1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,December 31, 1998
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
DIGITAL SOLUTIONS,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 Number)
300 Atrium Drive, Somerset, NJ 08873
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 748-1700
DIGITAL SOLUTIONS, INC.
Former name, former address and former fiscal year, if
changed since last report.
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
--- ---
19,298,01027,617,241 shares of Common Stock, par value $.001 per share, were outstanding
as of July 24, 1998.February 8, 1999.
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DIGITAL SOLUTIONS,TEAMSTAFF, INC. AND SUBSIDIARIES
FORM 10-Q
June 30,December 31, 1998
Table of Contents
Page No.
--------
Part I - Financial Information
Item 1. Consolidated Balance Sheets as of
June 30, 1998 (Unaudited) and
September 30, 1997 3
Consolidated Statements of
Income for the three months ended
June 30, 1998 and 1997 (Unaudited) 5
Consolidated Statements of
Income for the nine months ended
June 30, 1998 and 1997 (Unaudited) 6
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1998 and 1997
(Unaudited) 7
Notes to Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's discussion and analysis of
financial condition and results of operations 11
Part II - Other Information
Item 1. Legal Proceedings 15
Page No.
--------
Part I - Financial Information
Item 1. Consolidated Balance Sheets as of
December 31, 1998 (Unaudited) and
September 30, 1998 3
Consolidated Statements of
Income for the three months ended
December 31, 1998 and 1997 (Unaudited) 5
Consolidated Statements of Cash Flows for the
three months ended December 31, 1998 and 1997
(Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's discussion and analysis of
financial condition and results of operations 11
Part II - Other Information
Item 1. Legal Proceedings 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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DIGITAL SOLUTIONS,TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,DECEMBER 31, SEPTEMBER 30,
1998 1997
----------- -------------1998
---- ----
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 1,806,0001,300,000 $ 841,0001,530,000
Restricted Cash 738,000 738,000350,000 --
Accounts receivable, net of allowance 4,924,000 5,820,0007,139,000 6,891,000
Other current assets 901,000 402,000741,000 691,000
----------- -----------
Total current assets 8,369,000 7,801,0009,530,000 9,112,000
EQUIPMENT AND IMPROVEMENTS
Equipment 3,254,000 3,170,0003,359,000 3,336,000
Leasehold improvements 47,000 47,000
----------- -----------
3,301,000 3,217,0003,406,000 3,383,000
Accumulated depreciation and amortization 2,535,000 2,310,0002,682,000 2,591,000
----------- -----------
766,000 907,000724,000 792,000
DEFERRED TAX ASSET 1,916,000 760,0001,570,000 1,782,000
GOODWILL, net of amortization 4,158,000 4,344,0004,035,000 4,096,000
OTHER ASSETS 575,000 351,0001,008,000 866,000
----------- -----------
TOTAL ASSETS $15,784,000 $14,163,000$16,867,000 $16,648,000
=========== ===========
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated balance sheets.
Page 3 of 16
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DIGITAL SOLUTIONS,TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,DECEMBER 31, SEPTEMBER 30,
1998 1997
------------ -------------1998
---- ----
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ -- $ 2,697,000
Current portion of long-term debt 541,000 113,000$ 538,000 $ 540,000
Accounts payable 1,680,000 2,254,0002,132,000 1,792,000
Accrued expenses and other current liabilities 2,849,000 4,138,0003,333,000 3,461,000
------------ ------------
Total current liabilities 5,070,000 9,202,0006,003,000 5,793,000
LONG-TERM DEBT 3,096,000 89,0002,613,000 2,981,000
------------ ------------
Total Liabilities 8,166,000 9,291,0008,616,000 8,774,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.001 par value; authorized 40,000,000 shares;
issued and outstanding 19,298,010 and 19,141,76019,383,833 at June 30,December 31, 1998
and 19,356,833 at September 30, 1997, respectively1998 19,000 19,000
Additional paid-in capital 13,643,000 13,393,00013,734,000 13,692,000
Accumulated deficit (6,044,000) (8,540,000)(5,502,000) (5,837,000)
------------ ------------
Total shareholders' equity 7,618,000 4,872,0008,251,000 7,874,000
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 15,784,00016,867,000 $ 14,163,00016,648,000
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated balance sheets.
Page 4 of 16
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DIGITAL SOLUTIONS,TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED
JUNE 30,
-----------------------------DECEMBER 31,
---------------------------
1998 1997
------------ ---------------- ----
REVENUES $ 35,885,00039,699,000 $ 31,185,00033,662,000
DIRECT EXPENSES 33,182,000 28,908,00036,705,000 31,060,000
------------ ------------
Gross profit 2,703,000 2,277,0002,994,000 2,602,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,059,000 2,034,0002,150,000 1,857,000
DEPRECIATION AND AMORTIZATION 163,000 213,000176,000 169,000
------------ ------------
Income from operations 481,000 30,000668,000 576,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 14,000 1,000104,000 12,000
Interest expense (173,000)(166,000) (88,000)
------------ ------------
(159,000) (87,000)(62,000) (76,000)
------------ ------------
Income (loss) before tax 322,000 (57,000)606,000 500,000
INCOME TAX BENEFIT 1,470,000EXPENSE (271,000) --
------------ ------------
NET INCOME (LOSS) $ 1,792,000335,000 $ (57,000)500,000
============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE $ 0.090.02 $ (0.00)0.03
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 19,298,010 19,103,85419,363,511 19,194,409
============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 0.090.02 $ (0.00)0.03
============ ============
DILUTED SHARES OUTSTANDING 19,548,671 19,103,85419,518,235 19,458,078
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated statements.
Page 5 of 16
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DIGITAL SOLUTIONS,TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)CASH FLOWS
(UNAUDITED)
FOR THE NINETHREE MONTHS ENDED
JUNE 30,
-------------------------------DECEMBER 31,
---------------------------
1998 1997
------------- ----------------- ----
REVENUESCASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 102,122,000335,000 $ 92,295,000
DIRECT EXPENSES 94,588,000 85,911,000
------------- -------------
Gross profit 7,534,000 6,384,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,677,000 8,402,000
DEPRECIATION AND AMORTIZATION 502,000 830,000
------------- -------------
Income (loss) from operations 1,355,000 (2,848,000)
------------- -------------
OTHER INCOME (EXPENSE)
Interest500,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 176,000 169,000
Provision for doubtful accounts 49,000 14,000
Deferred income taxes 212,000 --
Changes in operating assets and liabilities:
Increase (decrease) in accounts receivable (297,000) 169,000
Increase in other assets (216,000) (32,000)
Increase (decrease) in accounts payable, accrued expenses and
other income 37,000 34,000
Interest expense (366,000) (284,000)
------------- -------------
(329,000) (250,000)
------------- -------------
Income (loss) before tax 1,026,000 (3,098,000)
INCOME TAX BENEFIT 1,470,000current liabilities 212,000 (977,000)
Increase in restricted cash (350,000) --
------------- -------------
NET INCOME (LOSS)----------- -----------
Net cash provided by (used in) operating activities 121,000 (157,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements (23,000) (85,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments on long term debt (125,000) --
Repayments on revolving line of credit (233,000) (130,000)
Payments under capital lease obligations (12,000) (34,000)
Proceeds from issuance of common stock and
exercise of common stock options and warrants - net 42,000 250,000
----------- -----------
Net cash provided by (used in) financing activities (328,000) 86,000
----------- -----------
Net decrease in cash (230,000) (156,000)
CASH AT BEGINNING OF PERIOD 1,530,000 841,000
----------- -----------
CASH AT END OF PERIOD $ 2,496,0001,300,000 $ (3,098,000)
============= =============
BASIC EARNINGS (LOSS) PER COMMON SHARE685,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 0.1389,000 $ (0.16)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 19,263,097 19,048,901
============= =============
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 0.13 $ (0.16)
============= =============
DILUTED SHARES OUTSTANDING 19,504,058 19,048,901
============= =============82,000
=========== ===========
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated statements.
Page 6 of 16
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS
JUNE 30,
---------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,496,000 $(3,098,000)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 502,000 830,000
Provision for doubtful accounts 69,000 1,085,000
Deferred taxes (1,470,000) --
Other non cash items -- 1,109,000
Changes in operating assets and liabilities:
Accounts receivable 827,000 403,000
Other current assets (499,000) (293,000)
Notes due from officers -- 136,000
Accounts payable, accrued expenses and
other current liabilities (1,865,000) 369,000
----------- -----------
Net cash provided by operating activities 60,000 541,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements (84,000) (163,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings on line of credit 3,600,000 410,000
Repayments on long term debt (42,000) --
Repayments on revolving line of credit (2,697,000) (490,000)
Payments under capital lease obligations (122,000) (44,000)
Proceeds from letter of credit termination -- 417,000
Proceeds from issuance of common stock and
exercise of common stock options and warrants - net 250,000 208,000
----------- -----------
Net cash provided by financing activities 989,000 501,000
----------- -----------
Net increase in cash 965,000 879,000
CASH AT BEGINNING OF PERIOD 841,000 --
----------- -----------
CASH AT END OF PERIOD $ 1,806,000 $ 879,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 276,000 $ 265,000
=========== ===========
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
Page 7 of 16
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DIGITAL SOLUTIONS,TEAMSTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION AND BUSINESS
TeamStaff, Inc., formerly Digital Solutions, Inc. (the Company) was incorporated under the laws of the
State of"Company"), a New Jersey
on November 25, 1969. The Company,Corporation, with its subsidiaries, provides a broad spectrum of human resource
services including Professional
Employer Organization (PEO)professional employer services, payroll processing, human
resource administration and placement of temporary and permanent employees. The
Company has regional offices in Somerset, New Jersey; Houston, Texas; and
Clearwater, Florida and sales service centers in New York, New York; El Paso and
Houston, Texas; Clearwater, Florida; and Somerset, New Jersey.
The Company changed its name from Digital Solutions, Inc. to TeamStaff, Inc. on
February 10, 1999. Effective January 25, 1999, the Company acquired the ten
entities operating under the trade name, The Teamstaff Companies. The financial
data and discussion contained in this Form 10-Q do not reflect the acquisition
as it occurred after the end of the quarter.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of PresentationBASIS OF PRESENTATION-
The consolidated financial statements included herein have been prepared by the
registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the registrant 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 the Company's latest
annual report on Form 10-K. This financial information reflects, in the opinion
of management, all adjustments necessary to present fairly the results for the
interim periods. The results of operations for such interim periods are not
necessarily indicative of the results for the full year.
The accompanying consolidated financial statements include those of DSI,TeamStaff
Inc., a New Jersey Corporation and its wholly-owned subsidiaries; DSI Contract
Staffing, DSI Staff ConnXions - Northeast, Inc., DSI Staff ConnXions -
Southwest, Inc., and DSI Staff Rx, Inc. The results of operations of acquired
companies have been included in the consolidated financial statements from the
date of acquisition. All significant intercompany balances and transactions have
been eliminated in the consolidated financial statements.
Earnings Per Common ShareNEW ACCOUNTING PRONOUNCEMENTS-
In MarchJune 1997, the FASB issued Statement of Financial Accounting Standards BoardNo.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS
Page 7 of 16
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131 establishes standards for the way public enterprises are to report
information about operating segments in interim financial statements and
requires the reporting of selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS 131 is effective for fiscal periods beginning after December 15,
1997, at which time the Company will adopt the provisions. The Company does not
expect SFAS 131 to have a material effect on reported results.
EARNINGS PER SHARE-
In February 1997, the FASB issued Statement on Financial Accounting Standards
Number 128, "Earnings Per Share" (FAS("SFAS No. 128).
FAS 128128"), which requires the
presentation of basic earnings per share ("Basis EPS") and diluted earnings per
share for all periods presented. "Basic earnings per share"
represents net("Diluted EPS"). Basic EPS is calculated by dividing income dividedavailable to
common shareholders by the 8 of 16
9
weighted average number of shares outstanding. "Diluted earnings per share" represents netof common stock
outstanding during the period. Diluted EPS is calculated by dividing income
dividedavailable to common shareholders by weighted average shares outstanding adjusted for the
incremental dilution of outstanding and vested stock options and warrants.
A reconciliation of weighted average number of common shares
outstanding for the period adjusted to weighted average common shares outstanding assuming dilution is as follows:reflect potentially dilutive securities.
In accordance with SFAS 128, the following table reconciles net income and share
amounts used to calculate basic earnings per share and diluted earnings per
share:
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------December 31,
1998 1997
1998 1997
---------- ---------- ---------- -------------- ----
Numerator:
Net income $ 335,000 $ 500,000
----------- -----------
Denominator:
Weighted average number of common shares
19,298,010 19,103,854 19,263,097 19,048,901
Dilutive share equivalentsOutstanding - Basic 19,363,511 19,194,409
Incremental shares for assumed conversions
of outstanding
stock options 250,661 -- 240,961 --
---------- ---------- ---------- ----------options/warrants 154,724 263,669
----------- -----------
Weighted average number of common and
Equivalent shares assuming dilution 19,548,671 19,103,854 19,504,058 19,048,901
========== ========== ========== ==========outstanding-Diluted 19,518,235 19,458,078
----------- -----------
Earnings per share - Basic $ 0.02 $ 0.03
Earnings per share - Diluted $ 0.02 $ 0.03
Stock options and warrants outstanding at June 30,December 31, 1998 to purchase
686,479946,229 shares of common stock were not included in the computation of
earnings per
share assuming dilution because the optionsDiluted EPS as they were antidilutive.
8 of 16
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(3) INCOME TAXES
Income taxesTAXES:
At December 31, 1998, the Company had available operating loss
carryforwards of approximately $6,000,000 to reduce future periods' taxable
income. The carryforwards expire in various years beginning in 2004 and
extending through 2012.
The Company has recorded a $1,950,000 and a $760,000 deferred tax asset at
December 31, 1998 and 1997, respectively. This represents management's
estimate of the income tax benefits to be realized upon utilization of a
portion of its net operating losses 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 the quarter ended June 30,Company's operations can generate
sufficient taxable income to realize this deferred tax asset as a result of
recent business developments, its ability to meet its operating plan as
well as the resolution of significant past problems which had adversely
affected the Company in prior years.
As of December 31, 1998 reflectedother current assets included $380,000 related to
the deferred tax asset.
(4) DEBT:
On April 29, 1998, the Company was successful in replacing the former
credit facility with a net tax benefitnew long-term credit facility from FINOVA Capital
Corporation totaling $4,500,000. Substantially all assets of $1,470,000 relatingthe Company
secure the credit facility. The facility includes a three-year loan for
$2,500,000, with a five year amortization, at prime + 3% (10.75% as of
December 31, 1998) and a $2 million revolving line of credit secured by
certain accounts receivable of the Company at prime + 1% (8.75% as of
December 31, 1998). The credit facility is also subject to success fees of
$200,000, $225,000 and $250,000 due on the anniversary date of the loan.
Taking these fees into consideration, and assuming the Company continuously
fully utilizes the revolver, the effective rate of interest on the total
borrowings is approximately 16.1%. The credit facility is subject to
certain covenants including but not limited to a reductionminimum current ratio,
debt to net worth ratio, a minimum net worth and a minimum debt service
coverage ratio, as defined.
The Company received an increase of its present lending facility from
FINOVA Capital Corporation in order to fund the TeamStaff acquisition.
The facility is comprised of (i) a three-year term loan, with a five year
amortization, and a balloon payment at the end of three years, in the
amount of $2,500,000; (ii) a one year bridge loan in the amount of
$750,000 and (iii) an increase in the Company's valuation allowance. Asrevolving line of September 30, 1997,credit
from $2,000,000 to $2,500,000. The term loan bears an interest rate of
prime + 3%, the bridge loan bears a interest rate of prime + 1%. In
addition, the Company had established a deferred tax valuation
allowancewill incur "success" fees of $2,680,000. In view$200,000, $225,000 and
$250,000 due on the anniversary dates of the continued earnings improvementloan.
(5) COMMITMENTS AND CONTINGENCIES:
In September 1998, the Company negotiated and settled with Liberty Mutual
Insurance Company its liability on all workers' compensation claims
incurred during the three year period 1995, 1996 and 1997. In return for
terminating all future exposure under the Liberty Mutual workers'
compensation policy, the Company agreed to make a one-time payment of
approximately $919,000. The settlement was funded by allocating $738,000
of the Company over the last four quarters and its current financial position and
prospects, management has determined that it is more likely than not that the
majority of such valuation allowance will be realized. As of June 30, 1998, the
Company's valuation allowance approximated $680,000.
(4) COMMITMENTS AND CONTINGENCIES
In connection with the Company's former workers' compensation insurance policyrestricted cash, which expired on April 1, 1997, the insurance company developed reserve factors
on each claim that may or may not materialize after the claim is fully
investigated. Generally Accepted Accounting Principles require that all
incurred, but not paid claims, as well as an estimate for claims incurred, but
not reported (IBNR), be accrued on the balance sheet as a current liability,
althoughhad been used to collateralize a
portion of the claims may not be paid in the following 12 months.letter of credit to Liberty Mutual and by internal funds
of $181,000. On April 1, 1997, the Company entered into a workers'
compensation policy with a new carrier. Under the terms of the new
workers' compensation insurance program the Company is required to fund
the
9 of 16
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anticipated loss reserves on a current basis. During the ninethree months
ended June 30,December 31, 1998 and 1997, the Company recognized approximately
$717,000$214,000 and $694,000,$190,000, respectively, as its share of premiums collected
from customers covered by these policies in excess of claims and fees
paid.
9 of 16
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(6) SUBSEQUENT EVENT
The Company has outstanding letters of credit amountingchanged its name from Digital Solutions, Inc, to $1,193,000 as of June
30, 1998. The letters of credit are required to collateralize unpaid claims in
connection with the Company's former workers' compensation insurance policy and
can only be drawn upon by the beneficiary ifTeamstaff,
Inc. on February 10, 1999. Effective January 25, 1999, the Company
doesacquired the ten entities operating under the trade name, The Teamstaff
Companies. The financial data and discussions contained in this Form 10-Q
do not perform
according toreflect the termsacquisition as it occurred after the end of the
related agreement. The Company has collateralized
these letters of credit by maintaining compensating restricted cash balances of
$738,000 and utilizing $455,000 of amounts available under its line of credit.
The Company's current policy does not require a letter of credit because the
Company funds the estimated loss reserves on a monthly basis.
(5) SHAREHOLDERS' EQUITY
During the first nine months of fiscal 1998, $250,000 was received from an
equity investment by the Company directors and executive officers, as well as
from a former director, to be used for general corporate purposes.quarter.
10 of 16
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of OperationsRESULTS OF OPERATIONS
Certain statements contained herein constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "1995 Reform Act"). Digital Solutions,TeamStaff, Inc. (the "Company") desires to avail itself of
certain "safe harbor" provisions of the 1995 Reform Act and is therefore
including this special note to enable the Company to do so. Forward-looking
statements included in this report involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ from the future
results, performance (financial or operating) achievements expressed or implied
by such forward lookingforward-looking statements. Such future results are based upon
management's best estimates based upon current conditions and the most recent
results of operations. These risks include, but are not limited to, risks
associated with the Company's risks of current as well as future acquisitions,
effects of competition and technological changes and dependence upon key
personnel.
The Company's revenues for the three months ended June 30,December 31, 1998 and
1997 were $35,885,000$39,699,000 and $31,185,000,$33,662,000, respectively, which represents an
increase of $4,700,000$6,037,000 or 15.1%. For the nine months ended June 30, 1998 and
1997, the Company's revenues were $102,122,000 and $92,295,000, respectively,
which represents an increase of $9,827,000 or 10.6%17.9%. This increase iswas due entirely to increased
sales through the efforts of the Company's internal sales force to continually bring in new business which
accounted for all of the increase. Revenues for the first nine months ended June
30, 1997 include approximately $8,000,000 in revenue from two contracts
completed in the third quarter of fiscal 1997. Excluding these contracts,
revenues for the first nine months of fiscal 1998 increased 21% over the
comparable prior year period.force.
Direct expenses were $33,182,000$36,705,000 for the three months ended June 30,December
31, 1998 and $28,908,000$31,060,000 for the comparable period last year, representing an
increase of $4,274,000$5,645,000 or 14.8%18.2%. This increase represents the corresponding
higher costs associated with higher revenues. As a percentage of revenue, direct
expenses for the three months ended June 30,December 31, 1998 and 1997 were 92.5% and
92.7%92.3%.
For the nine months ended June 30, 1998 and 1997, direct costs increased
$8,677,000 or 10.1%, from $85,911,000 to $94,588,000, respectively. This
increase represents the corresponding higher costs associated with higher
revenues. As a percentage of revenue, direct costs for the nine months ended
June 30, 1998 and 1997 were 92.6% and 93.1%, respectively.
Gross profits were $2,703,000$2,994,000 and $2,277,000$2,602,000 for the quarters ended
June 30,December 31, 1998 and 1997, respectively, or an increase of $426,000.$392,000 or 15.1%.
Gross profits, as a percentage of revenue, were 7.5% and 7.3%7.7% for the quarters
ended June 30,December 31, 1998 and 1997, 11 of 16
12
respectively.
For the nine months ended June 30, 1998Selling, general and 1997, gross profits
increased to $7,534,000 from $6,384,000, respectively. As a percentage of
revenue, gross profits for the nine months ended June 30, 1998 and 1997 were
7.4% and 6.9%, respectively. The increase in gross profits as a percentage of
revenue is attributed to an increase in the percentage of the medical staffing
business which has a higher margin.
SG&Aadministrative "SG&A" costs for the quarters ended
June 30,December 31, 1998 and 1997 were $2,059,000$2,150,000 and $2,034,000,$1,857,000, respectively,
representing an increase of $25,000$293,000 or 1.2%15.8%. This increase is partially
attributed to the correspondingadditional employee costs necessary to generate the increased
level of revenue and also to the increased commission expense associated with
rise in sales. Also included in the increase in revenue. ForSG&A are the nine months ended June 30, 1998costs of additional
office equipment leases and 1997 SG&A decreased from $8,402,000supplies necessary to $5,677,000, respectively. Includedsupport the increase in
business and to facilitate the nine months ended June 30, 1997 SG&A
costs were $2,024,000corporate move.
11 of items including $1,002,000 to increase the Company's
bad debt reserve, $300,000 to absorb miscellaneous charges, $124,000 to correct
unrecorded 1996 expenses, $102,000 to establish a vacation pay accrual, $81,000
to change supplies accounting, $93,000 to establish a reserve for severance
costs, a $51,000 severance charge and $271,000 for various other miscellaneous
items. The need to substantially increase the Company's bad debt reserve became
evident after January, 1997 when previously current clients became seriously
delinquent. The Company is currently filing legal claims to recover some of
these amounts. Excluding these items, SG&A decreased by $701,000 which was
attributable to the reduction in overhead costs implemented in the fourth fiscal
quarter of 1997.16
12
Depreciation and amortization for the quarters ended June 30,December 31, 1998
and 1997 decreasedincreased to $163,000$176,000 from $213,000,$169,000, respectively, or $50,000.$7,000. The
decrease
was attributableincrease is reflective of the slight increase in depreciable assets.
Interest expense for the quarter ended December 31, 1998 increased
$78,000 to several intangible assets that have become fully amortized$166,000 from $88,000 in the current fiscal year. For the nine monthcorresponding period ended June 30, 1998in 1997 due to an
increase in debt financing and 1997, depreciation and amortization decreased from $830,000 to $502,000,
respectively, or $328,000. The majority of the decrease was attributable to the
writing off of the intangible assets of Digital Insurance Services, Inc.an increase in the first quarter of 1997, as a result of management's decision to abandon these
assets since it was decided not to remaineffective borrowing rate
associated with the Company's new financing arrangements effective in the insurance business.April,
1998.
Income taxes for the quarter ended June 30,December 31, 1998 reflected a net tax
benefitexpense of $1,470,000 relating to a reduction$271,000 versus $0 in the Company's valuation
allowance. As of September 30, 1997,same quarter last year. For the Company had established a deferred taxthree
months ended December 31, 1998, the company decreased its valuation allowance of $2,680,000. In view ofby
$271,000 to offset the continued earnings improvement
of the Company over the last four quarters and its current financial position
and prospects, management has determined that it is more likely than not that
the majority of such valuation allowance will be realized. As of June 30, 1998,
the Company's valuation allowance approximated $680,000.income tax provision.
Net income for the quarter ended June 30,December 31, 1998 was $1,792,000$335,000 versus
a net lossincome of $57,000$500,000 for the similar period in 1997. This increase of $1,849,000
is attributed to the $1,470,000decrease in net tax benefits and the overhead reductions
implemented in the fourth fiscal quarter of 1997. For the nine months ended June
30, 1998 the Company reported
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13 net
income of $2,496,000 versus$165,000 reflects a losstax expense of $3,098,000$271,000 as compared to no tax in
the similar period of 1997 or an increase of $5,594,000. This increase is attributable1997. The net income before tax increased $106,000 from
$500,000 to $606,000 due to the $3.1
million in adjustments recorded in fiscal 1997, the net tax benefit of
$1,470,000 recorded in fiscal 1998 and the overhead reductions implementedincrease in the fourth fiscalCompany's revenues in all
divisions.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities improved in the first quarter
of 1997.
Liquidity and Capital Resources1999 to $122,000, from net cash used of ($157,000) in the same period of
fiscal 1998. The Company's working capital position as of June 30, 1998 was
$3,299,000 versus a working capital deficit of ($1,401,000) as of September 30,
1997. The improved working capital positionincrease in cash flow from operations is attributable to the
continued earnings improvement of the Company andCompany. The net cash used in financing
activities increased in the successful refinancingquarter ended December 31, 1998, compared to the
quarter ended December 31, 1997 due to the increase in required payments on the
current line of the
Company's short term borrowings,credit as discussed below,below. Cash outflow for the purchases of
equipment and improvements was $23,000 in the three months ended December 31,
1998 compared to a long term credit
facility.$85,000 in the three months ended December 31, 1997. The
decrease is related to the timing of capital projects during the quarters.
Capital expenditures have been relatively stable over the last three fiscal
years. At June 30,December 31, 1998, the Company had cash of $1,806,000,$1,300,000, restricted cash
of $738,000$350,000 and accounts receivable of $4,924,000.
In February 1995, the Company entered into a one year revolving credit
line facility (the "Line") with a bank which was subsequently extended and
amended on seven occasions. At September 30, 1997 the total amount outstanding
on the Line was $2,697,000.$7,139,000.
On April 29, 1998, the Company was successful in replacing the former
credit facility with a new long termlong-term credit facility from FINOVA Capital
Corporation totaling $4.5 million. The credit facility includes a three year termthree-year
loan for $2.5 million, with a five yearfive-year amortization, at prime + 3% (currently 11.5%)(10.75% at
December 31, 1998) and a $2 million revolving line of credit secured by certain
accounts receivable of the Company at prime + 1% (currently 9.5%)(8.75% at December 31, 1998).
The credit facility is also subject to success fees of $200,000, $225,000 and
$250,000 due on the anniversary date of the loan beginning in April, 1999.
Taking variousthese fees into consideration and assuming the Company continuously fully
utilizes the revolver, the effective rate of interest on the total borrowings is
approximately 16.1%.
The Balance Sheet asCompany received an increase of June 30, 1998
reflectsits present lending facility from
FINOVA Capital Corporation in order to fund the categorizationTeamStaff acquisition. The
facility is comprised of (i) a three-year term loan, with a five year
amortization, and a balloon payment at the end of three years, in the amount of
$2,500,000; (ii) a one year bridge loan in the amount of $750,000 and (iii) an
increase in the Company's revolving line of credit from $2,000,000 to
$2,500,000. The term loan bears an interest rate of prime + 3%, the bridge loan
bears a interest rate of prime + 1%. In addition, the Company will incur
"success" fees of $200,000, $225,000 and $250,000 due on the anniversary dates
of the debt between short-term and long-term due to
the new financing. The short-term portion reflects the next twelve months of
principal payments due FINOVA starting June 1, 1998. The long-term portion
reflects the balanceloan.
Management of the debt owed as of JuneCompany believes that its existing cash and available
borrowing capacity will be sufficient to support cash needs through September
30, 1998.1999.
Inflation and changing prices have not had a material effect on the
Company's net revenues and results of operations in the last three fiscal years,
as the Company has been able to modify its prices to respond to inflation and
changing prices.
The Company anticipates that its available funds, together with cash
generated from operations and amounts that may be borrowed under the credit
facility will be sufficient to fund working capital and debt service
requirements for the next twelve months.
Year 2000 Issue
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1413
YEAR 2000 ISSUE
The year 2000 issue is the programming of computer systems to
recognize the values "00" in a date field as the year 2000 and not the year
1900. The Company began steps in 1997 to reasonably ensure that the software it
utilizes will be year 2000 compliant. The Company is utilizing internal staffhas evaluated the Year 2000
readiness of the hardware and external sources to make its information technology/computer systems year
2000 compliant.software products used by the Company. The
Company's assessment covered the following phases: (1) identification of all
Products, IT Systems, and non-IT Systems, such as building security and voice
mail; (2) assessment of repair or replacement requirements; (3) testing and (4)
implementation. The assessment and the first phases of testing and
implementation were completed in fiscal 1998, and based on this, the Company
believes that, with some modifications to existing software and conversions to
new software, the year 2000 issue will not pose significant operational
problems. The replacement, final testing and implementation will be complete in
February of 1999. The costs of these modifications are not expected to have a
material impact on the Company's financial position. StatementHowever, the assessment of
Financial Accounting Standards
In June, 1997,whether a complete system or device will operate correctly depends in large part
on the Financial Accounting Standards Board (FASB)
issued StatementYear 2000 compliance of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"),the product or system's other components, many of
which establishes standards for reportingare supplied by parties other than the Company. The supplier of the
Company's current financial and displaying comprehensive income and its components. The components of
comprehensive income refer to revenues, expenses, gains and losses that are
excluded from net income under current accounting standards, including
unrecognized foreign currency translation items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. SFAS 130 requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement displayed in equal prominence with the other financial
statements; the total of other comprehensive income for a period is required to
be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. SFAS 130 is
effective for both interim and annual periods beginning after fiscal December
15, 1997, at which timesoftware has informed the Company
that such software is Year 2000 compliant. Further, the Company relies on
various vendors, utility companies, telecommunication service companies,
delivery service companies and other service providers who are outside of the
Company's control. There is no assurance that such parties will adoptnot suffer Year
2000 business disruption, which could impact the provisions. The Company does
not expect SFAS 130 to have a material effect on reported results.Company's financial condition
and results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the way public
enterprises are to report information about operating segments in interim
financial statements and requires the reporting of selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for periods
beginning after fiscal December 15, 1997, at which time the Company will adopt the
provisions. The Company does not expect SFAS 131 to have a material effect on
reported results.
In March, the AICPA issued Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Maintained for
Internal Use." SOP 98-1 provides guidance on the treatment of costs related to
internal use software. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998, at which time the Company will adopt the provisions. The
Company does not expect SOP 98-1 to have a material effect on reported results.
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP
98-5"), "Reporting on the Cost of Startup Activities". SOP 98-5 provides
guidance on the financial reporting of startup costs and organization costs and
requires that the cost of startup activities and organization costs be
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14
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, at which time the Company will adopt the 14 of 16
15
provisions. The
Company does not expect SOP 98-5 to have a material effect on reported results.
PART II
OTHER INFORMATION
ItemITEM 1. Legal Proceedings
At June 30,LEGAL PROCEEDINGS
The Company's subsidiary, DSI Staff Connxions-Southwest, Inc., is the
defendant in a suit (Frederico Farias v. Thomson Consumer Electronics and DSI
Staff Connxions-Southwest, Inc.; 327th Judicial District Case No. 96-3036;
District Court of El Paso County, Texas) whereby a former leased employee of a
client obtained a judgment against the Company during August, 1998 in the amount
of $315,000 including interest. The judgment includes approximately $115,000 in
compensatory damages and $200,000 in punitive damages. The Company has posted a
bond for the full amount of the judgment and is appealing the judgment.
Management of the Company, after consultation with counsel, believes that there
is no basis for the awarding of punitive damages, and that the award of
compensatory damages was based on insufficient evidence. Although there can be
no assurances the Company will be successful in prosecuting the appeal, the
management of the Company, after consultation with counsel, believes it will
obtain a reversal of the judgment. If the Company is involvednot successful with the
appeal, the Company would record expense of $315,000.
The Company is also a defendant in various other legal
proceedings incurreda lawsuit (ASI Group, Inc. and Terri
Munkirs v. Digital Solutions, Inc., George Eklund and Miriam H. Silverman;
Superior Court of New Jersey, Law Division, Middlesex County, Docket No.
8906-97) which is currently pending in the normal courseSuperior Court of business. The Company continues to
pursue the collection of past due accounts receivable balances. In the opinion
of management and its counsel, none of these proceedings would haveNew Jersey. This
action was brought by a material
effect, if adversely decided, on the consolidated financial position or results
of operationscompetitor of the Company.
Item 5. Other Information
On April 28, 1998, the Company entered into a loan and security
agreement (the "Agreement") with Finova Capital Corporation ("Finova") which
provided a facility in the aggregate amount of $4,500,000. The facility includes
a revolving loan in the maximum amount of $2,000,000 secured by certain eligible
receivables as defined in the Agreement, and a three-year term loan in the
aggregate amount of $2,500.000. The term loan bears interest at the rate of
prime plus 3% and the revolving loan bears interest at prime plus 1%. The
proceeds of the loan were used to repay the existing balance of the Company's
previous credit facility maintained with Summit Bank, and for general working
capital. The timely retirement of the Summit Bank facility enabled the Company
to cancel a warrant to purchase 500,000 shares of Common Stock issued to Summit
upon the renewal of the bank loan in October 1997. In addition, the Company was
also required to pay additional fees and expenses of Finova in connection with the
establishmenttransfer of several former clients of the credit facility.
On July 14, 1998,competitor to the Company. The Company
has denied the material allegations of the complaint. Discovery in the case is
in the preliminary stages. The plaintiffs have submitted a calculation of
damages of $300,000 for the claims identified in the lawsuit which includes
damages for clients which never became clients of the Company. Although there
can be no assurances the Company announced that two new directors had been
elected, increasingwill be successful in defending the board membershipclaim,
management of the Company, after consultation with counsel, believes it has
meritorious defenses against the claim.
The Company is engaged in no other litigation, the effect of which
would be anticipated to seven. The new directors are Mr.
Charles R. Dees, Jr. Ph.D.,have a nationally known university administrator and
former official inmaterial adverse impact on the U.S. DepartmentCompany.
ITEM 5. OTHER INFORMATION
Effective January 14, 1999, George Eklund resigned as a Director of Education and Mr. Martin J. Delaney,
a prominent healthcare executive.
Itemthe
Company due to personal reasons.
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ITEM 6. Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
- None3.1 Amendment to amended and restated certificate of
incorporation
(b) Reports on Form 8-K
none filed during the quarter ended June 30, 1998.Date of Report Item Reported
12/24/98 Item 2 - Acquisition or Disposition of Assets
11/10/98 Item 5 - Other Events
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
DIGITAL SOLUTIONS,TEAMSTAFF, INC.
(Registrant)
/s/ Donald W. Kappauf
------------------------------------------------------
Donald W. Kappauf
Chief Executive Officer
/s/ Donald T. Kelly
------------------------------------------------------
Donald T. Kelly
Chief Financial Officer
Date: July 24, 1998February 9, 1999
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