accounted for approximately $4,614,000
less revenue, while our PEO division accounted for approximately $3,654,000 less
revenue. TeamStaff's Medical Staffing business, TeamStaff Rx, has, on a
percentage of revenue basis, been our fastest growing business segment over the
last few years. However, in comparison to the third fiscal quarter 2002, revenue
for this segment decreased by 25%. This decrease has partially been attributed
to our closing of the division's Houston, Texas office in April 2002. This
office was primarily involved in staffing per diem nurses in the local Houston
market. Our Medical Staffing business places predominantly long term temporary
medical personnel in assignments that average at least thirteen weeks compared
to per diem staffing, which are typically staffed on an hourly or daily basis.
The overhead necessary to support per diem nursing did not justify keeping this
business segment in operation. In addition, due to the increased number of
temporary medical staffing companies that have appeared over the last few years,
our Medical Staffing business segment is facing increased competition from a
number of companies. While many of these companies had traditionally
concentrated in the nursing market, they have expanded their operations into
markets, such as imaging personnel staffing, where TeamStaff Rx has
concentrated, and which previously were substantially less competitive. Also
contributing to the decrease in revenues is the recent practice among hospitals
of forcing overtime to permanent staff and replacing temporary positions with
permanent hires. The PEO division's reduced revenue is 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. The declining economic conditions in the
United States also contributed to a reduced workforce for our clients of
approximately 4,000 worksite employees.
TeamStaff's revenues for the nine months ended June 30, 2003 and 2002 were
$118,795,000 and $136,097,000, respectively, which represents a decrease of
$17,302,000, or 12.7%. Decreased revenues in TeamStaff's Medical Staffing
division accounted for approximately $10,583,000 less revenue while our PEO
division accounted for approximately $6,608,000 less revenue. The reduced
Medical Staffing division and PEO revenue is for the same reasons as stated
above. This loss in PEO business was somewhat offset by revenue generated by our
acquisition of the assets of Corporate Staffing Concepts in January of 2002,
which resulted in increased PEO division revenue of $1,100,000 for the nine
months ended June 30, 2003 compared to the same period last year.
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Direct expenses were $32,162,000 for the three months ended June 30, 2003 and
$35,964,000 for the comparable quarter last year, representing a decrease of
$3,802,000, or 10.6%. This decrease is a direct result of the lower consolidated
revenues of TeamStaff. As a percentage of revenue, direct expenses for the three
months ended June 30, 2003 and 2002 were 83.6% and 76.7%, respectively. This
increase, as a percentage of revenue is attributable to the settlement in 2002
of approximately four years of workers' compensation programs with one of
TeamStaff's former insurance carriers resulting in a reduction of 2002 direct
expenses by approximately $2.7 million. For the nine months ended June 30, 2003
and 2002, direct expenses were $100,376,000 and $109,699,000, respectively,
representing a decrease of $9,323,000, or 8.5%. As a percentage of revenue,
direct expenses for the nine months ended June 30, 2003 and 2002 were 84.5% and
80.6%, respectively. This increase in direct expenses as a percentage of revenue
is due primarily to the 2002 expenses being reduced by a settlement of
approximately four years of workers' compensation programs for reasons stated
above. Additionally, direct expenses were negatively affected in the amount of
$599,000, by the impact of higher state unemployment tax (SUTA) rates effective
as of January 1, 2003, as well as increased workers' compensation reserves of
$378,000. As poor economic conditions resulted in a reduction in workforce for
certain of our PEO clients over the past few years, an increased number of
worksite employee unemployment claims were filed. Since SUTA rates are based on
an employer's unemployment claims experience, in those states that recognize a
PEO as the employer of record for unemployment compensation purposes, our SUTA
rates increased as more unemployment claims were filed.
Gross profits were $6,316,000 and $10,910,000 for the quarters ended June 30,
2003 and 2002, respectively, a decrease of $4,594,000, or 42.1%. This decrease
is attributed to the reduction in our Medical Staffing and PEO business, and the
fiscal year 2002 settlement of workers' compensation programs discussed above.
Gross profits, as a percentage of revenue, were 16.4% and 23.3 % for the
quarters ended June 30, 2003 and 2002, respectively. For the nine months ended
June 30, 2002 and 2003, gross profits were $18,419,000 and $26,398,000,
respectively, representing a decrease of $7,979,000 or 30.2%. This decrease is
attributed to the reduction in our Medical Staffing and PEO business, the fiscal
year 2002 settlement of workers' compensation programs, higher state
unemployment taxes and higher workers' compensation reserves.
Selling, general and administrative (SG&A) expenses for the three months ended
June 30, 2003 and 2002 were $7,935,000 and $7,554,000, respectively,
representing an increase of $381,000, or 5.0%. The overall increase in SG&A is
primarily attributable to an accrual for potential severance agreement
obligations related to TeamStaff's former President and Chief Executive Officer
under his severance agreement and the SERP of $1,453,000. SG&A decreased
significantly by $824,000 in the PEO division, $179,000 in the Medical Staffing
division, and $165,000 for Corporate, compared to the same quarter last year.
For the nine months ended June 30, 2003 and 2002, SG&A expenses were $22,408,000
and $21,291,000, respectively, representing an increase of $1,117,000, or 5.2%,
primarily for the same reasons stated above, with additional severance agreement
and SERP expenses for the former Chief Financial Officer recorded in the second
fiscal quarter of 2003. Total Severance and SERP accruals for the former Chief
Executive Office and Chief Financial Officer for the nine months ended June 30,
2003 are $2,448,000.
Intangible impairment write down for the three months ended June 30, 2003 is
$1,200,000 for the remaining value of the Wachovia relationship. TeamStaff
received written notice from Wachovia terminating the agreement. Goodwill
impairment write down for the nine months ended June 30, 2003 is $20,396,000.
Intangible impairment write down for the nine months ended June 30, 2003 is
$6,900,000. The decision to test for impairment was based on a variety of
factors, including, but not limited to, the overall downturn in the nation's
economy, the relatively recent substantial decrease in the number of PEO
worksite employees, the poor performance of the marketing agreement established
at the time of the BrightLane acquisition, the reduced valuations of individual
PEOs by various market analysts and the associated market downgrade in the PEO
industry in general.
Depreciation and amortization for the three months ended June 30, 2003 and 2002
were $293,000 and 355,000 respectively, for a decrease of $62,000. For the nine
months ended June 30, 2003 and 2002, depreciation and amortization were $952,000
and $1,017,000, respectively, for a decrease of $65,000.
Interest and other income decreased $163,000 from $299,000 in the third fiscal
quarter of 2002 to $136,000 in the third fiscal quarter of 2003. For the nine
months ended June 30, 2003 and 2002, interest income decreased $423,000 from
$887,000 to $464,000. This decrease is primarily attributable to the reduction
in late payment fees received by our Medical Staffing division due to a more
competitive pricing environment, and referral fees received in the third fiscal
quarter of 2002 due to the closing of the Houston Medical Staffing service
office.
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Interest and other expense decreased $49,000 to $11,000 in the third fiscal
quarter of 2003 from $60,000 in the third fiscal quarter of 2002. For the nine
months ended June 30, 2003 and 2002, interest expense increased $90,000, from
$92,000 to $182,000. The increase for the nine months was due to the
amortization of deferred financing costs associated with our line of credit with
Fleet, which was effective April 9, 2002 and interest costs associated with the
settlement of outstanding Texas state unemployment taxes.
Income tax benefit for the three months ended June 30, 2003 was $723,000 versus
income tax expense of $1,202,000 for the quarter ended June 30, 2002. Income tax
benefit for the nine months ended June 30, 2003 was $3,819,000 versus income tax
expense of $1,776,000 for the nine months ended June 30, 2002. These tax
benefits in 2003 are a result of a write down of tax deductible components of
goodwill and losses from operations.
Net loss for the quarter ended June 30, 2003 was $(2,264,000), or $(0.14) per
fully diluted share, as compared to net income of $2,038,000, or $0.13 per fully
diluted share, for the quarter ended June 30, 2002. This decrease is primarily
due to the severance accrual recorded for the former President and Chief
Executive Officer, the intangible asset write-off for the Wachovia relationship,
and the fiscal year 2002 settlement of workers' compensation programs discussed
above. Net loss for the nine months ended June 30, 2003 was $(28,136,000) or
$(1.79) per fully diluted share, as compared to net income of $3,109,000 or
$0.19 per fully diluted share for the same period last year. This decrease is
predominantly due to the after tax write down of impaired goodwill and the
Wachovia relationship of $(25,353,000), or $(1.61) per fully diluted share.
Additional losses resulted from increased workers' compensation reserves,
increased state unemployment taxes, the accrual for TeamStaff's potential
obligations to its former Chief Executive Officer and Chief Financial Officer
under their severance agreement and under its SERP, and the decreased
performance of TeamStaff's Medical Staffing division.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities in the first nine months of fiscal 2003
was $4,250,000 compared to net cash provided of $2,576,000 in the same period of
fiscal 2002. The change in cash from operations compared to last year relates to
lower accounts receivable and accrued liabilities due to reduced revenue in the
PEO reporting segment, increases in restricted cash to fund the SERP agreement,
increases in prepaid workers' compensation cost, and lower earnings. The
remaining change is due 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.
Cash used in investing activities of $1,385,000 was primarily related to costs
incurred for the licensing of the ScorPEO PEO software system of
$315,000,capitalized internally developed software of $447,000, software license
fees of $135,000 and payment related to the earn out provisions from our
purchase of the assets of Corporate Staffing Concepts LLC of $250,000.
The cash used in financing activities of $954,000 was primarily due to spending
$782,000 in repurchasing 251,214 shares of TeamStaff stock in the first nine
months of fiscal 2003.
As of June 30, 2003, TeamStaff had cash and cash equivalents of $5,866,000 and
net accounts receivable of $19,207,000.
Management of TeamStaff believes that its existing cash will be sufficient to
support cash needs for at least 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 repurchase up to 3% of
the outstanding shares of TeamStaff's common stock. On November 19, 2002, the
Board of Directors authorized an additional repurchase of up to $1,000,000 in
common stock. Since inception through June 30, 2003, we have repurchased 581,470
shares at an average cost of $4.18 per share for a total cost of $2,430,000.
These share repurchases are reflected as treasury shares in these financial
statements and will eventually be retired. During the quarter ended June 30,
2003, 34,702 shares were purchased at a cost of $107,000. During the nine months
ended June 30, 2003, 251,214 shares were purchased at a cost of $782,000.
On April 9, 2002, TeamStaff 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
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interest rate is either the Fleet prime rate or LIBOR, at the discretion of
TeamStaff, and is currently 4.00%. The facility is collateralized by
substantially all of the assets of TeamStaff, 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.
Effective March 21, 2003, the Company and Fleet agreed to a renewal of the
revolving loan facility, which now expires on March 31, 2004. The terms of the
facility are substantially as described above, except that the total outstanding
loan amount at any one time cannot exceed the lesser of $6,000,0000 or the sum
of 85% of the qualified accounts receivable less an amount reserved by Fleet. At
June 30, 2003, the sole outstanding amount of the facility represented an
outstanding letter of credit in the amount of $3.5 million issued with respect
to TeamStaff's workers' compensation program with Zurich effective April 1, 2003
described above. TeamStaff is not in compliance with the minimum earnings before
interest and taxes covenant as of June 30, 2003 due, in part, to the accrual of
potential severance payment obligations related to TeamStaff's former President
and Chief Executive Officer in the third fiscal quarter. Fleet Bank has granted
TeamStaff a waiver for the minimum earnings before interest and taxes covenant
and has amended the agreement to delete the interest rate coverage covenant and
replace it with a minimum earnings before interest expense covenant for future
quarters. Fleet Bank has also agreed to reduce the minimum working capital
covenant from $10,000,000 to $9,750,000 for the fiscal quarter ending June 30,
2003 only.
EFFECTS OF INFLATION
Inflation and changing prices have not had a material effect on TeamStaff's net
revenues and results of operations in the last three fiscal years, as TeamStaff
has been able to modify its prices and cost structure to respond to inflation
and changing prices.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TeamStaff 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. TeamStaff 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 periods'
decreases, TeamStaff's workers' compensation expense would increase because
TeamStaff would be entitled to less interest income on the deposited funds.
ITEM 4. 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)) as of the end of the quarterly period covered by this report on
Form 10-Q. Based on their evaluation, our chief executive officer and controller
have concluded that as of the date of their evaluation, our disclosure controls
and procedures are effective to ensure that all material information required to
be filed in this Quarterly Report on Form 10-Q has been made known to them.
CHANGES IN INTERNAL CONTROLS:
TeamStaff has completed the consolidation of its multiple PEO operating systems
onto one, web-enabled system, ScorPEO, licensed by F.W. Davison. TeamStaff also
has implemented its new financial and reporting system licensed from Lawson,
effective May 2, 2003, that will ultimately be integrated with the ScorPEO
system. TeamStaff expects this integration to be complete by August 31, 2003.
In accordance with Section 202 of the Sarbanes-Oxley Act of 2002 and the rules
of the United States Securities and Exchange Commission promulgated thereunder,
the Audit Committee of the Board of Directors adopted policies and procedures
for the pre-approval of audit and permissible non-audit services effective as of
May 6, 2003. These
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policies and procedures require that all audit and otherwise permissible
non-audit services performed by TeamStaff's independent auditors be pre-approved
by the Audit Committee. These policies and procedures have been shared and
reviewed with TeamStaff's auditors. In compliance with the disclosure
requirements of the Sarbanes-Oxley Act of 2002, we will provide additional
disclosure of these policies in our Annual Report on Form 10-K.
On June 20, 2003, TeamStaff distributed a company-wide Code of Ethics and its
Code of Ethics and Business Conduct and Code of Ethics for Chief Executive
Officer, Chief Financial Officer and Controller to all employees. Additionally,
the Codes were posted on TeamStaff's internal intranet website. In compliance
with the disclosure requirements of the Sarbanes-Oxley Act of 2002, we will file
other applicable codes as an exhibit to our Annual Report on Form 10-K and/or
post them on our publicly available website. These Codes were adopted by
TeamStaff's Board of Directors, and provide employees with a confidential method
of reporting suspected Code violations.
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 II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2000, TeamStaff made claims for indemnification against the selling
shareholders of the TeamStaff Companies (the Sellers), which were acquired by
the Company 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, the
Company 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 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 and to date 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 former
owners.
The Company'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 believe 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
agreements, subject to a $300,000 threshold. In the event that 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 per 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 the 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 service provider and temporary
medical staffing firm, 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 client's employers 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 a 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 the Company's financial
conditions or results of operations.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders for a vote during the quarter ended
June 30, 2003. The Company has scheduled its next meeting of shareholders for
August 12, 2003.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEAMSTAFF, INC.
(Registrant)
/s/ T. Kent Smith
--------------------
T. Kent Smith
Chief Executive Officer
/s/ Gerard A. Romano
--------------------
Gerard A. Romano
Controller
Date: August 6, 2003
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