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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 December 31, 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
15,714,229 shares of Common Stock, par value $.001 per share, were outstanding
as of February 6, 2004.
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TEAMSTAFF, INC. AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 2003
TABLE OF CONTENTS
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of
December 31, 2003 (Unaudited) and
September 30, 2003 3
Consolidated Statements of
Operations and Comprehensive Income for the three months
ended December 31, 2003 and 2002 (Unaudited) 5
Consolidated Statements of Cash Flows for the three months
ended December 31, 2003 and 2002 (Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's discussion and analysis of
financial condition and results of operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit 31.1 22
Exhibit 31.2 23
Exhibit 32.1 24
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TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(PAGE 1 OF 2)
DECEMBER 31, SEPTEMBER 30,
2003 2003
------------ --------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,294 $ 4,329
Restricted cash 3,629 1,264
Accounts receivable, net of allowance for doubtful accounts
of $209 and $142 at December 31, 2003 and
September 30, 2003, respectively 3,969 4,926
Prepaid workers' compensation 5,033 3,645
Other current assets 2,889 1,447
-------- --------
Total current assets 19,814 15,611
-------- --------
EQUIPMENT AND IMPROVEMENTS:
Equipment 2,795 2,628
Computer equipment 368 1,073
Computer software 1,120 1,060
Leasehold improvements 224 146
-------- --------
4,507 4,907
Less accumulated depreciation and amortization (3,253) (3,689)
-------- --------
Equipment and improvements, net 1,254 1,218
-------- --------
DEFERRED TAX ASSET 16,542 14,875
TRADENAME 4,199 4,199
GOODWILL 1,710 1,710
OTHER ASSETS 294 555
ASSETS HELD FOR SALE 1,167 22,449
-------- --------
Total Assets $ 44,980 $ 60,617
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
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TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(PAGE 2 OF 2)
DECEMBER 31, SEPTEMBER 30,
2003 2003
----------- -------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 60 $ 61
Accounts payable 1,313 669
Accrued payroll 2,977 2,856
Deferred tax liability 1,053 538
Accrued expenses and other current liabilities 2,218 3,181
-------- --------
Total current liabilities 7,621 7,305
-------- --------
LONG-TERM DEBT, net of current portion 82 94
ACCRUED PENSION LIABILITY 1,338 1,724
LIABILITIES HELD FOR SALE 2,672 16,384
-------- --------
Total liabilities 11,713 25,507
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value; authorized 5,000 shares; 0 issued
and outstanding - -
Common Stock, $.001 par value; authorized 40,000 shares;
issued 15,721 and 16,267 at December 31, 2003 and September 30, 2003,
respectively; outstanding 15,714 and 15,714 at December 31, 2003 and
September 30, 2003, respectively 16 16
Additional paid-in capital 62,962 65,256
Retained (deficit) earnings (29,419) (27,572)
Accumulated comprehensive losses (269) (273)
Treasury stock, 7 and 553 shares at cost at December 31, 2003 and
September 30, 2003, respectively (23) (2,317)
-------- --------
Total shareholders' equity 33,267 35,110
-------- --------
Total liabilities and shareholders' equity $ 44,980 $ 60,617
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
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TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
For the three months ended
December 31,
2003 2002
-------- --------
REVENUES $ 9,738 $ 18,457
DIRECT EXPENSES 7,508 14,934
-------- --------
Gross profit 2,230 3,523
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 3,074 3,120
DEPRECIATION AND AMORTIZATION 73 74
-------- --------
(Loss) income from operations (917) 329
-------- --------
OTHER INCOME (EXPENSE):
Interest income 5 24
Interest expense (27) (66)
Other income 71 171
-------- --------
49 129
-------- --------
(Loss) income before tax (868) 458
INCOME TAX BENEFIT (EXPENSE) 330 (185)
-------- --------
(Loss) income from continuing operations (538) 273
-------- --------
(LOSS) FROM DISCONTINUED OPERATIONS:
(Loss) from operations, net of tax benefit of $325 and $183 for quarters
ended December 31, 2003 and 2002, respectively (530) (188)
(Loss) from disposal, net of tax benefit of $483 and $0 for quarters ended
December 31, 2003 and 2002, respectively (779) -
-------- --------
(1,309) (188)
-------- --------
Net (loss) income (1,847) 85
OTHER COMPREHENSIVE INCOME (EXPENSE):
Minimum pension liability adjustment, net of tax 4 (68)
-------- --------
COMPREHENSIVE (LOSS) INCOME $ (1,843) $ 17
======== ========
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
(Loss) income from continuing operations $ (0.04) $ 0.02
(Loss) from discontinued operations (0.08) (0.01)
-------- --------
Net (loss) income $ (0.12) $ 0.01
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 15,714 15,791
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND EQUIVALENTS
OUTSTANDING - DILUTED \ 15,714 15,793
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
5 of 24
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
For the three months ended
December 31,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) income from continuing operations $ (538) $ 273
Adjustments to reconcile net (loss) income to net
cash (used) by operating activities, net of acquired businesses:
Deferred income taxes 478 23
Depreciation and amortization 73 59
Pension amortization - 15
Provision for doubtful accounts 117 40
Changes in operating assets and liabilities, net of acquired businesses:
(Increase) in restricted cash (2,365) -
Decrease in accounts receivable 840 291
(Increase) in other current assets (2,831) (1,585)
(Increase) in other assets (1,405) (85)
(Decrease) in accounts payable, accrued payroll, accrued
expenses and other current liabilities (161) (3,423)
(Decrease) increase in pension liability (386) 156
Change in net assets held for sale & loss from discontinued operations 6,171 2,042
-------- --------
Net cash (used in) operating activities (7) (2,194)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, leasehold improvements and software (19) (107)
-------- --------
Net cash (used in) investing activities (19) (107)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on capital leases obligations (13) (11)
Repurchase of common shares - (432)
Net comprehensive income (expense) on pension 4 (68)
-------- --------
Net cash (used in) financing activities (9) (511)
-------- --------
Net (decrease) in cash and cash equivalents (35) (2,812)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,329 12,455
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,294 $ 9,643
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 27 $ 29
======== ========
Income taxes $ 40 $ 89
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
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TEAMSTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS:
TeamStaff, Inc., a New Jersey corporation, was founded in 1969 as a payroll
service company and has evolved into a leading provider of outsourced business
solutions focusing on human resource services to a wide variety of industries in
50 states. TeamStaff's corporate headquarters is in Somerset, New Jersey and it
has offices located in Clearwater, Florida, Woburn, Massachusetts, and
Alpharetta, Georgia. TeamStaff's wholly-owned subsidiaries include TeamStaff Rx,
Inc., DSI Staff ConnXions-Northeast Inc., DSI Staff ConnXions-Southwest Inc.,
TeamStaff Solutions, Inc., TeamStaff I, Inc., TeamStaff II, Inc., TeamStaff III,
Inc., TeamStaff IV, Inc., TeamStaff V, Inc., TeamStaff VI, Inc., TeamStaff
Insurance Services, Inc., TeamStaff VIII, Inc., Employer Support Services, Inc.,
TeamStaff IX, Inc., Digital Insurance Services, Inc., HR2, Inc., and
BrightLane.com, Inc. When we use the term TeamStaff, sometimes we will mean
TeamStaff and its subsidiaries.
TeamStaff provides a variety of employment related services through two business
units: (1) Its TeamStaff Rx unit provides medical allied health professionals
and nurses to doctors' offices and medical facilities throughout the United
States on a temporary or permanent basis; and (2) the payroll services division
provides customized payroll management and tax filing services to select
industries, such as construction. We believe our medical staffing subsidiary is
one of the top providers in the niche medical imaging field, placing temporary
employees for over 275 clients. The payroll processing division processes
payrolls for approximately 750 clients with more than 30,000 employees.
Effective November 17, 2003, TeamStaff sold certain of the assets of the
subsidiaries through which it operated its professional employer organization
("PEO") business to Gevity HR, Inc. for the sum of $9.5 million in cash, $2.5
million of which has been placed in escrow. Under the terms of the asset sale,
the escrowed payment is scheduled to be determined approximately 90 days from
the November 17, 2003, closing, but is subject to downward adjustment based on a
reduction in annualized administrative fees payable by the former TeamStaff PEO
clients. Any such downward adjustment may be offset by annualized administrative
fees of certain clients produced by former TeamStaff sales representatives
during the 90-day period. The assets sold consisted primarily of client
contracts, marketing agreements and internally developed software for use in
reconciling certain benefit provider monthly invoices. As part of the
transaction, Gevity HR, Inc. agreed, among other things, to hire certain former
TeamStaff employees assigned to the PEO division and assume certain of
TeamStaff's lease obligations. Further, TeamStaff agreed to a non-competition
agreement which prohibits us from engaging in the PEO business for a period of
five years. As a result of the transaction with Gevity, our internal corporate
employee staff was reduced by approximately 117 persons, and our workforce staff
was reduced by approximately 17,000 worksite employees. See also Note 3
"Discontinued Operations."
BASIS OF PRESENTATION:
TeamStaff accounts for its revenues in accordance with EITF 99-19, Reporting
Revenues 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 Medical 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 Medical Staffing are commissions from permanent placements.
7 of 24
Commissions from permanent placements result from the successful placement of a
medical staffing employee to a customer's workforce as a permanent employee.
The Payroll Services revenue is recognized as service is rendered and consists
primarily of administrative service fees charged to clients for the processing
of paychecks as well as preparing quarterly and annual payroll related reports.
In connection with its discontinued operation, 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 were invoiced
to clients concurrently with each periodic payroll of its worksite employees.
Historically, TeamStaff had 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 assumed as an
employer, regardless of whether it actually collected its gross billings. After
discussions with Securities and Exchange Commission staff, and with the
concurrence of its auditors, TeamStaff changed its presentation of PEO revenues
from the gross method to an approach that presented its revenues net of worksite
employee payroll costs (net method) primarily because TeamStaff was 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 ended December 31, 2003 and 2002 by $41.8
million and $116.3 million, respectively, but had no effect on gross profit,
operating income (loss) or net income (loss). The above amounts have now been
reflected as part of income (loss) from discontinued operations in the
consolidated financial statements. Consistent with this change in revenue
recognition policy, TeamStaff's PEO division direct costs did not include the
payroll costs of its worksite employees. TeamStaff's PEO division direct costs
associated with its revenue generating activities were 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.
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 the accounts of
TeamStaff, Inc., and its subsidiaries, all of which are wholly owned. 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.
(2) SIGNIFICANT ACCOUNTING POLICIES:
STOCK-BASED COMPENSATION:
At December 31, 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.
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(Amounts in thousands, except per share data)
Three Months Ended
December 31,
2003 2002
------- --------
Net income(loss), as reported $(1,847) $ 85
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (75) (85)
------- --------
Pro forma net income(loss) $(1,922) $ -
======= ========
Earnings (loss) per share:
Basic & diluted-as reported $ (0.12) $ 0.01
======= ========
Basic & diluted-pro forma $ (0.12) $ 0.00
======= ========
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 3.23% and 3.06% in
fiscal first quarter 2004 and 2003, respectively, expected option life of 4
years, and expected volatility of 69% and 74% in fiscal first quarter 2004 and
2003, 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 basic shares
outstanding to fully diluted shares outstanding:
Three Months Ended
December 31,
2003 2002
------ ------
(Amounts in thousands)
Weighted average number of common shares
outstanding- basic 15,714 15,791
Incremental shares for assumed conversion of stock
options/warrants - 2
------ ------
Weighted average number of common shares
outstanding-diluted 15,714 15,793
====== ======
Stock options and warrants outstanding at December 31, 2003 to purchase
1,370,276 shares of common stock and at December 31, 2002 to purchase 1,017,096
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 $16.5 million deferred tax asset at December 31, 2003
and $14.9 million at September 30, 2003. 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 historical profitability and its ability to generate
operating income in the future.
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PAYROLL TAXES:
TeamStaff has received notices from the IRS claiming taxes, interest and
penalties due related to payroll taxes from its PEO operations. 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. Until the recent sale of certain assets as
described elsewhere, TeamStaff operated 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 Executive
Retirement Plan (SERP) (See Note 5). When TeamStaff's SERP obligations were
measured at December 31, 2003, the amount of the Projected Benefits Obligation
(PBO) exceeded the recorded SERP liability. These changes resulted in a
comprehensive income net of tax for the three months ended December 31, 2003 of
$4,000, and a comprehensive loss net of tax for the three months ended December
31, 2002 of $68,000. No other sources of comprehensive gains or losses occurred.
WORKERS' COMPENSATION:
As discussed more fully below, TeamStaff's workers' compensation insurance
program is provided by Zurich American Insurance Company. The Zurich program
originally covered the period from March 22, 2002 through March 31, 2003,
inclusive. On March 28, 2003, TeamStaff renewed its workers' compensation
program with Zurich for the period from April 1, 2003, through March 31, 2004,
inclusive. (See Note 3 to the consolidated financial statements) The renewal
program contains a large deductible feature of $0.5 million for each claim, with
a maximum liability cap of the greater of 104.41% of manual premium or $15.6
million. The premium for the program was paid monthly based upon estimated
payroll for the year and is subject to a policy year-end audit. The renewal
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, as part of TeamStaff's line
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 experience. Claims
handling services for the program are provided by GAB Robins, a third party
administrator. At December 31, 2003, TeamStaff has a prepaid current asset of
$5.0 million for the premiums and the prepayments made to the trust for both
years of the Zurich plan.
In conjunction with the sale of its PEO assets to GevityHR, Inc., TeamStaff
requested a pro rata cancellation of this policy effective as of November 17,
2003. TeamStaff entered into a new workers' compensation program with Zurich
covering TeamStaff's temporary employees and, as of January 1, 2004, its
corporate employees. The program is managed by Cedar Hill and claims handling
services for the program are provided by GAB Robins. This program is a
fully-insured, guaranteed cost program that contains no deductible or retention
feature. This new policy will terminate effective April 1, 2004.
(3) DISCONTINUED OPERATIONS:
Effective November 17, 2003, TeamStaff sold certain of the assets of the
subsidiaries through which it operated its PEO business to Gevity HR, Inc. for
the sum of $9.5 million in cash, $2.5 million of which has been placed in
escrow. Under the terms of the asset sale the escrowed payment is scheduled to
be determined approximately 90 days from the November 17, 2003, closing, but is
subject to downward adjustment based on any reduction in annualized
administrative fees payable by the former TeamStaff PEO clients. Any such
downward adjustment may be offset by annualized administrative fees of certain
clients produced by former TeamStaff sales representatives during the 90-day
period. The assets consisted primarily of client contracts, marketing agreements
and internally developed software for use in reconciling certain benefit
provider monthly invoices. As part of the transaction, Gevity HR, Inc. agreed,
among other things, to hire certain former TeamStaff employees assigned to the
PEO division and assume certain of TeamStaff's lease obligations.
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 $27.2 million in
goodwill. During the fiscal quarter ended March 31, 2003, TeamStaff determined
10 of 24
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 $20.4 million, as indicated by an independent outside
valuation, was recognized in the PEO reporting unit for the fiscal quarter ended
March 31, 2003. As a result of the sale of the PEO business, TeamStaff has
written off the remaining goodwill related to the PEO business of $5.4 million.
As of December 31, 2003, TeamStaff has accounted for the discontinued operation
in accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", within the consolidated financial statements and notes to
consolidated financial statements included in this Form 10-Q filing.
The following chart details assets and liabilities held for sale:
December 31, September 30,
2003 2003
------------ -------------
ASSETS
Cash $ 1,167 $ -
Accounts Receivable - 14,191
Other current assets - 353
-------- --------
Total current assets 1,167 14,544
-------- --------
Fixed assets - 4,874
Accumulated depreciation - (2,547)
-------- --------
Net fixed assets - 2,327
-------- --------
Goodwill - 5,390
Intangible assets - 10
Other assets - 178
-------- --------
Total assets $ 1,167 $ 22,449
======== ========
LIABILITIES
Accounts payable $ 969 $ 1,199
Accrued payroll 506 13,905
Accrued expenses and other current liabilities 1,197 859
-------- --------
Total current liabilities 2,672 15,963
-------- --------
Client security deposits - 421
-------- --------
Total liabilities $ 2,672 $ 16,384
======== ========
Cash and accounts payable in the above chart includes obligations to GevityHR,
Inc., predominantly related to PEO client payments received by TeamStaff during
the period immediately following the sale of TeamStaff's PEO-related assets to
Gevity, offset in part by invoices paid by TeamStaff for Gevity's share of
certain costs such as medical insurance premiums and rent
Net revenues for the PEO segment during the period October 1, 2003 through the
date of sale were $11.3 million. Net revenues for the PEO segment for the
quarter ended December 31, 2002 were $23.9 million.
TeamStaff's loss generated from the sale of the PEO assets to GevityHR, Inc.,
combined with the Company's discontinued operations, is $1.3 million for the
first fiscal quarter of 2004. The loss includes the writedown of goodwill and
fixed assets, salary, severance and stay bonus payouts to affected employees,
accruals for losses from lease obligations in offices no longer used by
TeamStaff's continuing operations offset by estimated sublease of unoccupied
office space, investment banking fees and other expenses required to dispose of
the PEO business. The loss is also based on estimates of the anticipated amount
in escrow scheduled to be determined approximately 90 days from date of sale.
The escrow estimate is based on historical client attrition rates. There can be
no assurances that the amount actually received from the $2.5 million in escrow
will be the same as our estimate.
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In determining the loss from the sale of the PEO assets, TeamStaff incurred the
following disposal costs:
Disposal Cost (amounts in thousands):
Termination benefits $ 523
Lease obligations (net of sublease income) 947
Fixed asset write-offs 2,028
Goodwill write-offs 5,390
Investment banking fees 271
All other 603
------
Total $9,762
======
(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 $7.0 million 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
receivable. The facility is subject to certain covenants including, but not
limited to, interest rate coverage of 2.0 to 1.0, total liabilities to tangible
net worth ratio of 2.0 to 1.0, and minimum working capital of $10.0 million.
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 $6.0 million or the sum
of 85% of the qualified accounts receivable less an amount reserved by Fleet.
TeamStaff had used this loan agreement as collateral for 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. In connection with the sale of certain PEO assets to Gevity HR, Inc.,
TeamStaff was required to obtain the consent of Fleet to the transaction. As
part of its agreement to the sale of PEO assets (which served as collateral for
the loan) Fleet required that TeamStaff provide substitution collateral in the
form of a $3.5 million cash deposit at Fleet. This deposit is considered
restricted cash in that until the parties review the loan conditions, we may not
use it for general purposes. The parties are currently in discussion regarding
substituting qualifying receivables as collateral, thereby reducing the amount
of restricted cash.
(5) 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, subject to certain
vesting requirements. Vesting accelerated upon a change of control, as defined
in the SERP. TeamStaff's former President and Chief Executive Officer and its
former Chief Financial Officer were the only SERP participants.
SERP participants also were 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 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 was required
to 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 was
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.
In connection with the change in their employment status, TeamStaff engaged in
negotiations with its former President and Chief Executive Officer and the
former Chief Financial Officer regarding the payment of certain severance
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benefits and the satisfaction of TeamStaff's obligations to each of them under
the SERP and the split dollar life insurance arrangements. On December 31, 2003,
TeamStaff executed an agreement with its former President and Chief Executive
Officer pursuant to which TeamStaff agreed to, among other things, release the
collateral assignment of the split dollar life insurance policy as of December
31, 2003 and to accelerate the payment of certain agreed upon payments under the
SERP in complete satisfaction of TeamStaff's obligations under the SERP.
TeamStaff entered into a similar agreement with its former Chief Financial
Officer effective as of December 30, 2003. That agreement also provided for the
payment of severance and other benefits over time in satisfaction of TeamStaff's
obligations to its former Chief Financial Officer under his severance agreement
effective May 22, 2002. The effect of these settlements with the former Chief
Executive Officer and former Chief Financial Officer in fiscal year 2004 will be
$0.4 million of additional expense related to the SERP. Cash payments of $0.5
million have been made in the first fiscal quarter of 2004.
(6) TREASURY STOCK AND OPTIONS:
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 December 31, 2003, we have repurchased
581,470 shares at an average cost of $4.18 per share for a total cost of
$2,430,000. No treasury stock has been repurchased during this fiscal year. As
of December 31, 2003, 574,470 shares of treasury stock have been retired. During
the quarter ended December 31, 2003, TeamStaff granted 50,000 options at an
average price of $2.08 per share, 136,624 options expired or were cancelled
unexercised and no options were exercised. During the quarter ended December 31,
2002, TeamStaff granted 73,000 options at an average price of $3.00, 35,116
options expired or were cancelled unexercised, and no options were exercised.
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(7) SEGMENT REPORTING:
As a part of continuing operations, TeamStaff operates two different lines of
business: medical staffing and payroll services.
TeamStaff currently provides temporary and permanent staffing for allied
healthcare 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, approximately 75% of which are in the construction
industry. Services provided include the preparation of payroll checks, filing of
payroll taxes, government reports, W-2's, remote processing directly to the
client's offices and certified payrolls.
All corporate expenses, interest expense, as well as depreciation on corporate
assets and miscellaneous charges, are reflected in a separate unit called
Corporate.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. TeamStaff evaluates the performance
of its business lines based on pre-tax income.
The following table represents the financial results for each of TeamStaff's
segments:
(Amounts in thousands)
FOR THE THREE MONTHS ENDED
DECEMBER 31, Medical Payroll
2003 Staffing Services Corporate Consolidated
---- -------- -------- --------- ------------
Revenues $ 8,452 $ 1,286 $ - $ 9,738
Income/(loss) from operations
before income taxes $ 126 $ 628 $(1,622) $ (868)
FOR THE THREE MONTHS ENDED
DECEMBER 31, Medical Payroll
2002 Staffing Services Corporate Consolidated
---- -------- -------- --------- ------------
Revenues $ 17,032 $ 1,425 $ - $ 18,457
Income/(loss) from operations
before income taxes $ 1,140 $ 584 $ (1,266) $ 458
TeamStaff has no revenue derived from outside the United States.
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ITEM2: 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, 2003 and other reports and filings made
by TeamStaff.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
TeamStaff believes its significant critical accounting policies have not changed
since fiscal year end September 30, 2003. See Note 2 of TeamStaff's 2003 annual
report on Form 10-K as well as "Critical Accounting Policies" contained therein
for a detailed discussion on the application of these and other accounting
policies.
REVENUE RECOGNITION
TeamStaff accounts for its revenues in accordance with EITF 99-19, Reporting
Revenues 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 Medical 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 medical staffing are commissions from permanent placements.
Commissions from permanent placements result from the successful placement of a
medical staffing employee to a customer's workforce as a permanent employee.
The Payroll services revenue is recognized as service is rendered and consists
primarily of administrative service fees charged to clients for the processing
of paychecks as well as preparing quarterly and annual payroll related reports.
In connection with its discontinued operation, 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 were invoiced
to clients concurrently with each periodic payroll of its worksite employees.
Historically, TeamStaff had 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 assumed as an
employer, regardless of whether it actually collected its gross billings. After
discussions with Securities and Exchange Commission staff, and with the
concurrence of its auditors, TeamStaff changed its presentation of PEO revenues
from the gross method to an approach that presented its revenues net of worksite
employee payroll costs (net method) primarily because TeamStaff was not
generally responsible for the output and quality of work performed by the
worksite employees. This change in accounting method reduced both the revenue
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and direct costs for the quarter ended December 31, 2003 and 2002 by $41.8
million and $116.3 million, respectively, but had no effect on gross profit,
operating income (loss) or net income (loss). The above amounts have now been
reflected as part of income (loss) from discontinued operations in the
consolidated financial statements. Consistent with this change in revenue
recognition policy, TeamStaff's PEO division direct costs did not include the
payroll costs of its worksite employees. TeamStaff's PEO division direct costs
associated with its revenue generating activities were 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.
WORKERS' COMPENSATION
TeamStaff's current workers' compensation insurance provider is Zurich American
Insurance Company. The program is managed by Cedar Hill Insurance Agency, Inc.,
whose duties include underwriting analysis, loss control services, and other
program management services.
The Zurich program originally covered the period from March 22, 2002 through
March 31, 2003, inclusive. 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 renewal program contains a large deductible
feature of $0.5 million for each claim, with a maximum liability cap of the
greater of 104.41% of manual premium or $15.6 million. The premium for the
program was paid monthly based upon estimated payroll for the year and is
subject to a policy year-end audit. The renewal 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, as part of TeamStaff's line 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 experience. Claims handling services for the
program are provided by GAB Robins, a third party administrator. At December 31,
2003, TeamStaff has a prepaid current asset of $5.0 million for the premiums and
the prepayments made to the trust for both years of the Zurich plan.
In conjunction with the sale of its PEO assets to GevityHR, Inc., TeamStaff
requested a pro rata cancellation of this policy effective as of November 17,
2003. TeamStaff entered into a new workers' compensation program with Zurich
covering TeamStaff's temporary employees. As of January 1, 2004, this program
covers TeamStaff's corporate employees as well. The program is managed by Cedar
Hill and claims handling services for the program are provided by GAB Robins.
This program is a fully-insured, guaranteed cost program that contains no
deductible or retention feature. This new policy will terminate effective April
1, 2004.
TeamStaff's primary workers' compensation insurance provider from January 22,
2001 through March 21, 2002, was Continental Assurance (CNA). 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 $2.1 million, which
TeamStaff pays, up to $8.7 million. Once the $8.7 million is exceeded, TeamStaff
pays 89.5% of paid claims up to $12.1 million. 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 $0.5 million, 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 $0.2 million back
from the original $0.5 million 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 $0.3 million disputed
amount. Accordingly, TeamStaff plans to offset this $0.3 million 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 proposed a fine
against CNA and a refund of $0.2 million in policy issuance costs to TeamStaff.
TeamStaff and CNA are attempting to resolve these matters amicably.
16 of 24
Prior to its reclassification as discontinued operations, TeamStaff recorded 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.
As of December 31, 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, 2003, 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 CONTINUING OPERATIONS
TeamStaff's revenues for the three months ended December 31, 2003 and 2002 were
$9.7 million and $18.5 million respectively, which represents a decrease of $8.7
million or 47.2% from first fiscal quarter 2003 to first fiscal quarter 2004.
The decline is attributable, in part, to the decrease in demand for temporary
medical staffing workers. We believe this relates to current economic conditions
in that hospitals have experienced lower admissions and have stretched their
current permanent staff. This, in turn, has led to less demand for temporary
health care professionals. Longer term, we believe the demand for temporary
medical personnel will increase, driven, in part, by an aging population and an
improving economy. Additionally, we are substantially expanding our sales and
marketing efforts in order to increase our contact with current and prospective
clients.
Direct expenses were $7.5 million for the three months ended December 31, 2003
and $14.9 million for the comparable quarter last year, representing a decrease
of $7.4 million or 49.7%. This decrease is a direct result of the lower
revenues.
Gross profits were $2.2 million and $3.5 million for the quarters ended December
31, 2003 and 2002, respectively, a decrease of $1.3 million or 36.7%. This
decrease is attributed to the reduction in our Medical Staffing business as
discussed above. Gross profits, as a percentage of revenue, were 22.9% and 19.1
% for the quarters ended December 31, 2003 and 2002, respectively. The higher
gross margin from the Payroll Services division is 39.1% of total gross profit
for the first quarter of fiscal 2004 vs. 27.1% in the first quarter of fiscal
2003, increasing TeamStaff's total gross margin percentage.
Selling, general and administrative ("SG&A") expenses for the quarters ended
December 31, 2003 and 2002 were $3.1 million. SG&A as a percentage of revenue
was 31.6% and 16.9% for the quarters ended December 31, 2003 and 2002,
respectively. While revenue declined, SG&A remained flat due to increases in
directors and officers insurance premium and strengthening of bad debt reserves.
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Additionally, while our Medical Staffing division has reduced overall SG&A, we
have increased our product development, sales and marketing efforts in that
division, which has offset reductions in general expenses.
Depreciation and amortization for the quarters ended December 31, 2003 and 2002
were $0.1 million.
Other income decreased $0.1 million from $0.2 million in the first quarter of
fiscal 2003 to $0.1 million in the first fiscal quarter of 2004. This decrease
is attributable to the reduction in late payment fees received by our Medical
Staffing division.
Income tax benefit for the quarter ended December 31, 2003 was $0.3 million
versus income tax expense of $0.2 million for the quarter ended December 31,
2002. These tax benefits in fiscal 2003 are a result of losses from operations.
Loss from continuing operations for the quarter ended December 31, 2003 was $0.5
million or $(0.04) per fully diluted share, as compared to income from
continuing operations of $0.3 million or $0.02 per fully diluted share for the
same period last year. This decrease is due to the decreased performance of
TeamStaff's Medical Staffing division.
Losses from discontinued operations net of tax for the quarters ended December
31, 2003 and 2002 were $1.3 million and $0.2 million, respectively. Loss from
operations from the discontinued business unit net of tax for the quarters ended
December 31, 2003 and 2002 were $0.5 million and $0.2 million respectively.
TeamStaff generated revenue from the PEO business for only six weeks in the
first fiscal quarter of 2004 while certain costs associated with the operation
of that business unit continued for the full fiscal quarter. Losses on disposal
net of taxes are $0.8 million for the quarter ended December 31, 2003. The loss
includes the writedown of goodwill and fixed assets, salary, severance and stay
bonus payouts to affected employees, accruals for losses from lease obligations
in offices no longer used by TeamStaff's continuing operations offset by
estimated sublease of unoccupied office space, investment banking fees and other
expenses required to dispose of the PEO business. The loss is also based on
estimates of the anticipated amount in escrow scheduled to be determined
approximately 90 days from date of sale. The escrow estimate is based on
historical client attrition rates. There can be no assurances that the amount
actually received from the $2.5 million in escrow will be the same as our
estimate.
Net loss for the quarter ended December 31, 2003 was $1.8 million or $(0.12) per
fully diluted share, as compared to net income of $0.1 million or $0.01 per
fully diluted share for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities in the first three months of fiscal 2004
was virtually unchanged compared to $2.2 million used in the same period of
fiscal 2003. As part of the sale of the PEO business, TeamStaff received $7.0
million in cash. Use of cash during the first fiscal quarter of 2004 included
additional cash classified as restricted cash related to our letter of credit
provided by Fleet in connection with our Zurich workers' compensation program,
increased other current assets related to the receivable for the escrow balance
from Gevity in connection with the sale of the PEO business and workers'
compensation payments, increased other assets related to increases in
TeamStaff's deferred tax asset, and losses from continuing and discontinued
operations.
As stated in Note 4 of the notes to consolidated financial statements, TeamStaff
is in discussions with Fleet to substitute qualifying receivables as collateral
for the letter of credit, thereby reducing the amount of restricted cash.
Cash used in investing activities was virtually unchanged compared to $0.1
million this quarter last year.
The cash used in financing activities was virtually unchanged compared to $0.5
million this quarter last year. Last years spending was for the repurchasing
137,900 shares of TeamStaff stock.
As of December 31, 2003, TeamStaff had unrestricted cash and cash equivalents of
$4.3 million and net accounts receivable of $4.0 million.
As of December 31, 2003, TeamStaff had working capital of $12.2 million.
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Management of TeamStaff believes that its existing cash will be sufficient to
support cash needs for the next twelve months.
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 December 31, 2003, we have repurchased
581,470 shares at an average cost of $4.18 per share for a total cost of
$2,430,000. No treasury stock has been repurchased during fiscal quarter ended
December 31, 2003. As of December 31, 2003, 574,470 shares of treasury stock
have been retired.
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 Chief Financial Officer, 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
Chief Financial Officer 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:
In response to the passage of the Sarbanes-Oxley Act of 2002, TeamStaff, among
other actions, formed a Disclosure Committee comprised of various members of our
management team. The Disclosure Committee is charged with, among other things,
reviewing and developing policies and procedures to enhance our disclosure
controls and procedures as well as with reviewing our periodic reports and other
public disclosures. In September, 2003, representatives of the Disclosure
Committee and the Chief Financial Officer met with consultants engaged by
TeamStaff to formalize the process for compliance with Section 404 of the
Sarbanes Oxley Act of 2002. The Disclosure Committee anticipates that the sale
of the assets of the PEO division will have an impact on the overall design of
its internal control framework and will refine the Section 404 compliance
process to reflect the cessation of this business.
Other than as described above, there have been no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the Evaluation Date set forth above.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
TeamStaff's subsidiary, BrightLane, is party to a suit brought by one of its
former shareholders (Atomic Fusion, Inc. v. BrightLane.com, Inc. Civil Action No
ONS02246OE, Fulton County State Court, Georgia). The plaintiff seeks damages for
alleged unpaid contractual services provided to BrightLane, alleging that the
shares (both in number and value) of BrightLane stock provided to the plaintiff
in payment of services were inadequate to pay for the alleged agreed upon value
of services. TeamStaff and BrightLane intend to defend themselves vigorously in
this matter and believes that they have meritorious and valid defenses to
plaintiff's claims. In addition, the former shareholders of BrightLane have
placed approximately 158,000 shares in escrow to provide indemnification for any
claims made by TeamStaff under the acquisition agreement, subject to a $0.3
million threshold. Some or all of these shares may be canceled in an amount
equal to the amount of any claim or expense in excess of the threshold. Under
the terms of the agreements between TeamStaff and BrightLane, the value of the
shares held in escrow is $8.10/share. It is possible that an award in favor of
Atomic Fusion would result in monetary damages against TeamStaff, which could
not be recovered under the indemnification provisions because cancellation of
the shares in escrow is the sole method of satisfying these indemnification
obligations. On November 20, 2003, the Fulton County Superior Court (to which
the action was transferred) awarded summary judgment in BrightLane's favor on
all counts of Atomic Fusion's complaint except for a beach of contract claim. We
intend to continue our defense in the matter.
As a commercial enterprise and employer and with respect to its
employment-related businesses in particular, TeamStaff is engaged in litigation
from time to time during the ordinary course of business in connection with
employment-relations issues, workers' compensation and other matters. Generally,
TeamStaff is entitled to indemnification or repayment from its former PEO
clients for claims brought by worksite employees related to their employment.
However, there can be no assurance that the client employer will have funds or
insurance in amounts to cover any damages or awards, and as co-employer,
TeamStaff may be subject to liability.
TeamStaff is engaged in no other litigation, the effect of which would be
anticipated to have a material adverse impact on TeamStaff's financial
conditions or results of operations.
ITEM 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
None.
ITEM 5. OTHER INFORMATION
None.
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
The following reports were filed during the quarter ended December 31,
2003.
Date of Report Item Reported
- -------------- -------------
November 17, 2003 Item 5 Other Events/Item 7 Financial Statements and Exhibits (in connection with
TeamStaff's entry into an agreement for the sale of the assets of its PEO division to
Gevity HR, Inc.
December 15, 2003 Item 5 Other Events/ Item 7 Financial Statements and Exhibits (in connection with
TeamStaff's appointment of Timothy Nieman as President of its TeamStaff Rx unit)
December 23, 2003 Item 7 Financial Statements and Exhibits/ Item 12 Results of Operations and Financial
Condition (in connection with TeamStaff's earnings release for the fiscal year ended
September 30, 2003)
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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
President and Chief Executive Officer
/s/ Rick Filippelli
-------------------
Rick Filippelli
Vice President Finance and Chief
Financial Officer
Date: February 10, 2004
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