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, 2005
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
19,278,270 shares of Common Stock, par value $.001 per share, were outstanding
as of December 31, 2005 and 19,278,270 shares of Common Stock, par value $.001
per share, were outstanding as of February 10, 2006.
TEAMSTAFF, INC. AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 2005
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE NO.
------------------------------ --------
Item 1. Consolidated Balance Sheets as of
December 31, 2005 (Unaudited) and
September 30, 2005 3
(Unaudited) Consolidated Statements of Operations and
Comprehensive Income (Loss) for the three months
ended December 31, 2005 and 2004 5
(Unaudited) Consolidated Statements of Cash Flows for the
three months ended December 31, 2005 and 2004 6
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 24
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits 26
Signatures 27
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
2
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(PAGE 1 OF 2)
DECEMBER 31, SEPTEMBER 30,
ASSETS 2005 2005
------ ------------------- ---------------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $247 $1,304
Accounts receivable, net of allowance for doubtful
accounts of $103 and $41 at December 31, 2005
and September 30, 2005, respectively 10,857 9,470
Deferred tax asset 717 634
Prepaid workers' compensation 1,480 1,461
Other current assets 1,448 1,155
------------------- ---------------------
Total current assets 14,749 14,024
------------------- ---------------------
EQUIPMENT AND IMPROVEMENTS:
Furniture and equipment 3,360 3,360
Computer equipment 522 516
Computer software 1,250 1,250
Leasehold improvements 172 177
------------------- ---------------------
5,304 5,303
Less accumulated depreciation and amortization (4,144) (4,037)
------------------- ---------------------
Equipment and improvements, net 1,160 1,266
------------------- ---------------------
DEFERRED TAX ASSET, net of current portion 17,771 17,848
TRADENAME 4,199 4,199
GOODWILL 10,281 10,281
OTHER ASSETS:
Prepaid workers' compensation, net of current portion 2,200 2,200
Other assets 248 236
------------------- ---------------------
Total other assets 2,448 2,436
------------------- ---------------------
TOTAL ASSETS $50,608 $50,054
=================== =====================
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
3
TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(PAGE 2 OF 2)
LIABILITIES AND SHAREHOLDERS' EQUITY DECEMBER 31, SEPTEMBER 30,
------------------------------------ 2005 2005
-------------------- ----------------------
(unaudited)
CURRENT LIABILITIES:
Bank line of credit $5,419 $4,006
Notes payable 1,790 1,543
Current portion of capital lease obligations 122 120
Accrued workers' compensation 1,750 2,050
Accrued payroll 1,535 1,512
Accrued pension liability 210 294
Accounts payable 1,276 1,537
Accrued expenses and other current liabilities 1,681 1,960
-------------------- ----------------------
Total current liabilities 13,783 13,022
CAPITAL LEASE OBLIGATIONS, net of current portion 189 220
NOTES PAYABLE, net of current portion 1,500 1,500
ACCRUED PENSION LIABILITY, net of current portion 444 578
LIABILITIES FROM DISCONTINUED OPERATIONS 348 422
-------------------- ----------------------
Total liabilities 16,264 15,742
-------------------- ----------------------
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 19,285 at December 31, 2005 and September 30, 2005;
outstanding 19,278 at December 31, 2005 and September 30, 2005 19 19
Additional paid-in capital 68,620 68,615
Retained (deficit) (34,158) (34,140)
Accumulated comprehensive losses (113) (158)
Treasury stock, 7 shares at cost at December 31, 2005 and
September 30, 2005 (24) (24)
-------------------- ----------------------
Total shareholders' equity 34,344 34,312
-------------------- ----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $50,608 $50,054
==================== ======================
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
4
TEAMSTAFF, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the three months ended
December 31,
2005 2004
-------------------- ---------------------
REVENUES $20,883 $10,201
DIRECT EXPENSES 16,572 7,612
-------------------- ---------------------
Gross profit 4,311 2,589
OPERATING EXPENSES 4,052 3,134
DEPRECIATION AND AMORTIZATION 122 148
-------------------- ---------------------
Income (loss) from operations 137 (693)
-------------------- ---------------------
OTHER INCOME (EXPENSE):
Interest income 3 20
Interest expense (177) (20)
Other income 39 60
-------------------- ---------------------
(135) 60
-------------------- ---------------------
Income (loss) from continuing operations before tax 2 (633)
INCOME TAX (EXPENSE) BENEFIT (1) 239
-------------------- ---------------------
Income (loss) from continuing operations 1 (394)
-------------------- ---------------------
LOSS FROM DISCONTINUED OPERATIONS:
Loss from operations, net of tax benefit of $12 and $115 for
quarters ended December 31, 2005 and 2004, respectively (19) (186)
Income from disposal, net of tax benefit of $0 for quarter
ended December 31, 2004 - 1
-------------------- ---------------------
(19) (185)
-------------------- ---------------------
Net loss (18) (579)
OTHER COMPREHENSIVE INCOME (LOSS):
Minimum pension liability adjustment, net of tax 45 58
-------------------- ---------------------
COMPREHENSIVE INCOME (LOSS) $27 $(521)
==================== =====================
LOSS PER SHARE - BASIC AND DILUTED
Loss from continuing operations $0.00 $(0.02)
Loss from discontinued operations 0.00 (0.01)
-------------------- ---------------------
Net loss $0.00 $(0.03)
==================== =====================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 19,278 17,040
==================== =====================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND EQUIVALENTS
OUTSTANDING - DILUTED 19,278 17,040
==================== =====================
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
5
TEAMSTAFF, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(PAGE 1 OF 2)
For the three months ended
December 31,
2005 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations $1 $(394)
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities, net of acquired businesses:
Deferred income taxes (6) (343)
Depreciation and amortization 122 148
Compensation expense related to director stock option grants 5 -
Provision for doubtful accounts 51 17
Changes in operating assets and liabilities, net of acquired
businesses:
(Increase) in accounts receivable (1,438) (1,566)
Decrease (increase) in other current assets 85 (16)
(Increase) in other assets (12) (26)
(Decrease) in accounts payable, accrued payroll, accrued
expenses and other current liabilities (817) (131)
(Decrease) in pension liability (218) (215)
Change in net assets from disposal of discontinued operations (93) (382)
------------------ ------------------
Net cash used in operating activities (2,320) (2,908)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, leasehold improvements and software (17) (25)
Payment for acquisition of Nursing Innovations - (1,850)
------------------ ------------------
Net cash used in investing activities (17) (1,875)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving line of credit 21,450 -
Payments on revolving line of credit (20,037) -
Principal payments on notes payable (149) -
Repayments on capital leases obligations (29) (64)
Net proceeds from issuance of common stock, net of expense - 3,973
Net comprehensive income on pension 45 58
------------------ ------------------
Net cash provided by financing activities 1,280 3,967
------------------ ------------------
Net (decrease) in cash and cash equivalents (1,057) (816)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,304 3,060
------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $247 $2,244
================== ==================
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
6
TEAMSTAFF, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(PAGE 2 OF 2)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $177 $20
=============== ===============
Income taxes $24 $60
=============== ===============
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITY:
The Company recorded $396,000 in notes payable related to the funding of the RS
Staffing workers' compensation insurance policy renewal during the three months
ended December 31, 2005.
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
7
TEAMSTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005(UNAUDITED)
(1) ORGANIZATION AND BUSINESS:
TeamStaff, Inc., a New Jersey corporation ("TeamStaff" or the "Company"), was
founded in 1969 as a payroll service company and has evolved into a national
provider of payroll and temporary and permanent medical and administrative
staffing services. TeamStaff's corporate headquarters is in Somerset, New
Jersey. TeamStaff has offices located in Clearwater, Florida, Memphis,
Tennessee, Monroe, Georgia and Atlanta, Georgia.
When we use the term "TeamStaff," or the "Company" we mean TeamStaff and its
subsidiaries. Currently, we operate only through the parent corporation,
TeamStaff, Inc. (including its DSI Payroll Services division), and our TeamStaff
Rx, Inc. (including its Nursing Innovations division) and RS Staffing Services,
Inc. wholly-owned subsidiaries. TeamStaff's other wholly-owned subsidiaries
include 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. As a result of the sale of our PEO business in fiscal
year 2004, most of these subsidiaries are not actively operating.
TeamStaff provides specialized medical, nursing and administrative staffing and
payroll administration services. TeamStaff provides allied healthcare and
nursing professionals and administrative personnel through three staffing units.
The Company's TeamStaff Rx subsidiary operates throughout the United States and
specializes in providing allied medical employees and nurses, especially
"travel" staff (typically on a thirteen-week assignment basis). Allied medical
staff includes MRI technicians, mammographers, dosimetrists, ultrasound staff
and physicists. TeamStaff Rx places temporary employees for over 250 clients.
TeamStaff Rx's Nursing Innovations unit provides travel nursing, per diem
nursing, temporary-to-permanent nursing and permanent nursing placement
services. Nursing Innovations places temporary employees for over 85 clients.
The Company's RS Staffing subsidiary specializes in providing medical and office
administration/technical professionals through nationwide Schedule contracts
with both the General Services Administration and Veterans Affairs. RS Staffing
places temporary employees at over 75 facilities.
Through its DSI Payroll Services division, TeamStaff provides customized payroll
management and tax services, primarily to the construction industry. DSI's
service offerings include payroll check processing via web, phone or fax,
federal and state quarterly and year-end tax compliance reports, W-2 processing
and financial management reports, including certified payroll reports and custom
software interfaces. DSI processes payrolls for over 700 clients that have more
than 30,000 employees.
TeamStaff, Inc. was organized under the laws of the State of New Jersey on
November 25, 1969 and maintains its executive offices at 300 Atrium Drive,
Somerset, New Jersey 08873 where its telephone number is (732) 748-1700.
BASIS OF PRESENTATION:
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. 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 as of the date of acquisition, all of
which are wholly owned. All significant intercompany balances and transactions
have been eliminated in the consolidated financial statements.
Certain prior period amounts have been reclassed to conform to current year
presentation.
8
(2) SIGNIFICANT ACCOUNTING POLICIES:
RECENTLY ISSUED ACCOUNTING STANDARDS AFFECTING THE COMPANY:
In April 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 47 ("FIN 47"), "Accounting for Conditional Asset Retirement
Obligations -- An Interpretation of FASB Statement No. 143." FIN 47 clarifies
the terms of FASB Statement No. 143 and requires an entity to recognize a
liability for a conditional asset retirement obligation if the entity has
sufficient information to reasonably estimate its fair value. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
The Company believes that the adoption of FIN 47 will have no material impact on
its financial statements.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" - a replacement of APB Opinion No. 20 (Accounting Changes) and FASB
No. 3 (Reporting Accounting Changes in Interim Financial Statements), which
changed the requirements for the accounting for and reporting of a change in
accounting principle. This statement requires retrospective application to prior
periods' financial statements of changes in accounting principle unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. When it is impracticable to determine the period- specific
effects of an accounting change on one or more individual prior periods
presented, this statement requires that the new accounting principle be applied
to the balances of assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable and that a
corresponding adjustment be made to the opening balance of retained earnings (or
other appropriate components of equity or net assets in the statement of
financial position) for that period rather than being reported in an income
statement. When it is impracticable to determine the cumulative effect of
applying a change in accounting principle to all prior periods, this statement
requires the new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable. Statement No. 154 is effective
for accounting changes and error corrections made in fiscal years beginning
after December 15, 2005. The Company will comply with the provisions of FAS 154
although the impact of such adoption is not determinable at this time.
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 and SAB 104, Revenue
Recognition. 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; 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.
Staffing (whether medical or administrative) revenue is recognized as service is
rendered. TeamStaff typically bills its clients for staffing services 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, commissions from permanent placements are
included in revenue related to Medical Staffing. Commissions from permanent
placements result from the successful placement of a medical staffing employee
to a customer's workforce as a permanent employee.
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.
Direct costs of the temporary staffing business include wages, employment
related taxes and reimbursable expenses. Payroll services' direct costs include
salaries and supplies associated with the processing of the payroll service.
STOCK-BASED COMPENSATION
Effective October 1, 2005, the Company's 2000 Employee Stock Option Plan and
2000 Non-Executive Director Stock Option Plan are accounted for in accordance
with the recognition and measurement provisions of Statement of Financial
Accounting Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS
123(R)"), which
9
replaces FAS No. 123, Accounting for Stock-Based Compensation, and supercedes
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees, and related interpretations. FAS 123 (R) requires compensation
costs related to share-based payment transactions, including employee stock
options, to be recognized in the financial statements. In addition, the Company
adheres to the guidance set forth within Securities and Exchange Commission
("SEC") Staff Accounting Bulletin ("SAB") No. 107, which provides the Staff's
views regarding the interaction between SFAS No. 123(R) and certain SEC rules
and regulations and provides interpretations with respect to the valuation of
share-based payments for public companies.
Prior to October 1, 2005, the Company accounted for similar transactions in
accordance with APB No. 25 which employed the intrinsic value method of
measuring compensation cost. Accordingly, compensation expense was not
recognized for fixed stock options if the exercise price of the option equaled
or exceeded the fair value of the underlying stock at the grant date.
While FAS No. 123 encouraged recognition of the fair value of all stock-based
awards on the date of grant as expense over the vesting period, companies were
permitted to continue to apply the intrinsic value-based method of accounting
prescribed by APB No. 25 and disclose certain pro-forma amounts as if the fair
value approach of SFAS No. 123 had been applied. In December 2002, FAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of SFAS No. 123, was issued, which, in addition to providing alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation, required more prominent pro-forma disclosures
in both the annual and interim financial statements. The Company complied with
these disclosure requirements for all applicable periods prior to October 1,
2005.
In adopting FAS 123(R), the Company applied the modified prospective approach to
transition. Under the modified prospective approach, the provisions of FAS 123
(R) are to be applied to new awards and to awards modified, repurchased, or
cancelled after the required effective date. Additionally, compensation cost for
the portion of awards for which the requisite service has not been rendered that
are outstanding as of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective date. The
compensation cost for that portion of awards shall be based on the grant-date
fair value of those awards as calculated for either recognition or pro-forma
disclosures under FAS 123.
As a result of the adoption of FAS 123 (R), the Company's results for the three
month period ended December 31, 2005 include share-based compensation expense
totaling approximately $5,000. Such amounts have been included in the
Consolidated Statements of Operations within operating expenses. During the
three month period ended December 31, 2005, the Company recognized related tax
benefits associated with its share-based compensation arrangements totaling
approximately $2,000.
The following table addresses the additional disclosure requirements of 123(R)
in the period of adoption. The table illustrates the effect on net income and
earnings per share as if the fair value recognition provisions of FAS No. 123
had been applied to all outstanding and unvested awards in the prior year
comparable period.
Three Months Ended
(Amounts in thousands, except per share data) December 31, 2004
------------------
Net loss, as reported $(579)
Add: Total stock-based employee compensation expense included
in reported net income, net of related tax effects -
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (64)
Pro forma net loss $(643)
Loss per share:
Basic and diluted-as reported $(0.03)
Basic and diluted-pro forma $(0.04)
10
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,
(Amounts in thousands) 2005 2004
------------ ---------
Weighted average number of common shares
outstanding-basic 19,278 17,040
Incremental shares for assumed conversion of stock
options/warrants - -
Weighted average number of common shares
outstanding-diluted 19,278 17,040
Stock options and warrants outstanding at December 31, 2005 to purchase
1,932,000 shares of common stock and at December 31, 2004 to purchase 1,943,742
shares of common stock were not included in the computation of diluted earnings
per share as they were antidilutive.
INCOME TAXES
TeamStaff has recorded an $18.5 million deferred tax asset at December 31, 2005
and September 30, 2005, respectively. This represents management's estimate of
the income tax benefits to be realized upon utilization of its net operating
losses and tax credits as well as temporary differences between the financial
statement and tax bases of certain assets and liabilities, for which management
believes utilization to be more likely than not. 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. The acquisitions of RS Staffing and Nursing
Innovations, two historically profitable companies, coupled with an improving
business climate for temporary medical staffing will help drive TeamStaff's
return to profitability. Management believes it will generate enough future
profits to utilize the carrying value of its deferred tax asset.
ACCUMULATED COMPREHENSIVE LOSS AND MINIMUM PENSION LIABILITY ADJUSTMENT
A minimum pension liability adjustment is required when the actuarial present
value of accumulated benefit obligation exceeds the plan assets and accrued
pension liabilities. The minimum pension liability adjustment, net of income
taxes, is recorded as a component of "Accumulated comprehensive income" on the
balance sheet and is reflected in Statement of Comprehensive Income as "Minimum
pension liability adjustment, net of tax". The Company used a discount rate of
3.0% each to calculate the projected benefit obligation and the periodic benefit
cost calculation for the three months ended December 31, 2005. The Company
recorded a gain from such adjustment, net of tax of $45,000 and $58,000 for the
three month period ended December 31, 2005 and 2004, respectively. At December
31, 2005 and September 30, 2005, accumulated comprehensive loss on the balance
sheet reflects the cumulative balance due to the minimum pension liability
adjustment.
(3) BUSINESS COMBINATIONS:
ACQUISITION OF RS STAFFING SERVICES, INC.:
On June 8, 2005 TeamStaff, Inc. completed its acquisition of RS Staffing
Services, Inc., a privately held Georgia corporation, pursuant to the terms of a
Stock Purchase Agreement dated as of May 26, 2005. RS Staffing, headquartered in
Monroe, GA, specializes in providing medical and office administration/technical
professionals through nationwide Schedule contracts with both the General
Services Administration ("GSA") and Veterans Affairs ("VA"). Closing of the
transaction was completed for accounting purposes as of June 4, 2005. TeamStaff
acquired all of the capital stock of RS Staffing for a purchase price of $8
million consisting of $3.25 million in cash, $3 million in a 2-year note, and
$1.75 million in TeamStaff common stock (1,206,896 shares). The shares are
restricted shares and can only be sold in accordance with the provisions of Rule
144 of the Securities Act of 1933. The Sellers guaranteed a minimum net worth of
$1.4 million and any amounts above or below this amount after a
11
finalized accounting are subject to a purchase price adjustment. In addition,
there is a one-year earn out of up to $2 million based upon the achievement of
specified performance targets for the business. Principals of RS Staffing,
namely Roger Staggs and Barry Durham, initially continued as management of RS
pursuant to employment agreements with each of them. Barry Durham resigned his
position effective as of December, 2005. The acquisition agreement also provided
for mutual indemnification for breaches of representations and warranties.
Further, the note issued by TeamStaff as part of the purchase price bears
interest at 5% per annum, is payable one half in one year and the remainder in
two years, and is secured by a lien on certain assets of the business,
subordinate to any liens granted in connection with financing for the
transaction. In connection with the acquisition, TeamStaff obtained financing
from PNC Bank, National Association.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed:
(Amounts in thousands)
Current assets $5,865
Property, plant, and equipment 204
Goodwill 6,890
Other assets 75
------------
Total assets acquired 13,034
------------
Current liabilities 4,680
Long term liabilities 39
------------
Total liabilities assumed 4,719
------------
Net assets acquired $8,315
============
Included in Goodwill is $315,000 of expenses directly related to the
acquisition.
ACQUISITION OF CERTAIN ASSETS OF NURSING INNOVATIONS, INC.:
On November 14, 2004, TeamStaff's medical staffing subsidiary, TeamStaff Rx,
Inc. acquired the assets of the staffing business of Nursing Innovations, Inc.,
a Memphis, Tennessee-based provider of travel and per diem nurses. The terms of
the agreement provided for TeamStaff Rx to acquire certain assets from Nursing
Innovations and its primary shareholder. The combined purchase price was
approximately $1.8 million, of which $180,000 was held in an escrow account for
a period of one year to provide security for the sellers' indemnification
obligations. The purchase price was subject to downward adjustment based upon
the percentage of former Nursing Innovations business that successfully
transferred to TeamStaff Rx. It was determined that no additional purchase price
adjustment was due after the first year and on November 18, 2005, we authorized
the release of the $180,000 of funds held in escrow to the sellers. In addition,
there are certain deferred purchase price provisions which may increase the
total purchase price based upon the performance of the former Nursing
Innovations business during the two years following closing of the transaction.
It was determined that no additional purchase price was due for year one of the
two year earn-out period.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed:
(Amounts in thousands)
Property, plant, and equipment $ 185
Goodwill 1,681
-------------
Total assets acquired 1,866
-------------
Total liabilities assumed -
-------------
Net assets acquired $1,866
=============
Included in Goodwill is $66,000 of expenses directly related to the acquisition.
The following unaudited pro forma information presents a summary of consolidated
financial results of operations of the Company and acquired companies as if the
acquisitions had occurred on October 1, 2004, the beginning of the earliest
period presented. The unaudited pro forma results are not necessarily indicative
of what would have actually occurred had the acquisitions been in effect for the
period presented.
12
(Amounts in thousands, except per share data). Three Months Ended
December 31, 2004
------------------
Revenues $24,711
Net loss $(400)
Earnings per share - basic and diluted $(0.02)
The number of common shares outstanding used to calculate pro forma earnings per
share have been adjusted to include 2,392,000 shares issued as the source of
financing for the Nursing Innovations acquisition and 1,206,896 shares issued as
part of the RS Staffing Services acquisition, as if these shares had been
outstanding as of the earliest period presented.
This table does not reflect cost savings of approximately $77,000 for the three
months ended December 31, 2004 that would have potentially been eliminated due
to cost synergies between the companies as part of the acquisition.
(4) DISCONTINUED OPERATIONS:
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. ("Gevity") for the sum of $9.5 million in
cash, $2.5 million of which had been placed in escrow.
On April 23, 2004, TeamStaff and Gevity agreed that TeamStaff's share of the
$2.5 million placed in escrow was $2.25 million. That amount was released from
escrow for TeamStaff's benefit. When added to the $7.0 million previously paid
by Gevity, the total purchase price paid was $9.25 million. Concurrently,
TeamStaff settled obligations to Gevity related to payroll for TeamStaff's
internal employees under a co-employment arrangement of $1.2 million, and
settled obligations predominantly related to PEO client payments received by
TeamStaff during the period following the sale, offset in part by invoices paid
by TeamStaff on Gevity's behalf, totaling $1.1 million. Additionally, effective
May 2, 2004, TeamStaff sold certain of the assets of TeamStaff Solutions, Inc.,
the subsidiary through which it operated its temporary technical staffing
business, to Metro Tech Consulting Services, Inc. for the sum of $65,000.
There were no revenues for the PEO segment for the three months ended December
31, 2005 and 2004.
The following chart details assets and liabilities from discontinued operations:
December 31, September 30,
(amounts in thousands) 2005 2005
---------------------- --------------- --------------
ASSETS $ - $ -
------ =============== ==============
LIABILITIES
-----------
Accrued expenses and other current liabilities $348 $422
--------------- --------------
Total current liabilities 348 422
--------------- --------------
Total liabilities $348 $422
=============== ==============
Liability Balances September 30, Expensed Paid This December 31,
(amounts in thousands) 2005 Balance This Quarter Quarter 2005 Balance
--------------- -------------- -------------- ---------------
Accrued expenses and other current liabilities $422 $31 $(105) $348
--------------- -------------- -------------- ---------------
Total $422 $31 $(105) $348
=============== ============== ============== ===============
(5) COMMITMENT AND CONTINGENCY:
NEW LEASE AGREEMENT:
On November 18, 2005, TeamStaff, Inc., as tenant, and One Peachtree Pointe
Associates, LLC, as landlord, entered into a lease for approximately 2,998
rentable square feet located at 1545 Peachtree St NE, Atlanta, Georgia. The
lease is for a sixty-five month term, with an anticipated commencement date of
February 1, 2006. The premises will be used primarily as office space for
TeamStaff's corporate executive and information technology staff. The total
value of the commitment over the life of the lease is approximately $450,000.
The Company is also responsible for its share in increase to Operating Costs (as
defined in the Lease) after the first lease year. TeamStaff's current office
13
lease in Atlanta, Georgia expired on November 30, 2005 but was extended on a
month to month basis until January 31, 2006.
PAYROLL TAXES:
TeamStaff has received notices from the IRS claiming taxes, interest and
penalties due related to payroll taxes predominantly from its former PEO
operations. TeamStaff has also received notices from the IRS reporting
overpayments of taxes. Management believes that these notices are predominantly
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 sale of certain assets as described in Note 4, 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
has also received notices from the Social Security Administration claiming
variances in wage reporting compared to IRS transcripts. TeamStaff believes the
notices from the Social Security Administration are directly related to the IRS
notices received. TeamStaff has retained the services of Ernst & Young LLP as a
consultant to assist it in resolving certain of these matters with the IRS and
Social Security Administration. TeamStaff believes that after the IRS applies
all the funds correctly, any significant interest and penalties will be abated;
however, there can be no assurance that each of these matters will be resolved
favorably.
(6) WORKERS' COMPENSATION:
PREPAID WORKERS' COMPENSATION:
TeamStaff's current 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. The renewal program
contained 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 was subject to a policy year-end audit. The renewal
program was collateralized by a letter of credit inuring to the benefit of
Zurich, and cash held in a trust account by a third party. A letter of credit
for $3.5 million was secured through Fleet Bank, as part of TeamStaff's line of
credit. Effective March 31, 2004, Zurich agreed to a reduction in the amount of
the letter of credit to $1.8 million. As a result, on March 31, 2004, TeamStaff
secured a new letter of credit in the amount of $1.8 million with SunTrust Bank.
Effective March 31, 2005, Zurich withdrew the requirement for a letter of credit
and $1.8 million of restricted cash held in the form of a certificate of deposit
at SunTrust Bank was released to TeamStaff. 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 are
made from the trust. Assets in the trust may be adjusted from time to time based
on program experience. GAB Robins, a third party administrator, provides claims
handling services for the program. In conjunction with the sale of its PEO
assets to GevityHR, Inc., TeamStaff requested and received a pro rata
cancellation of the policy described immediately above as of November 17, 2003.
On May 12, 2004, TeamStaff received $963,000 in return premiums from Zurich for
the policy period April 1, 2002 through November 17, 2003. A reduction of the
prepaid asset in the amount of $0.5 million was recorded in the fiscal year
ended September 30, 2005 as a result of adverse claims development for the
period April 1, 2002 through November 17, 2003. This write-down was
predominantly driven by one claim that caused the Company to increase its
maximum exposure to equal the policy deductible. At December 31, 2005, TeamStaff
has a prepaid asset of $3.6 million for the premiums and the prepayments made to
the trust for both years of the Zurich plan TeamStaff estimates that, of the
remaining prepaid asset, approximately an additional $1.4 million in return
premiums will be received within the next twelve months, and this is reflected
on the balance sheet at December 31, 2005 as a current asset.
Effective November 17, 2003, TeamStaff then 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 GAB Robins provide claims handling services. This program was a fully
insured, guaranteed cost program that contained no deductible or retention
feature (the "Zurich Policy"). The Zurich Policy expired April 1, 2004.
Effective April 1, 2004, TeamStaff entered into a new workers' compensation
program with Zurich for the period April 1, 2004 through March 31, 2005
identical to the Zurich Policy. Effective April 1, 2005, TeamStaff renewed its
workers' compensation program with Zurich for the period from April 1, 2005
through March 31, 2006. This renewal is also identical to the Zurich Policy.
As of December 31, 2005, 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
14
from our workers' compensation insurance carriers that may include loss data for
claims incurred during prior policy periods. 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, therefore 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.
ACCRUED WORKERS' COMPENSATION:
As was previously reported in TeamStaff's Exchange Act filing on Form 8-K, filed
on October 20, 2005, the Company settled certain disputed workers' compensation
insurance premium and loss claims totaling nearly $4.4 million for $2.05 million
payable over two (2) years (subject to certain prepayment requirements), and was
fully reserved as of the Company's June 30, 2005 balance sheet. The settlement
was entered on or about October 10, 2005. In or about January, 2001, TeamStaff
purchased from Transportation Insurance Company ("TPIC"), Transcontinental
Insurance Company ("TCIC"), Continental Casualty Company ("CCC"), CNA Claimplus,
Inc. ("ClaimPlus") and North Rock Insurance Company Limited ("North Rock")
(together, the "CNA Entities") a workers' compensation insurance program to
provide workers' compensation insurance and claims services for TeamStaff's
professional employee operations nationwide (the "Program"). The Program
provided TeamStaff with workers' compensation insurance coverage and claims
services for all covered claims incurred during the period from January 22, 2001
to January 22, 2002 (the "Initial Policy Term"). TeamStaff secured its
obligations under the Program through its February 5, 2001 purchase of an
Exposure Buyback Policy numbered EBP 006/001 from North Rock (the "Exposure
Buyback Policy"), also covering the period from January 22, 2001 to January 22,
2002. On or around January 22, 2002, TeamStaff purchased from TCIC and RSKCo an
extension of the Program (the "Program Extension"). The Program Extension
provided TeamStaff with workers' compensation insurance coverage and claims
services for all covered claims incurred during the period from January 22, 2002
to March 22, 2002 (the "Extended Policy Term").
TeamStaff contested the CNA Entities' accounting of the amount due and owing
under the Program, the Program Extension and the Exposure Buyback Policy, and of
the ultimate losses projected to be due from TeamStaff. TeamStaff additionally
asserted that the CNA Entities committed certain errors in claims management
which unjustifiably increased the losses incurred under the Program and the
Program Extension, and inappropriately included certain non-recoverable items in
the premium calculations for both the Program and the Program Extension, thereby
entitling TeamStaff to a credit against the amounts ultimately due and owing
under the Program, the Program Extension and the Exposure Buyback Policy. The
CNA Entities maintained that there was due and owing from TeamStaff the sum of
$1,824,975 in premiums, deductibles, claims services fees, losses and allocated
loss adjustment expenses under the Program and the Program Extension, and
$835,596 in premiums and losses under the Exposure Buyback Policy. The CNA
Entities projected that TeamStaff would be liable for an additional $1,181,301
of losses under the Program and the Program Extension, and an additional
$556,176 of losses under the Exposure Buyback Policy. The aggregate amounts
totaled $4,398,048.
The settlement fully and completely resolves, without litigation, all of the
issues addressed above on the material terms described below and in the
Agreement, without admitting and, in fact, expressly denying, the allegations
and claims each party could have made against the other. Under the settlement,
TeamStaff will pay the CNA Entities the sum of $2,050,000, plus interest at a
rate of 6.0%, as follows: (1) $300,000 upon execution of the Agreement; (2)
$250,000 every 90 days thereafter, plus interest on the unpaid sum at a rate of
6.0% from the date of the preceding payment, for a total of eight (8) payments.
TeamStaff made the first $250,000 payment on or about January 20, 2006. The
$300,000 payment made at execution was in settlement of the outstanding
premiums, deductibles, claims services fees, losses and allocated loss
adjustment expenses due and owing under the Program, the Program Extension and
the Exposure Buyback Policy. The second through eighth payments are in
settlement of liabilities that become due and/or may become due under the
Program, the Program Extension and the Exposure Buyback Policy, including but
not limited to, premiums, deductibles, claims services fees, losses and
allocated loss adjustment expenses. It was also agreed that the payment schedule
would be accelerated by and in the amount of any and all payments TeamStaff
receives from Zurich North American in settlement of the receivable TeamStaff is
carrying from its prior years' workers compensation insurance programs, up and
to the then outstanding balance due the CNA Entities.
15
(7) OTHER CURRENT ASSETS:
Other current assets at December 31, 2005 and September 30, 2005 consist of the
following- (amounts in thousands)
December 31, September 30,
2005 2005
------------- --------------
Miscellaneous receivables $561 $516
Security deposits 136 181
Prepaid insurance 601 283
Miscellaneous prepaid expense 109 126
Other miscellaneous current assets 41 49
------------- --------------
$1,448 $1,155
============= ==============
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities at December 31, 2005 and
September 30, 2005 consist of the following- (Amounts in thousands)
December 31, September 30,
2005 2005
------------- --------------
Accrued bonus and commission $189 $528
Accrued medical insurance and employee benefit expense 276 420
Accrued audit and tax fees 156 222
Accrued subcontracting expense 325 168
Accrued rebates 128 128
Accrued interest expense 142 74
Accrued payroll taxes and workers' compensation 109 74
Accrued occupancy expense 179 34
Accrued professional fees 8 33
Other miscellaneous accrued expenses 169 279
------------- --------------
$1,681 $1,960
============= ==============
(9) DEBT:
In connection with the acquisition of RS Staffing Services, Inc. (see Note 3),
TeamStaff secured financing with PNC Bank, National Association in the form of a
$7.0 million revolving credit facility. The credit facility was provided by PNC
Bank effective on June 8, 2005 to (i) provide for the acquisition of RS
Staffing; (ii) refinance an outstanding senior loan facility; and (iii) provide
ongoing working capital. Revolving Credit advances under the credit facility
will bear interest at either a PNC Bank internal rate that approximates the
Prime Rate plus 25 basis points or LIBOR plus 275 basis points, whichever is
higher. The facility has a three-year life and contains term and line of credit
borrowing options. The facility is subject to certain restrictive covenants,
including minimum EBITDA, and minimum consolidated debt service coverage ratio.
For the three month period ended December 31, 2005, TeamStaff was in compliance
with these covenants. The facility is subject to acceleration upon non-payment
or various other standard default clauses. In addition, we granted PNC a lien
and security interest on all of our assets. At December 31, 2005, the
outstanding balance of the credit facility was $5.4 million and there was $1.2
million of unused availability under the line, based on billed accounts
receivable. The average daily outstanding balance since the date of inception on
June 8, 2005 through December 31, 2005, was $4.4 million. TeamStaff is currently
in discussions with PNC Bank to obtain an additional $1.0 million of borrowing
capacity. The increase in line availability would be utilized to fund growth in
RS Staffing. The weighted average interest rate on advances since the date of
inception on June 8, 2005 through December 31, 2005, was 6.84%. The interest
rate effective as of December 31, 2005 was 7.5%.
In connection with the acquisition of RS Staffing, TeamStaff issued two
promissory notes to the former owners of RS Staffing as part of the acquisition
price, in the aggregate principal amount of $3.0 million. The notes bear
interest at 5% per annum, and are subordinate to the financing provided by PNC
Bank described above. One half of the principal and interest is due on June 8,
2006 and the remaining is due in June 2007.
TeamStaff has several short term notes payable with AI Credit Corp in connection
with the financing of various RS Staffing insurance premiums. As of December 31,
2005, the remaining principal balance on these notes was approximately $290,000.
Interest rates range from 6.0% to 6.75% with maturity dates ranging from August
2005 through July 2006.
16
Notes payable at December 31, 2005 and September 30, 2005 consists of the
following- (Amounts in thousands)
December 31, September 31,
2005 2005
------------------ ----------------
Notes payable $3,290 $3,043
Less- Current portion (1,790) (1,543)
------------------ ----------------
Long-term debt $1,500 $1,500
================== ================
Maturities of notes payable as of September 30, 2006 are as follows- (Amounts in
thousands)
Years Ending
September 30,
--------------------
2007 $1,500
--------------
Total $1,500
==============
(10) STOCK OPTIONS AND WARRANTS:
During the quarter ended December 31, 2005, TeamStaff did not grant any options,
no options expired or were cancelled unexercised, and no options were exercised.
During the quarter ended December 31, 2004, TeamStaff granted 180,000 options at
an average price of $2.07, 87,199 options expired or were cancelled unexercised,
and no options were exercised.
During the quarter ended December 31, 2005, no warrants were issued, 10,000
warrants expired unexercised, and no warrants were exercised. During the quarter
ended December 31, 2004, TeamStaff granted warrants to purchase 598,000 shares
of common stock in conjunction with a private placement stock offering. The cash
received from the transaction has been allocated among common stock and warrants
based on the relative fair market value of the components. During the quarter
ended December 31, 2004 no warrants expired unexercised, and no warrants were
exercised.
(11) SUPPLEMENTAL RETIREMENT PLAN:
Effective October 1, 2000, TeamStaff adopted a non-qualified Supplemental
Retirement Plan (SERP) covering certain TeamStaff corporate officers.
TeamStaff's former President and Chief Executive Officer and its former Chief
Financial Officer were the only SERP participants. No current employees are
covered under the SERP. SERP participants also were provided with a split dollar
life insurance policy, insuring the life of the participant. Each participant
collaterally assigned his policy to TeamStaff to secure repayment of policy
premiums. 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 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 in complete satisfaction of
TeamStaff's obligations under the SERP. That agreement also provided for the
payment of severance and other benefits over time in complete satisfaction of
TeamStaff's obligations to its former Chief Financial Officer under his
severance agreement effective May 22, 2002.
Cash payments aggregating $0.2 million have been made to the former President
and Chief Executive Officer and the former Chief Financial Officer during the
first three months of fiscal 2006.
COMPONENTS OF NET PERIODIC BENEFIT COST:
Three Months Ended
December 31,
(amounts in thousands) 2005 2004
----------- ----------
Interest cost $5 $9
Amortization of net loss 11 19
Settlement charges 65 78
----------- ----------
Total pension cost $81 $106
=========== ==========
17
(12) SEGMENT REPORTING:
As a part of continuing operations, TeamStaff operates two different lines of
business: staffing (principally medical staffing) and payroll services.
TeamStaff provides nursing and allied healthcare professionals and operates
through three medical staffing units. TeamStaff's RS Staffing subsidiary
specializes in providing medical and office administration/technical
professionals through nationwide schedule contracts with both the General
Services Administration and Veterans Affairs, among other customers. The
TeamStaff Rx subsidiary operates throughout the US and specializes in the supply
of allied medical employees and nurses, especially "travel" staff (typically 13
week assignments). Allied medical staff includes MRI technicians, mammographers,
dosimetrists, ultrasound staff and physicists. TeamStaff's Nursing Innovations
unit provides travel nursing, per diem nursing, temporary-to-permanent nursing
and permanent nursing placement services. All TeamStaff Rx and Nursing
Innovations revenues, and approximately two-thirds of RS Staffing revenues, are
derived from medical staffing.
Through its DSI Payroll Services division, TeamStaff provides customized payroll
management and tax services, primarily to the construction industry. DSI's
service offerings include payroll check processing via web, phone or fax,
federal and state quarterly and year-end tax compliance reports, W-2 processing
and financial management reports, including certified payroll reports and custom
software interfaces. DSI processes payrolls for approximately 700 clients that
have more than 30,000 employees.
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. TeamStaff has no
revenue derived from outside the United States.
The following table represents the financial information for each of TeamStaff's
segments:
Three Months Ended
December 31,
(In thousands) 2005 2004
------------ -----------
STAFFING SERVICES:
Revenues: $19,426 $8,897
Income before tax: $855 $291
Total assets: $21,656 $8,582
Capital expenditures: $11 $-
PAYROLL SERVICES:
Revenues: $1,457 $1,304
Income before tax: $686 $579
Total assets: $1,268 $1,101
Capital expenditures: $- $-
CORPORATE:
Revenues: $- $-
Loss before tax: $(1,539) $(1,503)
Total assets: $27,684 $30,972
Capital expenditures: $6 $25
CONSOLIDATED:
Revenues: $20,883 $10,201
Loss before tax: $2 $(633)
Total assets: $50,608 $40,655
Capital expenditures: $17 $25
18
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 managements best estimates
based upon current conditions and the most recent results of operations. These
risks include, but are not limited to, risks associated with risks undertaken in
connection with acquisitions, risks from potential workers' compensation claims,
increased insurance costs and required payments, risks from employer/employee
related suits such as discrimination or wrongful termination, risk associated
with medical professional liability claims, 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, 2005 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 2005 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
-------------------
As of and for the period ended December 31, 2005, TeamStaff operated two
different lines of business from which it derived substantially all of its
revenue: temporary and permanent 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 and SAB 104, Revenue
Recognition. 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; 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.
Staffing (whether medical or administrative) 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,
commissions from permanent placements are included in revenue related to Medical
Staffing. Commissions from permanent placements result from the successful
placement of a medical staffing employee to a customer's workforce as a
permanent employee.
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.
Direct costs of the temporary staffing business include wages, employment
related taxes and reimbursable expenses. Payroll services' direct costs include
salaries and supplies associated with the processing of the payroll service.
WORKERS' COMPENSATION
---------------------
19
PREPAID WORKERS' COMPENSATION:
TeamStaff's current 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. The renewal program
contained 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 was subject to a policy year-end audit. The renewal
program was collateralized by a letter of credit inuring to the benefit of
Zurich, and cash held in a trust account by a third party. A letter of credit
for $3.5 million was secured through Fleet Bank, as part of TeamStaff's line of
credit. Effective March 31, 2004, Zurich agreed to a reduction in the amount of
the letter of credit to $1.8 million. As a result, on March 31, 2004, TeamStaff
secured a new letter of credit in the amount of $1.8 million with SunTrust Bank.
Effective March 31, 2005, Zurich withdrew the requirement for a letter of credit
and $1.8 million of restricted cash held in the form of a certificate of deposit
at SunTrust Bank was released to TeamStaff. 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 are
made from the trust. Assets in the trust may be adjusted from time to time based
on program experience. GAB Robins, a third party administrator, provides claims
handling services for the program. In conjunction with the sale of its PEO
assets to GevityHR, Inc., TeamStaff requested and received a pro rata
cancellation of the policy described immediately above as of November 17, 2003.
On May 12, 2004, TeamStaff received $963,000 in return premiums from Zurich for
the policy period April 1, 2002 through November 17, 2003. A reduction of the
prepaid asset in the amount of $0.5 million was recorded in the fiscal year
ended September 30, 2005 as a result of adverse claims development for the
period April 1, 2002 through November 17, 2003. This write-down was
predominantly driven by one claim that caused the Company to increase its
maximum exposure to equal the policy deductible. At December 31, 2005, TeamStaff
has a prepaid asset of $3.6 million for the premiums and the prepayments made to
the trust for both years of the Zurich plan TeamStaff estimates that, of the
remaining prepaid asset, approximately an additional $1.4 million in return
premiums will be received within the next twelve months, and this is reflected
on the balance sheet at December 31, 2005 as a current asset.
Effective November 17, 2003, TeamStaff then 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 GAB Robins provide claims handling services. This program was a fully
insured, guaranteed cost program that contained no deductible or retention
feature (the "Zurich Policy"). The Zurich Policy expired April 1, 2004.
Effective April 1, 2004, TeamStaff entered into a new workers' compensation
program with Zurich for the period April 1, 2004 through March 31, 2005
identical to the Zurich Policy. Effective April 1, 2005, TeamStaff renewed its
workers' compensation program with Zurich for the period from April 1, 2005
through March 31, 2006. This renewal is also identical to the Zurich Policy.
As of December 31, 2005, 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 that may include loss data for claims
incurred during prior policy periods. 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, therefore 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.
ACCRUED WORKERS' COMPENSATION:
As was previously reported in TeamStaff's Exchange Act filing on Form 8-K, filed
on October 20, 2005, the Company settled certain disputed workers' compensation
insurance premium and loss claims totaling nearly $4.4 million for $2.05 million
payable over two (2) years (subject to certain prepayment requirements), and was
fully reserved as of the Company's June 30, 2005 balance sheet. The settlement
was entered on or about October 10, 2005. In or about January, 2001, TeamStaff
purchased from Transportation Insurance Company ("TPIC"), Transcontinental
Insurance Company ("TCIC"), Continental Casualty Company ("CCC"), CNA Claimplus,
Inc. ("ClaimPlus") and North Rock Insurance Company Limited ("North Rock")
(together, the "CNA Entities") a workers' compensation insurance program to
provide workers' compensation insurance and claims services for TeamStaff's
professional employee operations nationwide (the "Program"). The Program
provided TeamStaff with workers' compensation insurance coverage and claims
services for all covered claims incurred during the period from January 22, 2001
to January 22, 2002 (the "Initial Policy Term"). TeamStaff secured its
obligations under the Program through its February 5, 2001 purchase of an
Exposure Buyback Policy numbered EBP 006/001 from North Rock (the "Exposure
Buyback Policy"), also covering the period from January 22, 2001 to January 22,
2002. On or around January 22, 2002, TeamStaff purchased from TCIC and RSKCo an
extension of the Program (the "Program
20
Extension"). The Program Extension provided TeamStaff with workers' compensation
insurance coverage and claims services for all covered claims incurred during
the period from January 22, 2002 to March 22, 2002 (the "Extended Policy Term").
TeamStaff contested the CNA Entities' accounting of the amount due and owing
under the Program, the Program Extension and the Exposure Buyback Policy, and of
the ultimate losses projected to be due from TeamStaff. TeamStaff additionally
asserted that the CNA Entities committed certain errors in claims management
which unjustifiably increased the losses incurred under the Program and the
Program Extension, and inappropriately included certain non-recoverable items in
the premium calculations for both the Program and the Program Extension, thereby
entitling TeamStaff to a credit against the amounts ultimately due and owing
under the Program, the Program Extension and the Exposure Buyback Policy. The
CNA Entities maintained that there was due and owing from TeamStaff the sum of
$1,824,975 in premiums, deductibles, claims services fees, losses and allocated
loss adjustment expenses under the Program and the Program Extension, and
$835,596 in premiums and losses under the Exposure Buyback Policy. The CNA
Entities projected that TeamStaff would be liable for an additional $1,181,301
of losses under the Program and the Program Extension, and an additional
$556,176 of losses under the Exposure Buyback Policy. The aggregate amounts
totaled $4,398,048.
The settlement fully and completely resolves, without litigation, all of the
issues addressed above on the material terms described below and in the
Agreement, without admitting and, in fact, expressly denying, the allegations
and claims each party could have made against the other. Under the settlement,
TeamStaff will pay the CNA Entities the sum of $2,050,000, plus interest at a
rate of 6.0%, as follows: (1) $300,000 upon execution of the Agreement; (2)
$250,000 every 90 days thereafter, plus interest on the unpaid sum at a rate of
6.0% from the date of the preceding payment, for a total of eight (8) payments.
TeamStaff made the first $250,000 payment on or about January 20, 2006. The
$300,000 payment made at execution was in settlement of the outstanding
premiums, deductibles, claims services fees, losses and allocated loss
adjustment expenses due and owing under the Program, the Program Extension and
the Exposure Buyback Policy. The second through eighth payments are in
settlement of liabilities that become due and/or may become due under the
Program, the Program Extension and the Exposure Buyback Policy, including but
not limited to, premiums, deductibles, claims services fees, losses and
allocated loss adjustment expenses. It was also agreed that the payment schedule
would be accelerated by and in the amount of any and all payments TeamStaff
receives from Zurich North American in settlement of the receivable TeamStaff is
carrying from its prior years' workers compensation insurance programs, up and
to the then outstanding balance due the CNA Entities.
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, 2005 and 2004 were
$20.9 million and $10.2 million, respectively, which represents an increase of
$10.7 million, or 104.7%, from first fiscal quarter 2005 to first fiscal quarter
2006. Revenues from staffing services for the three months ended December 31,
2005 and 2004 were $19.4 million and $8.9 million, respectively, which
represents an increase of $10.5 million, or 118.3%, from first fiscal quarter
2005 to first fiscal quarter 2006. Revenues for first fiscal quarter 2006
include $3.1 million related to the acquisition of Nursing Innovations, a
Memphis, Tennessee-based provider of travel and per diem nurses effective as of
November 14, 2004 (See Note 3 of Notes to Consolidated Financial Statements).
Revenues related to Nursing Innovations for first fiscal quarter 2005, which
includes revenue from the date of acquisition effective November 14, 2004 to
December 31, 2004, was $1.6 million. $11.0 million related to the acquisition of
RS Staffing Services, a Monroe, Georgia-based provider of medical and office
administration/technical professionals effective as of June 4, 2005 (See Note 3
of Notes to Consolidated Financial Statements.) These acquisitions helped offset
a decrease in the revenues of the allied healthcare portion of our Staffing
Services division from first fiscal quarter 2005 to first fiscal quarter 2006 of
$1.8 million. The Payroll Services division revenues for the three months ended
December 31, 2005 and 2004 were $1.5 million and $1.3 million, respectively,
which represents an increase of $0.2 million, or 11.5%, from first fiscal
quarter 2005 to first fiscal quarter 2006.
21
In the second half of calendar 2005, before the normal seasonal holiday
downturn, we saw an increase in demand for our travel nurses as well as an
increase in applicants entering the travel segment. This increase, however, was
not experienced in our travel allied division as we continued to see hospitals
focus on containing cost in this higher priced business segment by placing
greater reliance on permanent staff. We believe that since the business
fundamentals of allied health are similar to those in the nursing segment, that
the allied sector will eventually experience a sustained rebound.
Longer term, we believe the demand for temporary medical personnel will
increase. Key drivers in our major business segments include an aging
population, a strong employment environment and growth in hospital admissions.
We believe demand will also increase as more states introduce legislation for
mandatory minimum nurse to patient ratios and overtime limitations. The
acquisition of Nursing Innovations in the first quarter of last fiscal year
provided TeamStaff with the opportunity to benefit from these industry changes
that, we believe, impact our temporary nurse staffing business most
significantly. Our acquisition of RS Staffing completed in early June 2005 gives
us a strong presence in the government sector and provides us with an
opportunity to cross sell to our nursing and allied divisions. Revenues in the
RS Staffing division grew 10% sequentially from the fourth fiscal quarter of
2005 to the first fiscal quarter of 2006. We continue to focus on our sales and
marketing efforts throughout the divisions in order to increase our contact with
current and prospective clients.
Direct expenses for the three months ended December 31, 2005 and 2004 were $16.6
million and $7.6 million, respectively, which represents an increase of $9.0
million, or 117.7%, from first fiscal quarter 2005 to first fiscal quarter 2006.
This increase is a direct result of increased revenues. As a percentage of
revenue, direct expenses for the three months ended December 31, 2005 and 2004
were 79.4% and 74.6%, respectively. This increase is a result of a higher volume
of teaming partner (subcontractor) costs due to the inclusion of RS Staffing.
Teaming is a business practice expected by government entities who prefer their
suppliers to provide more of a master vendor service where the supplier looks to
outside sources when needed to fill open staffing positions.
Gross profits for the three months ended December 31, 2005 and 2004 were $4.3
million and $2.6 million, respectively, which represents an increase of $1.7
million, or 66.5%, from first fiscal quarter 2005 to first fiscal quarter 2006.
This increase is attributable to the growth by acquisition of our staffing
business as well as more prudent expense management and selected price increases
in the Payroll Services division. Gross profits, as a percentage of revenue,
decreased to 20.6% from 25.4%, for the first fiscal quarter ended December 31,
2005 and 2004, respectively. This decrease is primarily due to the inclusion of
RS Staffing in the 2006 revenues and costs related to staffing teaming partners.
Operating expenses for the three months ended December 31, 2005 and 2004 were
$4.0 million and $3.1 million, respectively, which represents an increase of
$0.9 million, or 29.3%. Operating expenses related to Nursing Innovations for 7
weeks of operations in first fiscal quarter 2005 were $0.2 million, compared to
$0.6 million for 13 weeks of operations in first fiscal quarter 2006. Operating
expenses related to RS Staffing for first fiscal quarter 2006 were $0.8 million.
After adjusting for operating expenses due to the acquisitions of Nursing
Innovations and RS Staffing, expenses decreased 8% from first fiscal quarter
2005 to first fiscal quarter 2006. Operating expenses, as a percentage of
revenue, were 19.4% and 30.7%, for the fiscal quarters ended December 31, 2005
and 2004, respectively.
Depreciation and amortization for the three months ended December 31, 2005 and
2004 was approximately $122,000 and $148,000, respectively. Although there was
an increase from first fiscal quarter 2004 to first fiscal quarter 2005, due to
additional fixed assets acquired as part of the acquisitions of Nursing
Innovations and RS Staffing, this increase was offset by a reduction in
depreciation expense caused by several asset groups becoming fully depreciated
during the prior fiscal year.
Other income, which is comprised of interest income and late fee income, for the
three months ended December 31, 2005 and 2004 was approximately $39,000 and
$60,000, respectively, representing a decrease of $21,000. Late fee income is
earned only in the allied healthcare division and the decrease is a result of
lower revenues.
Interest expense for the three months ended December 31, 2005 and 2004 was
approximately $177,000 and $20,000, respectively, representing an increase of
$157,000. This increase is primarily a result of interest expense related to the
revolving credit facility effective as of June 8, 2005, as well as interest
expense from the notes payable related to the acquisition of RS Staffing
effective as of June 4, 2005.
Income tax expense from continuing operations for three months ended December
31, 2005 was virtually zero, compared to income tax benefit of $0.2 million for
the three months ended December 31, 2004. These tax benefits in the prior fiscal
year were a result of losses from operations. Management believes that due to
the acquisitions of
22
RS Staffing and Nursing Innovations, two historically profitable companies,
coupled with an improving business climate for temporary staffing, the Company
will be able to utilize the recorded deferred tax asset.
Income from continuing operations for the three months ended December 31, 2005
was breakeven, or $0.00 per fully diluted share, as compared to loss from
continuing operations for the three months ended December 31, 2004 of $0.4
million, or $(0.02) per fully diluted share.
Loss from discontinued operations, net of tax, for the three months ended
December 31, 2005 was $0.02 million, or $0.00 per fully diluted share, as
compared to loss from discontinued operations, net of tax, for the three months
ended December 31, 2004 of $0.2 million, or $(0.01) per fully diluted share. In
fiscal 2005, the loss was due to previously unbilled legal fees and
non-cancelable software licenses related to the discontinued business unit.
Net loss for the three months ended December 31, 2005 was $0.02 million, or
$0.00 per fully diluted share, as compared to a net loss of $0.6 million, or
$(0.03) per fully diluted share, for the three months ended December 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net cash used in operating activities for the three months ended December 31,
2005 was $2.3 million compared to $2.9 million for the three months ended
December 31, 2004. Use of cash during first fiscal quarter 2006 includes
increased accounts receivable of $1.4 million due to the increased sales in the
RS Staffing division, as well as the recurring annual slowdown in collections
due to the holiday season, and $0.8 million due to a decrease in accounts
payable, accrued payroll and other accrued expenses. Use of cash during first
fiscal quarter 2005 includes increased accounts receivable of $1.6 million
primarily due to the operations of Nursing Innovations subsequent to the
acquisition on November 13, 2004, and losses in continuing and discontinued
operations.
Cash used in investing activities for the three months ended December 31, 2005
was $0.02 million compared to $1.9 million for the three months ended December
31, 2004. Use of cash in first fiscal quarter 2006 was for the purchase of
equipment and leasehold improvements. Use of cash in first fiscal quarter 2005
was primarily for the purchase of certain of the assets of Nursing Innovations
for $1.9 million.
Cash provided by financing activities for the three months ended December 31,
2005 was $1.3 million compared to $4.0 million for the three months ended
December 31, 2004. Effective June 8, 2005, TeamStaff, Inc. entered into a $7.0
million revolving credit facility provided by PNC Bank to (i) provide for the
acquisition of RS Staffing; (ii) refinance an outstanding senior loan facility;
and (iii) provide ongoing working capital. Revolving Credit advances bear
interest at either the Prime Rate plus 25 basis points or LIBOR plus 275 basis
points, whichever is higher. The facility has a three-year life and contains
term and line of credit borrowing options. The facility is subject to certain
restrictive covenants, including minimum EBITDA and a minimum consolidated debt
service coverage ratio. For the period ended December 31, 2005, TeamStaff was in
compliance with these covenants. The facility is subject to acceleration upon
non-payment or various other standard default clauses. In addition, we granted
PNC a lien and security interest on all of our assets. As of December 31, 2005,
there was $5.4 million debt outstanding under the Credit Facility and $1.2
million of unused availability under the line, based on billed accounts
receivable. The interest rate effective as of December 31, 2005 was 7.5%.
Availability under the PNC line of credit is directly related to the successful
assignment of certain accounts receivable. Certain government accounts of RS
Staffing Services are required to execute "Acknowledgements of Assignment."
There can be no assurance that every RS Staffing government account will execute
the documentation to effectuate the assignment and secure availability. The
failure of government third parties to sign the required documentation could
result in a decrease in availability under the line of credit.
During the first fiscal quarter of 2005, TeamStaff entered into Securities
Purchase Agreements with several accredited investors for the private sale under
Section 4(2) of the Securities Act of 1933 and/or Regulation D of securities for
an aggregate purchase price of $4.3 million. TeamStaff received net proceeds of
approximately $4.0 million, after payment of commissions and related offering
expenses.
As of December 31, 2005, TeamStaff had unrestricted cash and cash equivalents of
$0.2 million and net accounts receivable of $10.9 million. TeamStaff also had
$1.2 million of unused availability under the revolving credit facility provided
by PNC Bank. As of December 31, 2005, TeamStaff had working capital of $0.97
million. The Company has requested from PNC Bank an increase in line
availability of $1.0 million. This increase would be used to fund growth in the
RS Staffing business segment. In addition, due to strong January collections,
line availability increased to $1.7 million as of February 6, 2006. Management
believes its existing cash, liquidity provided by the
23
Company's revolving line of credit and funds generated by operations will be
sufficient to support cash needs for at least the next twelve months.
Obligations
(Amounts in thousands) Payments Due By Period
----------------------
Less than 1-3
Total 1 year years 4-5 years
----------- -------------- ----------- ------------
Long-term debt (1) $10,770 $8,331 $2,439 $-
Operating leases (2) 3,066 772 1,804 490
Pension liability (3) 654 210 308 136
----------- -------------- ----------- ------------
Total Obligations $14,490 $9,313 $4,551 $626
=========== ============== =========== ============
(1) Represents bank line of credit, notes payable related to acquisition of RS
Staffing, CNA settlement, and capital lease obligations. Bank line of credit has
a 3-year life but is classified as short term because it is subject to
acceleration upon non-payment or various other standard default clauses.
Additionally, the CNA settlement is classified as short term because it contains
an acceleration clause not to exceed amounts received from Zurich American
Insurance Company.
(2) Represents lease payments net of sublease income.
(3) Represents pension liability for the former CEO and former CFO.
EFFECTS OF INFLATION
--------------------
Inflation and changing prices have not had a material effect on TeamStaff's net
revenues and results of operations, 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 is not
materially subject to fluctuations in foreign exchange rates, commodity prices
or other market rates or prices from market sensitive instruments. TeamStaff has
a material interest rate risk with respect to our prior workers' compensation
programs. In connection with TeamStaff's prior workers' compensation programs,
prepayments of future claims were 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'
decrease, TeamStaff's workers' compensation expense would increase because
TeamStaff would be entitled to less interest income on the deposited funds.
Further, and as discussed elsewhere in this filing, TeamStaff, Inc. completed a
$7.0 million revolving credit facility by PNC Bank effective on June 8, 2005.
Revolving Credit advances bear interest at either the Prime Rate plus 25 basis
points or LIBOR plus 275 basis points, whichever is higher. The facility has a
three-year life and contains term and line of credit borrowing options. The
facility is subject to certain restrictive covenants, including minimum EBITDA
and a minimum consolidated debt service coverage ratio. The facility is subject
to acceleration upon non-payment or various other standard default clauses.
Material increases in the Prime or LIBOR rate could have a material adverse
effect on our results of operations, the status of the Revolving Credit Facility
as well as interest costs. TeamStaff is currently in discussions with PNC Bank
to obtain an additional $1.0 million of borrowing capacity. The increase in line
availability would be utilized to fund growth in RS Staffing.
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 (who serves as our principal
accounting 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 period (December 31, 2005) ("Evaluation Date") covered by
this Quarterly Report on Form 10-Q. Based on their evaluation, our Chief
Executive Officer and Chief Financial Officer (who serves as our principal
accounting officer) have concluded that as of the Evaluation Date, our
disclosure controls and procedures are effective to ensure that all material
information required to be filed in this Quarterly Report on Form 10-Q has been
made known to them.
24
CHANGES IN INTERNAL CONTROLS:
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
TeamStaff in January 1999. The claims consisted of various potential liabilities
and expenses incurred based on breaches of representations and warranties
contained in the acquisition agreement. The Sellers disputed these claims and
attempted to assert claims of their own. On January 12, 2001, TeamStaff entered
into a settlement agreement with the Sellers. Under the settlement agreement,
the Sellers agreed to be liable and responsible for certain potential
liabilities estimated at approximately $0.5 million and agreed that 55,000
shares of TeamStaff common stock, which had been held in escrow since the
acquisition, were to be cancelled. TeamStaff also agreed to release 29,915
escrow shares to the Sellers. TeamStaff retains 75,000 shares in escrow to
provide security for the Seller's obligations. Each party agreed to release each
other from all other claims under the acquisition agreements. No third parties
have contacted TeamStaff seeking payment in the last fiscal year for these
potential liabilities. In the event that TeamStaff incurs liability to third
parties with respect to the claims, TeamStaff would declare an event of default
under the settlement agreement and seek collection from the Sellers.
TeamStaff's subsidiary, BrightLane, is party to a suit brought by one of its
former shareholders (Atomic Fusion, Inc. v. BrightLane.com, Inc. Civil Action No
ONS02246OE, Fulton County State Court, Georgia). The plaintiff seeks damages for
alleged unpaid contractual services provided to BrightLane, alleging that the
shares (both in number and value) of BrightLane stock provided to the plaintiff
in payment of services were inadequate to pay for the alleged agreed upon value
of services. In connection with TeamStaff's acquisition of BrightLane, the
former shareholders of BrightLane were required to place 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 per share. 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.
In August, 2004, a trial was held on Atomic Fusion's breach of contract claim
before a jury. The jury returned a verdict in Atomic Fusion's favor, awarding
$534,246 in damages and $116,849 in attorney's fees, for a total verdict of
$651,095, including interest and costs. BrightLane filed a motion for judgment
notwithstanding the verdict, which was denied by the court. BrightLane believes
that the jury's award of damages and attorney's fees is not supported by Georgia
law, and BrightLane also believes the trial court erred in denying its motion
for judgment notwithstanding the verdict. Therefore, BrightLane has filed
appeals on both the jury's verdict on liability and damages and the denial of
the motion for judgment notwithstanding the verdict. BrightLane also has filed a
motion to recover certain of its attorneys' fees expended in pursuing its motion
for summary judgment. This motion also is pending before the court. BrightLane
is no longer an operating entity and has minimal assets.
In connection with TeamStaff's acquisition of BrightLane effective as of August
31, 2001, persons holding BrightLane options to acquire approximately 2.1
million BrightLane shares (the equivalent of approximately 481,000 TeamStaff
shares) exercised their options. BrightLane made recourse loans of approximately
$1.0 million principal amount to the holders of these options to assist them in
payment of tax obligations incurred with exercise of the options. The loans were
repayable upon the earlier of (i) sale of the TeamStaff shares or (ii) three
years. The shares that were received for the option exercise secured the loans.
As of September 30, 2005 all of these loans have been repaid or forgiven. All
loans were to be repaid in cash with the exception of one loan. Under the terms
of TeamStaff's employment agreement with a former executive officer of
TeamStaff's BrightLane subsidiary, the loan ($131,000) was forgiven over a
two-year period of time. We previously commenced litigation against two of the
persons who received loans, and these persons filed counterclaims against
BrightLane and our Chairman. Both of the actions were settled. Pursuant to one
of the settlements, the shareholder returned all shares of TeamStaff stock and
the note was forgiven. This settlement has been completed. The other action was
settled on identical terms. However, TeamStaff is awaiting delivery of the
shares to be returned and at that time the accounting with respect to the return
of the shares will be completed. TeamStaff recognized an expense in the amount
of $190,000 in the second fiscal quarter of 2005, representing a partial
write-down of the original principal amount of the loan.
As a commercial enterprise and employer and with respect to its
employment-related businesses in particular,
25
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. Additionally, in connection with its medical staffing business,
TeamStaff is exposed to potential liability for the acts, errors or omissions of
its temporary medical employees. The professional liability insurance policy
provides up to $5,000,000 aggregate coverage with a $2,000,000 per occurrence
limit. Although TeamStaff believes the liability insurance is reasonable under
the circumstances to protect it from liability for such claims, there can be no
assurance that such insurance will be adequate to cover all potential claims.
TeamStaff is engaged in no other litigation, the effect of which would be
anticipated to have a material adverse impact on TeamStaff's financial condition
or results of operations.
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
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 $1.0 million in
common stock. Since inception we have repurchased 581,470 shares at an average
cost of $4.18 per share for a total cost of $2.4 million. No shares were
repurchased during the quarter ended December 31, 2005. As of December 31, 2005,
TeamStaff retired 574,470 of the 581,470 shares of treasury stock. We do not
currently have any plans to repurchase our securities.
The Registrant previously reported the sale of equity securities on Form 8-K
dated November 12, 2004. See the description contained in the Form 8-K or also
in the notes to financial statements above which are incorporated by reference
to this Item 2.
In connection with the acquisition of RS Staffing Services described above,
TeamStaff issued to the shareholders of RS Staffing Services an aggregate of
1,206,896 shares of its Common Stock. The shares are restricted securities and
may be sold only pursuant to Rule 144. Teamstaff relied upon the exemption from
registration under the Securities Act of 1993 provided by Section 4(2) of the
Securities Act in issuing the shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None. TeamStaff has scheduled its Annual Meeting of Shareholders for April 27,
2006.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
10.1 Form of Lease dated as of November 18, 2005 between TeamStaff, Inc.
and One Peachtree Pointe Associates, LLC
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
26
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEAMSTAFF, INC.
/s/T. Kent Smith
----------------
T. Kent Smith
President and Chief Executive Officer
/s/ Rick Filippelli
Rick Filippelli
---------------
Vice President, Finance and Chief
Financial Officer
Dated: February 14, 2006
27
