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TABLE OF CONTENTS
DLH Holdings Corp. and Subsidiaries Index to Consolidated Financial Statements

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
(Mark One)  
þ
ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2009

For the fiscal year ended September 30, 2012

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to          
For the transition period fromto

Commission File No. 0-18492

DLH HOLDINGS CORP.

TEAMSTAFF, INC.
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)
its charter)

New Jersey22-1899798

(State or other jurisdiction of
incorporation or organization)
 22-1899798
(I.R.S. Employer
Identification No.)

1776 Peachtree Street, NW
Atlanta, Georgia

(Address of principal executive offices)


30309
(Zip Code)

1 Executive Drive, Somerset, NJ 08873, Suite 130(866) 952-1647
(Address of principal executive offices) (Zip Code)

Issuer’sRegistrant's telephone number, including area code(877) 523-9897code)

Securities registered pursuant to Section 12(b) of the Exchange Act

Title of Each ClassName of Each Exchange on
Title of Each ClassWhich Registered
COMMON STOCK, PAR VALUE $.001 PER SHARE THE NASDAQ STOCK MARKET, LLC

Securities registered pursuant to Section 12(g) of the Securities Exchange Act:NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yeso    Noþý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act.Yeso    Noþý

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 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 Yesþý    Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Yesoý    Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large"large accelerated filer,” “accelerated filer”" "accelerated filer" and “smaller"smaller reporting company”company" inRule 12b-2 of the Exchange Act. (check one):

Large accelerated filero Accelerated filero Non-accelerated fileroSmaller reporting company
þ
(do not check if a
smaller reporting company)
 Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yeso    Noþý

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’sregistrant's most recently completed second fiscal quarter (March 31, 2009)2012): $4,586,028.

$11,967,618.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrant’sregistrant's classes of common stock, as of the latest practicable date: On January 5, 2010November 30, 2012, there were 4,940,9829,265,702 shares outstanding of common stock of the Registrant.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933.

None

          Part III of this report incorporates information by reference from the Company's definitive proxy statement, which proxy statement is due to be filed with the Securities and Exchange Commission not later than 120 days after September 30, 2012.

   



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PAGE

PART I

    

Item 1.

 PAGE

Business


3
 

Item 1A.

Risk Factors

11

Item 1B.

Unresolved Staff Comments

28

Item 2.

Properties

28

Item 3.

Legal Proceedings

28

Item 4.

Mine Safety Disclosure

29

PART II

    

Item 1. Business

5.

 1
7
18
19
19
20

  21
29
 

Item 6.

Selected Financial Data

  30 

Item 6. Selected Financial Data

7.

 23
Item 7. Management’s

Management's Discussion and Analysis of Financial Condition and Results of Operations

  2330 

Item 7A.

 
Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

  3449 

Item 8.

 
Item 8.

Financial Statements and Supplemental Data

  3449 

Item 9.

 
Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

  3449 

Item 9A.

Controls and Procedures

50

Item 9B.

Other Information

51

PART III

    

Item 9A. Controls10.

Directors, Executive Officers and ProceduresCorporate Governance

  34
52
 

Item 11.

Executive Compensation

52

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

52

Item 13.

Certain Relationships and Related Transactions, and Director Independence

52

Item 14.

Principal Accountant Fees and Services

52

PART IV

    

Item 9B. Other Information

15.

 35
36
41
53
55
56

  57
53
 
Exhibit 10.35
Exhibit 10.36
Exhibit 10.37
Exhibit 21
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1


ITEM 1.BUSINESS
INTRODUCTION ITEM 1.    BUSINESS

GENERAL

GeneralCompany Profile

TeamStaff, Inc. and

        For more than 25 years, DLH Holdings Corp. ("DLH") through its subsidiaries, (“TeamStaff”has provided professional services to the U.S. Government. Headquartered in Atlanta, Georgia, DLH employs approximately 1,100 skilled technicians, logisticians, engineers, healthcare and support personnel at more than 25 locations around the United States. DLH's operating subsidiary, DLH Solutions, Inc., is organized into three broad integrated business areas: Healthcare Delivery Solutions, Logistics and Technical Services, and Contingency / Staff Augmentation Services. Our government customers, a majority of whom are within the Departments of Defense ("DoD") and Veterans Affairs ("DVA"), benefit from proven leadership processes, technical excellence, industry-leading productivity and affordability enhancement tools, and Lean Six Sigma-based quality improvement processes.

        In February 2012, the Company's shareholders approved a proposal to change its corporate name to DLH Holdings Corp. This change was driven by management in order to better align the Company's branding with its core competencies and revised strategic focus. On June 25, 2012 the Company filed an amendment to its certificate of incorporation to implement the change in its corporate name to DLH Holdings Corp. (together with its subsidiaries, "DLH" or the “Company”,"Company" and also referred to as “we,” “us”"we," "us" and “our”"our"), provide staffing services to the United States Department of Veterans Affairs (“DVA”) and other US governmental entities. TeamStaff’s primary operations are located in Loganville, Georgia. DLH's corporate headquarters and its principal executive office isoffices are located at 1 Executive Drive, Suite 130, Somerset,1776 Peachtree Street, Atlanta, Georgia 30309.

Corporate History

        DLH Holdings Corp. was originally incorporated in New Jersey 08873 where its telephone number is (877) 523-9897.

Company History
TeamStaff, Inc., a New Jersey corporation, was founded in 1969 as a payroll service companystaffing company. Through several strategic transactions over recent decades, the Company has evolved considerably and evolved into a national providerin early 2010, made the strategic decision to build the Company around its government services entity, DLH Solutions, Inc. This transformation began with the divestiture of contractits commercial business and permanent medical and administrative staffing services. Its principal operations are conducted through its subsidiary, TeamStaff Government Solutions, (“TeamStaff GS”), a wholly-owned subsidiary of TeamStaff, Inc. TeamStaff GS changed its name from RS Staffing Services, Inc on February 12, 2008 to reflect the subsidiary’s expanding service offerings.
As described in greater detail below, on December 28, 2009, TeamStaff and TeamStaff Rx, Inc. (“TeamStaff Rx”), our wholly-owned subsidiary, entered into a definitive Asset Purchase Agreement with Advantage RN, LLC, an Ohio limited liability company (“Advantage RN”), providing for the sale of substantially allreplacement of the operating assets of TeamStaff Rx related to TeamStaff Rx’s business of providing travel nurseCEO and allied healthcare professionals for temporary assignments to Advantage RN. The closing of this transaction occurred on January 4, 2010. The Asset Purchase Agreement provides that the purchased assets were acquired by Advantage RN for a purchase price of up to $425,000, of which (i) $350,000 in cash was paid at the closing, and (ii) $75,000 is subject to an escrowed holdback as described in the Asset Purchase Agreement. Additionally, Advantage RN will make rent subsidy payments to TeamStaff Rx totaling $125,000, consisting of (i) $25,000 payable at closing, and (ii) an additional $100,000 payable in 10 equal monthly installments beginning on March 1, 2010. Under the termsCFO of the Asset Purchase Agreement, Advantage RN did not assume any debts, obligations or liabilities of TeamStaff Rx nor did it purchase any accounts receivable outstandingCompany with executives with skills and experience more closely aligned with the Company's new direction. The Company is now completely focused on government services both as of the closing date.
TeamStaff’sa prime contractor as well as a partner with other government contractors. The Company's other wholly-owned subsidiaries are not actively operating.

Strategic Development

        In late 2010, the Company realigned its business into three broad integrated business areas: Healthcare Delivery Solutions, Logistics & Technical Services, and Contingency/Staff Augmentation. This structure enables us to leverage our core competencies and drive towards profitable growth within our focused target markets. We intend to strategically enhance the Company's value through sustainable, profitable growth leveraging our core competencies and performance track record within current customers and adjacent markets.

        During fiscal 2011, the Company continued to strengthen its leadership team and its business base, with substantial competitive contract wins (including renewals within the Department of Veterans Affairs), leading to a contract backlog of approximately three times revenue at year end. In fiscal 2011, the Company reported its first major prime DoD IDIQ contract awards, including the Navy's Seaport-e contract. In addition, Management initiated a strategic market advisory board consisting of two former high-ranking military officers aligned with the Company's top strategic focus areas (Healthcare and Logistics). During fiscal 2012, the Company invested in key initiatives to bolster its performance, roll-out its market differentiators, enhance performance tracking and reporting, and achieve


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government certification of its business systems. The company made significant progress toward achieving these goals during fiscal 2012.

        The Company operates primarily through prime contracts awarded competitively through full and open competition by the government. Additionally, the Company has a diverse mix of contract vehicles with various agencies of the United States Government, which we expect to support our overall corporate growth strategy. The majority of our contracts are fixed-price type contracts that were awarded on a best-value basis. As such, the Company has developed and continues to leverage a suite of solution offerings geared toward enhancing performance and productivity while reducing costs to its US government clients. With a voluntary turnover rate in the low single digits, the Company continues to demonstrate that it values and effectively supports its workforce. In addition, we have implemented a Quarterly Performance Review program which provides effective oversight to ensure that we meet or exceed safety, technical, quality, schedule, cost and customer satisfaction objectives on our projects. We also utilize various components of Lean Six Sigma and other management techniques to achieve continuous improvement. We believe that since 2010, the Company's track record of growth and improved results of operations are leading indicators of the effectiveness of these and other measures.

Major Lines of Business

Healthcare Delivery Solutions

        The Healthcare Delivery Solutions business unit, provides a broad continuum of care for our nation's servicemen/women and veterans in various settings and facilities. These include DSI Combat Trauma Centers (CTCs), Military Treatment Facilities (MTFs), Medical Centers, Community-based Outpatient Clinics (CBOCs), and Pharmacy Distribution Centers (including VA Consolidated Mail-order Outpatient Pharmacy). We leverage our network of over 400 active clinicians and other healthcare workers throughout selected regions in the US, applying differentiating tools, databases and technology (including e-PRAT and SPOT-m) to deliver these services. For over a decade, DLH Solutions has been serving the DVA and DoD in providing qualified medical and other professionals in a variety of positions. Healthcare Delivery Solutions is one of our strategic focus areas for growth and a major business area that DLH Solutions services. As more and more Federal and DoD programs increase their performance-based requirements, DLH Solutions' workforce profile of medical talent and credentials (as described above) will help it to compete and differentiate itself in the market place. Our healthcare and medical service new business pipeline adds important credentials strategically linked to diversifying and profitably growing our Healthcare Delivery Solutions business base. Professional services have included case management, health and injury assessment, critical care, medical/surgical, emergency room/trauma center, counseling, behavioral health and traumic brain injury management, medical systems analysis, and medical logistics. While the DVA is its largest customer in this business unit, the Company has focused on leveraging that experience in adjacent healthcare markets within DoD and other federal agencies. In fiscal 2012, approximately 54% of our revenue was derived from the Healthcare Delivery Solutions business unit.

Logistics & Technical Services

        The Logistics & Technical Services business unit draws heavily upon our proven logistics expertise and processes. DLH resources possess expertise covering a wide range of logistics, readiness, and project engineering. The experience of DLH Solutions' project personnel is diverse from operational unit level to major systems and program office experience. Our core competencies include; supply chain management, performance-based logistics, distribution center and inventory management, statistical process control, packaging/handling/storage & transportation, configuration management, readiness planning and supply support operations. In addition, we provide program and project management, systems engineering and applicable information technology services, integrated logistics support (including operational systems), readiness assessments, training, equipment maintenance, hazardous


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material management, facilities and shipyard support services and more. DLH Solutions also provides professional staff to the federal government specializing in logistics, office administration, IT, and facilities/warehouse management.

        Through competitively awarded contracts and task orders (including its LOGWORLD contract) DLH Solutions has developed a strong portfolio of logistics processes, personnel and tools to help its clients achieve nationally recognized awards for customer satisfaction. While the DVA is its largest customer in this area, the Company has taken steps to expand in adjacent logistics markets within DoD and other federal agencies. In fiscal 2012, over 45% of our revenue was derived from the Logistics & Technical Services business unit.

Contingency/Staff ConnXions Northeast, Inc.Augmentation

        The Contingency/Staff Augmentation business unit provides disaster and emergency response services and civilian workforce augmentation services. General staffing and selective recruitment process outsourcing are key components of this service area. Less than 1% of fiscal 2012 revenue was derived from the Contingency/Staff Augmentation line of service.

Recent Business Trends

        Though the recent Federal election is now behind us, the uncertainty surrounding the budget deficit negotiations and potential sequestration continues to cause delays in funding and contract awards by government program offices. While it is unclear whether sequestration will occur and what the exact impact of it would be, we are continuously reviewing our operations and new pursuits in an attempt to identify those programs that could be at risk so that we can make appropriate contingency plans. While we may experience reduced funding on some of our targeted programs, we do not expect the cancellation of any of our major programs. In addition, financial developments in the U.S., DSI Staff ConnXions Southwest, Inc., TeamStaff Solutions, Inc., TeamStaff I, Inc., TeamStaff II, Inc., TeamStaff III, Inc., TeamStaff IV, Inc., TeamStaff VIII, Inc., TeamStaff IX, Inc., Digital Insurance Services, Inc., HR2, Inc.Europe and BrightLane.com, Inc.emerging markets will continue to have a significant impact on U.S. Gross Domestic Product growth and in turn, U.S. fiscal deficits for the foreseeable future.

        In addition, the government has continued to change the manner in which it purchases goods and services. We have noticed an increased emphasis on the use of low priced, technically acceptable proposal evaluations, which could challenge our ability to maintain value added differentiation to our solutions. Further, we have also seen a reduced rate of usage of T&M and sole-source contracts along with a commitment to expand small business set asides. In addition, more scrutiny is being placed on the amount of fee bid on cost reimbursable type contracts. Pricing competition is taking on an increasing role in best value determinations with more detailed pricing oversight.

        Based on the above considerations, from an overall budget perspective it is likely that government discretionary spending will be constrained for several years to come. Although specific funding priorities are subject to change from year to year, we believe that our strategic business alignment around DoD and Veterans healthcare and logistics sustainment services allows us to remain well-placed to address what we consider are top national priority budget areas (along with cyberspace and intelligence). We particularly benefit from the multi-year budgeting process unique to the Department of Veterans Affairs. As with other companies operating in the Federal government market, the possibility remains, however, that one or more of our targeted programs could be cut back or terminated as a result of the salebudget deficit negotiations.

Intellectual Property

        We claim copyright, trademark and other proprietary rights in a variety of intellectual property, including each of our Professional Employer Organizationproprietary computer software and data products and the related documentation. Because our business involves providing services to government entities, our operations generally are not substantially dependent upon obtaining and/or maintaining copyright or trademark protections,


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although our operations make use of such protections and benefit from them as discriminators in competition. We maintain a number of trade secrets that contribute to our success and competitive distinction and endeavor to accord such trade secrets protection adequate to ensure their continuing availability to us.

        An important aspect of the Company's strategy is the use of program management to achieve the integration of people, processes and tools. The key principles of our program management approach begin with a joint understanding of the project requirements, and include attaining and sustaining excellence from all Program Management Office staff members, consistent quality control measures, and the delivery of compliant task order solutions on time and within budget. We tailor our program management methodologies and apply them to individual task orders, depending on their complexity and duration. Our goal is to manage cost, schedule, and performance by implementing our integrated People, Processes, and Tools methodology. Our tools and processes include our electronic Practitioner Resource Allocation Tool ("ePRAT"), which is a proprietary software solution and our SPOT-m supply chain management optimization process.

Customers

        Our primary customers are agencies of the U.S. Government. Total revenue from all agencies of the U.S. Government accounted, either directly or indirectly, for 100% of our total revenue during the 2012 fiscal year. Our largest service line is healthcare, which accounted for approximately 54% and 45% of revenue in fiscal year 20042012 and 2011, respectively. Within the U.S. Government, our largest customer in fiscal 2012 and 2011 continued to be the DVA with whom the Company held over a dozen unique contracts and/or task orders for logistics, pharmaceutical, and other medical services covering a substantial percentage of the Company's revenues as discussed in Note 13 to the accompanying consolidated financial statements. During fiscal 2011 the Company was awarded contracts with an estimated value of up to $145 million for pharmaceutical and other medical services during a period of up to five years which will both retain and expand its business changes, these “other” subsidiaries are not actively operating.

Governmental Services
Followingwith the dispositionDVA. Work under this contract began November 1, 2011. Accordingly, DLH Solutions remains particularly dependent on the continuation of its TeamStaff Rx business, TeamStaff’s operations are concentratedrelationship with the DVA. See Risk Factors in the governmental staffing segment. TeamStaff, through its TeamStaff GS subsidiary, is a staffing provider specializing in providing healthcare, logistical, information technology and office administration personnel to U.S. government entities.Part I, Item 1A.

        The staffing services offered by TeamStaff GS are provided through independent Federal Supply Schedule (“FSS”) contracts through the United States General Services Administration (“GSA”). The provision of logistical and administrative personnel is accomplished through the Logistics Worldwide Schedule and medical personnel are supplied through the Professional and Allied Healthcare Staffing Services Schedule. TeamStaff also provides its staffing services to federal government agencies through competitively bid contracts and has a GSA schedule contract to provide information technology professional services. TeamStaff provides these services to the DVA, the US Department of Defense and other US governmental agencies and placed contract employees at over 40 facilities during the 2009 fiscal year.

1


Description of Services
TeamStaff, through its TeamStaff GS subsidiary, is a staffing provider specializing in healthcare, logistical, information technology and office administration personnel that has been serving the Federal Government for over a decade. Providing quality staffing solutions and facility management services, TeamStaff GS is committed to providing on-time delivery of multi-disciplined employees who possess the necessary experience, expertise, and dedication required to meet contract specifications. TeamStaff GS’ vision is to become the preferred partner of the federal government facilities by providing reliable services and qualified personnel that deliver exceptional results. TeamStaff GS provides nationwide service and has several remote offices and branches across the continental United States.
TeamStaff GS’s primary client has been the United States Government and its various agencies. TeamStaff GS provides contract staffing solutions for government agencies in the categories of medical, professional, office administration, general services support, facility management and logistics support. Through its FSS contracts with both the GSA and the DVA, TeamStaff GS offers the ease of ordering directly through one of its multiple-award contracts and through multiple procurement vehicles and schedules. These procurement vehicles include the Logistics World schedule, the Professional and Allied Healthcare and Information Technology schedules, as well as the ability to order through the GSA’s e-Buy system. TeamStaff GS also provides technology for online timesheets, reporting, ordering and invoicing as well as a provision of qualified personnel which can be based on any term assignment or contract. During the fiscal year ended September 30, 2009, this subsidiary generated $46.0 million in revenues.
Teamstaff GS’ variety of services, nationwide presence and broad depth of experience enables the company to provide staffing services to a wide range of Federal Government agencies. Some of these clients include: United States Forestry Service, United States Fish and Wildlife Service, Army Corps of Engineers, Army Medical Centers, Veterans Affairs Medical Centers, National Naval Medical Centers, General Services Administration, United State Air Force, Bureau of Land Management, Center for Disease Control, Naval Construction Battalion, Federal Bureau of Prisons and the Equal Employment Opportunity Commission. TeamStaff GS also is seeking to develop and maintain a nationwide network of teaming partners, including small businesses, Service Disabled Veteran Owned Small Businesses and other small-businesses certified under Section 8(a) of the Small Business Administration in order to expand and diversify its service offerings.
Healthcare Staffing
For over a decade TeamStaff GS has been serving the United States Veteran’s Affairs Department and Department of Defense by providing qualified medical and non-medical professionals. TeamStaff GS healthcare professionals are highly skilled clinicians who are licensed and credentialed, experienced and knowledgeable. TeamStaff GS provides assignments ranging from short to long-term positions.
TeamStaff GS has an expansive pool of allied health and nursing professionals, which includes many carefully screened and dedicated professionals experienced in a large number of modalities. Our allied health professionals include persons trained as: MRI Technologists; CRNA; Diagnostic Sonographers; Respiratory Therapists; Phlebotomists; Radiologic Technologists; Mammographers; Administration; Physicists; Medical Laboratory Technicians; Dosimetrists; PA/Nurse Practitioners; Radiation Therapists; Speech Therapists; Pharmacists; Pharmacy Technicians; Physical Therapists and Occupational Therapists. Our nursing professionals are experienced in the following areas: ICU; Emergency Room; CAN; Critical Care; Neonatal Intensive Care Unit; Medical Assistants; Medical/Surgical; Post Partum; NP; Pediatrics; Labor and Delivery; CRNA; Dialysis; LPN Long Term Care; Telemetry; Nursery; PACU; and PICU.
Relationship with DVA
The DVA’sDVA's mission is one of service to the 27 million veterans who have served theirour country. To accomplish this mission, the VADVA provides various products and services to veterans by working closely with various industry sectors. TeamStaff GS ispartners. These products and services include medical care, benefits, and social programs for the veteran community throughout the country.

        We currently hold multiple GSA schedule contracts, under which we provide services that constitute a pre-qualified vendor under Schedule 621 I, and offerssignificant percentage of our total revenue. During the fiscal year ended September 30, 2012 our federal supply schedule contract for professional and medical personnel inallied healthcare services was extended through June 30, 2017. In October 2012, our logistics worldwide services contract was extended through November 2017.

        We provide services to the healthcare field, including nursing, pharmacists and pharmaceutical personnel. TeamStaff GS helps its clients bridge gaps in professional clinical staffing inU.S. Government pursuant to a variety of locationscontract types, including fixed-price awards, indefinite delivery/indefinite quantity (IDIQ) and government wide acquisition contracts such as General Services Administration (GSA) schedule contracts, which are awarded competitively through full and open competition by the government. The majority of our contracts are fixed-price type contracts that were awarded on a shortbest-value basis. As such, the Company has developed and continues to leverage a suite of solution offerings geared toward enhancing performance and productivity while reducing costs to its US government client. Management believes the expanded use of these differentiating tools will become even more valuable as the Federal government deficit reduction initiatives evolve. The award of an IDIQ contract does not represent a firm order for services and is subject to competitive bidding. Generally, under an IDIQ contract, the government is not


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obligated to order a minimum of services or long-term basis.

Since 1999, TeamStaff GS has provided the DVA with contract staffing services atsupplies from its consolidated pharmacy distribution facilities. These services include pharmacists, pharmacy technicians and shipping packers and are performed at sixcontractor, irrespective of the seven DVA-operated locations. In January 2008 Teamstaff GStotal estimated contract value.

Backlog

        At September 30, 2012, the total backlog was issued purchase orders for all sites from the DVA’s consolidated pharmacy national contracting office, which allowed for standardizationapproximately $153 million. Total backlog as of labor categories as well as implementationSeptember 30, 2011 was approximately $160 million. Backlog represents total estimated contract value of correct Department of Labor Wage Determinations. Although, the current task orders expired on December 31, 2009, a six month continuation of services extension for all six locations serviced by TeamStaff GS was awarded on December 14, 2009.

2


Previously, DVA had issued a new contract solicitation in June 2008 for these services, which was cancelled in October 2008. We anticipatepredominantly multi-year government contracts, based upon customer commitments that the DVA may release new requests for proposals related to staffing services at its pharmacy distribution facilities early in 2010. In such an event, the Company intends to submit a proposal to address any such solicitation. Although the Company believes itto be firm over the remaining performance period of our contracts. Backlog value is well positionedbased upon contract commitments, management judgment and assumptions about the volume of services, availability of customer funding and other factors. Our backlog may consist of both funded and unfunded amounts under existing contracts including option periods. At September 30, 2012, our funded backlog was $65 million and our unfunded backlog was $88 million. However, there can be no assurances that existing contracts will result in earned revenue in any future period, or at all. The value of multi-client, competitive ID/IQ awards is included in backlog computation only when a task order is awarded. A number of U.S. Government programs with which we are associated are multi-year programs, and as such a substantial portion of our backlog is expected to continue its relationshipbe filled subsequent to fiscal 2013.

Government Regulation

        Our business is affected by numerous laws and regulations relating to the award, administration and performance of U.S. Government contracts. In addition, many Federal and state laws materially affect the Company's operations. These laws relate to ethics, labor, tax, and employment matters. As any employer, DLH is subject to Federal and state statutes and regulations governing their standards of business conduct with the DVA, no assurancesgovernment. The development of additional statutes and regulations and interpretation of existing statutes and regulations with respect to our industry can be given that inexpected to evolve over time. Through its corporate membership with the event the DVA issues such a solicitation, that any purchase orders would be awarded to the Company or if it is granted subsequent orders, that such orders would be of a scope comparable to the services that the Company has provided to date.

Logistics
TeamStaff GS is also a staffing provider of logistics and administrative professionals to the federal government. TeamStaff GS specializes in proving personnel for logistics, office administration, IT, and facilities/warehouse management through Federal Service Schedules. TeamStaff GS’ project managers range from career government support employees to retired military veterans with extensive experience. The experience of TeamStaff GS’ project managers is diverse from operational unit level to systems command/headquarters program office experience. More recently, TeamStaff GS has entered into several teaming agreements with Service Disabled Veteran Owned Small Businesses. These agreements allow the Company to aid these companies, which typically support Department of Defense requirements, and more specifically Defense Logistics Agency, in having the ability to draw from our human resources and account administration expertise. In particular, TeamStaff GS is experienced in providing personnel with supply chain distribution as well as inventory and warehouse management expertise. TeamStaff GS is moving forward to expand its service offering, especially within the Department of Defense.
TeamStaff GS’ full spectrum of logistics and technical expertise is available to the governmentProfessional Services Council and other authorized agencies through its LOGWORLD contract, which allows agencies to select service providersaffiliations, DLH monitors proposed and pending regulations from relevant congressional committees and government agency policies that meet their needs for personnel, management, supplies, services, materials, equipment, facilitieshave potential impact upon our industry and transportation. Staffing of logistics personnel includesour specific strategically targeted markets. As with any commercial enterprise, DLH cannot predict with certainty the following: Logistics Support, Office Administration, Information Technologies and Facilities Management.
Our Strategy
TeamStaff’s entire complement of staffing services provides numerous benefits to customers in managing their workforces. TeamStaff’s contract staffing services allow a client to avoid administrative responsibility for payroll, payroll taxes, workers’ compensation, unemployment and medical benefits for interim employees.
The Company believes that its contract staffing services provide a client with an increased pool of qualified personnel. Since TeamStaff’s contract staffing employees have access to a wide array of benefits, such as paid time off, health and life insurance and Section 125 premium conversion plans, TeamStaff believes it is able to attract a sufficient pool of qualified personnel to grow this business. These benefits provide contract employees with the motivation of permanent workers without additional benefit and administrative costs to the client.
TeamStaff GS has achieved positive results in expanding its penetration of DVA facilities through vertical expansion of previously awarded contracts. The Company is also expanding its reach within the government sector beyond VA opportunities by bidding on Department of Defense (“DOD”) staffing contracts afforded to large businesses and the GSA’se-Buyportal, an electronic Request for Quote (RFQ) / Request for Proposal (RFP) system, which is designed to allow Federal buyers to request information, find sources, and prepare RFQs/RFPs, online, for various services offered through GSA’s Multiple Award Schedule. Additionally, TeamStaff GS is evaluating opportunities to satisfy the staffing needs of other government agencies in addition to the DVA and DOD as a means of horizontal expansion of its client base.

3


Customers
As of September 30, 2009, TeamStaff’s combined customer base consisted of approximately 40 government clients. Substantially allnature or direction of the development of federal statutes and regulations that will affect its business operations. See Risk Factors in Part I, Item 1A.

        Most of our TeamStaff GS subsidiary is accomplished through contractsrevenue arrangements with various agencies of the United States Government. In fiscal 2009, through its FSS contracts primarily with the DVA, TeamStaff GS had independent task–orders with four DVA-related facilities which comprised 31%, 23%, 12% and 11%, or 77% in the aggregate, of the Company’s overall consolidated revenue. In fiscal 2009, TeamStaff GS had five task-orders that each individually comprised greater than 5% of the subsidiary’s revenue. As described in greater detail above, we are currently providing these services under extended task orders, which are scheduled to expire on or around June 30, 2010 and we anticipate that the DVA may release new requests for proposals related to staffing services at its pharmacy distribution facilities in early 2010. In such an event, the Company intends to submit a proposal to address any such solicitation.

Government Contracts
The U.S. Government is the primary customer to our TeamStaff GS subsidiary. Many of the U.S. Government programs in which we participate as a contractor or subcontractor may extend for several years. However, such programs are normally fundedsubject to unique procurement and administrative rules. These rules are based on an annual basis. Allboth laws and regulations, including the U.S. GovernmentFederal Acquisition Regulations ("FAR"), that: (1) impose various profit and cost controls, (2) regulate the allocations of costs, both direct and indirect, to contracts and subcontracts may be modified, curtailed or terminated at(3) provide for the conveniencenon-reimbursement of theunallowable costs. Our contract administration and cost accounting policies and practices are also subject to oversight by government for any reason, including if program requirements or budgetary constraints change. If a contract is terminated for convenience, we would generally be reimbursed for our allowable costs through the date of terminationinspectors, technical specialists and would be paid a proportionate amount of the stipulated profit or fee attributable to the work actually performed. Although contract and program modifications, curtailments or terminations have not had a material adverse effect on the business of TeamStaff GS in the past, no assurance can be given that such modifications, curtailments or terminations will not have a material adverse effect on our financial condition or results of operations in the future. In addition, the U.S. Government may terminate a contract for default. Although the U.S. Government has never terminated any of TeamStaff GS’s contracts for default, such a termination could have a significant impact on our business. If a contract is terminated for default, we may be unable to recover amounts billed or billable under the contract and may be liable for other costs and damages.auditors. The U.S. Government contract bid process is complex and sometimes lengthy. Once a bid is won and a contract awarded, there still is the possibility of a bid protest or numerous delays in implementation. There

        The U.S. government also regulates the methods by which allowable costs may be allocated under U.S. government contracts. Our government contracts are subject to audits at various points in the contracting process. Pre-award audits are performed at the time a proposal is submitted to the U.S. government for cost-reimbursement contracts. During the performance of a contract, the U.S. government has the right to examine our costs incurred on the contract, including any labor charges, material purchases and indirect cost allocations. Upon a contract's completion, the U.S. government typically performs an incurred cost audit of all aspects of contract performance for cost-reimbursement contracts to ensure that we have performed the contract in a manner consistent with our proposal.


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        As is common in the U.S. defense industry, we are subject to business risks, including changes in the U.S. Government's procurement policies (such as greater emphasis on competitive procurement), governmental appropriations, and availability of funds. A reduction in expenditures by the U.S. Government for the services that we provide, lower margins resulting from increasingly competitive procurement policies, a reduction in the volume of contracts or subcontracts awarded to us or the incurrence of substantial contract cost overruns could materially adversely affect our business. All of our U.S. Government contracts can be terminated by the U.S. Government either for its convenience or if we default by failing to perform under the contract. Termination for convenience provisions provide only for our recovery of costs incurred or committed and settlement of expenses and profit on the work completed prior to termination. Termination for default provisions provide for the contractor to be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source.

Employee Relations

        As of September 30, 2012, the Company employed approximately 1,100 employees performing in over 22 states throughout the U.S. The Company believes it maintains good relations with its employees as evidenced by a voluntary attrition rate of approximately 5 percent. As of this date, the Company has no assurance thatemployees covered by a collective bargaining agreement.

Competitive Landscape

        Intense competition and long business development cycles are characteristics of our business and the government and defense industry. For major program competition, the business acquisition cycle typically ranges from 18 to 36 months for prime contractor companies. Companies may pursue work either as prime contractor or partner with other companies in a subcontractor role. Those competing as prime contractors normally expend substantially more resources than those in subcontractor roles. We partner and compete with several large and small-business companies in pursuit of acquiring new business.

        In the Federal and Defense logistics and technical services sector, we compete and partner with major tier I and very large companies such protest process or implementation delays will not haveas Lockheed Martin, Raytheon Company, BAE Systems, SAIC, General Dynamics, Northrop Grumman, and L-3 Communications Corporation. Other companies in our space include Honeywell, CACI, Computer Sciences Corp., Mantech, URS, DynCorp International, Deloitte and many others. We compete and partner with many of these same companies and a material adverse effect on our financial condition, resultsrange of operations or cash flowsothers in the future.

Saleshealthcare delivery and Marketing
TeamStaff maintains healthcare information technology market, including both large and government staffing sales, service and marketing personnel in Tucson, Arizona; Loganville, Georgia; Hines, Illinois; Leavenworth, Kansas; Boston, Massachusetts; Biloxi, Mississippi; Murfreesboro, Tennessee; and Charleston, South Carolina.
Through our operating subsidiary, TeamStaff continues to build sales through both the GSA’se-Buy portal, an electronic system designed to allow Federal buyers to request information, find sources, and prepare RFQs/RFPs, online and face-to-face client interactions. Efforts to build marketing presence include the launching of new TeamStaff GS and corporate websites, implementing a print advertisement campaign, and revising our strategic marketing communications plan in an effort to attract allied medical and nurse travelers. During the year, we also added several marketing events to our tradeshow calendar in order to increase our brand recognition. This added exposure is allowing us to introduce our suite of offerings to an expanded market. We continue to focus on our sales and marketing efforts in order to increase our contact with current and prospective clients. During fiscal 2008 we completed a corporate branding campaign. TeamStaff GS gives us a strong presence in the government sector and provides us with an opportunity to bid on awards for large multi-year contracts with favorable operating margins.
Competition
Our primary competitors in government staffing solutions include Top Echelon Management, Inc., Total Management, Inc., Medical Staffing Network Holdings, Inc., Kforce, Inc. and Maxim Healthcare Services, Inc. TeamStaffsmall businesses.

        DLH competes with these companies by offering customized products, personalized service,leveraging our differentiating suite of tools and uniquely integrating People, Processes, and Tools resulting in highly competitive pricesproposals and specialized personnel to satisfy a client’s particular requirements. Manysolid track record of these companies have greater name-recognitionpast performance. We compete for awards through a full and financial resources than we do.open competition on a "best-value basis". The Company believes thatdraws heavily from its broad scope of servicesconsistent high quality past performance ratings, proven and its commitmentevolving technical differentiators, key personnel credentials and growing market recognition to quality service differentiate it fromteam and compete favorably against its competition. Further, the Company believes that TeamStaff GS’sour track record, knowledge and processes with respect to government contract bidding processes represents a competitive advantage. In addition,

        Our recent and future success in this competitive landscape hinges on our ability to continue to uniquely integrate people, processes and technology tools to deliver best value solutions for our targeted clients (both government and industry partners). Due in large part to government fiscal pressures and major defense platform cancellations and budget cuts, our ability to remain cost-competitive remains important, particularly in labor-intensive markets where we may face additional competition from other larger staffing companies that do not focuscan see greater pressure on the government staffing sector.margin rates.


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4

Financing


Industry/Government Regulation
Introduction
Federal and state laws materially affect TeamStaff’s operations. These laws relate to labor, tax and employment matters. As an employer, TeamStaff is subject to all federal statutes and regulations governing its employer-employee relationships. The development of additional statutes and regulations and interpretation of existing statutes and regulations with respect to the alternative staffing industry can be expected to evolve over time. TeamStaff cannot predict with certainty the nature or direction of the development of federal, state and local statutes and regulations.
Federal and State Employment Taxes
TeamStaff assumes the sole responsibility and liability for the payment of federal and state employment taxes with respect to wages and salaries paid to its employees, including its contract staffing employees. There are essentially three types of federal employment tax obligations: (i) withholding of income tax requirements; (ii) obligations under the Federal Insurance Contribution Act (“FICA”); and, (iii) obligations under the Federal Unemployment Tax Act. Under these statutes, employers have the obligation to withhold and remit the employer portion and, where applicable, the employee portion of these taxes.
Employee Benefit Plans
TeamStaff offers various employee benefit plans to its full-time corporate (non-worksite) employees. These plans include a 401(k) Plan (a profit-sharing plan with a cash or deferred arrangement, or “CODA”), under Internal Revenue Code (“IRC”) Section 401(k)), a Section 125 plan, group health plans, group dental insurance, vision insurance, a group life insurance plan and a group disability insurance plan. Contract staffing employees are offered various employee benefit plans that include a Section 125 plan, group health plans, group dental insurance and group life insurance. Generally, employee benefit plans are subject to provisions of both the Code and the Employee Retirement Income Security Act of 1974 (“ERISA”). TeamStaff also makes a variety of voluntary insurance products available to its employees, which its employees may purchase through payroll deductions.
In order to qualify for favorable tax treatment under the IRC, the plans must be established and maintained by an employer for the exclusive benefit of its employees. In addition to the employer/employee threshold, pension and profit-sharing plans, including plans that offer CODAs under IRC Section 401(k) and matching contributions under IRC Section 401(m), must satisfy certain other requirements under the IRC. These other requirements are generally designed to prevent discrimination in favor of highly compensated employees to the detriment of non-highly compensated employees with respect to both the availability of, and the benefits, rights and features offered in qualified employee benefit plans.
Employee pension and welfare benefit plans are also governed by ERISA. ERISA defines “employer” as “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan.” ERISA defines the term “employee” as “any individual employed by an employer.”
State Regulation
As an employer, TeamStaff is subject to all federal, state and local statutes and regulations governing the employer-employee relationship. Additionally, an increasing number of states have adopted or are considering adopting licensing or registration requirements that affect TeamStaff’s contract medical staffing and permanent placement business. These license and registration requirements generally provide for an evaluation of the operator’s background and integrity and periodic or ongoing monitoring of the medical staffing firm’s policies and practices.
Information and Technology Systems
Throughout the 2009 fiscal year, the Company has made technology related strategic improvements. Previously, the infrastructure and IT support at TeamStaff GS’s Loganville, GA headquarters was outsourced.        In an effort to reduce costimprove and increase network response time,stabilize the Company's financial position in fiscal 2012, the Company further amended its secured credit facility with Presidential Financial Corporation and also completed a rights offering in which we received $4.2 million in gross proceeds.

        In November 2011, we entered into an amendment of our Loan and Security Agreement with Presidential Financial Corporation, pursuant to which they agreed to not seek to terminate the Loan and Security Agreement without cause until after December 31, 2012. Following that date, the terms of the original loan continue to apply, which provide that the agreement automatically renews upon each anniversary date, unless the Borrower or Lender provides written notice of intent to not renew 60 days in advance of the anniversary date. The financial institution has the ability to terminate the Company's line of credit immediately upon the occurrence of a defined event of default, including among others, a material adverse change in the Company's circumstances or if the financial institution deems itself to be insecure in the ability of the Company to repay its obligations or, as to the sufficiency of the collateral. At present, the Company has moved all aspectsnot experienced, and the financial institution has not declared, an event of ITdefault.

        Further, in house; improving overall support, while reducingMay 2012, we again amended the Company’s IT-related expenditures by approximately $75,000 per year.

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Looking forward,Loan and Security Agreement and Presidential Financial agreed to increase the Company will continueavailable line of credit from $3,000,000 to focus ona maximum amount of $6,000,000 and to increase the government division. The Company has analyzed and documentedmaximum amount available under the requirements needed to replace the aged TeamStaff GS operating system, which, while functional and compliant, will not efficiently meet the growth strategyunbilled accounts facility of the division. The new enterprise resource planning (“ERP”) system that will replace the current payroll system has been identified and implementation will start in the first fiscal quarter of 2010 with an expected activation with the first payroll cycle of the 2010 calendar year. This new ERP system will open the doorsLoan Agreement from $500,000 to much larger government contracts that are unattainable with the current solution due to the cost accounting system requirements of the Defense Contract Audit Agency. In addition to the new ERP system, the Company will implement a new staffing database module that will allow the division to more easily source open positions. Both the new ERP and staffing solutions will integrate seamlessly with each other and Microsoft Outlook, streamlining business processes and efficiency.
Disposition of Assets
On December 28, 2009, TeamStaff, Inc. and TeamStaff Rx entered into a definitive Asset Purchase Agreement, dated$1,000,000. However, as of December 28, 2009 with Advantage RN that provides for the sale of substantially all of the operating assets of TeamStaff Rx related to TeamStaff Rx’s business of providing travel nurse and allied healthcare professionals for temporary assignments to Advantage RN. The closing was held on January 4, 2010. The Asset Purchase Agreement provided for the purchase of the purchased assets by Advantage RN for a purchase price of up to $425,000, of which (i) $350,000 in cash was paid at the closing, and (ii) $75,000 is subject to an escrowed holdback under certain terms and conditions as described in the Asset Purchase Agreement. The holdback consists of (i) $50,000 that will be held back subject to the number of travel nurses and allied healthcare professionals associated with and working in the business on a full-time basis for the week ending January 24, 2010, and (ii) $25,000 that will be held back until appropriate releases have been obtained from certain third parties by TeamStaff Rx and no encumbrances on the purchased assets remain outstanding. As described in greater detail in Note 46 below, the Company's ability to borrow against the Company’s consolidated financial statements, management anticipates that the Company will (i) report a net loss from discontinued operations through the effective date of the sale to Advantage RN, which will include an estimated charge of $0.2 million for severance to certain TeamStaff Rx employees and (ii) incur a loss on the disposal of TeamStaff Rx approximating $0.3 million principally from recognition of the remaining unfunded operating lease payments.
Under the terms of the Asset Purchase Agreement, Advantage RN did not assume any debts, obligations or liabilities of TeamStaff Rx nor did it purchase any accounts receivable outstanding as of the closing date. Following the closing, Advantage RN will have the right to use, through February 28, 2011, the premises located in Clearwater, Florida thatincreased available credit is currently used by TeamStaff Rx for its principal executive offices of the Business. In connection with such use, Advantage RN will make rent subsidy payments to TeamStaff Rx totaling $125,000, consisting of (i) $25,000 payable at the closing, and (ii) an additional $100,000 payable in 10 equal monthly installments of $10,000 payable on the first day of each calendar month beginning on March 1, 2010 until December 1, 2010. Effective with the closing of this transaction, the President of our TeamStaff Rx subsidiary, Dale West, ceased her employment with TeamStaff. Ms. West will receive severance payments and benefits as provided for in the employment agreement we entered into with her in December 2008. See the discussion of these payments and benefits under the section of this annual report captioned “Employment Agreements with Named Executive Officers”.
Loan Facility
On March 28, 2008, we entered into an Amended and Restated Loan and Security Agreement dated as of March 28, 2008 (the “Loan Agreement”) with Business Alliance Capital Company (“BACC”), a division of Sovereign Bank (“Sovereign” or “Lender”). Effective April 1, 2008, BACC changed its name to Sovereign Business Capital. Under the Loan Agreement, the Lender agreed to provide a revolving credit facility to the Company in an aggregate amount of up to $3,000,000, subject to the further termssatisfaction of a number of conditions, and conditions ofpresently, the Loan Agreement. Themaximum availability under this loan facility is secured by a first priority lien on all of the Company’s assets. Previously in 2005, the Company and PNC Bank, National Association (“PNC”) had entered into an $8,000,000 revolving credit facility (“PNC Loan Facility”). Pursuant to the Loan Agreement, the Lender (i) acquired by assignment from PNC all right, title and interest of PNC under the PNC Loan Facility, the PNC note and related loan documentation, and (ii) restructured the PNC Loan Facility into a $3,000,000 revolving credit facility with a 3 year term. The Company’s ability to request loan advances under the Loan Agreement is$3,000,000; subject to computation of the Company’s advance limit and compliance with the covenants and conditions of the loan. The facility is for a term of 36 months and matures on March 31, 2011. Interest on amounts due accrues on the daily unpaid balance of the loan advances at a per annum rate of 0.25% percentage point above the Prime Rate in effect from time to time, but not less than 5.5% per annum.
The facility is subject to certain restrictive covenants, including minimum debt service coverage ratio and restrictions on the Company’s ability to, among other things, dispose of certain assets, engage in certain transactions, incur indebtedness and pay dividends. The Loan Agreement also provides for customary events of default following which, the Lender may, at its option, accelerate the amounts outstanding under the Loan Agreement.
eligible accounts receivable.

        

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In connection with the disposition of the assets of our TeamStaff Rx subsidiary, we were required to obtain the consent of Sovereign. On January 12, 2010 we received such consent. As a condition to such consent, however, Sovereign reduced the maximum amount available under such loan facility from $3.0 million to $2.0 million. As of September 30, 2009, there was no debt outstanding under the Loan Agreement and unused availability (as defined) totaled $1.7 million, net of required collateral reserves per the Loan Agreement for certain payroll and tax liabilities. As of September 30, 2009, TeamStaff had working capital of $0.9 million. Accordingly, management does not believe that the reduction in the availability under the Loan Agreement will have a material adverse impact on the Company’s operations and financial condition.
In addition, on January 11, 2010, we determined that as of September 30, 2009, we were not in compliance withMarch 16, 2012, the debt service coverage ratio covenant of the Loan Agreement. The Loan Agreement provides that following an event of default, Sovereign may, among other remedies provided for in the Loan Agreement, accelerate the amounts outstanding under the Loan Agreement, take such actions as it deems necessary to protect its security interest in the collateral, and terminate the Loan Agreement. In connection with its consent to the sale of the TeamStaff Rx assets and loan modification, Sovereign waived such non-compliance for the period ended September 30, 2009. Sovereign, however, reserved its rights under the Loan Agreement with respect to any future non-compliance with the debt service coverage ratio for any future period or any other provision of the Loan Agreement. If covenant violations were to occur in the future and the lender does not agree to modify the covenants or waive such violations, it could result in the acceleration of the maturity date of all of our debt under this loan facility. In both of these circumstances it could haveCompany filed a material adverse impactregistration statement on our business and financial condition. See “Risk Factors – Risks Relating to our Revolving Credit Line”.
Employees
As of September 30, 2009, TeamStaff employed 45 corporate (non worksite) employees, both full-time and part-time, including executive officers, a decrease from 64 during the previous fiscal year. As of September 30, 2009, TeamStaff also employed approximately 911 contract employees on client assignments. TeamStaff believes its relationship with its current employees is satisfactory. None of TeamStaff’s employees are covered by a collective bargaining agreement.
Available Information
We file annual, quarterly and current reports and other informationForm S-1 with the Securities and Exchange Commission (“SEC”for a rights offering in which its existing stockholders received non-transferable rights to purchase $4.2 million of additional shares of the Company's common stock. Each subscription right entitled the holder to purchase 0.532 shares of the Company's common stock at a price of $1.30 per share. In connection with the rights offering, on May 2, 2012, the Company entered into a standby purchase agreement with Wynnefield Capital, Inc. ("Wynnefield Capital"), which owned, prior to the rights offering, approximately 21% of the Company's common stock (excluding common stock warrants and a convertible note) through certain affiliated entities. The closing of the rights offering occurred on June 15, 2012 and the Company raised gross proceeds of $4.2 million from the sale of 3,230,769 shares of common stock.

Corporate

        Our principal executive offices are located at 1776 Peachtree Street NW, Suite 300S, Atlanta, Georgia 30309. Our telephone number is 866-952-1647 and our new consolidated homepage is www.dlhcorp.com. References herein to our website are provided purely as a convenience and do not constitute, and should not be viewed as, incorporation by reference of the information contained on, or available through, the website.


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Executive Officers

        Our executive officers are:

Name
AgePositions

Zachary C. Parker

55President, Chief Executive Officer and Director

Kathryn M. JohnBull

53Chief Financial Officer

John F. Armstrong

63Executive Vice President—Corporate Development

Kevin Wilson

47President, DLH Solutions, Inc.

Zachary C. Parker became Chief Executive Officer and President of DLH Holdings Corp. in February 2010. He has over 25 years of experience with the government services market, including DoD, holding several senior and executive management positions in addition to business development posts. His tenure includes approximately 19 years with Northrop Grumman, 7 years with GE Government Services (now Lockheed Martin), and 3 and 2 years with VSE Corporation and VT Group, respectively. Prior to joining DLH, Mr. Parker held executive positions, including President and previously Executive Vice President for Business Development, within VT Group , from March 2008 to February 2010. His executive development includes the GE Crotonville Executive Development Program, Darden Executive Leadership Program, Northrop Grumman Action Leadership Program, Wharton Earned Value Management, California Institute of Technology Strategic Marketing Program, and is Lean Six Sigma Green Belt certified among other professional and technical certifications. Mr. Parker is active in both professional and community associations including the Governmental Affairs Committee and the Veteran Affairs Task Force of the Washington DC-based Professional Services Council and has served as industry co-chair of the Government/Industry Partnership Executive council. He is an advisory board member of Hero Health Hire (a non-profit entity). Our annualHe has also served as board member on joint venture companies in the government services business. Mr. Parker earned his bachelors degree from California State University, Northridge (with honors) specializing in Human Factors Engineering and has completed post-graduate studies.

Kathryn M. JohnBull was named Chief Financial Officer on June 25, 2012. She has 25 years of experience within the government services market, principally with publicly-traded companies who experienced substantial organic and acquisitive growth. From January 2008 to June 2012, Ms. JohnBull was a senior financial executive with QinetiQ North America, serving in both corporate and operating group roles, including as Senior Vice President—Finance for its overall operations. From August 2002 to December 2007, Ms. JohnBull served as Operations Segment Chief Financial Officer for MAXIMUS, Inc, a publicly-traded provider of business process outsourcing, consulting and systems solutions. Prior industry positions, with emphasis on tax and treasury, were with BDM International, Inc. and United Defense. Ms. JohnBull is a certified public accountant and from 1985 to 1988 was with Arthur Andersen & Company as a tax manager and staff. Ms. JohnBull received a Bachelor of Business Administration, summa cum laude, from the University of Tulsa.

John F. Armstrong, FACHE joined DLH Holdings Corp. as its Executive Vice President on December 1, 2010 and leads our strategic partnerships corporate business development efforts. Mr. Armstrong has over three decades of in-depth experience (both public and private) in the military and the government services industry. Mr. Armstrong most recently served as director of the Sustainment and Health Services operation within Lockheed Martin Corporation from May 2008 to November 2010. Previously, from August 2002 to May 2008, he served as senior vice president of business development for Eagle Group International where he was instrumental in successfully growing the company to a competitive large business prior to being acquired by Lockheed Martin. Additionally, Mr. Armstrong served a distinguished career as an officer in the U.S. Army (Medical Services Corps), retiring as a Colonel in 2002. Mr. Armstrong is a fellow in the American College of Healthcare Executives and earned a Master of Business Administration degree from Marymount University, a


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Master of Arts from Ball State University and completed his undergraduate studies at the University of Central Florida.

Kevin Wilson was appointed as the President of our subsidiary DLH Solutions in October 2008, previously serving as the Director of DLH Solutions from June 2007 through September 2008. From January 2004 to June 2007, Mr. Wilson served as the Director of Strategic Alliances of government services provider SAIC, Inc., where he was responsible for business development in the domestic and foreign defense markets. From March 1997 to January 2004, Mr. Wilson was the Program Manager for a multiyear defense services contract with Endress Hauser Systems & Gauging. Mr. Wilson also worked at Tracer Research Corporation from January 1990 to March 1997, where he was Project Manager for the United States Air Force, Air Combat Command professional services contract. Mr. Wilson holds a BS in Business Marketing from Northwest Missouri State University.

Available Information

        We file registration statements, periodic and current reports, proxy statements, and other materials with the Securities and Exchange Commission (SEC). You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including our filings. We make our public filings with the SEC, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all exhibits and amendments to thosethese reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), are available free of charge on our Web site, http://www.dlhcorp.com, as soon as reasonably practicable after we file such material with the SEC. We also make available on our Web site reports filed by our executive officers and directors on Forms 3, 4 and 5 regarding their ownership of our securities. These materials are available in the “Investor Relations” section"Investor Relations" portion of our Web site, under the link "SEC Filings." We also use our website to make generally available important information about our company. Important information, including press releases, presentation and financial information regarding our company, is routinely posted on and accessible on the Investor Relations subpage of our website, at www.teamstaff.com. Our Internetwhich is accessible by clicking on the tab labeled "Investor Relations" on our website andhome page. Therefore, investors should look to the information"Investor Relations" subpage of our web site for important information. Information contained on that website, or accessible from our website,Web site is not intended to be incorporated intopart of this Annual Report on Form 10-K or any other filings we make with the SEC. These reports, and any amendments to these reports, are made available on our website as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Such reports are also available, free of charge, from the SEC’s EDGAR database at www.sec.gov.

Item 1A.Risk Factors
ITEM 1A.    RISK FACTORS

As provided for under the Private Securities Litigation Reform Act of 1995 (“("1995 Reform Act”Act"), we wish to caution shareholders and investors that the following important factors, among others discussed throughout this Annual Report on Form 10-K for the fiscal year ended September 30, 2009,2012, have affected, and in some cases could affect, our actual results of operationoperations and cause our results to differ materially from those anticipated in forward looking statements made herein. Our business, results of operations, cash flows and financial condition may be materially and adversely affected due to any of the following risks. The risks described below are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. The trading price of our common stock could decline due to any of these risks. In assessing these risks, you should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.


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7


Safe Harbor Statement

Certain statements contained herein constitute “forward-looking statements”"forward-looking statements" within the meaning of the 1995 Reform Act. TeamStaffDLH desires to avail itself of certain “safe harbor”"safe harbor" provisions of the 1995 Reform Act and is therefore including this special note to enable it to do so. Forward-looking statements included in this Annual Report on Form 10-K for fiscal year ended September 30, 20092012 involve known and unknown risks, uncertainties, and other factors which could cause TeamStaff’sDLH'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-lookingforward- looking statements. Such future results are based upon management’smanagement's best estimates based upon current conditions and the most recent results of operations. These risks include, but are not limited to, the risks identified below.

We believe it is important to communicate our expectations to our shareholders and potential shareholders. There may be events in the future, however, that we are not accurately able to predict or over which we have no control. The risk factors listed below, as well as any cautionary language in this filing, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should be aware that the occurrence of any of the events described in the risk factors below, elsewhere in this filing and other events that we have not predicted or assessed could have a material adverse effect on our earnings, financial condition, cash flows or business. In such case, the price of our securities could decline.

Risks Relating to Our Business and Our Industry

TeamStaff GS’sWe depend on contracts with the federal government for virtually all of our revenue are derived from U.S. Government customers.and our business could be seriously harmed if the federal government decreased or ceased doing business with us or changed its budgets or budgetary priorities.

We derive a substantial portionvirtually all of our revenues in our TeamStaff GS subsidiary from the U.S. Government as a prime contractor or a subcontractor. Revenues fromFurther, our revenue concentration is heavily dependent upon contracts with the DVA. Accordingly, the loss or delay of all or a substantial portion of our sales to the U.S. Government, represented approximately 98% of the total revenues of TeamStaff GS for each of the 2009 and 2008 fiscal years. Further, in fiscal 2009, through its FSS contracts primarily with the DVA, TeamStaff GS had independent task-orders with four DVA-related facilities that comprised 31%, 23%, 12% and 11% of the Company’s overall consolidated revenue, or 77% in the aggregate. Accordingly, our consolidated revenues could be materially adversely impacted bywhether due to a reduction in the overall level of U.S. Government spending and by changesor a change in its spending priorities, would have a material adverse effect on our results of operations and cash flows.

        Presently, the Company derives all of its revenue from yearagencies of the Federal government and the Company has derived a substantial portion of its revenues through various contracts awarded by the DVA. The Company currently provides services to year.

We are particularly dependent on the continuation of our relationship with DVA. As discussed above, in January 2008 Teamstaff GS was issued purchase orders for the DVA’s consolidated pharmacy distribution centers from the DVA national contracting office. Althoughunder a single source Blanket Purchase Agreement awarded in fiscal 2011 that has a ceiling value of up to $145,000,000 and is scheduled to expire on October 31, 2016. The agreement is subject to the current task orders expired on December 31, 2009, a six month continuationFederal Acquisition Regulations, and there can be no assurance as to the actual amount of services extension for all six locations serviced by TeamStaff GS was awarded on December 14, 2009. We anticipate that the Company will ultimately provide under the agreement. This agreement represented approximately 51% of its revenue in the fiscal year ended September 30, 2012. In addition, the Company also holds contractual order cover through September 30, 2013 in respect of DVA may release newcontracts that generated approximately 44% of its revenue in the fiscal year ended September 30, 2012, which are not currently the subject of requests for proposals related to staffing services at its pharmacy distribution facilitiesand may in early 2010. In such an event,due course be further extended by the Company intends to submitDVA on a proposal to address any such solicitation. Althoughsole source basis. While the Company believes it is well positioned to continue its relationship with the DVA, no assurances can be given that the DVA would further extend our current service order ororders for the provision of services, that the Company will successfullywe would be successful in any bid for new contract solicitations which may by published by DVAcontracts to provide such services or that even if the Company iswe are granted subsequent orders, that such orders would be of a scope comparable to the services that the Company haswe have provided to date. If the DVA does not further extend the Company’sour current service contractcontracts or the Company iswe are not successful in itsour efforts to obtain contract awards pursuant to either the current or new solicitations for the Company’sprovision of such services, our results of operations, cash flows and financial condition would be materially adversely


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affected.

However, in such circumstances, the Company may be able to avail itself of a right to continue for an additional period beyond the expiration date as part of any protest filed by an interested party.

Furthermore, even if the overall level of U.S. Government spending does increase or remains stable, the budgets of the government agencies with whomwhich we do business may be decreased or our projects with them may not be sufficiently funded, particularly because Congress usually appropriates funds for a given project on a fiscal-year basis even though contract performance may take more than one year.funded. In the event the budgets or budgetary priorities of the U.S. Government entities with which we do business, particularly the DVA, are decreased or underfunded, our consolidated revenues and results of operations could be materially and adversely affected. In addition, obtaining U.S. Government contracts remains a highly competitive process and this has led to a greater portion of our revenue base being associated with contracts providing for a lower amount of reimbursable cost than we have traditionally been able to recover. We are heavily dependent upon the U.S. Government as the primary customer to our TeamStaff GS subsidiary. In light of the recent disposition of our TeamStaff Rx business, our dependence on the results of operations of TeamStaff is significantly increased as compared to prior periods. Our future success and revenue growth will depend in part upon our ability to continue to expand our customerbusiness base.

Because of the current concentration of our contracts, if a significant number of our contracts are simultaneously delayed or cancelled for budgetary, performance or other reasons, it would have a material adverse effect on our results of operations and cash flows.

        During 2011, the federal government was unable to reach agreement on budget reduction measures required by the Budget Control Act of 2011 (Budget Act) passed by Congress. Unless Congress and the Administration take further action, the Budget Act will trigger automatic reductions in both defense and discretionary spending in January 2013. While the impact of sequestration is yet to be determined, automatic across-the-board cuts would approximately double the $487 billion top-line reduction already reflected in the defense funding over a ten-year period, with a $52 billion reduction occurring in the government's fiscal year 2013. The resulting automatic across-the-board budget cuts in sequestration could have significant consequences to our business and industry. While it is unclear whether sequestration will occur and what the exact impact of it would be, we are continuously reviewing our operations in an attempt to identify those programs that could be at risk so that we can make appropriate contingency plans. These or other factors could result in a significant decline in, or redirection of, current and future budgets and could adversely affect our operating performance, including the possible loss of revenue and reduction in our operating cash flow.

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We face risks relating to U.S. Government contracts because these contracts may be terminated at will.

Many of the U.S. Government programs in which we participate as a contractor or subcontractor may extend for several years. However, these programs are normally funded on an annual basis. TheAs mentioned above the U.S. Government may modify, curtail or terminate its contracts and subcontracts at itsfor convenience. Due to our increasing dependence on these relationships, the modification, curtailment or termination of our major programs or contracts would have a material adverse effect on our results of operations and financial condition.

        If the government terminates a cost reimbursable contract for convenience, we may not recover the cost of work which has not been completed. We can recover only our incurred or actual cost, to include in certain cases committed costs, and cost for settling outstanding debts and restocking fees. We will also be able to negotiate for a fee based upon the percentage of the work performed or cost incurred. If the government terminates a contract for default, normally we would be unable to recover all costs for work performed and in some cases may be liable for liquidated damages in excess of actual costs incurred. Additionally, the government may seek to have the contract pay for its re-procurement cost for all undelivered items and services not received from another source. Depending on the value of a contract, such termination could cause our actual results to differ materially and adversely from those anticipated. The Company has never had a contract terminated for default.


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We incurred a net loss from operations for the year ended September 30, 2012 and industry conditions under which we operate have negatively impacted our revenues. Any failure to increase our revenues and keep our expenses consistent with revenues could prevent us from achieving and maintaining profitability.

        We incurred a net loss from continuing operations of approximately $2.0 million for the fiscal year ended September 30, 2012 and had an accumulated deficit of approximately $67.4 million at such date. Our business is under economic pressures due to Federal government procurement delays, substantial Federal budget uncertainty, an economy in recession, and other challenging industry dynamics. We have expended, and will continue to be required to expend, substantial funds to enhance our marketing efforts and to otherwise operate our business. Therefore, we will need to generate higher revenues to continue increasing profitability and cannot assure you that we will be profitable in any particular future period. Our prospects should be considered in light of the difficulties we are facing, including the current economic climate and the overall competitive environment in which we operate. Revenue levels achieved from our customers, the mix of solutions that we offer and our ability to reduce and manage our operating expenses will affect our financial results.

Our capital requirements are significant and we may need to raise additional capital to supplement our revenues derived from operations.

        Our working capital requirements have been and will continue to be significant. As previously reported, in July 2010, we entered into a secured loan arrangement with Presidential Financial Corporation which, as amended to date, provides us with a maximum amount of $6.0 million of credit, subject to the conditions and limitations of the facility. As described in greater detail in Note 6, our ability to borrow against the increased available credit is subject to the satisfaction of a number of conditions, and presently, the maximum availability under this loan facility is $3.0 million, subject to eligible accounts receivable. In addition, as further described in Note 10, during 2012 the Company completed a rights offering and raised gross proceeds of $4.2 million from the sale of 3,230,769 shares of its common stock. However, we have, from time to time, utilized our secured credit facility to supplement cash flows from operations in order to satisfy our working capital needs. We used approximately $2.8 million and $1.0 million in cash for operating activities for the fiscal years ended September 30, 2012 and 2011, respectively, and our available cash and cash equivalents as of September 30, 2012 totaled approximately $3.1 million. Based on our business plan and current working capital position, we presently believe that we have sufficient liquidity resources, including those expected to be generated by forecasted operations and from timely collection of unbilled receivables from the DVA as well as those expected to be available under our credit facility, and the effects of cost reduction programs and initiatives to fund our operations for the next twelve months. This in part assumes the ultimate non-payment of certain liabilities and recorded guarantees which we are currently contesting or are not expected to be settled in cash (see Note 6 to the accompanying consolidated financial statements) (classified as current at September 30, 2012) in fiscal 2013. During 2011, the Company received equity and debt funding of $150,000 and $350,000, respectively, exclusive of direct costs. Such proceeds were derived from management and board members and our largest shareholder, all of whom are considered related parties.

        However, it may be necessary for us to raise additional capital to accelerate growth, fund operations and to meet our obligations in the future. To meet our financing requirements, we may seek to raise funds through equity, debt or equity-based financings (such as convertible debt) or strategic alliances. Raising additional funds by issuing equity or convertible debt securities may cause our stockholders to experience substantial dilution in their ownership interests and new investors may have rights superior to the rights of our other stockholders. Raising additional funds through debt financing, if available, may involve covenants that restrict our business activities and options. We currently have no firm agreements with any third-parties for such transactions and no assurances can be given that we will be successful in raising sufficient capital from any proposed financings, or that additional financing,


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if at all available, can be obtained on acceptable terms to us. If we are unable to obtain additional capital when required, or on acceptable terms, we may need to reduce expenses and operations and you may lose your investment in our Company. Our future capital requirements will depend on, and could increase substantially as a result of, many factors, including:

    our need to utilize a significant amount of cash to support operations and to make incremental investments in our organization;

    our ability to achieve targeted gross profit margins and cost management objectives;

    our ability to reach break-even or profitability;

    our ability to achieve timely collection of unbilled accounts receivable from the DVA;

    our ability to continue to not make payment of certain liabilities (classified as current at September 30, 2012);

    the success of our sales and marketing efforts; and

    changes in economic, regulatory or competitive conditions.

Our contract costsproposals and in many cases our invoices are subject to audits and investigations by U.S. Government agencies and unfavorable government audit results could force us to refund previously recognized revenues and could subject us to a variety of penalties and sanctions.

From time to time, U.S. Government representatives may audit our performance on and costs incurredinvoices submitted on our U.S. Government contracts, including allocated indirect costs.contract. Further, federal agencies can also audit and review our compliance with applicable laws, regulations and standards. TheseUnder these audits, if it is found that we incorrectly invoiced or invoiced work not performed or claimed hours to be performed that were not performed we would have to refund these amounts. Normally, these audits are performed throughout the year and as such if found represent a refund within the current year. However, the government may go further back in time than the present fiscal year and adjustments may result in adjustments to our contract costs. In the event that it is determined that our payments from Government agencies was in excess of contractual costs, we could be assessed for these excess payments. We would expect that we would normally negotiate with U.S. Government representatives before settling on final adjustments to our contract costs. However, we do not know the outcome of any future audits and adjustments and we may be required to reduce our revenuesover one or profits upon completion and final negotiation of these audits. Further, an audit of our work, including an audit of work performed by companies we have acquired or may acquire, or subcontractors we have hired or may hire, could force us to refund previously recognized revenues. Similarly,more fiscal years. Additionally, as a government contractor, we are from time to time subject to inquiries and investigations of our business practices by the U.S. Government due to our participation in government contracts. We cannot assure you that any such inquiry or investigation will not have a material adverse effect on our results of operations, cash flows, and financial condition.

If a government audit uncovers improperillegal activities or illegal activities not in compliance with a contract's terms or conditions, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with federal government agencies. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us, whether or not true. If we were suspended or debarred from contracting with the federal government generally or with any specific agency, if our reputation or relationships with government agencies were impaired, or if the government otherwise were to cease doing business with us or were to significantly decrease the amount of business it does with us, our revenue, cash flows and operating results would be materially adversely affected.

        If an audit determines that any of our administrative processes and systems do not comply with requirements, we may be subjected to increased government scrutiny and approval that could delay or otherwise adversely affect our ability to compete for or perform contracts or collect our revenue in a timely manner. Therefore, an unfavorable outcome of an audit could cause actual results to differ materially and adversely from those anticipated. Moreover, if an audit determines that costs were improperly allocated to a specific contract, such amounts will not be reimbursed, and any such costs already reimbursed must be refunded and certain penalties may be imposed.


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The U.S. Government contract bid process is highly competitive, complex and sometimes lengthy, and is subject to protest and implementation delays.

The U.S. Government contract bid

        Many of our contracts and task orders with the federal government are awarded through a competitive bidding process, which is complex and sometimes lengthy. OnceWe expect that much of the business that we will seek in the foreseeable future will continue to be awarded through competitive bidding. If a bid is won and a contract awarded, there still is the possibility of a bid protest or numerous delays in implementation. ThereOur business could be adversely affected by delays caused by our competitors protesting major contract awards received by us, resulting in the delay of the initiation of work. It can take many months to resolve protests by one or more of our competitors of contract awards we receive. The resulting delay in the start up and funding of the work under these contracts may cause our actual results to differ materially and adversely from those anticipated, and there can be no assurance that such protest process or implementation delays will not have a material adverse effect on our financial condition or results of operations in the future.

This competitive bidding process presents a number of risks, including the following:

    we expend substantial cost and managerial time and effort to prepare bids and proposals for contracts that we may not win;

    we may be unable to estimate accurately the resources and cost structure that will be required to service any contract we win; and

    we may encounter expenses and delays if our competitors protest or challenge awards of contracts to us in competitive bidding, and any such protest or challenge could result in the resubmission of bids on modified specifications, or in the termination, reduction or modification of the awarded contract.

        If we are unable to win particular contracts, we may be prevented from providing to clients services that are purchased under those contracts for a number of years. If we are unable to consistently win new contract awards over any extended period, our business and prospects will be adversely affected and that could cause our actual results to differ materially and adversely from those anticipated. In addition, upon the expiration of a contract, if the client requires further services of the type provided by the contract, there is frequently a competitive rebidding process. There can be no assurance that we will win any particular bid, or that we will be able to replace business lost upon expiration or completion of a contract, and the termination or non-renewal of any of our significant contracts could cause our actual results to differ materially and adversely from those anticipated.

Our failure to comply with complex federalFederal procurement laws and regulations could cause us to lose business, incur additional costs, and subject us to a variety of penalties.

We must comply with complex laws and regulations relating to the formation, administration, and performance of federal government contracts. These laws and regulations create compliance risk and affect how we do business with our federal agency clients, and may impose added costs on our business. If a government review or investigation uncovers improperillegal activities or illegal activities not in compliance with a particular contract's terms or conditions, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to our reputation, suspension of payments, fines, and suspension or debarment from doing business with federal government agencies. The government may in the future reform its procurement practices or adopt new contracting rules and regulations, including cost accounting standards, that could be costly to satisfy or that could impair our ability to obtain new contracts. A failure to comply with applicable laws and regulations could result in contract termination, price or fee reductions, or suspension or debarment from contracting with the federal government, each of which could lead to a material reduction in our revenues, cash flows and operating results.


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Our government services business is dependent upon maintaining our reputation, our relationships and our performance.performance in regard to government service.

The reputation and relationships that we have established and currently maintain with government personnel and agencies are important to maintaining existing business and identifying new business. If our reputation or relationships were damaged, it could have a material adverse effect on our ability to maintain or expand our business relationship with U.S. Government entities. In addition, if our performance does not meet agency expectations, our revenue and operating results could be materially harmed.

Competition is intense in the government services business.

There is often intense competition to win federal agency contracts. If we are unable to successfully compete for new business or win competitions to maintain existing business, our revenue growth and margins may materially decline. Many of our competitors are larger and have greater resources than we do, larger client bases and greater brand recognition. Our larger competitors, alsoindividually or through relationships with third parties, may be able to provide clients with different or greater capabilities or benefits than we can provide.

        Budgetary pressures and changes in the procurement process have caused many government clients to increasingly purchase goods and services through Indefinite Delivery Indefinite Quantity ("IDIQ") contracts, General Services Administration ("GSA") schedule contracts and other government-wide acquisition contracts. These contracts, some of which are awarded to multiple contractors, have increased competition and pricing pressure, requiring that we make sustained post-award efforts to realize revenue under each such contract. In addition, in consideration of the practice of agencies awarding work under such contracts that is arguably outside the intended scope of the contracts, both the GSA and the DoD have initiated programs aimed to ensure that all work fits properly within the scope of the contract under which it is awarded. The net effect of such programs may reduce the number of bidding opportunities available to us. Moreover, even if we are highly qualified to work on a particular new contract, we might not be awarded business because of the federal government's policy and practice of maintaining a diverse contracting base.

We may not receive the full amounts authorized under the contracts included in our backlog, which could reduce our revenue in future periods below the levels anticipated.

        Our backlog consists of funded backlog, which is based on amounts actually committed by a client for payment for goods and services, and unfunded backlog, which is based upon management's estimate of the future potential of our existing contracts and task orders, including options, to generate revenue. Our backlog may not result in actual revenue in any particular period, or at all, which could cause our actual results to differ materially and adversely from those anticipated. The maximum contract value specified under a government contract or task order awarded to us is not necessarily indicative of the revenue that we will realize under that contract. Although many of our Federal government contracts contemplate performance over a period of years, Congress often appropriates funds for these contracts for only one year at a time. As a result, our contracts typically are only partially funded at any point during their term, and all or some of the work intended to be performed under the contracts will remain unfunded pending subsequent Congressional appropriations and the obligation of additional funds to the contract by the procuring agency. Nevertheless, we may estimate our share of the contract values, including values based on the assumed exercise of options relating to these contracts, in calculating the amount of our backlog. Because we may not receive the full amount we expect under a contract, our estimate of our backlog may be inaccurate and we may generate results that differ materially and adversely from those anticipated.


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Failure to maintain strong relationships with other contractors could materially and adversely affect our revenue.

        We intend to derive substantial revenue from contracts in which we act as a subcontractor or from teaming arrangements, in which we and other contractors bid on particular contracts or programs. As a subcontractor or teammate, we will often lack control over fulfillment of a contract, and poor performance on the contract could impact our customer relationship, even if we perform as required. We expect to increasingly depend on relationships with other contractors for a portion of our revenue in the foreseeable future. Moreover, our revenue and operating results could differ materially and adversely from those anticipated if any such prime contractor or teammate chose to offer directly to the client services of the type that we provide or if they team with other companies to provide those services.

Loss of our General Services Administration (“GSA”)GSA schedule contracts or other contracting vehicles could impair our ability to win new business.business and perform under existing contracts.

        We currently hold multiple GSA schedule contracts, constituteincluding a significant percentagefederal supply schedule contract for professional and allied healthcare services and the logistics worldwide services contract. During 2012, our professional and allied healthcare services schedule was extended through June 2017. In October 2012, the term of revenue from our federal agency clients. Duelogistics worldwide schedule was extended to our dependence on providing staffing services to U.S. government entities, ifNovember 2017. If we were to lose one or more of these contracts or other contracting vehicles, we could lose a significant revenue source and our operating results and financial condition would be materially and adversely affected. These contracts typically have an initial term with multiple options that may be exercised by our government agency clients to extend the contract for successive periods of one or more years. We can provide no assurance that our clients will exercise these options.

Our failure to obtain and maintain necessary security clearances may limit our ability to perform classified work for government clients, which could cause us to lose business.
Some government contracts require us to maintain facility security clearances and require some of our employees to maintain individual security clearances. If our employees lose or are unable to timely obtain security clearances, or we lose a facility clearance, a government agency client may terminate the contract or decide not to renew it upon its expiration.

Our employees (or those of others, with whom we are associated, such as teammates, prime or sub-contractors) may engage in misconduct or other improper activities, which could harm our business.

Like all government contractors, we are exposed to the risk that employee fraud or other misconduct could occur. Misconduct by our employees (or those of others, with whom we are associated, such as teammates, prime or sub-contractors) could include intentional failures to comply with federal government procurement regulations, engaging in unauthorized activities, seeking reimbursement for improper expenses, or falsifying time records. Employee misconduct could also involve the improper use of our clients’clients' sensitive or classified information which couldand result in regulatory sanctions against us anda serious harm to our reputation. While we have policies in effect to deter illegal activities and promote proper conduct, these are not a failsafe. It is not always possible to deter employee misconduct, and precautions to prevent and detect this activity may not be effective in controlling such risks or losses, which could materially and adversely affect our business.

Security breaches in sensitive government information systems could result in lossbusiness, results of our clientsoperations, financial condition, cash flows, and cause negative publicity.
Many of the systems we develop, install, and maintain involve managing and protecting information used in intelligence, national security, and other sensitive or classified government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation, and prevent us from being eligible for further work on sensitive or classified systems for federal government clients. We could incur losses from such a security breach that could exceed the policy limits under our insurance. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of our systems could materially reduce our revenue.

liquidity.

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The failure by Congress to approve budgets on a timely basis for the federal agencies we support or changes in the budget priorities of such agencies could delay or reduce spending and cause us to lose revenue.

On an annual basis, Congress must approve budgets that govern spending by each of the federal agencies we support. When Congress is unable to agree on budget priorities and is unable to pass the annual budget on a timely basis, Congress typically enacts a continuing resolution. A continuing resolution allows government agencies to operate at spending levels approved in the previous budget cycle. When government agencies must operate under a continuing resolution, it may delay funding we expect to receive from clients on work we are already performing and will likely result in any new initiatives being delayed or, in the extreme, cancelled. In particular, if the Federal government does not adopt, or delays adoption of, a budget for each fiscal year beginning on October 1, or fails to pass a continuing resolution, federal agencies may be forced to suspend our contracts and potentially cancelled. Changes in federal government fiscal or spending policies could adversely affectdelay the award of


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new and follow-on contracts and orders due to a lack of funding. Therefore, period-to-period comparisons of our government agency business. Theoperating results may not be a good indication of our future performance and the occurrence of either scenario wouldany of the above mentioned scenarios may materially and adversely impact our results of operations.

operations and financial condition.

Our profits and revenues could suffer if we are involved in legal proceedings, investigations and disputes.

        As with much of the government services market, workers performance can result in substantial injury and we are exposed to legal proceedings, investigations and disputes. As previously reported, in fiscal 2012, we were advised of a claim by the U.S. Attorney based on an alleged failure to pay certain classes of employees the prevailing wages as required by the Service Contract Act during the years 2003-2010. The Company is continuing to review the data allegedly supporting the claims with the U.S. Department of Justice in an effort to determine whether any wage adjustment is required. These claims appear, in part, to be part of the claims previously disclosed by DLH and related to services provided to the Department of Veterans Affairs by DLH. See "Potential Contractual Billing Adjustments" in the Management Discussion and Analysis, below. Until the analysis of the data is complete, we cannot finally determine either the merits of the claim or the potential impact on us. However, we continue to believe that we have acted in conformity with our contractual commitments and no wage adjustment is required. Nevertheless, there can be no assurance that an adverse decision or settlement would not have a material adverse impact on us.

        In addition, in the ordinary course of our business we may become involved in legal disputes regarding personal injury or employee disputes. While we provision for these types of incidents through commercial party insurance carriers, we often defray these types of cost through higher deductibles. Any unfavorable legal ruling against us could result in substantial monetary damages by losing our deductible portion of carried insurance or even criminal violations. We maintain insurance coverage as part of our overall legal and risk management strategy to lower our potential liabilities. If we sustain liabilities that exceed our insurance coverage or for which we are not insured, it could have a material adverse impact on our results of operations, cash flows and financial condition, including our profits, revenues and liquidity.

We are dependent upon certain of our management personnel.personnel and do not maintain "key personnel" life insurance on our executive officers.

Our success to date has resulted in part from the significant contributions of our executive officers. Our executive officers are expected to continue to make important contributions to our success. The lossAs of September 30, 2012, our CEO, CFO, Executive Vice President of Business Development and the President of DLH Solutions are under employment contracts. However, we do not maintain "key person" life insurance on any of our executive officers. Loss for any reason of the services of our key personnel could materially affect our operations. Currently, our CEO, CFO and the President of TeamStaff GS are under employment contracts. The Company does not maintain “key person” life insurance policies on any of our key personnel.

Our current President and Chief Executive Officer intends to resign from such positions at the end of January 2010. If we do not employ a new President and Chief Executive Officer by the time of his departure, we will not have an executive officer to perform important managerial and oversight functions.
As previously disclosed, our President and Chief Executive Officer, Rick J. Filippelli, has informed the Board of his intent to resign from such positions effective at the end of January 2010. Our Board has established a search committee to identify candidates for Chief Executive Officer and has developed a short-list of candidates from which it anticipates being able to select the new President and Chief Executive Officer. However, no assurances can be given that we will be able select and employ our new President and Chief Executive Officer prior to the time that Mr. Filippelli intends to depart our company. In such an event, we would need to appoint a person to perform such responsibilities on an interim basis. If we are not able to employ a new President and Chief Executive Officer by the time of Mr. Filippelli’s departure, we will not have an executive officer to perform the important managerial and oversight functions customarily performed by a Company’s chief executive. If this condition persists for an extended period, our business, financial condition and results of operations could be materially adversely affected.

Demand for staffingour services could be significantly affected by the general level of economic activity and unemployment or by factors beyond our control (i.e.;(e.g. hurricanes, weather conditions, acts of war, etc.) in the United States.

Our business, financial condition, cash flow and results of operations may be affected by various economic factors. Unfavorable economic conditions may make it more difficult or impossible for us to maintain and continueor grow our revenue growth.revenue. In an economic recession or under other adverse economic conditions, customers and vendors may be more likely to be unable to meet contractual terms or their payment obligations. When economic activity increases, contract


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We may be held liable for the actions of our employees are often added before full-time employees are hired. However,and therefore incur unforeseen liabilities.

        While we carry insurance for these types of liabilities, as economic activity slows, many companies, includinga result of our hospital and healthcare facility clients, reduce their useemployer status, we may be liable for violations of contract employees before laying off full-time employees.these or other laws despite contractual protections. In addition, as our employees may be deemed to be our agents, we experience more competitive pricing pressure during periods of economic downturn. A decline in economic conditionscould be held liable for their actions which may have a material adverse effect on our business.

results of operations, financial condition and liquidity.

Our staffing of healthcare professionals exposes us to potential malpractice liability.

        Through our subsidiaries, we engage or have recently engaged in the business of providing healthcare professionals. The current recessionplacement of such employees increases our potential liability for negligence and professional malpractice of those employees and any such liabilities may not become immediately apparent. Although we are covered by professional malpractice liability insurance on a claims made basis in the continuation or intensificationaggregate amount of $5.0 million with a $2.0 million per occurrence limit, which we deem reasonable under the circumstances, not all of the potential liability we face may be fully covered by insurance. Any significant adverse claim which is not covered by insurance may have a material adverse effect on our financial condition, results of operations and liquidity.

We may not be fully covered by the insurance we procure and our business could be adversely impacted if we were not able to renew all of our insurance plans.

        Although we carry liability insurance, it may not be sufficient to cover the total cost of any continued volatilityjudgments, settlements or costs relating to any present or future claims, suits or complaints. In addition, sufficient insurance may not be available to us in the financial markets may have an adversefuture on satisfactory terms or at all. Also, any increase in our costs of insurance will impact on the availability of creditour profitability to our customers and businesses generally and could lead to a further weakening of the U.S. and global economies. To the extent that disruption inwe cannot offset these increases into our costs of services. If the insurance we carry is not sufficient to cover any judgments, settlements or costs relating to any present or future claims, suits or complaints, our business, financial markets continues and/or intensifies, it has the potential to materially affect our customers’ ability to tap into debt and/or equity markets to continue their ongoing operations, have access to cash and/or pay their debts as they come due, all of which could reasonably be expected to have an adverse impact on the number of open positions for healthcare staff they request, as well as their ability to pay for our staffing services. Continued economic weakness is likely to adversely impact ourcondition, results of operations.

The disruptions that the financial markets are currently undergoing have led to unprecedented governmental intervention on an emergency basis. The results of these actions have been unclear, resulting in confusionoperations and uncertainty which in itself has beenliquidity could be materially detrimental to the efficient functioning of the markets. It is impossible to predict what, if any, additional interim or permanent governmental restrictions may be imposed on the markets and/or the effect of such restrictions on us, our customers and the operations of corporate entities generally in the United States.

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There are significant expectations that there may be legislative changes in the next few years that fundamentally impact the healthcare industry. We cannot assess the impact that any such future changes may have on our customers and, as a result, on our business. We also cannot assess how, and whether, the recently enacted fiscal stimulus bill will impact our business and our industry.
Our business may be adversely affected due to economic conditions in specific geographic markets.
A significant portion of our revenues are derived from Illinois, Kansas, South Carolina and Tennessee with respect to the government staffing services provided by TeamStaff GS. While we believe that our market diversification will eventually lessen this risk in addition to generating significant revenue growth, we may not be able to duplicate in other markets the revenue growth and operating results experienced in the listed markets. Accordingly, we have a specific sensitivity to adverse economic conditions in these geographic markets.
Our financial condition may be affected by increases in healthemployee healthcare claims and insurance premiums, unemployment taxes and workers’workers' compensation claims and insurance rates.
Health

        Our current workers' compensation and medical plans are partially self-funded insurance programs. The Company currently pays base premiums plus actual losses incurred, not to exceed certain individual and aggregate stop-loss limits. In addition, health insurance premiums, state unemployment taxes and workers’workers' compensation rates for the Company are in large part determined by our claims experience andexperience. These categories of expenditure comprise a significant portion of our direct costs. If we experience a large increase in claim activity, our direct expenditures, health insurance premiums, unemployment taxes or workers’workers' compensation rates couldwill increase. Although we employ internal and external risk management procedures in an attempt to manage our claims incidence and estimate claims expenses and structure our benefit contracts to provide as much cost stability as reasonably possible given the self-funded nature of our plans, we may not be able to prevent increases in claim activity, accurately estimate our claims expenses or pass the cost of such increases on to our clients. Since our ability to incorporate such increases into our fees to our clients is constrained by contractual arrangements with our clients, a delay could occur before such increases could be reflected in our fees, which may reduce our profit margin. As a result, such increases could have a material adverse effect on our financial condition, results of operations cash flows and liquidity.

Our financial condition may be affected by risks associated with our health and workers’ compensation claims experience.
Although we utilize only fully insured plans of health care and incur no direct risk of loss under those plans, the premiums that we pay for health care and workers’ compensation insurance are directly affected by our claims experience, including the claims experience of our off-site contract employees. If this experience is unfavorable, the premiums that are payable by us will increase or coverage may become unavailable altogether. We may not be able to pass such increases onto our clients, which may reduce our profit margins. Increasing health care and workers’ compensation premiums could also place us at a disadvantage in competing for new clients. In addition, periodic reassessments of workers’ compensation claims of prior periods (when TeamStaff was covered under large deductible-type plans) may require an increase or decrease to our reserves, and therefore may also affect our present and future financial condition.
If unfavorable government regulations regarding contract and permanent staffing are implemented, or if current regulations are changed, our business could be harmed.
Because many of the laws related to the employment relationship were enacted prior to the development of alternative staffing businesses, many of these laws do not specifically address the obligations and responsibilities of non-traditional employers. Numerous federal, state and local laws and regulations relating to labor, tax, insurance and employment matters affect our operations. Many states require licensure or registration of entities providing contract health care or nursing services as well as those offering permanent placement services. There can be no assurance that we will be able to comply with any such regulations, which may be imposed upon us now or in the future, and our inability to comply with any such regulations could have a material adverse effect on our results of operations and financial condition. In addition, there can be no assurance that existing laws and regulations which are not currently applicable to us will not be interpreted more broadly in the future to apply to our existing activities or that new laws and regulations will not be enacted with respect to our activities. Either of these changes could have a material adverse effect on our business, financial condition, results of operations and liquidity.

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We may not be able to obtain all of the licenses and certifications that we need to operate.
State authorities regulate the temporary medical staffing and permanent placement industry and some states require us to satisfy operating, licensing or certification requirements. If we are unable to obtain or maintain all of the required licenses or certifications that we need, we could experience material adverse effects to our results of operations, financial condition and liquidity.
Health care reform could impose unexpected burdens on our ability to conduct our business.
Regulation in the health care field continues to evolve, and we cannot predict what additional government regulations affecting our business may be adopted in the future. Changes in any of these laws or regulations may adversely impact the demand for our services, require that we develop new or modified services to meet the demands of the marketplace, or require that we modify the fees that we charge for our services. Any such changes may adversely impact our competitiveness and financial condition.
We may be held liable for the actions of our contract employees and therefore incur unforeseen liabilities.
A number of legal issues with respect to the employment arrangements among contract staffing firms, their clients and contract employees remain unresolved. These issues include who bears the ultimate liability for violations of employment and discrimination laws. As a result of our employer status, we may be liable for violations of these or other laws despite contractual protections. While our client service agreements generally provide that the client is to indemnify us for any liability caused by the client’s failure to comply with its contractual obligations and the requirements imposed by law, we may not be able to collect on such a contractual indemnification claim and may then be responsible for satisfying such liabilities. In addition, contract employees may be deemed to be our agents, which could make us liable for their actions.
Our staffing of healthcare professionals exposes us to potential malpractice liability.
Through our subsidiaries, we engage in the business of providing contract healthcare professionals. The placement of such employees increases our potential liability for negligence and professional malpractice of those employees. Although we are covered by professional malpractice liability insurance in the aggregate amount of $5.0 million with a $2.0 million per occurrence limit, which we deem reasonable under the circumstances, not all of the potential liability we face may be fully covered by insurance. Any significant adverse claim, which is not covered by insurance, may have a material adverse effect on us.
We may not be fully covered by the insurance we procure.
Although we carry liability insurance, the insurance we purchase may not be sufficient to cover any judgments, settlements or costs relating to any present or future claims, suits or complaints. In addition, sufficient insurance may not be available to us in the future on satisfactory terms or at all. Additionally, the ever-increasing costs of insurance will impact our profitability to the extent that we cannot offset these increases into our costs of services. Our current workers’ compensation plan is a partially self-funded workers’ compensation insurance program. The Company pays a base premium plus actual losses incurred, not to exceed certain stop-loss limits. The Company is insured for losses above these limits, both per occurrence and in the aggregate. If the insurance we carry is not sufficient to cover any judgments, settlements or costs relating to any present or future claims, suits or complaints, our business, financial condition, results of operations and liquidity could be materially adversely affected.
If we were not able to renew all of the insurancehealth and workers' compensation plans that cover contract healthcareour employees, our business would be adversely impacted.

The maintenance of health and workers’workers' compensation insurance and administration plans that cover our contract healthcare employees is a significant part of our business. If we were unable to secure renewal of


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contracts for such plans or the renewal of such plans with favorable rates and with competitive benefits, our business would be adversely affected. The current health and workers’workers' compensation contracts are provided by vendors with whom we have an established relationship and on terms that we believe to be favorable. While we believe that renewal contracts could be secured on competitive terms without causing significant disruption to our business, there can be no assurance in this regard.

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We operate in a highly competitive market and our success depends on our ability to remain competitive in obtaining and retaining clients and demonstrating the value of our services.
We operate in a highly competitive market. Our primary competitors in government staffing solutions include Top Echelon Management, Inc., Total Management, Inc., Medical Staffing Network Holdings, Inc., Kforce, Inc. and Maxim Healthcare Services, Inc. In addition, other large staffing companies that do not currently provide government staffing solutions may seek to enter into this space. These companies may have greater name recognition and financial and marketing resources than us. Since we compete with numerous entities that have greater resources than us, our business will suffer if we are not competitive with respect to each of the services we provide. We also compete with smaller, more specialized entities which are able to concentrate their resources on particular areas.
We believe that the primary competitive factors in obtaining and retaining government healthcare facility clients are identifying qualified healthcare professionals for specific job requirements, providing qualified employees in a timely manner, pricing services competitively and effectively monitoring the job performance of our contract professionals. Competition for government healthcare facility clients and contract and permanent healthcare professionals may increase in the future related to these factors or due to a shortage of qualified healthcare professionals in the marketplace and, as a result, we may not be able to remain competitive. To the extent competitors seek to gain or retain market share by reducing prices or increasing marketing expenditures, we could lose revenue or clients and our margins could decline, which could seriously harm our operating results and cause the price of our stock to decline. With respect to staffing for Government entities, we also compete with the U.S. Government’s own in-house capabilities and ability to hire permanent staff. To remain competitive, we must provide superior service and performance on a cost-effective basis to our customers. Any failure to do so could have a material adverse effect on our business.
If we are unable to attract qualified nurses and allied health professionals for our healthcare staffing business, or other contract personnel for our staffing business, our business may be negatively affected.

We rely heavily on our ability to attract and retain nursesqualified professionals and allied health professionalsother personnel who possess the skills, experience and licenses necessary in order to provide staffingour solutions for hospital and healthcare facilityour assignments. We compete for healthcare professionals with other healthcare staffing companies and with hospitals and healthcare facilities. We must continually evaluate and expandOur business is materially dependent upon the continued availability of such qualified personnel. Our inability to secure qualified personnel would have a material adverse effect on our healthcare professional network to keep pace with our hospital and healthcare facility clients’ needs. Currently, there is a shortage of qualified nurses in most areas of the United States and competition for nursing personnel is increasing. We may be unable to continue to increase the number of healthcare professionals that we recruit, thereby decreasing the potential for growing our business. Our ability to attract and retain healthcare professionals depends on several factors, including our ability to provide healthcare professionals with assignments that they view as attractive and to provide them with competitive benefits and wages. The cost of attracting healthcare professionalsqualified personnel and providing them with attractive benefits packages may be higher than we anticipate and, as a result, if we are unable to pass these costs on to our hospital and healthcare facility clients, our profitability could decline. Moreover, if we are unable to attract and retain healthcare professionals,qualified personnel, the quality of our services to our hospital and healthcare facility clients may decline and, as a result, we could lose clients.

Our results of operations and cash flow are affected by our ability to leverage our cost structure.

        We have technology, operations and human capital infrastructures in place to support both our current business operations and future growth. As revenues grow, these costs are leveraged over a larger revenue base, which positively impacts our results of operations and cash flows. Similarly, in orderperiods of contraction, these costs are no longer as leveraged, adversely affecting our results of operations and cash flow. During the last fiscal year, in light of the adverse market conditions being experienced by our business, we took steps to provide contract logistic,attempt to manage our general and administrative or other employeesexpenses. However, we expect reductions in such costs to be limited and there to be areas where additional spend may be deemed appropriate by management in preparation for anticipated growth, which will adversely affect our clients, we are dependent on securing a poolresults of qualified persons willing to accept assignments for our clients. Our business is materially dependent upon the continued availability of such qualified personnel. Our inability to secure qualified personnel would have a material adverse effect on our business.

operations and cash flow until revenues increase.

We are exposed to increased costs and risks associated with complying with increasing and new regulation of corporate governance and disclosure standards.

        Since the effectiveness for us of the Sarbanes-Oxley Act of 2002, we spend an increasing amount of management's time and resources (both internal and external) to comply with changing laws, regulations and standards relating to corporate governance and public disclosures. This compliance requires management's annual review and evaluation of our internal control systems. This process has caused us to engage outside advisory services and has resulted in additional accounting and legal expenses. We may encounter problems or delays in completing these reviews and evaluation and the implementation of improvements. If we are not able to timely comply with the requirements set forth in the Sarbanes-Oxley Act of 2002, we might be subject to sanctions or investigation by regulatory authorities. Any such action could materially adversely affect our business and our stock price.

We are highly dependent on the proper functioning of our information systems.

We are highly dependent on the proper functioning of our information systems in operating our business. Critical information systems used in daily operations identify and match staffing resources and client assignments. The system also tracks regulatory credentialing expirations and other relevant client and healthcare information. They also perform payroll, billing and accounts receivable functions. OurWhile we have multiple back up plans for these types of contingencies, our information systems are vulnerable to fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events. If our information systems fail or are otherwise unavailable, these functions would have to be accomplished manually, which in turn could impact our abilityfinancial viability, due to identify business opportunities quickly, maintain billing and staffing records reliably, pay our staff in a timely fashion and bill for services efficiently.the increased cost associated with performing these functions manually.


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Potential tax liabilities may adversely affect our financial condition.
From time to time, we have

        The Company has received several notices from the Internal Revenue Service regarding potential underpayment, overpayment or non-payment("IRS") claiming taxes, interest and penalties due related to payroll taxes predominantly from its former PEO operations which were sold in fiscal 2003. The Company has also received notices from the IRS reporting overpayments of payroll-related taxes. We have disputedManagement believes that these notices and strongly believe that such notices wereare predominantly the result of errors made in reporting taxes paid and the resulting misapplication of taxes paid, in large part duepayroll tax payments between its legal entities. If not resolved favorably, the Company may incur interest and penalties. Until the sale of certain assets related to our operation of approximately seventeen differentthe former PEO operations, the Company operated through 17 subsidiaries, predominantly from our former Professional Employer Organization discontinued operations. Theand management believes that the IRS has not correctly identified payments made through the different entities, therefore leading to the notices. To date, the Company has been working with the IRS to resolve these discrepancies and has had certain interest and penalty claims abated. DLH has also received notices from the Social Security Administration claiming variances in wage reporting compared to IRS transcripts. The Company believes the notices from the Social Security Administration are directly related to the IRS notices received. The Company believes that if we were required to pay in full, could materially adversely affect our financial conditionafter the IRS applies all the funds correctly, any significant interest and cash flows. We are contesting these notices because we believe all material payroll-related taxes have been paid. We further believe that once all tax payments are applied appropriately, all material penalties and interest shouldwill be abated. We have retained the services of Ernst & Young, LLP to assist us in this regard. However,abated; however, there can be no assurance that weeach of these matters will be successful in our efforts.resolved favorably. In settling various years for specific subsidiaries with the IRS, the Company has received refunds for those specific periods; however, as the process of settling and concluding on other periods and subsidiaries is not yet completed, and the potential exists for related penalties and interest,interest. No payments have been made by the remainingCompany in fiscal 2012 or 2011, but as disclosed in Note 9 to the Financial Statements, a liability ($1.1of $1.3 million is recorded at September 30, 2009) has been recorded in accounts payable in the accompanying balance sheets. In fiscal 2009, the Company paid $1.1 million, related to this matter. Based on an assessment of periods settled and the status of open periods under review by the IRS, management reduced its estimated liability by $0.7 million in 2008. Such amount, accounted for as a change in estimate, is included as a component of other income (expense) in the accompanying 2008 statement of operations.2012. Management believes that the ultimate resolution of these remaining payroll tax matters will not have a significant adverse effect on its financial position or future results of operations.

The Company's intention is that it will, in due course, seek to negotiate a mutually satisfactory payment plan with the IRS, but there is no assurance that it would be successful in doing so and the Company's future cash flows and liquidity could therefore be materially affected by this matter.

We have a substantial amount of goodwill on our balance sheet. Future write-offs of goodwill may have the effect of decreasing our earnings or increasing our losses.

We have previously obtained growth through acquisitions of other companies and businesses. Under existing accounting standards, we are required to periodically review goodwill and indefinite life intangible assets for possible impairment. In the event that we are required to write down the value of any assets under these pronouncements, it may materially and adversely affect our earnings. See the more detailed discussion appearing as part of our Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 herein.

As of September 30, 2009,2012, we had $8.6 million of goodwill, on our consolidated balance sheet, which represents the excess of the total purchase price of our acquisition over the fair value of the net assets acquired. At such date, goodwill represented approximately 32% of our total assets. As permitted, we do not amortize goodwill or intangible assets deemed to have an indefinite useful life. Impairment, for goodwill and intangible assets deemed to have an indefinite life, exists if the net book value of the goodwill or intangible asset equals or exceeds its fair value. As required,permitted, we performed our annual review fora qualitative and quantitative assessment of factors to determine whether it was necessary to perform the goodwill impairment during the fourth quarter of fiscal year 2009 by performing a fair value analysis of each reporting unit. The fair value analysis was completed with the assistance of outside valuation professionals. The carrying values of the intangibles associated with our continuing TeamStaff GS business were supported bytest. Based on the results of this valuation, However, as a result of the decision to divest TeamStaff Rx,work performed, the Company recognized anhas concluded that no impairment charge of $2.3 million to reduce the carrying value of long lived assets (tradename — $0.7 million and goodwill — $1.6 million) to estimated fair value. The estimated fair valueloss was derived from the terms of the sale of these assets to Advantage RN. The impairment charge is included in the 2009 loss from discontinued operations. Contributing to this 2009 impairment charge was the reduction in our projected growth rates (compared to prior projections), management’s current assessment of the healthcare staffing industry and the significant decrease in the enterprise value of the unit.warranted at September 30, 2012. Additional impairment analyses at future dates may be performed to determine if indicators of impairment are present, and if so, such amount will be determined and the associated charge will be recorded to the consolidated statement of operations. Although it does not affect our cash flow, an impairment charge to earnings has the effect of decreasing our earnings or increasing our losses, as the case may be. If we are required to record additionalgoodwill impairment charges, our stock price could also be adversely affected.


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We have a significant amount of net operating loss carry forwards which we may not be able to utilize in certain circumstances.

        At September 30, 2012, we had net operating losses, or NOLs, of approximately $40.2 million and $28.2 million for U.S. and state tax return purposes, respectively, and unutilized tax credits approximate $1.1 million. Under Section 382 of the Internal Revenue Code, following an "ownership change," special limitations apply to the use by a "loss corporation" of its: (i) NOL carry forwards arising before the ownership change; and (ii) net unrealized built-in losses (if such losses existed immediately before the ownership change and exceed a statutory threshold amount) recognized during the five years following the ownership change. As a result of previous business combinations and changes in ownership, there is a substantial amount of U.S. NOLs that are subject to annual limitations on utilization. Our U.S. NOLs begin to expire in 2021 and continue to expire through 2032. These net operating losses are fully offset by valuation allowances as of September 30, 2012.

Risks Relating To Our Revolving Credit Line

Our credit facility is secured by a lien on substantially all of our assets and if we are unable to make the scheduled principal and interest payments on the facility or maintain compliance with other debt covenants, we may default on the facility.

TeamStaff completed

        On July 29, 2010, DLH Solutions entered into a $3.0Loan and Security Agreement (the "Loan Agreement") with Presidential Financial Corporation (the "Lender"). Under the Loan Agreement, the Lender agreed to provide a two (2) year secured loan facility to DLH Solutions in an aggregate amount of up to $1.5 million, revolving credit facility by Sovereign Business Capital (formerly known as Business Alliance Capital Company), a division of Sovereign Bank, effective on March 28, 2008. Revolving credit advances bear interest atupon the per annum rate of Prime Rate plus 25 basis points, but not less than 5.5% per annum. The facility has a three-year lifefurther terms and contains term and line of credit borrowing options. In connection withsubject to the dispositionconditions of the assetsLoan Agreement. In November, 2010, the Lender agreed by means of our TeamStaff Rx subsidiary, we were requiredan amendment to obtain the consent of the lender under our Loan Agreement Sovereign. On January 12, 2010 we were granted such consent. As a condition to such consent, however, Sovereign reducedincrease the maximum amount available under such loanthe facility from $3.0$1.5 million to $2.0 million. As of September 30, 2009, there was no debt outstanding under$2.5 million and on February 9, 2011, we entered into a further amendment to the Loan Agreement and unused availability (as defined) totaled $1.7 million, net of required collateral reserves perpursuant to which the Loan Agreement for certain payroll and tax liabilities. As of September 30, 2009, we had working capital of $0.9 million. Accordingly, management does not believe that the reduction in theLender agreed to further increase our maximum availability under the Loan Agreement from $2.5 million to $3.0 million and to provide an unbilled receivable facility within the limits of the Loan Agreement. The February 2011 amendment also extended the term of the Loan Agreement by 12 months, to July 29, 2013, and will haveautomatically renew annually unless terminated by either party.

        In May 2012, the Company entered into a material adverse impact on our operationsfurther amendment to the Loan Agreement (the "Fifth Amendment") pursuant to which the Lender agreed to increase the available line of credit from $3,000,000 to a maximum amount of $6,000,000 and financial condition.

to increase the maximum amount available under the unbilled accounts facility of the Loan Agreement from $500,000 to $1,000,000. The facilityCompany's ability to borrow against the increased available credit, however, is subject to certain restrictive covenants, including minimum debt service coverage ratio and restrictions on the Company’s ability to, among other things, disposesatisfaction of certain assets, engageconditions. The Fifth Amendment provides for an initial sublimit under the maximum loan amount of $3,000,000 (the "Initial Sublimit") and an adjusted sublimit of $4,000,000 (the "Adjusted Sublimit"). The Initial Sublimit of $3,000,000 will remain in certain transactions, incur indebtednesseffect until the satisfaction of the following conditions: (i) the repayment of the $500,000 over-advance accommodation agreed to by Lender as of May 9, 2012, (ii) the Company's demonstration of the need for the increase, (iii) the Company's continued compliance with the Loan Agreement, and pay dividends.(iv) Lender, in its sole discretion, agrees to increase the Initial Sublimit. In the event that the foregoing conditions are satisfied, the credit available to under the Loan Agreement shall remain subject to the Adjusted Sublimit until the parties receive any required waivers or consents from the holders of the Company's subordinated Convertible Debentures issued as of July 28, 2011. In addition, the lineincreased availability under the unbilled accounts facility of creditthe Loan Agreement is subject to the satisfaction of the same conditions that are applicable to Initial Sublimit. Accordingly, until these conditions are satisfied, the current borrowing limits remain in effect. In addition, borrowings in excess of the Initial Sublimit are subject to an origination fee of 1% of the increased availability.


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        An interest rate premium of 2% is payable in respect of any advances secured by unbilled accounts receivable, which are subject to a sub-facility limit of $500,000 and an advance rate of 75%. The loan is secured by a security interest and lien on substantially all of our assets. Due to these covenantsDLH Solutions' cash accounts, account deposits, letters of credit and restrictions, our operations may be affected in several ways. For instance, a portion of our cash flow from operations will be dedicated to the paymentinvestment property, chattel paper, furniture, fixtures and equipment, instruments, investment property, general intangibles, deposit accounts, inventory, other property, all proceeds and products of the principalforegoing (including proceeds of any insurance policies and interest on our indebtednessclaims against third parties for loss of any of the foregoing) and as referenced above, ourall books and records related thereto. DLH Solutions' ability to enter into certain transactions, incur additional indebtedness and dispose of certain assets may be limited. The facilityrequest loan advances under the Loan Agreement is subject to acceleration upon non-payment or various other standard default clauses. Material increases(i) computation of DLH Solutions' advance availability limit based on "eligible accounts receivables" (as defined in the Loan Agreement) multiplied by the "Accounts Advance Rate" established by the Lender which initially shall be 85% and may be increased or decreased by the Lender in exercise of its discretion; and (ii) compliance with the covenants and conditions of the loan.

        Under the Loan and Security Agreement, interest accrues at the greater of (a) 3.25% or (b) (i) 1.95% above the Wall Street Journal Prime rate could haveon the accounts receivable portion of the credit line and (ii) 3.95% above the Wall Street Journal Prime rate on the unbilled accounts portion. In addition, DLH Solutions will pay certain other related fees and expense reimbursements including a monthly service charge of 0.65% based on the average daily loan balance which shall accrue daily and be due and payable on the last day of each month so long as the Loan Agreement is outstanding and a monthly collateral monitoring fee. The interest rate in effect at September 30, 2012 and 2011 was 5.2%. At September 30, 2012, based on current eligible accounts receivable, the amount of the unused availability under the line was $344,000. The amount outstanding as of September 30, 2012 was $2,363,000.

        The Loan Agreement requires compliance with customary covenants and contains restrictions on the Company's ability to engage in certain transactions. Among other matters, under the loan agreement we may not, without consent of the Lender, (i) merge or consolidate with another entity, form any new subsidiary or acquire any interest in a third party; (ii) acquire any assets except in the ordinary course of business; (iii) enter into any transaction outside the ordinary course of business; (iv) sell or transfer collateral; (v) make any loans to, or investments in, any affiliate or enter into any transaction with an affiliate other than on an arms-length basis; (vi) incur any debt outside the ordinary course of business; (vii) pay or declare any dividends or other distributions; or (viii) redeem, retire or purchase any of our equity interests exceeding $50,000. Further, without the consent of the Lender, the Company is also restricted from making any payments in respect of other outstanding indebtedness. The Lender agreed to eliminate the tangible net worth covenant as part of the Fifth Amendment. The Lender may terminate the Loan Agreement at any time upon 60 days written notice after December 31, 2012 and the Loan Agreement provides for customary events of default following which the Lender may, at its option, terminate the loan agreement and accelerate the repayment of any amount outstanding. The defined events of default include, among other things, a material adverse effect on our results of operations,change in the statusCompany's circumstances, or if the Lender deems itself insecure in the ability of the revolving credit facility, as well as interest costs. Failure to pay revolving credit advances or any failure to comply with applicable restrictive covenants would have a material adverse effect on our business in that we could be requiredCompany to repay its obligations, or as to the outstanding balance in advance or sell assets in ordersufficiency of the collateral.

        The Company has concurrently executed a Corporate Guaranty Agreement with Lender pursuant to repaywhich it has guaranteed all of the outstanding amount. In addition, the Lender could seize the collateral securing the loan facility.

Further, availabilityobligations of DLH Solutions under the Loan Agreement.

        Availability of funds under the Presidential Financial line of credit is directly related to the successful assignment of certain accounts receivable. Certain government accounts of TeamStaff GSDLH Solutions are required to execute “Acknowledgements"Acknowledgements of Assignment." There can be no assurance that every TeamStaff GSDLH Solutions government account will execute the documentation to effectuate the assignment and secure availability. The failure of government third partiescustomers to sign the required documentation could result in a decrease in availability under the existing line of credit,credit.


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Our customers make payments directly to a bank account controlled by our Lender.

        Our customers make payments directly to a bank account controlled by our Lender over which would materially affectwe have no control and which is used to pay down our loans. As a result, our access to cash resources is substantially at the Company’s business.

On January 11, 2010, we determined that asdiscretion of September 30, 2009, we were notour lender and could cease in compliance with the debt service coverage ratio covenant of the Loan Agreement. The Loan Agreement provides that following an event of default, Sovereign may, among other remedies provided for in the Loan Agreement, accelerate the amounts outstanding under the Loan Agreement, take such actions as it deems necessary to protect its security interest in the collateral, and terminate the Loan Agreement. In connection with its consent to the sale of the TeamStaff Rx assets and loan modification, on January 12, 2010, Sovereign waived such non-compliance for the period ending September 30, 2009. The Lender, however, reserved its rights under the Loan Agreement with respect to any future non-compliance with the debt service coverage ratio for any future period or any other provision of the Loan Agreement. If covenant violations were to occur in the future and the lender does not agree to modify the covenants or waive such violations, it could result in the acceleration of the maturity date of all of our debt under this loan facility. In both of these circumstances it could have a material adverse impactdefault on our business and financial condition.
loan agreement.

Risks Relating To Our Stock

There is limited trading volumeOur stock price may be volatile and your investment in our common stock and you may find it difficult to dispose of your shares of common stock; it is possible that our stock may be delisted from The Nasdaq Global Market.suffer a decline in value.

Our common stock is currently traded on The Nasdaq Capital Market under the symbol “TSTF”. On December 31, 2009, the closing bid price of our common stock was $0.80. If we fail to meet any of the continued listing standards of The Nasdaq Capital Market, our common stock will be delisted from The Nasdaq Capital Market. These continued listing standards include specifically enumerated criteria, such as a $1.00 minimum closing bid price.

        

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On December 17, 2009, we received a staff deficiency letter from The Nasdaq Stock Market notifying the Company that for the past 30 consecutive business days, the closing bid price per share of its common stock was below the $1.00 minimum bid price requirement for continued listing on the Nasdaq Capital Market set forth in Nasdaq Listing Rule 5550(a)(2). As a result, the Company was notified by Nasdaq that it is not in compliance with the Listing Rule. Nasdaq has provided the Company with 180 calendar days, or until June 15, 2010, to regain compliance. To regain compliance with the minimum bid price requirement, the closing bid price of our common stock must remain above $1.00 for a minimum of ten consecutive trading days during the 180-day compliance period. If this occurs, Nasdaq will provide us with written notification of compliance. However, if we do not regain compliance during this grace period, our common stock will be subject to delisting from The Nasdaq Capital Market. The 180-day compliance period relates exclusively to our bid price deficiency. We may be delisted during the 180-day period for failure to maintain compliance with any other listing requirement which occurs during this period.
If our common stock were to be delisted from The Nasdaq Capital Market, trading of our common stock most likely will be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities such as the OTC Bulletin Board. Such trading will reduce the market liquidity of our common stock. As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock. If our common stock is delisted from The Nasdaq Capital Market and the trading price remains below $5.00 per share, trading in our common stock might also become subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trade involving a stock defined as a “penny stock” (generally, any equity security not listed on a national securities exchange or quoted on Nasdaq that has a market price of less than $5.00 per share, subject to certain exceptions). Many brokerage firms are reluctant to recommend low-priced stocks to their clients. Moreover, various regulations and policies restrict the ability of shareholders to borrow against or “margin” low-priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the common stock can result in an individual shareholder paying transaction costs that represent a higher percentage of total share value than would be the case if our share price were higher. This factor may also limit the willingness of institutions to purchase our common stock. Finally, the additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from facilitating trades in our common stock, which could severely limit the market liquidity of the stock and the ability of investors to trade our common stock.
Changes in our business, the volatility of the market value of our comparable companies and the impact of litigation and disputes may increase the volatility of the stock price.
The price of our common stock could be subject to fluctuations and may decline in the future. This volatility may result from the impact on our stock price of:
the impact of acquisitions, investments, joint ventures and divestitures that we may undertake;
the impact of the volatility of the market value of comparable public companies that are considered in our valuation process and any publicly traded securities we may own;
the impact of litigation, government investigations or other customer disputes on our operating performance and future prospects; and
the mix of our commercial and international business as a proportion of our overall business and the volatility associated with companies in those business areas
of various specific factors, including but not limited to the following:

    actual or anticipated fluctuations in our operating results;

    actual or anticipated changes in our growth rates or our competitors' growth rates;

    actual or anticipated changes in healthcare or government policy in the U.S.;

    conditions in the financial markets in general or changes in general economic conditions;

    our ability to stay in compliance with credit facility covenants;

    our inability to raise additional capital when and if it is required for use in our business;

    conditions of our competitors or the government services industry generally;

    conditions of our current and desired clients;

    changes in stock market analyst recommendations regarding our common stock, other comparable companies or the government services industry generally;

    the impact of our ability to effectively implement acquisitions, investments, joint ventures and divestitures that we may undertake;

    the impact of the volatility of the market value of comparable public companies that are considered in our valuation process and any publicly traded securities we may own; and

    the impact of litigation, government investigations or customer or other disputes on our operating performance and future prospects.

Since we have not paid dividends on our common stock, you cannot expect dividend income from an investment in our common stock.

We have not paid any dividends on our common stock since our inception and do not contemplate or anticipate paying any dividends on our common stock in the foreseeable future. Future potential lenders may prohibit us from paying dividends without its prior consent. Therefore, holders of our common stock may not receive any dividends on their investment in us. Earnings, if any, will be retained and used to finance the development and expansion of our business.

The exercise of our outstanding options and warrants, or conversion of our outstanding debentures may depress our stock price and dilute your ownership of the company.

        As of September 30, 2012, the following options and warrants were outstanding:

    Stock options to purchase 1,362,500 shares of common stock at exercise prices ranging from $0.56 to $1.88 per share, not all of which are immediately exercisable. The weighted average

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      exercise price of the outstanding stock options is $1.19 per share. These stock options are employee, non employee and non-executive director options.

    Warrants to purchase 53,846 shares of common stock with a weighted average exercise price of $0.96 per share.

        In addition, July 2011, we sold an aggregate amount of $350,000 of convertible debentures to entities affiliated with Wynnefield Capital, Inc. (the "Purchasers") pursuant to a standby commitment (the "Commitment").The convertible debentures will mature on the 27-month anniversary of issuance and bear interest at the rate of the greater of the prime rate plus 5%, or 10% per annum, payable at maturity or upon redemption. The convertible debentures are convertible into shares of the Company's common stock at an initial conversion price of $1.30 per share, which was adjusted to $1.25 following the rights offering in accordance with the weighted-average anti-dilution provision. The conversion rate is also subject to adjustment to account for certain customary events. The Company can redeem the outstanding convertible debentures at any time at 120% of the remaining principal amount, plus accrued but unpaid interest. Presently, the convertible debentures are convertible into a total of 280,682 shares of our common stock.

17

        To the extent that these securities are exercised or converted, dilution to our shareholders will occur. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected, since the holders of these securities can be expected to exercise or convert them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than the exercise and conversion terms provided by those securities. Further, in the event the conversion price of our outstanding shares of convertible debentures is lower than the actual trading price on the day of conversion, the holders could immediately sell their converted common shares, which would have a dilutive effect on the value of the outstanding common shares. Furthermore, the significant downward pressure on the trading price of our common stock as convertible debenture holders converted these securities and sell the common shares received on conversion could encourage short sales by the holders of convertible debentures or other shareholders. This would place further downward pressure on the trading price of our common stock. Even the mere perception of eventual sales of common shares issued on the conversion of the shares of convertible debentures could lead to a decline in the trading price of our common stock.


We may issue preferred stock with rights senior to our common stock, which may adversely impact the voting and other rights of the holders of our common stock.

Our certificate of incorporation authorizes the issuance of “blank check”"blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors up to an aggregate of 5,000,000 shares of preferred stock. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which would adversely affect the voting power or other rights of the holders of our common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our Company, which could have the effect of discouraging bids for our Company and thereby prevent stockholders from receiving the maximum value for their shares. Although we have no present intention to issue any shares of our preferred stock, in order to discourage or delay a change of control of our Company, we may do so in the future. In addition, we may determine to issue preferred stock in connection with capital raising efforts and the terms of the stock so issued could have special voting rights or rights related to the composition of our Board.


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Anti-takeover provisions in our Articles of Incorporation make a change in control of our Company more difficult.

The provisions of our Articles of Incorporation and the New Jersey Business Corporation Act, together or separately, could discourage potential acquisition proposals, delay or prevent a change in control and limit the price that certain investors might be willing to pay in the future for our common stock. Among other things, these provisions:

require certain supermajority votes;
establish certain advance notice procedures for nomination of candidates for election as directors and for shareholders’ proposals to be considered at shareholders’ meetings; and
divide the board of directors into three classes of directors serving staggered three-year terms.

    require certain supermajority votes;

    establish certain advance notice procedures for nomination of candidates for election as directors and for shareholders' proposals to be considered at shareholders' meetings; and

    divide the board of directors into three classes of directors serving staggered three-year terms.

Pursuant to our articles of incorporation, the board of directors has authority to issue up to 5,000,000 preferred shares without further shareholder approval. Such preferred shares could have dividend, liquidation, conversion, voting and other rights and privileges that are superior or senior to our common stock. Issuance of preferred shares could result in the dilution of the voting power of our common stock, adversely affecting holders of our common stock in the event of its liquidation or delay, and defer or prevent a change in control. In certain circumstances, such issuance could have the effect of decreasing the market price of our common stock. In addition, the New Jersey Business Corporation Act contains provisions that, under certain conditions, prohibit business combinations with 10% shareholders and any New Jersey corporation for a period of five years from the time of acquisition of shares by the 10% shareholder. The New Jersey Business Corporation Act also contains provisions that restrict certain business combinations and other transactions between a New Jersey corporation and 10% shareholders.

Our executive officers, directors and significant stockholders will be able to influence matters requiring stockholder approval

        Our executive officers, directors and largest shareholder (Wynnefield Capital, Inc. and its affiliates) possess beneficial ownership of over 50% of our common stock. Within this amount, Wynnefield Capital, Inc. and its affiliates own approximately 44% of our outstanding common stock. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale or merger of our company and may negatively affect the market price of our common stock. These transactions might include proxy contests, tender offers, mergers or other purchases of common stock that could give our stockholders the opportunity to realize a premium over the then-prevailing market price for shares of our common stock.

        In addition, an employee of Wynnefield Capital, Inc. currently serves on our Board of Directors. As a result of this share ownership and representation on our Board of Directors, our largest stockholder will be able to influence all affairs and actions of our company, including matters requiring stockholder approval such as the election of directors and approval of significant corporate transactions. The interests of our principal stockholders may differ from the interests of the other stockholders.

You may not be able to rely on forward-looking statements.

The information contained in this report or in documents that we incorporate by reference or in statements made by our management includes some forward-looking statements that involve a number of risks and uncertainties. A number of factors, including but not limited to those outlined in the Risk Factors, could cause our actual results, performance, achievements, or industry results to be very different from the results, performance or achievements expressed or implied by these forward-looking statements.

In ,In addition, forward-looking statements depend upon assumptions, estimates and dates that


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may not be correct or precise and involve known or unknown risks, uncertainties and other factors. Accordingly, a forward-looking statement in this report is not a prediction of future events or circumstances and those future events or circumstances may not occur. Given these uncertainties and risks, you are warned not to rely on the forward-looking statements. A forward-looking statement is usually identified by our use of certain terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “pro"believes," "expects," "may," "will," "should," "seeks," "pro forma,” “anticipates”" "anticipates" or “intends,”"intends," or by discussions of strategies or intentions. We are not undertaking any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments.

ITEM 1B.UNRESOLVED STAFF COMMENTS
ITEM 1B.    UNRESOLVED STAFF COMMENTS

There are no unresolved staff comments.

18

ITEM 2.    PROPERTIES


ITEM 2.PROPERTIES
Operations and Facilities

Effective October 23, 2007, TeamStaff’sAugust 2, 2011, DLH's corporate headquarters is locatedwas relocated to 1776 Peachtree Street, NW, Suite 300S, in Atlanta, Georgia. The Company has vacated the former headquarters facility in Somerset, New Jersey. Previously, the Company’s corporate headquarters was locatedThe Company also has leased office space in Atlanta, Georgia. TeamStaff leases its 2,670 square foot corporate headquarters in Somerset, New Jersey, as well as offices in Atlanta, Georgia; Clearwater, Florida; Memphis, Tennessee; and Loganville, Georgia. The facilities provide sufficient capacity to meet demands for the foreseeable future. In the fiscal year ended September 30, 2009, TeamStaff’s2012, DLH's total lease expense for continuing operations was approximately $422,000.

$173,000.

The following is summary information on TeamStaff’sDLH's facilities as of September 30, 2009:2012:

APPROXIMATEEXPIRATIONMONTHLY
LOCATIONSQUARE FEETDATETERMS
Corporate Headquarters
2,6708/31/2012$4,248 10/2009 – 8/2010
1 Executive Drive
$4,376 9/2010 – 8/2011
Suite 130
$4,507 9/2011 – 8/2012
Somerset, NJ
1545 Peachtree Street, NE*
2,9986/30/2011$6,825 10/2009 – 1/2010
Suite 340
$7,030 2/2010 – 1/2011
Atlanta, GA
$7,241 2/2011 – 6/2011
18167 US 19 North**
15,1772/28/2011$25,624 10/2009 – 8/2010
Suite 400
$26,395 9/2010 – 2/2011
Clearwater, FL
6555 Quince Road***
1,8941/31/2010$2,956 10/2009 – 1/2010
Suite 303
Memphis, TN
3525 Highway 81 South
6,2005/31/2015$6.250 10/2009 – 5/2010
Loganville, GA$6,500 6/2010 – 5/2011
$6,750 6/2011 – 5/2012
$7,000 6/2012 – 5/2013
$7,250 6/2013 – 5/2014
$7,500 6/2014 – 5/2015
*As a result of the relocation of the Company’s corporate headquarters, the Atlanta, GA office space was vacated and has been subleased effective January 15, 2008 through the end of the lease term.
**In connection with sale of the operating assets of TeamStaff Rx, Advantage RN will have the right to use these premises and is obligated to make rent subsidy payments to us totaling $125,000, beginning on March 1, 2010.
***As a result of the sale of the Nursing Innovations per diem business, the Memphis, TN office space was vacated and is currently unoccupied.
LOCATION
APPROXIMATE
SQUARE FEET
EXPIRATION
DATE
ITEM 3.

Corporate Headquarters
1776 Peachtree Street
Suite 300 S Atlanta,
GA 30309

 LEGAL PROCEEDINGS3,9257/31/2017

3525 Highway 81 South
Loganville, GA


6,200

5/31/2015
RS Staffing Services, Inc.
On April 17, 2007, a Federal Grand Jury subpoena was issued by the Northern District of Illinois to the Company’s wholly-owned subsidiary, TeamStaff GS, formerly known as RS Staffing Services, requesting production of certain documents dating back to 1997, prior to the time the Company acquired RS Staffing Services. The subpoena stated that it was issued in connection with an investigation of possible violations of Federal criminal laws and related crimes concerning procurement at the DVA. According to the cover letter accompanying the subpoena, the U.S. Department of Justice, Antitrust Division (“DOJ”), along with the DVA, Office of the Inspector General, are responsible for the current criminal investigation. RS Staffing Services provides contract staffing at certain DVA hospitals that may be part of the investigation. The return date for documents called for by the subpoena was May 17, 2007. In connection with the same investigation, agents with the DVA, Office of Inspector General, executed a search warrant at the Monroe, Georgia offices of RS Staffing Services.

ITEM 3.    LEGAL PROCEEDINGS

        

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The government has advised TeamStaff that the DOJ has no intent to charge TeamStaff or any of its subsidiaries or employees in connection with the Federal investigation of contract practices at various government owned/contractor operated facilities. TeamStaff remains committed to cooperate with the DOJ’s continued investigation of other parties.
The Company originally acquired RS Staffing Services in June 2005. As part of the purchase price of the acquisition, the Company issued to the former owners of RS Staffing Services a $3.0 million promissory note, of which $1.5 million and interest of $150,000 was paid in June 2006. On May 31, 2007, the Company sent a notice of indemnification claim to the former owners for costs that have been incurred in connection with the investigation. Effective June 1, 2007, the Company and former owners of RS Staffing Services reached an agreement to extend the due date from June 8, 2007 to December 31, 2008 with respect to the remaining $1.5 million note payable and accrued interest payable. Such agreement has been extended to February 28, 2010. As of September 30 2009, the amount has not been settled. The Company recognized expenses related to legal representation and costs incurred in connection with the investigation in the amount of $21,000 and $219,000 during fiscal 2009 and 2008, respectively, as a component of other income (expense). Cumulative costs related to this matter approximate $1.7 million. Pursuant to the acquisition agreement with RS Staffing Services, the Company has notified the former owners of RS Staffing Services that it is the Company’s intention to exercise its right to setoff the payment of such expenses against the remaining principal and accrued interest due to the former owners of RS Staffing Services.
The Company will pursue the recovery as a right of offset in future periods. Management has a good faith belief that the Company will recover such amounts; however, generally accepted accounting principles preclude the Company from recording an offset to the note payable to the former owners of RS Staffing Services until the final amount of the claim is settled and determinable. At present, no assurances can be given that the former owners of RS Staffing Services would not pursue action against us or that the Company will be successful in the offset of such amounts against the outstanding debt and accrued interest from notice date forward, if any. Accordingly, the Company has expensed costs incurred related to the investigation through September 30, 2009.
Other Matters
On October 2, 2008, the United States Equal Employment Opportunity Commission (“EEOC”) issued a subpoena to TeamStaff GS regarding the alleged wrongful termination of certain employees who were employed at a federal facility staffed by TeamStaff GS contract employees. The wrongful termination is alleged to have occurred when the former employees were terminated because they could not satisfy English proficiency requirements imposed by the Federal government. TeamStaff GS has produced all documents that it believes were required by the subpoena and has submitted its position statement to the EEOC. It is unclear, at present, if or when the EEOC will respond.
As a commercial enterprise and employer, we are subject to various claims and legal actions in the ordinary course of business. These matters can include professional liability, employment-relations issues, workers’workers' compensation, tax, payroll and employee-related matters and inquiries and investigations by governmental agencies regarding our employment practices. We are not aware of any pending or threatened litigation that we believe is reasonably likely to have a material adverse effect on our results of operations, financial position or cash flows.
In connection However, as previously reported, in fiscal 2012 we were advised of a claim by the U.S. Attorney based on an alleged failure to pay certain classes of employees the prevailing wages as required by the Service Contract Act during the years 2003-2010. The Company is continuing to review the data allegedly supporting the claims with the U.S. Department of Justice in an effort to determine whether any wage adjustment is required. These claims appear, in part, to be part of the claims previously disclosed by DLH and related to services provided to the Department of Veterans Affairs by DLH. See "Risk Factors" in Part I and "Potential Contractual Billing Adjustments" in the Management Discussion and Analysis. Until the analysis of the data is complete, we cannot finally determine either the merits of the claim or the potential impact on DLH; however, DLH continues to believes that it has acted in conformity with its medical staffing business, TeamStaffcontractual commitments and no wage adjustment is exposed to potential liability for the acts, errors or omissions of its contract 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,required. Nevertheless, 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 whichan adverse decision or settlement would be anticipated tonot have a material adverse impact on TeamStaff’s resultsDLH.


Table of operations, financial position or cash flows.

ITEM 4.SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2009.
ITEM 4.    MINE SAFETY DISCLOSURES

        Not applicable.

20



PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Principal Market

TeamStaff’s

        Our common stock is currently traded in the over-the-counter market and included on theThe Nasdaq Capital Market under the symbol “TSTF”"DLHC". TeamStaff started trading on The Capital Market in November 25, 2009. Previously, TeamStaff’sPrior to June 27, 2012, our common stock was listed for tradingtraded on The Nasdaq Global Market. As previously announced, on September 15, 2009, we received a letter from the Nasdaq Stock Market advising that we had not maintained a minimum market value of publicly held shares of common stock of $5,000,000, as required by the continued listing requirements of the Nasdaq Global Market set forth in Nasdaq Listing Rule 5450(b)(1)(C). Subsequently, the Company elected to apply to transfer the listing of its common stock to the Nasdaq Capital Market. On November 23, 2009, Nasdaq approved the transfer application.

On December 17, 2009, we received a staff deficiency letter from The Nasdaq Stock Market notifying the Company that for the past 30 consecutive business days, the closing bid price per share of its common stock was below the $1.00 minimum bid price requirement for continued listing on the Nasdaq Capital Market set forth in Nasdaq Listing Rule 5550(a)(2). As a result,under the Company was notified by Nasdaq that it is not in compliance with the Listing Rule. Nasdaq has provided the Company with 180 calendar days, or until June 15, 2010, to regain compliance. See Item 1A-Risk Factors-Risks Relating to Our Stock.
symbol "TSTF".

Market Information

On April 17, 2008, the Company filed an amendment to its Amended and Restated Certificate of Incorporation in order to effect a one-for-four reverse split of the Company’s common stock. The reverse split was approved on April 17, 2008 at the Company’s annual meeting of shareholders and became effective on April 21, 2008, at which time the Company’s common stock began trading on the Nasdaq Global Market on a split-adjusted basis. As a result of the reverse stock split, each four shares of common stock was combined and reclassified into one share of common stock. All references to common stock, options, share based arrangements, exercise price, fair values and related data within this Form 10-K have been retroactively restated so as to incorporate the effect of this reverse stock split.

The range of high and low sales prices for TeamStaff’sthe Company's common stock for the periods indicated below are:

Common Stock

        
FISCAL YEAR 2009 HIGH LOW 
FISCAL YEAR 2012
 LOW HIGH 
1st Quarter $2.57 $1.64  $1.32 $2.92 
2nd Quarter
 $2.25 $1.03 

2nd Quarter

 $0.83 $2.22 
3rd Quarter $2.65 $1.23  $1.16 $2.04 
4th Quarter $1.98 $1.32  $0.72 $1.49 


        
FISCAL YEAR 2008 HIGH LOW 
FISCAL YEAR 2011
 LOW HIGH 
1st Quarter $4.16 $2.36  $0.48 $0.77 
2nd Quarter $3.24 $2.40  $0.36 $0.63 
3rd Quarter $2.80 $1.83  $0.46 $1.60 
4th Quarter $3.30 $1.85  $0.99 $3.27 

The above quotations reported by Nasdaq, represent prices between dealers and do not include retail mark-ups, markdowns or commissions. Such quotations do not necessarily represent actual transactions. On December 31, 2009, TeamStaff’sSeptember 30, 2012, the Company's common stock had a closing price of $0.80$1.06 per share.

Dividends

        

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Dividends
TeamStaffThe Company has not declared any cash dividends on its common stock since inception and has no present intention of paying any cash dividends on its common stock in the foreseeable future.

Approximate Number of Equity Security Holders

Effective August 31, 2001, TeamStaff acquired all of the capital stock of BrightLane. As contemplated under the agreements governing the transaction, TeamStaff agreed to issue 2,054,130 shares of its common stock in exchange for all of the outstanding capital stock of BrightLane.

        As of December 31, 2009, not all of the BrightLane shareholders had submitted their capital stock for exchange into shares of common stock; however such shares are classified as outstanding.

As of December 31, 2009,September 30, 2012, there were 4,940,9829,265,702 shares of common stock outstanding held of record by 267238 persons. TeamStaffThe Company believes it has approximately 1,3151,585 beneficial owners of its common stock.

Sales of Unregistered Securities

During the period covered by this report, the Company did not issue any securities that were not registered under the Securities Act of 1933, as amended, except as has been reported in previous filings with the SEC or as set forth herein. Following the end our 2009 fiscal year, on October 13, 2009, we granted an aggregate


Table of 42,500 shares of restricted stock to our non-executive directors, consistent with our compensation policy for non-executive directors. These shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

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Securities Authorized for Issuance Under Equity Compensation Plans

TeamStaff has three

        DLH presently utilizes one shareholder-approved equity compensation plans, all ofplan under which were approved by its Board of Directorsit makes equity compensation awards available to officers, directors, employees and its shareholders.consultants. The table set forth below discloses outstanding and available awards under our equity compensation plans as of September 30, 2009. The Company has no2012. All grants of equity compensation plans that have not been approved by security holders. All option grantssecurities made to executive officers and directors, including those to the Chief Executive Officer under employment agreements, are presently made under the plans referenced below. All grants of restricted stock made to executive officers are made under the plan referenced below.

The stock option plans under which options are outstanding are:
The 2000 Employee Stock Option Plan (“2000 Employee Plan”)
The 2000 Non-Executive Director Option Plan (“2000 Non-Executive Director Plan”)
The long-term incentive plan under which restricted stock grants were made is:
The 2006 Long Term Incentive Plan (“2006 Long Term Incentive Plan”)Plan.

Equity Compensation Plan Information(*) 
Plan Category
 (a)
Number of Securities
to be issued
upon exercise of
outstanding options,
warrants and rights
 (b)
Weighted Average
exercise price of
outstanding options,
warrants and rights
(or fair value at
date of grant)
 (c)
Number of securities
remaining available for
future issuances under
equity compensation
plans (excluding securities
reflected in column (a))
 

Equity Compensation Plans Approved by Security Holders:

          

2006 Long Term Incentive Plan

  1,362,500 $1.19  1,079,847 

Equity Compensation Plans Not Approved by Stockholders

  20,000(1)$2.28   

             
Equity Compensation Plan Information (*) 
      (b)    
      Weighted    
      Average  (c) 
  (a)  exercise price of  Number of securities 
  Number of Securities  outstanding  remaining available for 
  to be issued upon  options, warrants  future issuances under 
  exercise of  and rights (or fair  equity compensation plans 
  outstanding options,  value at date of  (excluding securities reflected in 
Plan Category warrants and rights  grant)  column (a)) 
 
Equity Compensation Plans Approved by Security Holders:            
             
2000 Employee Stock Option Plan  4,500  $7.84   1,706,187 
             
2000 Non-Executive Director Stock Option Plan (1)  10,625  $5.35    
             
2006 Long Term Incentive Plan  391,250  $1.96   4,454,222 
(1)
Consists of warrants to purchase common stock issued to a consultant.
(1)5,000 shares per year per non-executive director are granted under the 2000 Non-Executive Director Plan for a full year’s service and prorated for less than a full year’s service. Effective January 19, 2007, this Plan was suspended due to a change in the compensation terms for non-employee Board members. For additional information regarding our director compensation policy, see below under the caption “Director Compensation” in Item 11 – Executive Compensation.

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Registrant Repurchases of Securities
TeamStaff did not repurchase any

        The following table provides certain information with respect to our purchases of its securitiesshares of our common stock during the two prior fiscal yearsthree months ended September 30, 2009.2012:

Period
 Total Number
of Shares
Purchased
 Average Price
Paid Per Share
 Total Number of
Shares Purchased As
Part of Publicly
Announced Programs
 Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs(1)
 

July 2012

   $     

August 2012

         

September 2012

  40,000  1.00     
          

Total

  40,000 $1.00     
          

(1)
In connection with the resolution of the Company's remaining liability to holders of certain notes, in September 2012, the Company's remaining liability was satisfied in part through its repurchase of 40,000 shares of its common stock held by one of the note holders in consideration of the payment of $40,000.

ITEM 6.SELECTED FINANCIAL DATA
ITEM 6.    SELECTED FINANCIAL DATA

We are a “smaller"smaller reporting company”company" as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking and Cautionary Statements

This Annual Report on Form 10-K contains “forward-looking statements”"forward-looking statements" within the meaning of the 1995 Reform Act, Section 27A of the Securities Act and Section 21E of the Exchange Act. TeamStaff DLH


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desires to avail itself of certain “safe harbor”"safe harbor" provisions of the 1995 Reform Act and is therefore including this special note to enable TeamStaffDLH to do so. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may”"believe," "anticipate," "expect," "intend," "plan," "will," "may" and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements included in this report involve known and unknown risks, uncertainties and other factors which could cause TeamStaff’sDLH'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. We based these forward-looking statements on our current expectations and best estimates and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. The following factors (among others) could cause our actual results to differ materially from those implied by the forward-looking statements in this Annual Report on Form 10-K: our ability to continue to recruit qualifiedsecure contract and permanent healthcare professionals and administrative staff at reasonable costs; ourawards, including the ability to retain qualified contract healthcare professionals and administrative staff for multiple assignments at reasonable costs; our ability to attract and retain sales and operational personnel;secure renewals of contracts under which we currently provide services; our ability to enter into contracts with United States Government facilities and agencies on terms attractive to us and to secure orders related to those contracts; changes in the timing of orders for and our placement of contract and permanent healthcare professionals and administrative staff; the overall level of demand for the services offered by contract and permanent healthcare staffing providers;we provide; the variation in pricing of the healthcare facility contracts under which we place contract and permanent healthcare professionals; our ability to manage growth effectively; the performance of our management information and communication systems; the effect of existing or future government legislation and regulation; changes in government and customer priorities and requirements (including changes to respond to the priorities of Congress and the Administration, budgetary constraints, and cost-cutting initiatives); economic, business and political conditions domestically; the impact of medical malpractice and other claims asserted against us; the disruption or adverse impact to our business as a result of a terrorist attack; our ability to carry out our business strategy; the loss of key officers, and management personnel that could adversely affectpersonnel; the competitive environment for our ability to remain competitive;services; the effect of recognition by us of an impairment to goodwill and intangible assets;goodwill; other tax and regulatory issues and developments; and the effect of adjustments by us to accruals for self-insured retentions.

retentions; our ability to obtain any needed financing; our ability to attract and retain sales and operational personnel; and the effect of other events and important factors disclosed previously and from time-to-time in DLH's filings with the U.S. Securities Exchange Commission. For a discussion of such risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the company's periodic reports filed with the SEC. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such statements should not be regarded as a representation by the company or any other person that the objectives and plans of the Company will be achieved. The forward-looking statements contained in this report in Form 10-K are made as of the date hereof and may become outdated over time. The Company does not assume any responsibility for updating any forward-looking statements.

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Critical Accounting Policies and Estimates
TeamStaff

        DLH 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 2009DLH's 2012 Consolidated Financial Statements contained in this Annual Report on Form 10-K as well as “Critical"Critical Accounting Policies”Policies" contained therein for a detailed discussion on the application of these and other accounting policies.

Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the SEC. The preparation of our Consolidated Financial Statements and related notes in accordance with generally accepted accounting principles requires us to make estimates, which include judgments and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various assumptions that we


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believe to be reasonable under the circumstances. We evaluate our estimates on a regular basis and make changes accordingly. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our financial condition, results of operations and cash flow will be affected.

A critical accounting estimate is based on judgments and assumptions about matters that are uncertain at the time the estimate is made. Different estimates that reasonably could have been used or changes in accounting estimates could materially impact our financial statements. We believe that the policies described below represent our critical accounting policies, as they have the greatest potential impact on our Consolidated Financial Statements. However, you should also review ourSummary of Significant Accounting Policiesbeginning on page F-8 of the notes to our Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K.

Revenue Recognition

TeamStaff accounts for its revenues

        DLH's revenue is derived from professional and other specialized service offerings to US Government agencies through a variety of contracts, some of which are fixed-price in accordance with ACS 605-45,Reporting Revenues Grossnature and/or sourced through Federal Supply Schedules administered by the General Services Administration ("GSA") at fixed unit rates or hourly arrangements. We generally operate as a Principal Versus Netprime contractor, but have also entered into contracts as an Agent,a subcontractor. The recognition of revenue from fixed rates is based upon objective criteria that generally do not require significant estimates that may change over time. Other types of US Government contracts may include cost reimbursable contracts, fixed price or flexibly priced contracts requiring estimates based on percentage-of-completion methods of recognizing revenue and SAB 104, Revenue Recognition. TeamStaff recognizes all amounts billed to its contract staffing customers as gross revenue because, among other things, TeamStaff is the primary obligor in the contract staffing arrangement; TeamStaff has pricing latitude; TeamStaff selects contract employees for a given assignment from a broad pool of individuals; TeamStaff isprofit. These contracting vehicles do not, at risk for the payment of its direct costs; and TeamStaff assumesthis time, represent a significant amountportion of other risksour revenue nor require estimating techniques that would materially impact our revenue reported herein. DLH recognizes and liabilities asrecords revenue on government contracts when it is realized, or realizable, and earned. DLH considers these requirements met when: (a) persuasive evidence of an employer of its contract 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 toarrangement exists; (b) the services performed by contract employees which have not yet been billeddelivered to the customer ascustomer; (c) the sales price is fixed or determinable and free of the end of the accounting period.

contingencies or significant uncertainties; and (d) collectability is reasonably assured.

Revenues related to retroactive billings in 2008 (see Note 10 to the Consolidated Financial Statements) from an agency of the Federal government were recognized when: (1) the Company developed and calculated an amount for such prior period services and hashad a contractual right to bill for such amounts under its arrangements, (2) there were no remaining unfulfilled conditions for approval of such billings and (3) collectability is reasonably assured based on historical practices with the DVA. The related direct costs, principally comprised of salaries and benefits, are recognizedwere accrued to match the recognized reimbursements from the Federal agency; upon approval, wages will be processed for payment to the employees.

During the year ended September 30, 2008, TeamStaffDLH recognized revenues of $10.8 million and direct costs of $10.1 million related to these non-recurring arrangements. At September 30, 2009,2012 and September 30, 2011, the amount of the remaining accounts receivable with the DVA approximatesapproximated $9.3 million and accrued liabilities for salaries to employees and related benefits totaled $8.7 million. The $9.3 million in accounts receivable was unbilled to the DVA at September 30, 2009. At2012 and September 30, 2011. Although the timing cannot be guaranteed, at present the Company expects to bill and collect such amounts by the end of the second quarter ofduring fiscal 20102013, based on current discussions with the DVA and collection efforts.

Staffing (whether medical or administrative)

        As described in greater detail in Note 9 to the Consolidated Financial Statements, DLH has accrued the revenue and costs associated with certain government contracts covered by the Service Contract Act. These adjustments were due to changes in the contracted wage determination rates for certain employees. A wage determination is recognizedthe listing of wage rates and fringe benefit rates for each classification of laborers whom the Administrator of the Wage and Hour Division of the U.S. Department of Labor ("DOL") has determined to be prevailing in a given locality. An audit by the


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DOL in 2008 at one of the facilities revealed that notification, as service is rendered. TeamStaff bills its clients basedrequired by contract, was not provided to DLH Solutions in order to effectuate the wage increases in a timely manner. Wages for contract employees on anassignment at the time have been adjusted prospectively to the prevailing rate and hourly rate.billing rates to the DVA have been increased accordingly.

        In April 2012, the Company received formal contract modifications from the DVA, dated April 16, 2012, concerning the retroactive billing matter. The hourly rate is intendedcontract modifications from the DVA incorporate relevant wage determinations covering largely 2006 and 2007 applying to the Company's historical contracts with DVA during those periods. These government modifications initiate the procedures whereby the Company may invoice the DVA in accordance with the modified wage determinations and subsequently make timely retroactive payments to employees (active and inactive) covering work performed at the certain locations. The Company expects to follow the same process implemented as directed by and in conjunction with the Department of Labor and the DVA when similar wage determination-related contract modifications were made to cover TeamStaff’s direct labor costsother sites (also for the periods of 2006 and 2007) in 2008.

        The Company continues to support the Government's review of the contract employees, plusdetailed supporting calculations for the retroactive billings and to negotiate an estimateincremental final amount related to indirect costs and fees applied to these retroactive billings. As such, there may be additional revenues recognized in future periods once the final approval for overhead expensessuch additional amounts is obtained. The additional indirect costs and a profit margin. Additionally, commissions from permanent placementsfees are included in revenue as placements are made. Commissions from permanent placements result from the successful placement of a medical staffing employeeestimated to a customer’s workforce as a permanent employee.be between $0.4 million and $0.6 million. The Company also reviewshas developed these estimates under the status of such placementssame contractual provisions applied to assess the Company’s future performance obligations under such contracts.

sites that were settled in 2008. However, because these amounts remain subject to government review, no assurances can be given that any amounts we may receive will be within the range specified above.

Goodwill

        

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Direct costs of services are reflected in TeamStaff’s Consolidated Statements of Operations as “direct expenses” and are reflective of the type of revenue being generated. Direct costs of the contract staffing business include wages, employment related taxes and reimbursable expenses.
Goodwill and Intangible Assets
Beginning October 1, 2001, TeamStaff no longer amortizes goodwill or indefinite life intangible assets. TeamStaffIn accordance with applicable accounting standards, DLH does not amortize goodwill. DLH continues to review its goodwill and other intangible assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’sunit's carrying amount is greater than its fair value. At September 30, 2012, we performed a goodwill impairment evaluation. We performed both a qualitative and quantitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test. Based on the results of the work performed, the Company has concluded that no impairment loss was warranted at September 30, 2012. Additional impairment analyses at future dates may be performed to determine if indicators of impairment are present, and if so, such amount will be determined and the associated charge will be recorded to the consolidated statement of operations.

        Factors including non-renewal of a major contract (see Note 2—Liquidity and Note 13) or other substantial changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to future periods' results of operations. If an impairment write off of all the goodwill became necessary in future periods, a charge of up to $8.6 million would be expensed in the Consolidated Statement of Operations. All remaining goodwill is attributable to the DLH Solutions operating subsidiary.

Intangible Assets

        As required by applicable accounting standards, DLH did not amortize its tradenames, an indefinite life intangible asset. DLH reviewed its indefinite life intangible assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicated that an asset's carrying amount was greater than its fair value. On September 15, 2011, the Board of Directors of DLH approved the change of the corporate name of TeamStaff GS reporting unit. If an impairment write offto DLH Solutions and also approved a plan to change the corporate name of all the trade names became necessary, a charge


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Company to $3.9 million would be expensed in the Consolidated Statement of Operations. During 2009, inDLH Holdings Corp. In connection with these actions, the Company’s decision to exitCompany ceased further use of the TeamStaff Rx business, antrademark and implemented new marketing and branding initiatives associated with the new corporate identity being adopted by the Company. As a result of the corporate name change, abandoning the use of the TeamStaff name and associated rebranding efforts being implemented by the Company, the Company concluded that it was required to record a non-cash impairment losscharge with respect to the value of $1.6the "TeamStaff" trademark of $2.6 million was recognized to reducefully write-off the carrying value of this business’ goodwill to net realizable value and an impairment loss of $0.7 million was recognized to reduce the carrying valuetrademark.

Prepaid Workers' Compensation

        As part of the trade nameCompany's discontinued PEO operations, DLH had a workers' compensation program with Zurich American Insurance Company ("Zurich") which covered the period from March 22, 2002 through November 16, 2003, inclusive. Payments for the policy were made to net realizable value. TeamStaff has concluded,a trust monthly based on projected claims for the policy period. Interest on all assets held in the trust is credited to DLH. Payments for claims and claims expenses are made from the trust. From time-to-time, trust assets have been refunded to the Company based on Zurich's and managers' overall assessment of claims experience and historical and projected settlements. The final amount of trust funds that could be refunded to the Company is subject to a number of uncertainties (e.g. claim settlements and experience, health care costs, the extended statutory filing periods for such claims); however, based on a third party's study of claims experience, DLH estimates that at present, that thereSeptember 30, 2012, the remaining prepaid asset of $0.3 million will be received within the next twelve to thirty-six months. This amount is not anyreflected on DLH's balance sheet as of September 30, 2012 as a current asset, in addition to approximately $0.2 million related to other required write off of goodwill or its tradename.

policy deposits.

Prepaid Workers’Workers' Compensation Insurance

From November 17, 2003 through April 14, 2009, inclusive, TeamStaff’s workers’DLH's workers' compensation insurance program was provided by Zurich American Insurance Company (“Zurich”).Zurich. This program covered TeamStaff’sDLH's temporary, contract and corporate employees. This program was a fully insured, guaranteed cost program that contained no deductible or retention feature. The premium for the program was paid monthly based upon actual payroll and is subject to a policy year-end audit. Effective April 15, 2009, TeamStaffDLH entered into a partially self-funded workers’workers' compensation insurance program with a national insurance carrier for the premium year April 15, 2009 through April 14, 2010.2010 and has been renewed through April 14, 2013. The Company will paypays a base premium plus actual losses incurred, not to exceed certain stop-loss limits. The Company is insured for losses above these limits, both per occurrence and in the aggregate.

As part of the Company’s discontinued PEO operations, TeamStaff had a workers’ compensation program with Zurich, which covered the period from March 22, 2002 through November 16, 2003, inclusive. Payments for the policy were made to the trust monthly based on projected claims for the policy period. Interest on all assets held in the trust is credited to TeamStaff. Payments for claims and claims expenses are made from the trust. From time-to-time, trust assets have been refunded to the Company based on Zurich’s and managers’ overall assessment of claims experience and historical and projected settlements. In June 2009 and March 2008, Zurich reduced the collateral requirements on outstanding workers’ compensation claims and released $114,000 and $350,000, respectively, in trust account funds back to the Company. The final amount of trust funds that could be refunded to the Company is subject to a number of uncertainties (e.g. claim settlements and experience, health care costs, the extended statutory filing periods for such claims); however, based on a third party’s study of claims experience, TeamStaff estimates that at September 30, 2009, the remaining prepaid asset of $0.3 million will be received within the next twelve to thirty-six months. A portion of this is reflected on TeamStaff’s balance sheet as of September 30, 2009 as a current asset, in addition to approximately $0.2 million related to current policy deposits.

As of September 30, 20092012 and 2011, the adequacy of the workers’workers' compensation reserves (which(including those periods' amounts that are offset against the trust fund balances in prepaid assets) was determined, in management’smanagement's opinion, to be reasonable. In determining our reserves, we rely in part upon information regarding loss data received from our workers’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 and such variables as timing of payments and investment returns thereon are uncertain or unknown,unknown; therefore, actual results may vary from current estimates. TeamStaffDLH 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’sDLH's prepayments and adjust the related reserves as deemed appropriate.

Fair Value

        DLH has financial instruments, principally accounts receivable, accounts payable, loan payable, notes payable and accrued expenses. DLH estimates that the fair value of these financial instruments at September 30, 2012 and 2011 does not differ materially from the aggregate carrying values of these financial instruments recorded in the accompanying consolidated balance sheets. However, because the


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Company presents certain common stock warrants and embedded conversion features (associated with Convertible Debentures—See Note 6) and accounts for such derivative financial instruments at fair value, such derivatives are materially impacted by the market value of the Company's stock and therefore subject to a high degree of volatility. The Company's future results may be materially impacted by changes in the Company's closing stock price as of the date it prepares future periodic financial statements.


Income Taxes

TeamStaff accounts for income taxes in accordance with the “liability” method. Under this"liability" method, whereby 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 consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized.

In the fiscal year ended At September 30, 2006, after an assessment of all available evidence (including historical2012 and forecasted operating results), management concluded that realization of2011, the Company’sCompany recorded a 100% valuation allowance against its net operating loss carryforwards (which includes those amounts acquired in previous years’ business combinations, collectively “NOLs”), tax credits and other deferred tax assets could not(See Note 5).

        The Financial Accounting Standards Board ("FASB") has issued authoritative guidance that clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements and prescribes a recognition threshold of more-likely-than-not to be considered more likely than not. Accordingly, forsustained upon examination. Measurement of the fiscal years ended September 30, 2009, 2008tax uncertainty occurs if the recognition threshold has been met. This interpretation also provides guidance on de-recognition, classification, interest and 2007,penalties, accounting in interim periods and disclosures. The Company conducts business solely in the Company did not recordU.S. and, as a tax benefit for NOLs.

Based on an assessment performed as of September 30, 2009result, also files income taxes in various states and 2008,other jurisdictions. Given the substantial net operating losses and the related valuation allowance established against such amounts, the Company has maintained a full valuation allowance against remaining NOLs and other deferredconcluded that it does not have any uncertain tax assets; aspositions. There have been no income tax related interest or penalties for the realizationperiods presented in these consolidated financial statements. In the normal course of such amounts, at that date, could not be considered more likely than not. In prospective periods, there may be reductions to the valuation allowance to the extent thatbusiness, the Company concludes that it is more likely that not that all or a portion of the deferred tax assets can be utilized (subject to annual limitations and prior to the expiration of such NOLs), to offset future periods’ taxable income.
In the fiscal year ended September 30, 2009, the Company recognized a tax benefit of $28,000 related to a refund from a state. In the fiscal year ended September 30, 2008 the Company recorded tax expense of $60,000 related to certain estimated state taxes due which could not be offset by an NOL from those specific states.
At September 30, 2009 the Company had net operating losses of approximately $30.4 million, $15.1 million and $.7 million for U.S, New Jersey and other states’ tax return purposes, respectively, and unutilized tax credits approximate $1.1 million. As a result of previous business combinations and changes in its ownership, there is a substantial amount of U.S. NOLs thatsubsidiaries are subject to annual limitations on utilization.examination by Federal and state taxing authorities. The U.S. NOLs beginCompany's income tax returns for years subsequent to expirefiscal 2008 are currently open, by statute, for review by authorities. However, there are no examinations currently in 2021progress and continue to expire through 2029.
the Company is not aware of any pending audits.

Allowance for Doubtful Accounts

TeamStaff maintains

        Accounts receivable are unsecured and carried at fair value, which is net of an allowance for doubtful accounts. The allowance for doubtful accounts for estimated losses resulting fromis determined based on a specific identification methodology. Generally an account receivable is deemed uncollectible based upon the inabilityaging of its customers to pay. However, if the financial conditionreceivable and/or specific identification. Interest is not typically charged on past due accounts and the specific identification method takes into account the Company's assessment of TeamStaff’s customers were to deteriorate rapidly, resulting in nonpayment, TeamStaff’s accounts receivable balances could grow and TeamStaff could be required to provide for additional allowances, which would decrease net incomethe default risk based upon recent events in the periodcustomer's business, economic status and changes in credit status. With respect to receivables owed by agencies of the U.S. Government, the Company believes that such determination was made. For example, TeamStaff currently maintains an allowancethe risk of less than 1%loss on these accounts is minimal (See Note 13).

        Before accounts are deemed uncollectible, demand letters are sent and, if that does not result in payment, the receivable is placed for collection with a collection agency. The Company's last attempt at collection would be legal action, depending upon the customer's financial situation. If the Company is unsuccessful at collection after these steps, the receivable is written-off.


Table of billed accounts receivable due to the fact that a significant portion of accounts receivable are from the Federal Government which historically have had little, if any, write-offs for non-payment.

Contents

Overview

Business Description

TeamStaff, through its TeamStaff GS subsidiary, is a

        DLH, Holdings Corp., incorporated in New Jersey, provides healthcare logistical, information technologydelivery solutions, logistics & technical services, and office administration staffing provider which has been serving the Federal Government for over a decade. TeamStaff GS’s primary client has been the United States Government and its various agencies. TeamStaff GS is committed to providing on-time delivery of multi-disciplined employees who possess the necessary experience, expertise, and dedication required to meet contract specifications. The staffing services offered by TeamStaff GS are provided through independent FSS contracts through the GSA. The provision of logistical and administrative personnel is accomplished through the Logistics Worldwide Schedule and medical personnel are supplied through the Professional and Allied Healthcare Staffing Services Schedule. TeamStaff also provides its staffingcontingency/staff augmentation services to federal government agencies through competitively bid contracts and has a GSA schedule contract to provide information technology professional services. TeamStaff provides these services toincluding the DVA,Department of Veteran Affairs, the US Department of Defense, and other US governmental agenciesclients. The Company principally operates through its wholly-owned subsidiary DLH Solutions, Inc. ("DLH Solutions") and placed contract employees at over 40 facilities duringis headquartered in Atlanta, Georgia.

Name Change

        In February 2012, the 2009 fiscal year.

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As describedCompany's shareholders approved a proposal to change its corporate name to DLH Holdings Corp. On June 25, 2012 the Company filed an amendment to its certificate of incorporation to implement the change in greater detail below,its corporate name to DLH Holdings Corp. The Company's common shares continue to trade on December 28, 2009, TeamStaffthe Nasdaq Capital Market and TeamStaff Rx entered intoits new ticker symbol is "DLHC", which became effective on June 27, 2012. The name change is a definitive Asset Purchase Agreement with Advantage RN, LLC, an Ohio limited liability company, providing for the sale of substantially allreflection of the Company's refined and enhanced business strategy, which began approximately two years ago. In recent months the Company undertook a major rebranding effort, which included the change in corporate name of our principal operating assetssubsidiary to DLH Solutions, Inc., the launch of TeamStaff Rx relatednew corporate website at www.dlhcorp.com, and other communications and marketing measures to TeamStaff Rx’sestablish the "DLH" brand and create associated brand equity.

Business Units

        As part of our overall strategic planning process, the Company realigned its business into three broad integrated business areas: Healthcare Delivery Solutions, Logistics & Technical Services, and Contingency/Staff Augmentation. This structure enables us to leverage our core competencies and drive towards profitable growth within our focused target markets. We recognize that some business units may grow faster than others as a result of acquisitions or disposition of business. In either case, we intend to enhance our delivery of quality products and services.

Healthcare Delivery Solutions

        The Healthcare Delivery Solutions business unit, provides a broad continuum of care for our nation's servicemen/women and veterans in various settings and facilities. These include Combat Trauma Centers (CTCs), Military Treatment Facilities (MTFs), Medical Centers, Community-based Outpatient Clinics (CBOCs), and Pharmacy Distribution Centers (including VA Consolidated Mail-order Outpatient Pharmacy). We leverage our network of over 400 active clinicians and other healthcare workers throughout selected regions in the US, applying differentiating tools, databases and technology (including e-PRAT and SPOT-m) to deliver these services. For over a decade, DLH Solutions has been serving the DVA and DoD in providing travel nursequalified medical and alliedother professionals in a variety of positions. Healthcare Delivery Solutions is one of our strategic focus areas for growth and a major business area that DLH Solutions services. As more and more Federal and DoD programs increase their performance-based requirements, DLH Solutions' workforce profile of medical talent and credentials (as described above) will help it to compete and differentiate itself in the market place. Our healthcare professionalsand medical service new business pipeline adds important credentials strategically linked to diversifying and profitably growing our Healthcare Delivery Solutions business base. Professional services have included case management, health and injury assessment, critical care, medical/surgical, emergency room/trauma center, counseling, behavioral health and traumic brain injury management, medical systems analysis, and medical logistics. While the DVA is its largest customer in this business unit, the Company has focused on leveraging that experience in adjacent healthcare markets within


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DoD and other federal agencies. In fiscal 2012, approximately 54% of our revenue was derived from the Healthcare Delivery Solutions business unit.

Logistics & Technical Services

        The Logistics & Technical Services business unit draws heavily upon our proven logistics expertise and processes. DLH resources possess expertise covering a wide range of logistics, readiness and project engineering. The experience of DLH Solutions' project personnel is diverse from operational unit level to systems and program office experience. Our core competencies include; supply chain management, performance-based logistics, distribution center and inventory management, statistical process control, packaging/handling/storage & transportation, configuration management, readiness planning, and supply support operations. In addition, we provide program and project management, systems engineering and applicable information technology services, integrated logistics support (including operational systems), readiness assessments, training, equipment maintenance, hazardous material management, facilities and shipyard support services and more. DLH Solutions also provides professional staff to the federal government specializing in logistics, office administration, IT, and facilities/warehouse management.

        Through competitively awarded contracts and task orders (including its LOGWORLD contract) DLH Solutions has developed a strong portfolio of logistics processes, personnel and tools to help its clients achieve nationally recognized awards for temporary assignmentscustomer satisfaction. While the DVA is its largest customer in this area, the Company has taken steps to Advantage RN.expand in adjacent logistics markets within DoD and other federal agencies. In fiscal 2012, over 45% of our revenue was derived from the Logistics & Technical Services business unit.

Contingency/Staff Augmentation

        The closingContingency/Staff Augmentation business unit provides disaster and emergency response services and civilian workforce augmentation services. General staffing and selective recruitment process outsourcing are key components of this transaction occurredservice area. Less than 1% of fiscal 2012 revenue was derived from the Contingency/Staff Augmentation line of service.

Recent Business Trends

        The Federal Government continues to experience delays in awarding new contracts and committing new funds while Congress and the Administration continue to debate means to reduce the national debt and stimulate the economy. The Administration is attempting to balance decisions regarding defense, homeland security, and other federal spending priorities in a greatly constrained fiscal environment imposed by the enactment of the Budget Control Act of 2011 (Budget Act), which reduces defense spending by $487 billion over a ten-year period starting in fiscal 2012. Currently, the federal government is operating under a continuing resolution, scheduled to expire on March 31, 2013. If Congress and the Administration remain unable to reach a debt reduction consensus by the end of calendar year 2012, significant and equal reductions in both security and non-security spending will be automatically triggered and will take effect in January 4, 2010. The Asset Purchase Agreement provides2013 through a process referred to as sequestration. While it is unclear whether sequestration will occur and what the exact impact of it would be, we are continuously reviewing our operations in an attempt to identify those programs that could be at risk so that we can make appropriate contingency plans. While we may experience reduced funding on some of our programs, we do not expect the purchased assets were acquired by Advantage RNcancellation of any of our major programs.

        From an overall budget perspective, it is likely that government discretionary spending will be constrained for a purchase price of upseveral years to $425,000, of which (i) $350,000 in cash was paid at the closing, and (ii) $75,000 iscome. Though specific funding priorities are subject to an escrowed holdback as describedchange from year to year, we believe that our strategic business alignment around DoD and Veterans healthcare and logistics sustainment services allows us to remain well-placed to address what we consider are top


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national priority budget areas (along with cyberspace and intelligence). As with other companies operating in the Asset Purchase Agreement. Additionally, Advantage RN will make rent subsidy payments to TeamStaff Rx totaling $125,000, consistingFederal government market, the possibility remains, however, that one or more of (i) $25,000 payable at closing, and (ii) an additional $100,000 payable in 10 equal monthly installments beginning on March 1, 2010.

Management anticipates that the Company will reportour targeted programs could be cut back or terminated as a net loss from discontinued operations through the effective dateresult of the saleAdministration's decisions.

        The DVA continues to Advantage RN, which will include an estimated charge of $0.2 million for severancebe our largest customer followed by the DoD. Prior to certain TeamStaff Rx employees. Although there are certain conditions on the collection of amounts that are held in escrow, the Company expects to settle such matters in the second quarter of the fiscal year ending September 30, 2010. In addition, management estimates that the Company will incur a loss on the disposal of TeamStaff Rx approximating $0.3 million principally from recognition2011 over 90% of the remaining unfunded operating lease payments.Company's marketing, sales and discretionary resources were directed toward the commercial nursing and temporary staffing business while DLH Solutions did not bid on large government services contracts to complement its work with DVA and increase its backlog. As such, its business base over the recent 5 years remained relatively flat when adjusted for DVA business anomalies (such as overtime policy changes, preparation for anticipated epidemic, government in-sourcing, etc.).

        The measurement date for recording this liability is December 31, 2009. These amounts are preliminaryCompany's strategic plan first addressed creating the financial stability and subjectrunway to change based on future events;support implementation of new infrastructure and business development requirements. As such, significant cost reduction and containment initiatives were put into action in the ultimate amount could significantly differ from these current estimates.

Followingfirst two quarters of fiscal 2011 and continued through fiscal 2012. Subsequently, a capital raise initiative was put into place leveraging relationships with our largest shareholder, our new banking partner, and directors and management and included the disposition of our TeamStaff Rx business, TeamStaff provides staffing services through TeamStaff GS.
As described in greater detail in Note 4amendments to our consolidated financial statements,secured loan facility to increase our potential borrowings and the resultscompletion of operations, cash flowsa rights offering. Concurrently, management addressed the lack of new and related assetssustainable business by focusing resources on core competencies, existing and liabilitiesadjacent markets, larger and longer-term contracts, and development of our TeamStaff Rxdifferentiators to enhance competitiveness. Major changes in both resources and new business was reclassified inpipeline were implemented to align with the accompanying consolidated financial statements from thosestrategy of our continuing businesses to discontinued operations.
Recent Business Trends
TeamStaff GS is expandingestablishing sustainable, profitable growth while diversifying its reach within the government sector beyond DVA opportunities by bidding on Department of Defense staffing contracts afforded to large businessesportfolio and GSA’se-Buy portal, an electronic Request for Quote (RFQ) / Request for Proposal (RFP) system designed to allow Federal buyers to request information, find sources, and prepare RFQs/RFPs, online, for various services offered through GSA’s Multiple Award Schedule. Effective April 6, 2009, TeamStaff GS was awarded an Information Technology (“IT”) Schedule Contract for professional services by the GSA As an IT schedule holder, TeamStaff GS is also now eligible, along with a select number of companies, to participate in bid opportunities and requests for quotes for the Federal government’s IT staffing needs. Additionally, TeamStaff GS is evaluating opportunities to satisfy the staffing needs of other government agencies in addition to the DVA and DOD as a means of horizontal expansion of its client base. TeamStaff GS is also seeking to develop and maintain a nationwide network of teaming partners, including small businesses, Service Disabled Veteran Owned Small Businesses and other small-businesses certified under Section 8(a) of the Small Business Administration in order to expand and diversify its service offerings.
We believe demand will be strong in fiscal 2010 and beyond as the government maintains or improves social services provided to our returning veterans, as well as funding to other federal agencies that TeamStaff GS provides services to. In addition, we believe the government staffing business is stable in an economic downturn due to the longer term duration of its contracts.creating substantial backlog. Management believes that underits new strategy has seen early success. As the Company enters fiscal 2013, contract backlog is approximately $153 million at September 30, 2012. The Company has successfully competed to obtain extensions of its major healthcare re-compete programs, expanding the number of government locations supported as a result. Additonally, the Company has obtained extensions of its major logistics programs. Supporting the strategic portfolio diversification, the Company has been awarded a number of large IDIQ contracts covering a range of healthcare, logistics and technical services with various DoD customers, for which value is added to backlog as task orders are received. In keeping with its transformation, the Company has established several new teaming and partnership arrangements with strategic companies complementing our core competencies.

        Though our nation's economy continues to create headwinds for all markets, management has found that many government services industry analysts project a favorable market outlook particularly in select segments. The Company's strategic decision to build upon its healthcare delivery solutions competencies and business aligns its growth prospects with some of the stronger budget areas on both Capitol Hill and within the Pentagon. Based on current administration, there will not beresearch and market analysis, management believes that the federal government's healthcare budget including the Military Healthcare Systems and veterans' healthcare remain a reduction in government spending supporting social programs that benefit military personnel and veterans.top priority.


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Results of Operations

Fiscal Year 20092012 as Compared to Fiscal Year 20082011

The following table summarizes, for the periods indicated, selected consolidated statements of operations data expressed as a percentage of revenue:

         
  Fiscal Year  Fiscal Year 
  Ended  Ended 
  September 30,  September 30, 
  2009  2008 
Condensed Consolidated Statement of Operations:
        
 
Revenues  100.0%  100.0%
Direct Expenses  84.8%  84.7%
       
Gross Profit  15.2%  15.3%
Selling, general and administrative  14.1%  10.1%
Depreciation and amortization expense  0.3%  0.3%
       
Income from operations  0.8%  4.9%
Other income (expense)  -0.1%  0.7%
       
Income from continuing operations before taxes  0.7%  5.6%
Income tax (expense) benefit  0.1%  -0.1%
       
Income from continuing operations  0.8%  5.5%
Loss from discontinued operations  -10.3%  -3.5%
       
Net income  -9.5%  2.0%
       
 
 Fiscal year ended 
 
 September 30,
2012
 September 30,
2011
 

Condensed Consolidated Statement of Operations:

       

Revenues

  100.0% 100.0%

Direct expenses

  88.6% 85.9%
      

Gross profit

  11.4% 14.1%

General and administrative

  15.0% 17.7%

Severance

  0.5% 0.0%

Impairment charge-intangible assets

  0.0% 6.2%

Depreciation and amortization expense

  0.2% 0.3%
      

Loss from operations

  -4.3% -10.1%

Other income (expense)

  0.3% -0.9%
      

Loss from continuing operations before tax

  -4.0% -11.0%

Income tax expense

  0.0% 0.0%
      

Loss from continuing operations

  -4.0% -11.0%

Gain from discontinued operation

  0.0% 0.6%
      

Net loss

  -4.0% -10.4%
      
Operating revenues

Revenues

        Revenues from TeamStaff’sDLH's continuing operations for the fiscal years ended September 30, 20092012 and 20082011 were $46.0$49.2 million and $47.7$41.9 million, respectively, which represents a decreasean increase of $1.7$7.3 million or 3.6%17.4% over the prior fiscal year.year despite extended government delays in major awards. The decreaseincrease in operating revenues from continuing operations is due primarily to the impact of reduced overtimenew business awards and net reductions in headcount at certain Government facilities. TeamStaff’s total revenues for the fiscal years ended September 30, 2009 and 2008 were $46.0 million and $58.5 million, respectively, which represents a decrease of $12.5 million or 21.4% over the prior fiscal year. Included in revenues for the fiscal year ended September 30, 2008 is $10.8 million in non-recurring retroactive billings to the DVA.

TeamStaff GS is seeking approval from the Federal government for gross profitincreased business on retroactive billing rate increases associated with certain governmentexisting contracts, at which it has employees staffed on contract assignments. These adjustments are due to changesparticularly in the contracted wage determination rates for these contract employees. A wage determination is the listinghealthcare area.

Direct Expenses

        Direct expenses are generally comprised of wage ratesdirect labor (including benefits), subcontracts, and fringe benefit rates for each classification of laborers whom the Administrator of the Wage and Hour Division of the U.S. Department of Labor (“DOL”) has determined to be prevailing in a given locality. Contractors performing services for the Federal government under certain contracts are required to pay service employees in various classes no less than the wage rates and fringe benefits found prevailing in these localities. An audit by the DOL at one of the facilities revealed that notification, as required by contract, was not provided to TeamStaff GS in order to effectuate the wage increases in a timely manner. Wages for contract employees currently on assignment have been adjusted prospectively to the prevailing rate and hourly billing rates to the DVA have been increased accordingly. During the fiscal year ended September 30, 2008, TeamStaff recognized nonrecurring revenues of $10.8 million andother direct costs of $10.1 million, based on amounts that are contractually due under its arrangements with the Federal agencies. At September 30, 2009, the amount of the remaining accounts receivable with the DVA approximates $9.3 million. The Company has been and continues to be in discussions with representatives of the DVA regarding the matter and anticipates resolution during fiscal 2010. In addition, TeamStaff is in the process of negotiating a final amount related to gross profit on these adjustments. As such, there may be additional revenues recognized in future periods once the approval for such additional amounts is obtained. The ranges of additional revenue and gross profit are estimated to be between $0.4 million and $0.6 million. At present, the Company expects to collect such amounts during fiscal 2010 based on current discussions and collection efforts. Because these amounts are subject to government review, no assurances can be given that we will receive any additional billings from our government contracts or that if additional amounts are received, that the amount will be within the range specified above.

Operating directcosts. Direct expenses from continuing operations for the fiscal years ended September 30, 20092012 and 20082011 were $39.0$43.6 million and $39.5$36.0 million, respectively, which represent an increase for fiscal 2012 of $7.6 million or 21% over the prior fiscal year. This increase is primarily a result of increased direct labor and related expenses attributable to the increase in revenue. As a percentage of revenue, direct expenses were 88.6% and 85.9%, respectively. See the discussion on gross profit directly below for an explanation of the increase in direct expenses as a percentage of revenue.

Gross Profit

        Gross profit for the fiscal years ended September 30, 2012 and 2011 was $5.6 million and $5.9 million, respectively, which represents a decrease of $0.5$0.3 million or 1.2%5.1% over the prior fiscal year. Gross profit from continuing operations, as a percentage of revenue, was 11.4% and 14.1%, for the fiscal years ended September 30, 2012 and 2011, respectively. While gross profit benefited from the additional volume of revenue, the average unit price of hours delivered decreased year over year. This


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decrease isreflects the competitive marketplace which yields lower gross margins overall, as a percent of revenue.

General and Administrative Expenses

        General and administrative ("G&A") primarily relates to functions such as corporate and functional management, legal, finance, accounting, contracts, administration, human resources, management information systems, and business development. Exclusive of a result of lower revenues. Total direct$2.6 million impairment charge taken in 2011, G&A expenses for the fiscal years ended September 30, 20092012 and 20082011 were $39.0$7.6 million and $49.6$7.4 million, respectively. IncludedSignificant additional G&A costs in direct expenses for the year ended September 30, 2008 is $10.12012 included severance charges of approximately $0.3 million, investment in major business proposal initiatives of $0.7 million, and startup costs related to new contracts of $0.2 million. Significant incremental G&A costs in 2011 included approximately $0.6 million related to non-recurring retroactive billingsconfirmation of a new contract award.

        Distribution of G&A costs in 2012 reflects the Company having continued to the DVA. As a percentage of operating revenue from continuing operations, operating direct expenses were 84.8% and 82.7%, respectively, for the years ended September 30, 2009 and 2008. As a percentage of total revenue, direct expenses were 84.8% and 84.7%, respectively, for the years ended September 30, 2009 and 2008.

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Operating gross profit from continuing operations for the fiscal years ended September 30, 2009 and 2008 were $7.0 million and $8.3 million, respectively which represents a decrease of $1.3 million or 15.1% over the prior fiscal year. Operating gross profit from continuing operations, as a percentage of operating revenue, was 15.2% and 17.3%, for the fiscal years ended September 30, 2009 and 2008, respectively. Operating gross profit is lower as compared to the prior year due to increased health benefit expenses, lower overtime at certain government facilities and lower turnover among our government contract employees resulting in higher vacation expense. Total gross profit for the fiscal years ended September 30, 2009 and 2008 were $7.0 million and $8.9 million, respectively, which represents a decrease of $1.9 million, or 21.7%. Gross profit, as a percentage of total revenue, was 15.2% and 15.3%, for the fiscal years ended September 30, 2009 and 2008, respectively. Included in gross profit for the fiscal year ended September 30, 2008 is $0.7 million related to non-recurring retroactive billings to the DVA.
Selling, general and administrative (“SG&A”) expenses for the fiscal years ended September 30, 2009 and 2008 were $6.5 million and $5.9 million, respectively, which represents an increase of $0.6 million, or 9.7%. Included in this increase is $0.1 million in management consulting fees related to the strategic business review of our government business, $0.5 million in increased new business expense for additional sales related headcount and marketing expense at TeamStaff GS and $0.2 million in legal settlement expense. The Company continues with its cost saving initiatives, which have resulted in reduced headcount in non-revenue generating departments and G&A costs. The Company seeks continuedsuccessfully seek elimination of overhead costs deemed to be non-essential to growth or infrastructure.
infrastructure in order to permit reinvestment in areas considered important to support the strategic direction of the company. The Company has also continued its cost savings and reallocation initiatives, which have resulted in refocused headcount in non-revenue generating departments and within SG&A costs, with significantly increased emphasis on building a strong and sustainable pipeline of new business opportunities.

Impairment Charge—Intangible Assets

        There were no impairment charges for the fiscal year ended September 30, 2012. As a result of its rebranding initiative, the Company wrote off the carrying value of the tradename related to TeamStaff of $2.6 million in the fiscal year ended September 30, 2011.

Depreciation and Amortization

Depreciation and amortization expense on tangible assets was approximately $111,000 and $150,000$0.1 million for both of the fiscal years ended September 30, 20092012 and 2008, respectively.

Income2011.

Loss from Operations

        Loss from operations for the fiscal year ended September 30, 20092012 was $0.4$2.2 million as compared to incomeloss from operations for the fiscal year ended September 30, 20082011 of $2.9$4.2 million. This represents a declinean improvement of $2.5$2.0 million in results from operations from fiscal 20082012 to 2009.2011. The decreaseimprovement is due primarily due to lower operatingthe aforementioned impairment charge in the prior year, offset by the pressure on gross profit earnedand severance charges of $0.3 million in the fiscal 2009 as a result of increased health benefit expenses, lower overtime at certain government facilities and lower turnover among our government contract employees resulting in higher vacation expense, higher SG&A expenses, as well as $0.7 million profit reported in fiscal 2008 related to the non-recurring retroactive billings to the DVA.

year ended September 30, 2012.

Other Expense

Other income was $0.2$0.1 million and $0.8as compared to other expense of $0.4 million, for the fiscal years ended September 30, 20092012 and 2008,2011, respectively. In fiscal 2009, the Company received a notification from the state of Florida regarding a refund of $151,000 for various taxes. Such amount has been recognized in the related periods’ statement of operations as a change in estimate. In fiscal 2008, based on an assessment of periods settled and the status of open periods under review by the IRS regarding notices the Company received related predominantly to its former PEO operations, the Company reduced its estimated liability for payroll tax contingencies by $0.7 million and recorded such adjustment as a component of other income.

Interest expense for the fiscal years ended September 30, 20092012 and 20082011 was approximately $0.2$0.3 million and $0.1 million, respectively. The increase is primarily due to additional interest accruals related to the estimated liability for payroll tax contingencies.
The Company recorded other expense of $21,000 and $218,000,both fiscal years. Other income for the fiscal yearsyear ended September 30, 2009 and 2008, respectively representing a decrease2012 was principally derived from the gain on the settlement of $197,000. This expense is related to legal representation and investigation costs incurred in connection with the Federal Grand Jury subpoena issued to our subsidiary formerly known as RS Staffing Services on April 17, 2007.Notes Payable (see Note 6).

        The subpoena requested production of certain documents dating back to 1997. The Company acquired RS Staffing effective as of June 2005. These expenses are classified as non-operating expenses because the subpoena relates to activity prior to the acquisition.

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Beginning in fiscal 2006, the Company provided a 100% deferred tax valuation allowance because it believes that it cannot be considered more likely than not that it will be able to realize the full benefit of the deferred tax asset. The Company determined that negative evidence, including historic and current taxable losses, as well as uncertainties related to the ability to utilize certain Federal and state net loss carry forwards, outweighed any objectively verifiable positive factors, and as such, concluded that a valuation allowance was necessary. In assessing the need for a valuation allowance, the Company historically has considered


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all positive and negative evidence, including scheduled reversals of deferred tax liabilities, prudent and feasible tax planning strategies and recent financial performance. In the fiscal yearyears ended September 30, 2009,2012 and 2011, the Company recognized ano tax benefit of $28,000 related to a refundexpense.

Loss from a state. For fiscal 2008, the Company did not record a Federal tax provision or benefit but recorded tax expense of $60,000 related to certain estimated states’ taxes due.

Continuing Operations Before Income Taxes

        Loss from continuing operations for the fiscal year ended September 30, 20092012 was $0.4$2.0 million, or $0.08$0.29 per basic share and $0.07 per diluted share, as compared to incomeloss from continuing operations of $3.2$4.6 million, or $0.66$0.84 per basic and diluted share, for the fiscal year ended September 30, 2008.

Loss2011. The improvement is due to the same factors discussed above pertaining to our loss from operations for fiscal 2012.

Discontinued Operation

        A non-recurring gain from discontinued operations, net of tax,operation for the fiscal years ended September 30, 2009 was $4.7 million, or ($0.97) per basic share and ($0.93) per diluted share. This includes a loss of $2.4 million from the operating results of the discontinued TeamStaff Rx business and the write-down to fair value of TeamStaff Rx intangible assets of $2.3 million. Loss from discontinued operations for the fiscal year ended September 30, 20082011 was $2.0 million,recognized of $270,000 or ($0.42)$0.05 per basic and diluted share.

During the year ended September 30, 2011 the State of Florida determined that approximately $270,000 of escheated funds it was holding was the property of the Company and ordered that such funds be paid to the Company. The Company's right to the funds arose in connection with the Company's former PEO operations that were accounted for as a discontinued operation in fiscal 2003 and, accordingly, the Company has recognized the amounts as income from discontinued operations in the current period after concluding that the amount involved was not material to the results of operations in the year of discontinuance.

Net Loss

Net loss for the fiscal year ended September 30, 20092012 was $4.4$2.0 million, or ($0.89)0.29) per basic share and ($0.86) per diluted share, as compared to net incomeloss of $1.1$4.3 million, or $0.24($0.79) per basic and diluted share, for the fiscal year ended September 30, 2008. This represents a decline2011, due primarily to the aforementioned impairment charge in the prior year, offset by the pressure on gross profit and severance charges of $5.5$0.3 million in the fiscal year ended September 30, 2012.

Other Data

        Earnings (Loss) Before Interest Tax Depreciation and Amortization ("EBITDA") adjusted for other non-cash charges ("Adjusted EBITDA"(1)) for the year ended September 30, 2012 was ($1.7 million) as compared to ($1.1 million) for the year ended September 30, 2011. The additional loss is attributable to the softening gross profit and to increased G&A expense described above.


    (1)
    We present Adjusted EBITDA as a supplemental non-GAAP measure of our performance. We define Adjusted EBITDA as net loss from continuing operations plus (i) interest and other expenses, net, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, (iv) G&A expenses—equity grants, and (v) impairment charges. This non-GAAP measure of our performance is used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. Management and the Company's Board utilize this non-GAAP measure to make decisions about the use of the Company's resources, analyze performance between periods, develop internal projections and measure management performance. We believe that this non-GAAP measure is useful to investors in evaluating the Company's ongoing operating and financial results and understanding how such results compare with the Company's historical performance. By providing this non-GAAP measure, as a supplement to GAAP information, we believe we are enhancing investors' understanding of our business and our results of operations. This non-GAAP financial measure is limited in its usefulness and should be considered in addition to, and not in lieu of, US GAAP financial measures. Further, this non-GAAP measure may be unique to the Company, as it may be different from fiscal 2008 to fiscal 2009.the definition of non-GAAP measures

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      used by other companies. A reconciliation of Adjusted EBITDA with net loss from continuing operations is as follows:

 
 For the Year Ended
September 30,
 
 
 2012 2011 

Net loss from continuing operations

 $(2,026)$(4,590)

(i) Interest and other expenses (net)

  (125) 367 

(ii) provision for taxes

     

(iii) amortization and depreciation,

  121  113 

(iv) G&A expenses—equity grants

  352  444 

(v) impairment charges

    2,583 
      

EBITDA adjusted for other non-cash charges

 $(1,678)$(1,083)
      

Liquidity and Capital Resources; Commitments

Our principal

        In recent years, the Company has sought to finance its operations and capital expenditures through the sale of equity securities, convertible notes and more recently, through the proceeds from a rights offering. The Company's immediate sources of liquidity include cash and cash equivalents, accounts receivable, unbilled receivables and access to its asset-based credit facility with Presidential Financial Corporation. The Company's operating liabilities are largely predictable and consist of vendor and payroll related obligations. The Company's operations require substantial working capital to fund ourthe future growth of its business model with expanded business development efforts, and planned capital expenditures to support a larger customer base.

        At September 30, 2012, the Company had a net working capital needsdeficit of approximately $1.5 million and an accumulated deficit of approximately $67.4 million. For the year ended September 30, 2012, the Company incurred an operating loss and a net loss of approximately $2.0 million and $2.0 million, respectively. At September 30, 2012, the Company had $3.1 million in available cash and cash equivalents. The Company anticipates that it will also rely on operating cash flow and periodic funding, to the extent available, from its line of credit, to sustain the operations of the Company.

        In fiscal 2011 the Company completed measures to enhance its liquidity by approximately $1,000,000 as a result of increasing the maximum availability of its credit facility and receiving funding of and/or commitments for additional equity and/or debt financing. In that regard, our largest shareholder, Wynnefield Capital, Inc., and certain of our directors and executive officers collectively provided a total of $500,000 of additional capital to the Company. As described in Note 10, $150,000 of such capital was provided through equity investments on March 31, 2011 and $350,000 of such capital was provided in July 2011 by Wynnefield Capital through the sale of convertible debentures. In addition, as described in Note 6, on February 9, 2011, the Company entered into an amendment of its Loan and Security Agreement with Presidential Financial Corporation, pursuant to which they agreed to increase the maximum availability under the Loan and Security Agreement by an additional $500,000 and provide an unbilled receivable facility within the limits of the Loan and Security Agreement.

        In fiscal 2012, the Company continued its efforts to improve and stabilize its financial position and further amended its secured credit facility with Presidential Financial Corporation and completed a rights offering in which it received $4.2 million in gross proceeds. In May 2012, the Company entered into another amendment to the Loan Agreement pursuant to which the Lender agreed to increase the available line of credit from $3,000,000 to a maximum amount of $6,000,000 and to increase the maximum amount available under the unbilled accounts facility of the Loan Agreement from $500,000 to $1,000,000. However, as described in greater detail in Note 6 below, the Company's ability to borrow against the increased available credit is subject to the satisfaction of a number of conditions, and


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presently, the maximum availability under this loan facility is $3,000,000, subject to eligible accounts receivable. At September 30, 2012, the amount of unused availability was $344,000 and the amount outstanding on the loan facility was $2,363,000.

        On March 16, 2012, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission for a rights offering in which its existing stockholders received non-transferable rights to purchase $4.2 million of additional shares of the Company's common stock. Under the terms of the rights offering, the Company distributed to the holders of its common stock non- transferable subscription rights for each share of common stock owned on the record date. Each subscription right entitled the holder to purchase 0.532 shares of the Company's common stock at a price of $1.30 per share. In connection with the rights offering, on May 2, 2012, the Company entered into a standby purchase agreement with Wynnefield Capital, which owned, prior to the rights offering, approximately 21% of the Company's common stock (excluding common stock warrants and a convertible note) through certain affiliated entities. Pursuant to the standby purchase agreement, Wynnefield Capital (or affiliated assignees) agreed to acquire from the Company in the rights offering, subject to the satisfactions of specified conditions, the shares of common stock that related to any rights that remained unexercised at the expiration of the rights offering. The closing of the rights offering occurred on June 15, 2012 and the Company raised gross proceeds of $4.2 million from the sale of 3,230,769 shares of common stock.

        Management believes, at present, that: (a) cash and cash equivalents of approximately $3.1 million as of September 30, 2012; (b) the amounts available under its line of credit (which, in turn, is limited by a portion of the amount of eligible assets); (c) forecasted operating cash flow; (d) the ultimate non-payment of certain liabilities and recorded guarantees currently contested by the Company or not expected to be settled in cash (see Note 6 to the accompanying consolidated financial statements) (classified as current at September 30, 2012) in fiscal 2013; and (e) effects of cost reduction programs and initiatives should be sufficient to support the Company's operations for twelve months from the date of these financial statements. However, should any of the above- referenced factors not occur substantially as currently expected, there could be a material adverse effect on the Company's ability to access the level of liquidity necessary for it to sustain operations at current levels for the next twelve months. In such an event, management may be forced to make further reductions in spending or seek additional sources of capital to support our operations. If the Company raises additional funds by selling shares of common stock or convertible securities, the ownership of its existing shareholders would be diluted.

        Presently, the Company derives all of its revenue from agencies of the Federal government and the Company has derived a substantial portion of its revenues through various contracts awarded by the DVA. The Company currently provides services to the DVA under a single source Blanket Purchase Agreement awarded in fiscal 2011 that has a ceiling value of up to $145,000,000 and is scheduled to expire on October 31, 2016. The agreement is subject to the Federal Acquisition Regulations, and there can be no assurance as to the actual amount of services that the Company will ultimately provide under the agreement. This agreement represented approximately 51% of its revenue in the fiscal year ended September 30, 2012. In addition, the Company also holds contractual order cover through September 30, 2013 in respect of DVA contracts that generated close to a further 44% of its revenue in the fiscal year ended September 30, 2012, which are not currently the subject of requests for proposals and may in due course be further extended by the DVA on a sole source basis, although no assurances can be given that this will occur. The Company's results of operations, cash generatedflows and financial condition would be materially adversely affected in the event that we are unable to continue our relationships with the DVA or suffer a significant diminution in the quantity of services that they procure from operating activities and borrowings under our revolving credit facility.the Company.


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Cash from operating activities

Net cash used in operating activities for the year ended September 30, 2012 was $2.8 million as compared to $1.0 million for fiscal year ended September 30, 20092011. The increase in the cash used from 2011 to 2012 is principally due to growth in accounts receivable and other assets, partially offset by a growth in accounts payable, accrued payroll and accrued expenses.

Cash from investing activities

        Net cash used in investing activities in 2012 and fiscal 2011 were $68,000 and $37,000, respectively, principally due to capital expenditures.

Cash from financing activities

        Net cash provided by financing activities for the year ended September 30, 2012 was $2.1$5.2 million as compared to net cash provided by operating activities of $4.6$0.6 million for the fiscal year ended September 30, 2008. This decrease in net cash2011. The increase is fiscal 2012 was primarily driven by the loss from operations of the discontinued TeamStaff Rx business of $2.3 million, a net decrease in accounts payable of $1.0 million, of which $1.1 million was for payments made to the IRS for previously recorded payroll tax liabilities, offset by a decrease in days sales outstanding (“DSO”) from approximately 17 days to 13 days during fiscal 2009 as a result of improved payment processing by the government. Net cash provided by operating activities for the fiscal year ended September 30, 2008 was primarily driven by a decrease in DSO from approximately 40 days to 17 days during fiscal 2008 due to an enhanced and more efficient payment processing system implemented by the government. This decrease in DSOs increased our cash position by approximately $3 million. Also contributing to net cash provided by operating activities is net income of $1.1 million and $0.35 million in cash received from Zurich related to the reduction in collateral requirements on outstanding workers’ compensation claims.

Cash from investing activities
Net cash used in investing activities for the fiscal year ended September 30, 2009 was $0.1 million. We continue to have relatively low capital investment requirements. The Company spent $0.1 million during fiscal 2009 for the purchase of equipment. Net cash provided by investing activities for the fiscal year ended September 30, 2008 was $0.2 million as a result of proceeds from the salerights offering and increased use of our Per Diem division, offset in partthe Company's borrowing facilities with Presidential Financial Corporation, reduced by cash used for the purchases of furniture, technology equipment and software related to$0.7 million settlement payment on the relocation of TeamStaff GS administrative offices to Loganville, Georgia.
Cash from financing activities
Net cash used in financing activities for the fiscal year ended September 30, 2009 was $0.1 million primarily as a result of repayment of capital lease obligations for continuing and discontinued operations. Net cash used in financing activities for the fiscal year ended September 30, 2008 was $0.2 million, primarily as a result of repayments on capital lease obligations and fees related to the new credit facility with Sovereign Business Capital and capital lease obligations.

long-standing RS Staffing note.

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Loan Facility

On March 28, 2008, TeamStaff and its wholly-owned subsidiaries, TeamStaff Rx and TeamStaff GSJuly 29, 2010, DLH Solutions entered into an Amended and Restateda Loan and Security Agreement dated as of March 28, 2008 (the “Loan Agreement”"Loan Agreement") with Business Alliance Capital Company, a division of Sovereign Bank. Pursuant to the Loan Agreement, the Lender (i) acquired by assignment from the Company’s prior lender, PNC Bank, National Association, all right, title and interest of PNC under the $8.0 million PNC Credit Facility, the PNC note and related loan documentation, and (ii) restructured the PNC Credit Facility into a $3.0 million revolving credit facility with a three year term. Effective April 1, 2008, BACC changed its name to Sovereign Business Capital. The outstanding principal and interest balance under the PNC Credit Facility, related fees and certain expenses related to the execution and closing of the Loan Agreement were paid in full with $0.6 million in proceeds drawn from the Loan Agreement on April 2, 2008. Fees associated with this facility approximate $150,000, which are amortized over the life of the Loan Agreement.

Presidential Financial Corporation (the "Lender"). Under the Loan Agreement, the Lender agreed to provide a revolving credittwo (2) year secured loan facility to the CompanyDLH Solutions in an aggregate amount of up to $3.0$1.5 million, subject toupon the further terms and subject to the conditions of the Loan Agreement. In November, 2010, the Lender agreed by means of an amendment to the Loan Agreement to increase the maximum amount available under the facility from $1.5 million to $2.5 million and on February 9, 2011, we entered into a further amendment to the Loan Agreement pursuant to which the Lender agreed to further increase our maximum availability under the Loan Agreement from $2.5 million to $3.0 million and to provide an unbilled receivable facility within the limits of the Loan Agreement. The February 2011 amendment also extended the term of the Loan Agreement by 12 months, to July 29, 2013 and will automatically renew annually unless terminated by either party

        In May 2012, the Company entered into a further amendment to the Loan Agreement (the "Fifth Amendment") pursuant to which the Lender agreed to increase the available line of credit from $3,000,000 to a maximum amount of $6,000,000 and to increase the maximum amount available under the unbilled accounts facility of the Loan Agreement from $500,000 to $1,000,000. The Company's ability to borrow against the increased available credit, however, is subject to the satisfaction of certain conditions. The Fifth Amendment provides for an initial sublimit under the maximum loan amount of $3,000,000 (the "Initial Sublimit") and an adjusted sublimit of $4,000,000 (the "Adjusted Sublimit"). The Initial Sublimit of $3,000,000 will remain in effect until the satisfaction of the following conditions: (i) the repayment of the $500,000 over-advance accommodation agreed to by Lender as of May 9, 2012, (ii) the Company's demonstration of the need for the increase, (iii) the Company's continued compliance with the Loan Agreement, and (iv) Lender, in its sole discretion, agrees to increase the Initial Sublimit. In the event that the foregoing conditions are satisfied, the credit available to under the Loan Agreement shall remain subject to the Adjusted Sublimit until the parties receive any required waivers or consents from the holders of the Company's subordinated Convertible Debentures issued as of July 28, 2011 and Lender, in its sole discretion, agrees to such further increase. In addition, the increased availability under the unbilled accounts facility of the Loan Agreement is subject to the satisfaction of the same conditions that are applicable to Initial Sublimit. Accordingly, until these conditions are satisfied, the current borrowing limits remain in effect.


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        An interest rate premium of 2% is payable in respect of any advances secured by unbilled accounts receivable, which are subject to a sub-facility limit of $500,000 and an advance rate of 75%. The loan is secured by a first prioritysecurity interest and lien on all of the Company’s assets. There is currently no debt outstanding under the Loan Agreement. In connection with the dispositionDLH Solutions' cash accounts, account deposits, letters of credit and investment property, chattel paper, furniture, fixtures and equipment, instruments, investment property, general intangibles, deposit accounts, inventory, other property, all proceeds and products of the operating assetsforegoing (including proceeds of our TeamStaff Rx subsidiary, we were required to obtainany insurance policies and claims against third parties for loss of any of the consent of Sovereign. On January 12, 2010 we were granted such consent. As a condition to such consent, however, Sovereign reduced the maximum amount available under such loan facility from $3.0 million to $2.0 million. As of September 30, 2009, there was no debt outstanding under the Loan Agreementforegoing) and unused availability (as defined) totaled $1.7 million, net of required collateral reserves per the Loan Agreement for certain payrollall books and tax liabilities. The average daily outstanding balance on the facility for fiscal 2009 was $0.3 million. As of September 30, 2009, we had working capital of $0.9 million. Accordingly, management does not believe that the reduction in the availability under the Loan Agreement will have a material adverse impact on our operations and financial condition.

The Company’srecords related thereto. DLH Solutions' ability to request loan advances under the Loan Agreement is subject to (i) computation of DLH Solutions' advance availability limit based on "eligible accounts receivables" (as defined in the Company’s advance limitLoan Agreement) multiplied by the "Accounts Advance Rate" established by the Lender which initially shall be 85% and may be increased or decreased by the Lender in exercise of its discretion; and (ii) compliance with the covenants and conditions of the loan. The loan is for a term

        Under the Loan and Security Agreement, interest accrues at the greater of 36 months and matures on March 31, 2011. Interest on advances accrues(a) 3.25% or (b) (i) 1.95% above the Wall Street Journal Prime rate on the daily unpaid balanceaccounts receivable portion of the loan advances at a per annum rate of one-quarter (.25%) percentage pointscredit line and (ii) 3.95% above the Wall Street Journal Prime Rate in effect from time to time, but not less than fiverate on the unbilled accounts portion. In addition, DLH Solutions will pay certain other related fees and one-half percent (5.5%) per annum.expense reimbursements including a monthly service charge of 0.65% based on the average daily loan balance which shall accrue daily and be due and payable on the last day of each month so long as the Loan Agreement is outstanding. The interest rate on the facilityin effect at September 30, 20092012 and 2011 was 5.5%5.2%.

At September 30, 2012, based on current eligible accounts receivable, the amount of the unused availability under the line was $344,000. The amount outstanding as of September 30, 2012 was $2,363,000.

The Loan Agreement requires compliance with certain customary covenants including a debt service coverage ratio and imposescontains restrictions on the Company’sCompany's ability to among other things, dispose of certain assets, engage in certain transactions,transactions. Among other matters, under the loan agreement we may not, without consent of the Lender, (i) merge or consolidate with another entity, form any new subsidiary or acquire any interest in a third party; (ii) acquire any assets except in the ordinary course of business; (iii) enter into any transaction outside the ordinary course of business; (iv) sell or transfer collateral; (v) make any loans to, or investments in, any affiliate or enter into any transaction with an affiliate other than on an arms-length basis; (vi) incur indebtedness andany debt outside the ordinary course of business; (vii) pay dividends.or declare any dividends or other distributions; or (viii) redeem, retire or purchase any of our equity interests exceeding $50,000. Further, without the consent of the Lender, the Company is also restricted from making any payments in respect of other outstanding indebtedness. The Lender agreed to eliminate the tangible net worth covenant as part of the Fifth Amendment. The Lender may terminate the Loan Agreement alsoat any time upon 60 days written notice after December 31, 2012 and the Loan Agreement provides for customary events of default following which Sovereignthe Lender may, at its option, terminate the loan agreement and accelerate the repayment of any amount outstanding. The defined events of default include, among other things, a material adverse change in the Company's circumstances, or if the Lender deems itself insecure in the ability of the Company to repay its obligations, or as to the sufficiency of the collateral. At present, the Company has not experienced, and the financial institution has not declared, an event of default. On May 9, 2012, Presidential Financial Corporation agreed to allow the Company to borrow up to $500,000 under its facility with the Company in excess of the eligible collateral, but subject to the maximum loan amount of $3,000,000. This arrangement expired with the closing of the rights offering on June 15, 2012. There were no advances against this facility.

        In consideration of the Lender entering into the Fifth Amendment, we agreed to pay a monthly collateral monitoring fee, a documentation fee and at the time that we may borrow amounts outstandingin excess of the Initial Sublimit, an origination fee of 1% of the increased availability.

        The Company has concurrently executed a Corporate Guaranty Agreement with Lender pursuant to which it has guaranteed all of the obligations of DLH Solutions under the Loan Agreement.


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As of September 30, 2009, TeamStaff had cash and cash equivalents of $3.0 million and net accounts receivable of $11.4 million. At September 30, 2009, the amount of the accounts receivable associated with the DVA retroactive billings approximates $9.3 million and was unbilled at September 30, 2009. As of September 30, 2009, there was no debt outstanding under the Loan Agreement and defined unused availability totaled $1.7 million, net of required collateral reserves per the Loan Agreement for certain payroll and tax liabilities. As of September 30, 2009, TeamStaff had working capital of $0.9 million. The Company believes that it has adequate liquidity resources to fund operations over the next twelve months.
Payroll Taxes
As described in greater detail in the notes to the consolidated financial statements, TeamStaff had

        DLH has received notices from IRSthe Internal Revenue Service ("IRS") claiming taxes, interest and penalties due related to payroll taxes predominantly from its former PEO operations which were sold in fiscal 2003. TeamStaffDLH 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 related to the former PEO operations, DLH 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, TeamStaffDLH has been working with the IRS to resolve these discrepancies and has had certain interest and penalty claims abated. TeamStaffDLH has also received notices from the Social Security Administration claiming variances in wage reporting compared to IRS transcripts. TeamStaffDLH believes the notices from the Social Security Administration are directly related to the IRS notices received. TeamStaffDLH 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. In settling various years for specific subsidiaries with the IRS, the Company has received refunds for those specific periods; however, as the process of settling and concluding on other periods and subsidiaries is not yet completed, and the potential exists for related penalties and interest, theinterest. The remaining liability ($1.11.3 million at September 30, 2009)2012) has been recorded in accounts payable. In fiscal 2009,payable and includes estimated accrued penalties and interest totaling approximately $500,000.

        The Company believes it has accrued for the entire estimated remaining liability, inclusive of interest and penalties through the date of the financial statements. The Company paid $1.1 million, relatedmay incur additional interest and may incur possible additional penalties through the future date that this obligation is settled, however, it is not currently possible to this matter. Based on an assessment of periods settled and the status of open periods under review by the IRS, management reduced its estimated liability by $0.7 million in 2008. Such amount, accounted for as a change in estimate is included as a component of other income (expense)what, if any, additional amount(s) may be claimed in the accompanying 2008 statementfuture, given the uncertain timing and nature of operations.any future settlement negotiations. No payments were made in fiscal 2011 or fiscal 2012. Management believes that the ultimate resolution of these remaining payroll tax matters will not have a significant adverse effect on its financial position or future results of operations.

The Company's intention is that it will in due course seek to negotiate a mutually satisfactory payment plan with the IRS, but there is no assurance that it would be successful in doing so and the Company's future cash flows and liquidity could therefore be materially affected by this matter.

Contractual Obligations

 
  
 Payments Due By Period 
Obligations (Amounts in thousands)
 Total Less than
1 Year
 2 - 3
Years
 4 - 5
Years
 

Loan Payable(1)

 $2,363 $2,363 $ $ 

Operating Leases(2)

  642  163  312  167 

Convertible Debentures

  350    350   
          

Total Obligations

 $3,355 $2,526 $662 $167 
          

                 
      Payments Due By Period 
Obligations     Less than  1-3  4-5 
(Amounts in thousands) Total  1 Year  Years  Years 
Long Term Debt (1) $1,630  $1,564  $66  $ 
Operating Leases (2)  1,124   474   502   148 
Severence Liabilities (3)  108   108       
             
Total Obligations $2,862  $2,146  $568  $148 
             
(1)Represents bank line of credit, the maximum amount of notes payable related to the acquisition of TeamStaff GS, and capital lease obligations.
(2)Represents lease payments net of sublease income, including those of discontinued operations.
(3)Represents severance payments related to former President of TeamStaff Rx.
Employment Agreements
(1)
Represents the amount recorded in respect loan payable due to Presidential in accordance with the loan agreement and capital lease obligations.

(2)
Represents lease payments net of sublease income.
As described

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Settlement Agreement

        DLH and DLH Solutions entered into a settlement agreement dated as of July 22, 2011 (the "Agreement") with Roger Staggs and E. Barry Durham, the former principals of RS Staffing Services, Inc. (together, the "Sellers"). The Sellers were the holders of certain promissory notes issued by DLH in greater detailthe aggregate principal amount of $1,500,000 (the "Notes"). The claims resolved by the Settlement Agreement concerned DLH's claim of indemnification of approximately $1,800,000 arising out of the acquisition by DLH of RS Staffing Services, Inc. in June 2005 and certain counterclaims by the Sellers against DLH, including payment under the caption “Executive CompensationNotes. Pursuant to the Agreement, the Company paid $200,000 in cash to the Sellers, and Related Information – Employment Agreementsissued them an aggregate of 300,000 shares of common stock of DLH, valued at $795,000, the fair value of the stock at July 22, 2011. The Company also agreed to permit the Sellers to resell an aggregate of 201,724 other shares of common stock of DLH presently held by them, against which the Company had previously placed a stop order to prevent their resale. The Sellers agreed to orderly sale limitations with Named Executive Officers”respect to their ability to resell all their shares of common stock of DLH In addition, DLH provided guarantees to the Sellers that the net proceeds to be received by them from the resale of all of the shares of common stock of DLH sold by them pursuant to the Agreement would not be less than certain minimum guarantees. With respect to the shares of common stock of DLH owned by them prior to the effective date of the Agreement (the "Old DLH Shares"), DLH guaranteed to each Seller net proceeds of $100,000, and with respect to the shares of common stock of DLH issued under the Agreement (the "New DLH Shares"), DLH guaranteed net proceeds of $375,000 to each.

        The payments of all amounts under the Agreement were secured by the Notes. In addition, the parties agreed to release each other from any further claims that either may have against the other, except to enforce the Agreement. The guarantees in respect of the Old DLH Shares were satisfied in full as of September 30, 2011 and the guarantees in respect of the New DLH Shares were satisfied in full as of September 30, 2012. At September 27, 2012, the guarantees and the remaining value of the Notes have been satisfied through a combination of the repurchase of certain of the shares of the Company's common stock owned by one of the note holders and the expiration of the guarantee period under the Agreement. Following the completion of the sale of 100,000 shares of common stock of the Company by this holder to members of DLH's management team, the Company's retirement of 40,000 shares of its common stock against the payment of an additional $40,000 and the payment by the Company of $225,000, the Company fully satisfied its minimum guarantee obligations related to the Notes. Accordingly, the Company recorded a gain of approximately $486,000 in the fiscal fourth quarter ending September 30, 2012.

        The Company recognized expenses related to legal representation and costs incurred in connection with the investigation and settlement in the amount of $0 and $96,000 during fiscal 2008, we entered into employment agreements with our Chief Executive Officer2012 and Chief Financial Officer and during fiscal 2009, we entered into employment agreements with our President2011, respectively, as a component of TeamStaff GS and with our President of TeamStaff Rx. Subsequent to September 30, 2009, we have entered into new employment agreements with our Chief Executive Officer and Chief Financial Officer. The material terms and conditions of each of these employment agreements are summarized in greater detail under the caption “Executive Compensation and Related Information – Employment Agreements with Other Executive Officers”other income (expense). The summaries of each of the foregoing agreements are incorporated herein by reference.

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Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources. We have entered into various agreements by which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as intellectual property rights. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the particular


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contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, we have not made any payments under these agreements that have been material individually or in the aggregate. As of our most recent fiscal year end we were not aware of any obligations under such indemnification agreements that would require material payments.

Effects of Inflation

Inflation and changing prices have not had a material effect on TeamStaff’sDLH's net revenues and results of operations, as TeamStaffDLH has been able to modify its prices and cost structure to respond to inflation and changing prices.

Recently Issued Accounting Pronouncements Affecting the Company

In June 2006,May 2011, the Financial Accounting Standards Board (“FASB”) issued authoritativeFASB amended existing guidance that clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statementson fair value measurements to clarify certain disclosure requirements and prescribes a recognition threshold of more-likely-than-notimprove consistency with international reporting standards. This amendment is to be sustained upon examination. Measurement ofapplied prospectively and is effective for the tax uncertainty occurs if the recognition threshold has been met. This Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. TeamStaff conducts business solely in the U.S. and, as a result, files income tax returns for U.S., New Jersey and various other states and jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities.Company's fiscal quarter ending March 31, 2012. The Company’s tax returns for years subsequent to fiscal 2005 are open, by statute, for review by authorities. However, at present, there are no ongoing income tax audits or unresolved disputes with the various tax authorities that the Company currently files or has filed with. Given the Company’s substantial net operating loss carryforwards, which are subject to a full valuation allowance, as well as the historical operating losses in prior periods, the adoption of this guidance on October 1, 2007 did not have anya material effect on ourprospective financial position, resultsstatements.

        The FASB amended existing guidance on reporting comprehensive income in June 2011 to require entities to present the total of operationscomprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or cash flows asin two separate but consecutive statements. The amendment does not change the items that must be reported in other comprehensive income or when an item of the adoption date or for subsequent periods.

In September 2006, the FASB issued a standard which defines fair value, established a framework for measuring fair value in accordance withother comprehensive income must be reclassified to net income under current accounting principles generally accepted in the United States and expanded disclosures about fair value measurements.of America. This standardguidance was effective for the Company's fiscal quarter ending March 31, 2012 and its adoption did not had a material effect on the financial statements issuedstatements.

        In August 2011, the FASB approved a revised accounting standard to simplify the testing of goodwill for impairment. The guidance permits an entity to first assess defined qualitative factors in determining whether it is necessary to perform the goodwill impairment test. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after NovemberDecember 15, 2007,2011, with earlier application encouraged. Any amounts recognized uponearly adoption as a cumulative effect adjustment will be recordedpermitted. The Company has elected to adopt this guidance for the opening balance of retained earningsfiscal year ended September 30, 2012.

        In December 2011, the FASB amended disclosure concerning offsetting assets and liabilities. The amendments in the yearupdate requires an entity to disclose information about offsetting and related arrangements to enable users of adoption. In February 2008,its financial statements to understand the FASB issued supplemental guidanceeffect of those arrangements on its financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the formstatement of financial position and instruments and transactions subject to an agreement similar to a staff position, which delayed themaster netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendment is effective date of the initial standard for all nonfinancial assets and nonfinancial liabilities, except those that are recognizedannual reporting periods beginning on or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008,January 1, 2013, and interim periods within those fiscal years.annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company adoptedis currently evaluating the prospective effects, if any, of adopting this standard on October 1, 2008 with no effect on its financial position, results of operations and cash flows.

guidance.

In February 2007,July 2012, the FASB issuedfurther amended existing guidance on testing indefinite lived intangible assets for impairment. The amendments are intended to reduce the cost and complexity of performing


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an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a standardbasis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. This update applies to all entities, both public and nonpublic, that permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certainhave indefinite-lived intangible assets, other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to bethan goodwill, reported in earnings at each reporting date. This standard wastheir financial statements. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after NovemberSeptember 15, 2007,2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the provisions of which are required to be applied prospectively.most recent annual or interim period have not yet been issued. The Company adoptedis currently evaluating the prospective effects, if any, of adopting this standard on October 1, 2008 with no effect on its financial position, results of operations and cash flows.

guidance.

        

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In March 2008,August 2012, the FASB issued a standard which is intendedtechnical amendments and corrections to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable users of the financial statements to better understand the effects on an entity’s financial position, financial performance, and cash flows. It isSEC sections, effective for financial statements issued for interim periods beginning after November 15, 2008, with early application encouraged.the period ended September 30, 2012. The adoption of this standardguidance did not have a material effect on our consolidatedthe financial statements.

In June 2009,October 2012, the FASB issued a standardtechnical corrections and improvements, which stipulatedinclude revisions to prior guidance on numerous topics, including Convertible Debentures. The effective date of these revisions is for fiscal years beginning after December 15, 2012. The Company is currently evaluating theFASB Accounting Standards Codification™ is the source prospective effects, if any, of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. This standard is effective for financial statements issued for interim and annual periods ended after September 15, 2009. The implementation ofadopting this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

guidance.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk
TeamStaff ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        DLH 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. TeamStaffDLH is not materially subject to fluctuations in foreign exchange rates, commodity prices or other market rates or prices from market sensitive instruments. TeamStaff hasinstruments other than potentially in future periods in regard to certain derivative instruments or embedded features required to be accounted for as derivative instruments as discussed in Note 6 to the accompanying financial statements. DLH believes it does not have a material interest rate risk with respect to our prior workers’workers' compensation programs. In connection with TeamStaff’sDLH's prior workers’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,DLH, and is used to offset workers’workers' compensation expense. If interestInterest rates inpayable on these periods decrease, TeamStaff’s workers’ compensation expensefunds have been relatively static and at a level where any further downward rate adjustments would increase because TeamStaff wouldnot be entitledexpected to less interest income on the deposited funds. Further, and as discussed elsewhereresult in this filing, TeamStaff, Inc. has, effective in January 2010, a $2.0 million revolving credit facility by Sovereign Business Capital. Revolving credit advances bear interest at the Prime Rate plus 25 basis points. 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 a fixed charge coverage ratio. The facility is subject to acceleration upon non-payment or various other standard default clauses. Material increases in the Prime rate could have a material adverse effectimpact on our resultsthe Company's exposure to workers' compensation expense. DLH does not believe the level of operations,exposure to interest rate fluctuations on its debt instruments is material given the statusamount of debt subject to variable interest rates and the revolving credit facility as well asprime rate interest costs.

rate floors applied by the Lenders.

Item 8.Financial Statements and Supplemental Data
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

See attached Consolidated Financial Statements beginning on page F-1 attached to this Report on Form 10-K.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.


Item 9A(T).Controls and Procedures

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ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive OfficerCEO and President and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, havehas concluded that, based on the evaluation of these controls and procedures, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’sSEC's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive OfficerCEO and President and Chief Financial Officer, to allow timely decisions regarding required disclosure. Management does not view the Company’s inability to timely file its annual report on Form 10-K as evidence that the Company’s disclosure controls and procedures were not effective as the delay experienced by the Company in completing its annual report was caused by the timing of the closing of the Company’s disposition of the assets of its TeamStaff Rx business. Due to the timing of this transaction, the Company’s management was not able to complete its preparation of this annual report prior to the required filing date.

        

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Our management, including our Chief Executive OfficerCEO and President and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Our management, however, believes our disclosure controls and procedures are in fact effective to provide reasonable assurance that the objectives of the control system are met.
Management’s

Management's Report on Internal Control over Financial Reporting

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The company’sCompany's internal control over financial reporting includes those policies and procedures that:

    (i)  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii)  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the companyCompany are being made only in accordance with authorizations of management and directors of the company; and

(iii)  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’sCompany's assets that could have a material effect on the financial statements.

Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2009.2012. In making this evaluation, management used the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in Internal Control—Integrated Framework, our management has concluded that our internal control over financial reporting was effective as of September 30, 2009.2012.


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This annual report does not include an attestation report of our independent registered public accounting firm regarding our internal control over financial reporting. Management’sManagement's report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’smanagement's report in this annual report.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There was no change in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fourth fiscal quarter of our fiscal year ended September 30, 20092012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

        Effective as of November 15, 2012, the Company granted an aggregate of 52,500 shares of restricted stock to its non-executive directors consistent with its compensation policy for non-executive directors. These shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. There is no other information required to be disclosed that has materially affected, or is reasonably likely to materially affect, our results of operations, financial position or cash flows.


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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

        The information required by this item with respect to our executive officers is provided under the caption entitled "Executive Officers of the Company" in Part I of this Annual Report on Form 10-K and is incorporated by reference herein. The information required by this item with respect to our directors, board committees, and corporate governance matters will be set forth in our definitive Proxy Statement under the captions "Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Corporate Governance" of the Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.

        We have adopted a written code of business conduct and ethics, which applies to our principal executive officer, principal financial or accounting officer or person serving similar functions and all of our other employees and members of our board of directors. We did not waive any provisions of the code of business ethics during the year ended September 30, 2012. If we amend, or grant a waiver under, our code of business ethics that applies to our principal executive officer, principal financial or accounting officer, or persons performing similar functions, we intend to post information about such amendment or waiver on our website.

ITEM 11.    EXECUTIVE COMPENSATION

        The information required by this Item will be set forth in our definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        The information required by this Item will be set forth in our definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

        The information required by this Item will be set forth in our definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information required by this Item will be set forth in our definitive Proxy Statement under the caption "Independent Registered Public Accounting Firm", to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.


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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)
(1)  Financial Statements

      The financial statements and schedules of DLH are included in Part II, Item 8 of this report beginning on page F-1.

(a)
(2)  Financial Statement Schedule

      All schedules have been omitted since the required information is not applicable or because the information required is included in the Consolidated Financial Statements or the notes thereto.

(a)
(3)  Exhibits

      The exhibits designated with an asterisk (*) are filed herewith. All other exhibits have been previously filed with the Commission and, pursuant to 17 C.F.R. Secs. 20l.24 and 240.12b-32, are incorporated by reference to the document referenced in brackets following the descriptions of such exhibits. The exhibits designated with a number sign (#) indicate a management contract or compensation plan or arrangement.

Item 9B.Other Information
None.

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PART III
Item 10.Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
Our Board is presently comprised of seven members and is classified into three classes, which are each elected in staggered three-year terms. Class 1 consists of T. Stephen Johnson and Peter Black, and the term expires in 2012; Class 2 consists of Karl Dieckmann, Frederick G. Wasserman and William H. Alderman, and the term expires in 2010 and Class 3 consists of Martin Delaney and Rick J. Filippelli, and the term expires in 2011. In July 2009, Mr. Johnson notified us that he decided to resign as our Chairman, effective immediately. Following his resignation, Mr. Wasserman was appointed to serve as our Chairman. Mr. Johnson continues to serve as a director. No family relationship exists among any of our directors or executive officers.
The charts below list our directors and executive officers as of January 5, 2010 and are followed by biographic information about them.
Directors
           
Name Age Positions Class
           
Frederick G. Wasserman  55  Chairman of the Board of Directors  2 
           
Karl W. Dieckmann  81  Vice Chairman  2 
           
William H. Alderman  47  Director  2 
           
Peter Black  37  Director  1 
           
Martin Delaney  66  Director  3 
           
Rick J. Filippelli  53  President, Chief Executive Officer and Director  3 
           
T. Stephen Johnson  59  Director  1 
Executive Officers
NameAgePositions
Rick J. Filippelli53President, Chief Executive Officer and Director
Cheryl Presuto45Chief Financial Officer, Controller
Kevin Wilson44President, TeamStaff Government Solutions, Inc.
We reported on November 3, 2009, that Mr. Rick J. Filippelli, who has served as our President and Chief Executive Officer since January 2007, has informed the Board of his intent to resign from such positions in connection with the our strategic shift in our current business plan. Mr. Filippelli’s resignation as President and Chief Executive Officer will become effective at the end of January 2010. Mr. Filippelli has agreed to assist us with our transition to a new Chief Executive Officer. Our Board has established a search committee to identify candidates for Chief Executive Officer; however, we have not yet appointed a new President and Chief Executive Officer.

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Biographical Information – Board of Directors
William H. Aldermanjoined the Board of Directors in January 2007. Mr. Alderman has over 15 years experience providing investment banking services across multiple industries, with a particular expertise in financings, and mergers and acquisitions in the aerospace and defense industry. Since March 2001, Mr. Alderman has been the President of Alderman & Company, a securities broker specializing in the aerospace and defense industries. Mr. Alderman started his career at Bankers Trust Company and has held senior positions in investment management and corporate development at GE Capital, Aviation Sales Company, and most recently as Managing Director of the aviation investment banking practice of Fieldstone Investments. Mr. Alderman received a MBA from J.L. Kellogg Graduate School of Management in 1989 and is also a graduate of Kenyon College and the Taft School. Mr. Alderman is currently a director of Breeze-Eastern Corp. a publicly traded company and ZAN Alpha Fund, a private company.
Peter Blackjoined the Board of Directors in March 2005. For the past nine years, Mr. Black has been an Investment Analyst and Portfolio Manager at Wynnefield Capital, Inc., where he is responsible for researching and identifying small-cap value investments. Mr. Black has initiated investments on Wynnefield’s behalf that span multiple industries. Prior to joining Wynnefield, Mr. Black was an investment banker in the mergers and acquisition departments of UBS Securities and SG Cowen & Co. Mr. Black is a graduate of Boston College and received his MBA from Fordham University. Wynnefield Capital, Inc., through certain of its investment funds, is the owner of approximately 14% of our outstanding shares of common stock. Mr. Black is currently a director of Underground Solutions, Inc.
Martin J. Delaneyjoined the Board of Directors in July 1998. Mr. Delaney is an attorney and a prominent healthcare executive who began his hospital management career in 1971 as an Assistant Administrator at Nassau County Medical Center. He has been a director of a large regional Health Maintenance Organization on Long Island, the Hospital Association of New York State, the Greater New York Hospital Association, and chairman of the Nassau-Suffolk Hospital Council. He has been President, CEO and a director of Winthrop University Hospital, Winthrop South Nassau University Health Care Systems, and the Long Island Health Network. He has a graduate degree in health care management from The George Washington University and a law degree from St. John’s University. He has been admitted to practice in New York State and federal courts.
Karl W. Dieckmann, a Director of TeamStaff since April 1990, had been Chairman of the Board from November 1991 until September 2001 and has been Vice Chairman since September 2001. From 1980 to 1988, Mr. Dieckmann was the Executive Vice President of Science Management Corporation and managed the Engineering, Technology and Management Services Groups. From 1948 to 1980, Mr. Dieckmann was employed by the Allied Signal Corporation (now Honeywell Corporation) in various capacities including President, Semet Solvay Division; Executive Vice President, Industrial Chemicals Division; Vice President Technical – Fibers Division; Group General Manager – Fabricated Products Division; and General Manager – Plastics Division, as well as various positions with the Chemicals Division.
Rick J. Filippelliwas appointed as our Chief Executive Officer, President and a member of our Board of Directors in January 2007. Mr. Filippelli also served as Vice President from September 2003 to January 2007 and as Chief Financial Officer of TeamStaff from September 2003 to October 2007. Prior to joining TeamStaff, Mr. Filippelli spent approximately two years as Chief Financial Officer of Rediff.com, a publicly traded global information technology company. From 1985 through 2001, Mr. Filippelli held various financial positions including that of Chief Financial Officer with Financial Guaranty Insurance Company (“FGIC”), a subsidiary of GE Capital. Prior to joining FGIC, Mr. Filippelli spent six years in public accounting including three years with the Big 4 firm of Ernst and Young. Mr. Filippelli holds a Bachelor of Science degree in Accounting from Brooklyn College and is a Certified Public Accountant as well as a member of the American Institute of Certified Public Accountants.
T. Stephen Johnsonhas been a director of TeamStaff since September 2001. He served as our Chairman from September 2001 until July 2009. He has served as Chairman of T. Stephen Johnson & Associates, Inc., financial services consulting firm, and its related entities since inception in 1986. Mr. Johnson is a long-time banking consultant and Atlanta entrepreneur who has advised and organized dozens of community banks throughout the Southeast. He is Chairman Emeritus of Netbank, the largest and most successful Internet-only bank, as well as Chairman and principal owner of Bank Assets, Inc., a provider of benefit programs for directors and officers of financial institutions. Mr. Johnson is Chairman of the Board of Directo, Inc. a company specializing in providing financial services for un-banked individuals and Chairman of Atlanta Financial Corporation.
Frederick Wassermanjoined the Board of Directors in January 2007 and was appointed as our Chairman in July 2009. Mr. Wasserman is currently a financial management consultant. Until December 31, 2006, Mr. Wasserman was the Chief Operating/Financial Officer for Mitchell & Ness Nostalgia Co., a privately-held manufacturer and distributor of licensed sportswear and authentic team apparel. Prior to Mitchell & Ness, Mr. Wasserman served as the President of Goebel of North America, a U.S. subsidiary of the German specialty gift maker, from 2001 to 2005. Mr. Wasserman also served as the Chief Financial Officer of Goebel North America in 2001. Prior to Goebel, Mr. Wasserman served as both the Interim President and full-time Chief Financial Officer of Papel Giftware from 1995 to 2001. Mr. Wasserman spent the first 13 years of his career in the public accounting profession. Mr. Wasserman also serves as a director of Acme Communications, Inc., Allied Defense Group, Inc., Breeze Eastern Corporation, Gilman + Ciocia, Inc., Crown Crafts, Inc. and AfterSoft Group, Inc.

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Biographical Information – Other Executive Officers
Cheryl Presuto was appointed to the position of Chief Financial Officer in October 2007. She also serves as the Company’s Controller, a position she has held since August 2004. Ms. Presuto previously served as TeamStaff’s Accounting Manager since January 2002. Prior to joining TeamStaff, Ms. Presuto spent four years with the newspaper division of Gannett, Inc., where she served as Accounting Manager and Assistant Controller. Prior to joining Gannett, Ms. Presuto held various accounting and consulting positions. Ms. Presuto holds a Bachelor of Science degree in Accounting from Fairleigh Dickinson University where she graduated summa cum laude.
Kevin Wilson was appointed as the President of TeamStaff GS in October 2008. Previously, Mr. Wilson served as the Director of TeamStaff GS from June 2007 through September 2008. From January 2004 to June 2007, Mr. Wilson served as the Director of Strategic Alliances of Varec, Inc., where he was responsible for business development in the domestic and foreign defense markets. Prior to his tenure at Varec, Inc., from March 1997 to January 2004, Mr. Wilson was the Program Manager for a multiyear defense services contract with Endress Hauser Systems & Gauging. Mr. Wilson also worked at Tracer Research Corporation from January 1990 to March 1997, where he was Project Manager for the United States Air Force, Air Combat Command professional services contract. Mr. Wilson holds a BS in Business Marketing from Northwest Missouri State University.
Corporate Governance
Meetings of the Board of Directors; Independence and Committees
During the fiscal year ended September 30, 2009, the Board of Directors met on 8 occasions. Our Board of Directors determined that as of September 30, 2009, Messrs. Alderman, Black, Delaney, Dieckmann, Johnson and Wasserman satisfied the independence requirements within the meaning of the NASDAQ Marketplace Rules.
The Board of Directors has five standing committees: Audit Committee, Management Resources and Compensation Committee, Executive Committee, Nominating and Corporate Governance Committee and Strategic Planning Committee. Each of these committees has a written charter approved by the Board of Directors. Other than the charter of the Strategic Planning Committee, all of the charters of our Board committees, as well as the Company’s corporate governance guidelines, are available at the Company’s website,www.teamstaff.com (click on Investors, then on Corporate Governance).
For the fiscal year ended September 30, 2009, a general description of the duties of the Committees, their members and number of times each Committee met were as follows:
Audit Committee.A copy of the Audit Committee’s Amended and Restated Charter may be viewed on our website atwww.teamstaff.com. TeamStaff’s Audit Committee acts to: (i) review with management the finances, financial condition and interim financial statements of TeamStaff; (ii) review with TeamStaff’s independent auditors the year-end financial statements; and (iii) review implementation with the independent auditors and management any action recommended by the independent auditors and the retention and termination of TeamStaff’s independent auditors.
From October 1, 2008 to the present, members of our Audit Committee were and are Mr. Wasserman (Chair), Mr. Black and Mr. Dieckmann. Mr. Wasserman is also designated as our Audit Committee Financial Expert. During the 2009 fiscal year, all of the members of our Audit Committee were “independent” within the definition of that term as provided by the Nasdaq Marketplace Rules. During the fiscal year ended September 30, 2009, the Audit Committee met on 5 occasions.

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Management Resources and Compensation Committee.The charter governing the activities of the Management Resources and Compensation Committee (sometimes referred to as the “Compensation Committee”) may be viewed online on our website atwww.teamstaff.com.The Management Resources and Compensation Committee functions include negotiation and review of all employment agreements of executive officers of TeamStaff and administration of TeamStaff’s 2006 Long Term Incentive Plan, its 2000 Employee Stock Option Plan and Non-Executive Director Stock Option Plan. From October 1, 2008 to the present, the members of the Management Resources and Compensation Committee were and are Mr. Black (Chair), Mr. Dieckmann and Mr. Johnson. At all times members of the Management Resources and Compensation Committee satisfied the independence requirements of the Nasdaq Marketplace Rules. During the fiscal year ended September 30, 2009, this committee met on 3 occasions.
Nominating and Corporate Governance Committee. The charter governing the activities of the Nominating and Corporate Governance Committee may be viewed online on our website atwww.teamstaff.com. Pursuant to its charter, the Nominating and Corporate Governance Committee’s tasks include reviewing and recommending to the Board issues relating to the Board’s composition and structure; establishing criteria for membership and evaluating corporate policies relating to the recruitment of Board members; implementing and monitoring policies regarding principles of corporate governance in order to ensure the Board’s compliance with its fiduciary duties to the company and its shareholders; and making recommendations regarding proposals submitted by shareholders. The Nominating and Corporate Governance Committee functions also include the review of all candidates for a position on the board of directors including existing directors for re-nomination and reports its findings with recommendations to the Board. The Nominating and Corporate Governance Committee solicits candidates on behalf of TeamStaff to fill any vacancy on the Board. The members of the Nominating and Corporate Governance Committee members are Mr. Alderman (Chair), Mr. Delaney, Mr. Dieckmann and Mr. Johnson, each of whom satisfy the independence requirements of the Nasdaq Marketplace Rules. Mr. Delaney was appointed to this Committee in April 2009. During the fiscal year ended September 30, 2009, this committee met once.
Strategic Planning Committee. The Board of Directors established a Strategic Planning Committee in July 30, 2009. Members of this Committee are Messrs. Alderman, Black, Delaney and Wasserman. Mr. Alderman serves as the Chairman of this committee. The Strategic Planning Committee was created in order to confirm the strategic decisions of the Company and, as necessary, engage the services of outside professionals to assess the market for the Company’s products and services, and confirm or suggest modifications to, the Company’s business plans. During the 2009 fiscal year, the Strategic Planning Committee met on 2 occasions.
Executive Committee. The Board of Directors created an Executive Committee effective September 4, 2001. Executive Committee members are currently Mr. Karl W. Dieckmann and Mr. Rick Wasserman. Mr. Wasserman replaced Mr. Johnston on this committee at the time of his appointment as our Chairman. Mr. Wasserman serves as its chairman. This committee did not meet during the fiscal year ended September 30, 2009.
No member of the Board of Directors or any committee failed to attend at least, or participated in fewer than, 75% of the meetings of the Board or of a committee on which such member serves.
Management Resources and Compensation Committee Interlocks and Insider Participation in Compensation Decisions
Mr. Peter Black (Chair), Mr. Karl W. Dieckmann and Mr. T. Stephen Johnson served on the Management Resources and Compensation Committee for the fiscal year ended September 30, 2009. There are no interlocks between TeamStaff’s Directors and directors of other companies.

39


Nominating and Corporate Governance Matters
Our Nominating and Corporate Governance Committee considers candidates for election to our Board of Directors, whether recommended by security holders or otherwise, in accordance with the following criteria. The Nominating and Corporate Governance Committee applies the following general criteria to all candidates:
Nominees shall have a reputation for integrity, honesty and adherence to high ethical standards.
Nominees should have demonstrated business acumen, experience and the ability to exercise sound judgment in matters that relate to current and long term objectives of the Company and should be willing and able to contribute positively to TeamStaff’s decision-making process.
Nominees should have a commitment to understand the Company and its industries and to regularly attend and participate in meetings of the Board and its committees.
Nominees should have the interest and ability to understand the sometimes conflicting interests of the various constituencies of the Company, which include shareholders, employees, customers, governmental units, creditors and the general public, and to act in the interests of all shareholders.
Nominees should not have, nor appear to have, a conflict of interest that would impair the nominees’ ability to represent the interests of all the Company’s shareholders and to fulfill the responsibilities of a director.
Nominees shall not be discriminated against on the basis of race, religion, national origin, sex, disability or any other basis proscribed by applicable law.
The re-nomination of existing directors is not to be viewed as automatic, but is based on continuing qualification under the various criteria set forth above. In addition, the Nominating and Corporate Governance Committee considers the existing director’s performance on the Board and any committee thereof. The Nominating and Corporate Governance Committee also considers the backgrounds and qualifications of the directors considered as a group. The Nominating and Corporate Governance Committee strives to ensure that the Board, when taken as a whole, provides a significant breadth of experience, knowledge and abilities that shall assist the Board in fulfilling its responsibilities.
Procedure to be Followed by Shareholders in Submitting Director Candidate Recommendations
Any shareholder who desires the Nominating and Corporate Governance Committee to consider one or more candidates for nomination as a director should, either by personal delivery or by United States mail, postage prepaid, deliver a written recommendation addressed to the Chairman, TeamStaff, Inc. Nominating and Corporate Governance Committee at 1 Executive Drive, Suite 130, Somerset, New Jersey 08873, not later than (i) with respect to an election to be held at an annual meeting of shareholders, 90 days prior to the anniversary date of the immediately preceding annual meeting or if an annual meeting has not been held in the preceding year, 90 days prior the first Tuesday in April; and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. Each written recommendation should set forth: (a) the name and address of the shareholder making the recommendation and of the person or persons recommended; (b) the consent of such person(s) to serve as a director(s) of the Company if nominated and elected; and (c) a description of how the person(s) satisfy the General Criteria for consideration as a candidate referred to below in the section entitled “Nominating and Corporate Governance Matters.”
Additional Criteria for Notice of Shareholder Nominees
In accordance with our By-Laws, any shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder’s intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Company in accordance with the terms described in the preceding paragraph. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission (“SEC”); and (e) the consent of each nominee to serve as a director of the Company if so elected.

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Shareholder Communications with the Board
Any shareholder may communicate with the Board of Directors in writing through the Company’s Corporate Secretary (at TeamStaff, Inc., 1 Executive Drive, Suite 130, Somerset, New Jersey 08873) provided that the communication identifies the shareholder and the number and type of securities held by that shareholder. The Secretary reviews such communications, and forwards them to the Board of Directors unless the Secretary, in consultation with the Chief Executive Officer, determines that the communication is inappropriate for the Board’s consideration (for example, if it relates to a personal grievance or is unrelated to Company business). The Secretary maintains a permanent written record of all such shareholder communications received by the Secretary. This process was unanimously approved by the Nominating and Corporate Governance Committee of the Board of Directors (which is comprised of independent directors).
Code of Ethics
On June 20, 2003, TeamStaff distributed a company-wide Code of Ethics and Business Conduct and Code of Ethics for our Chief Executive Officer, Chief Financial Officer and Controller. Additionally, both the Codes were posted on TeamStaff’s internal intranet website and are available on TeamStaff’s Internet web address, www.teamstaff.com. These Codes were adopted by TeamStaff’s Board of Directors, and provide employees with a confidential method of reporting suspected Code violations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own, directly or indirectly, more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities we issue. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms that they file. Based solely on a review of the copies of such reports received by us, we believe that all Section 16(a) filing requirements applicable to our officers, directors and 10% shareholders were complied with during the 2009 fiscal year.
Item 11.Executive Compensation and Related Information
This section provides information, in tabular and narrative formats specified in applicable SEC rules, regarding the amounts of compensation paid to our Named Executive Officers and related information. As a smaller reporting company, the Company has presented such information in accordance with the scaled disclosure requirements permitted under applicable SEC regulations.
Summary Compensation Table
The following table sets forth certain information concerning all cash and non-cash compensation awarded to, earned by or paid to our each of our named executive officers during the two year period ended September 30, 2009:
                             
                  Change in Pension       
                  Value and       
                  Nonqualified Deferred       
              Stock  Compensation  All Other    
Name and Principal     Salary  Bonus  Awards  Earnings  Compensation    
Position Year  ($)(1)  ($)(2)  ($)(3)  ($)  ($)(4)  Total ($) 
                             
Rick J. Filippelli,
President and Chief
Executive Officer
  2009  $290,000  $  $44,625  $  $4,169  $338,794 
   2008  $280,000  $196,000  $100,796  $  $4,495  $581,291 
                             
Cheryl Presuto,
Chief Financial Officer
  2009  $181,000  $  $25,500  $  $2,501  $209,001 
   2008  $175,000  $87,500  $57,433  $  $3,394  $323,327 
                             
Dale West, President, TeamStaff Rx (5)  2009  $200,000  $  $50,500  $  $990  $251,490 
                             
Kevin Wilson, President, TeamStaff GS  2009  $200,000  $  $25,500  $  $  $225,500 
(1)“Salary” is comprised of the cash salary paid to the Named Executive Officers during fiscal 2009 and 2008.
(2)“Bonus” is comprised of cash awards made to the Named Executive Officers in the discretion of the Company’s Board of Directors as recommended by the Management Resources and Compensation Committee, subject to certain performance and EBITDA requirements.
(3)“Stock Awards” reflect the portion of restricted stock grants awarded to Named Executives Officers under the Company’s 2006 Long Term Incentive Plan that was recognized by the Company as a compensation expense in fiscal year 2009 and 2008 in accordance with the provisions of revised Statement of Financial Accounting Standards (“SFAS”) No. 123, (“FAS 123R”) Share-Based Payment.
(4)“All Other Compensation” consists of compensation received from employer matching contributions to the Company’s 401(k) Plan, long term disability insurance premiums and life insurance premiums paid by the Company for each Named Executive Officer.
(5)As previously reported, Ms. West’s employment was terminated on January 4, 2010 in connection with the closing of the Company’s disposition of assets of TeamStaff Rx.

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Additional Information.The Summary Compensation Table above quantifies the amount or value of the different forms of compensation earned by or awarded to our Named Executive Officers in fiscal 2009 and provides a dollar amount for total compensation. Descriptions of the material terms of each Named Executive Officer’s employment agreement and related information is provided under “Employment Agreements with Named Executive Officers” below. The agreements provide the general framework and some of the specific terms for the compensation of the Named Executive Officers. Approval of the Management Resources and Compensation Committee and/or the Board of Directors is required prior to our entering into employment agreements with its executive officers or amendments to those agreements. However, many of the decisions relating to compensation for a specific year are made by the Management Resources and Compensation Committee and are implemented without changes to the general terms of employment set forth in those agreements.
During the 2009 fiscal year, the Company granted restricted stock awards to its Named Executive Officers as follows. An aggregate of 70,000 shares of restricted stock were granted to Mr. Filippelli, with 35,000 shares vesting on January 2, 2010 and the balance vesting on January 2, 2011. Per Mr. Filippelli’s employment agreement, any unvested shares will immediately vest upon termination. An aggregate of 40,000 shares were granted to each of Ms. Presuto, Mr. Wilson and Ms. West. Of these grants, 20,000 shares vested January 2, 2010 and the balance vests on January 2, 2011. Following Ms. West’s departure, however, the vesting conditions applicable to the remaining 20,000 shares will not occur and such shares were cancelled following the closing of the disposition of the operating assets of TeamStaff Rx. Ms. West was also granted an aggregate of 16,612 shares of restricted stock during 2009 pursuant to her employment agreements. These shares were vested as of the grant date. For information regarding the effect on the vesting and treatment of these stock awards on the death, disability or termination of employment of a Named Executive Officer or a change in control of our company, see “Employment Agreements with Named Executive Officers” below. Each award of Restricted Stock to our Named Executive Officers in fiscal 2009 represents an award of Common Stock that is subject to certain restrictions, including restrictions on transferability. These Restricted Stock Awards were granted under our 2006 Plan. The restrictions lapse in accordance with the terms of the award agreement. Holders of shares of Restricted Stock have voting power and the right to receive dividends, if any, that are declared on those shares which are vested. The grants of Restricted Stock made to our Named Executive Officers vest as described in the footnotes to the above table. The 2006 Plan is administered by the Management Resources and Compensation Committee. The committee has authority to interpret the plan provisions and make all required determinations under those plans. This authority includes making required proportionate adjustments to outstanding awards upon the occurrence of certain corporate events such as reorganizations, mergers and stock splits. Awards granted under the 2006 Plan are generally only transferable to a beneficiary of a Plan participant upon his or her death. However, the committee may establish procedures for the transfer of awards to other persons or entities, provided that such transfers comply with applicable laws.
Outstanding Equity Awards at End of 2009
The following table sets forth certain information with respect to outstanding equity awards at September 30, 2009 with respect to the Named Executive Officers.
                                 
  Option Awards  Stock Awards 
(a) (b)  (c)  (d)  (e)  (f)  (g)  (h)  (i) 
                              Equity Incentive 
                          Equity Incentive  Plan Awards: 
                 Number  Market  Plan Awards:  Market or 
  Number of  Number of          of Shares  Value of  Number of  Payout Value of 
  Securities  Securities          or Units  Shares or  Unearned  Unearned 
  Underlying  Underlying          of Stock  Units of  Shares, Units or  Shares, Units or 
  Unexercised  Unexercised  Option      That  Stock That  Other Rights  Other Rights 
  Options  Options  Exercise  Option  Have Not  Have Not  That Have Not  That Have Not 
  (#)  (#)  Price  Expiration  Vested  Vested  Vested  Vested 
Name Exercisable  Unexercisable  ($)  Date  (#)(1)  ($)(2)  (#)(3)  ($)(2) 
                                 
Rick Filippelli                            
                   70,000  $105,000         
                           13,750  $20,625 
                                 
Cheryl Presuto  4,500     $7.84   11/04/09                 
                   40,000  $60,000         
                           10,000  $15,000 
                                 
Dale West                            
                   40,000  $60,000         
                           30,000  $45,000 
                                 
Kevin Wilson                            
                   40,000  $60,000         
                           20,000  $30,000 
(1)Represents unvested portion of stock award granted on January 2, 2009 with a two year vesting schedule.
(2)The market or payout value of stock awards reported in Columns (g) and (i) is computed by multiplying the number of shares of stock reported in Column (f) and (h) by the closing market price of our Common Stock on the last trading day of fiscal 2009.
(3)Represents unvested portion of stock award granted to Mr. Filippelli on April 27, 2008, Ms. Presuto on July 30, 2008, Ms. West on December 3, 2008 and Mr. Wilson on October 3, 2008 as part of their employment agreements. These unvested shares are subject to certain performance criteria for the fiscal year ended September 30, 2009 for Mr. Filippelli and Ms. Presuto and for the fiscal years ended September 30, 2009 and 2010 for Ms. West and Mr. Wilson. It was subsequently determined that the performance criteria for fiscal year 2009 was not met and 13,750 shares for Mr. Filippelli, 10,000 shares for Ms. Presuto, 15,000 shares for Ms. West and 10,000 shares for Mr. Wilson were cancelled. As a result of the sale of the operating assets of TeamStaff Rx, the remaining 15,000 shares for Ms. West will not vest and were cancelled on the closing date of such transaction.

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Additional Information.Each stock option grant reported in the table above was granted under, and is subject to, our 2000 Employee Plan. The option expiration date shown above is the normal expiration date, and the last date that the options may be exercised. For each Named Executive Officer, the unexercisable options shown above are also unvested. Unvested shares are generally forfeited if the Named Executive Officer’s employment terminates, except to the extent otherwise provided in an employment agreement. For information regarding the effect on vesting of options on the death, disability or termination of employment of a Named Executive Officer or a change in control of our company, see “Employment Agreements with Named Executive Officers” below. If a Named Executive Officer’s employment is terminated by us for cause, options (including the vested portion) are generally forfeited. The exercisable options shown above, and any unexercisable options shown above that subsequently become exercisable, will generally expire earlier than the normal expiration date if the Named Executive Officer’s employment terminates, except as otherwise specifically provided in the Named Executive Officer’s employment agreement. For a description of the material terms of the Named Executive Officer’s employment agreements, see “Employment Agreements with Named Executive Officers” below. Restricted Stock Awards granted our Named Executive Officers were granted under the 2006 Plan. This table does not reflect prior grants of restricted stock awards that are fully vested.
Employment Agreements with Named Executive Officers
The following are summaries of the employment agreements with our Named Executive Officers. The agreements provide the general framework and the specific terms for the compensation of the Named Executive Officers.
Rick J. Filippelli
On June 30, 2005 TeamStaff entered into a twenty seven month employment agreement with Mr. Rick J. Filippelli, its Vice President and Chief Financial Officer. The term of the agreement commenced on June 30, 2005 and was scheduled to terminate on September 30, 2007. TeamStaff entered into a formal letter agreement dated and effective as of February 14, 2007 with Mr. Filippelli following his appointment on January 10, 2007 as President and Chief Executive Officer, which modified certain terms of his 2005 employment agreement. On April 17, 2008, we entered into a new employment agreement with Mr. Filippelli which expired as of September 30, 2009.
On November 3, 2009, we announced that Mr. Rick J. Filippelli has informed the Board of his intent to resign from such positions in connection with our strategic shift in our current business plan. Mr. Filippelli’s resignation as President and Chief Executive Officer will become effective at the end of January 2010. Mr. Filippelli has agreed to assist us with our transition to a new Chief Executive Officer. In connection with the foregoing, on November 2, 2009, we entered into a new employment agreement with Mr. Filippelli, the material terms of which are summarized below. The following description of this employment is qualified in its entirety by reference to the full text of such agreement. The new employment agreement supersedes and replaces the employment agreement that the Company entered into with Mr. Filippelli on April 17, 2008.
 The new employment agreement is dated November 2, 2009, is effective as of October 1, 2009 and expires January 31, 2010, unless both parties agree to extend the term. Under the employment agreement, Mr. Filippelli will receive a base salary of $290,000 and may receive a bonus in the sole discretion of the Management Resources and Compensation Committee of the Board of Directors.
 Under the new employment agreement, Mr. Filippelli was granted options to purchase 30,000 shares of common stock. The options are exercisable for five years from the date of grant and vest upon the termination date, as defined in the new employment agreement, provided he complies with the obligations described therein. The exercise price of the options was equal to closing price of our common stock on the execution date of the new employment agreement.
 In the event of a termination of his employment by him for good reason (as defined in the employment agreement), (a) Mr. Filippelli’s right to purchase shares of common stock pursuant to any stock option or stock option plan shall immediately fully vest and become exercisable, (b) the exercise period in which he may exercise his options to purchase common stock shall be extended to the duration of their original term, as if he remained an employee of the Company, and (c) the terms of such options shall be deemed amended to reflect the foregoing provisions. Further, in the event of a termination of the Mr. Filippelli’s employment for cause, options granted and not exercised as of the termination date shall terminate immediately and be null and void. In the event of a termination of his employment due to his death or disability, Mr. Filippelli’s (or his estate’s or legal representative’s) right to exercise any stock option, to the extent vested as of the termination date, shall remain exercisable for a period of twelve (12) months following the termination date, but in no event after the expiration of the exercise period. In the event of a termination of his employment other than for good reason, his right to exercise the stock options, to the extent vested as of the termination date, shall remain exercisable for a period of three months following the termination date, but in no event after the expiration of the exercise period.

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 The employment agreement further provides that in the event of a change in control (as defined in the employment agreement), or termination without cause by us or for good reason (as defined in the employment agreement) by Mr. Filippelli, the conditions to the vesting of any outstanding restricted stock awards granted to Mr. Filippelli shall be deemed void and all such shares shall be immediately and fully vested and delivered to him. Mr. Filippelli agreed not sell 35,000 restricted shares of the Company’s Common Stock originally scheduled to vest in January 2011, and the shares of Common Stock underlying the option granted pursuant to the new employment agreement until the earlier of a Change of Control or January 31, 2011.
 In the event of the termination of employment by us without “cause” or by him for “good reason,” as those terms are defined in the employment agreement, or in the event his employment is terminated due to his disability, Mr. Filippelli would be entitled to: (a) a severance payment of 12 months of base salary; (b) continued participation in our health and welfare plans for a period not to exceed 18 months from the termination date; and (c) all compensation accrued but not paid as of the termination date. In the event of the termination of his employment due to his death, Mr. Filippelli’s estate would be entitled to receive all compensation accrued but not paid as of the termination date and continued participation in our health and welfare plans for a period not to exceed 18 months from the termination date. If his employment is terminated by us for “cause” or by him without “good reason,” he is not entitled to any additional compensation or benefits other than his accrued and unpaid compensation.
 In the event that within 180 days of a “Change in Control”, as defined in the employment agreement, (a) Mr. Filippelli’s employment is terminated, or (b) his status, title, position or responsibilities are materially reduced and he terminates his employment, the Company shall pay and/or provide to him, the following compensation and benefits:
(A) we shall pay him, in lieu of any other payments due hereunder, (i) the accrued compensation; (ii) the continuation benefits; and (iii) as severance, base salary for a period of 12 months, payable in one lump sum following the termination date; and
(B) The conditions to the vesting of any outstanding incentive awards (including restricted stock, stock options and granted performance shares or units) granted to Mr. Filippelli under any of our plans, or under any other incentive plan or arrangement, shall be deemed void and all such incentive awards shall be immediately and fully vested and exercisable. Further, any such options shall be deemed amended to provide that in the event of termination after a change of control, the options shall remain exercisable for the duration of their term.
 Notwithstanding the foregoing, if the payments due in the event of a change in control would constitute an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the aggregate of such credits or payments under the employment agreement and other agreements shall be reduced to the largest amount as will result in no portion of such aggregate payments being subject to the excise tax imposed by Section 4999 of the Code. The priority of the reduction of excess parachute payments shall be in the discretion of Mr. Filippelli.
 Pursuant to the employment agreement, Mr. Filippelli is subject to customary confidentiality, non-solicitation of employees and non-competition obligations that survive the termination of such agreement.

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Cheryl Presuto
On July 30, 2008, we entered into an employment agreement with our Chief Financial Officer, Cheryl Presuto, which expired as of September 30, 2009. On January 14, 2010, we entered into a new employment agreement with Ms. Presuto, the terms of which are summarized below. The following description of our new employment agreement with Ms. Presuto is qualified in its entirety by reference to the full text of such agreement.
 The employment agreement is for an initial term expiring September 30, 2010. Under the employment agreement, Ms. Presuto will receive a base salary of $181,000. The term of the agreement is effective as of October 1, 2009. Upon any termination of the Employee’s employment on or after the expiration date, other than cause (as defined in the employment agreement), Ms. Presuto will be entitled to the severance payment described below.
 Ms. Presuto may receive a bonus in the sole discretion of the Management Resources and Compensation Committee of the Board of Directors of up to 50% of her base salary for each fiscal year of employment. The bonus will be based on performance targets and other key objectives established by the Management Resources and Compensation Committee.
 Grant of options to purchase 75,000 shares of common stock under the Company’s 2006 Long Term Incentive Plan. The vesting schedule applicable to the options is as follows: 50% of the options shall vest on the date of the agreement and the balance shall vest on September 30, 2010, provided Ms. Presuto is an employee as of such date. The options are exercisable for a period of five years at a per share exercise price equal to the closing price of the Company’s common stock on the date of execution of the employment agreement.
In the event of the termination of her employment, the Options will be governed by the terms of the 2006 Plan, except that the following provisions shall apply:
(i)in the event Ms. Presuto’s employment is terminated for cause, options granted and not exercised as of the termination date shall terminate immediately and be null and void;
(ii)in the event her employment with the Company is terminated due to her death, or disability, her (or her estate’s or legal representative’s) right to purchase shares of common stock pursuant to any stock option or stock option plan to the extent vested as of the date of termination shall remain exercisable for a period of 12 months, but in no event after the expiration of the option;
(iii)in the event Ms. Presuto elects to terminate her employment other than for good reason (as defined in the agreement), her right to purchase shares of common stock of the Company pursuant to any stock option or stock option plan to the extent vested as of the date of termination shall remain exercisable for a period of three months following such termination date, but in no event after the expiration of option; and
(iv)In the event of (A) a Change of Control, as defined in the agreement, (B) employee’s termination by the Company without cause or; (C) termination by employee for good reason, the conditions to the vesting of any outstanding restricted stock awards or options granted under the agreement shall be deemed void and all such shares and options shall be immediately and fully vested and delivered to the employee and all outstanding options shall remain exercisable for a period of 24 months following the date of termination, but in no event after the expiration date of any such option.

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 In the event of the termination of employment by us without “cause” or by Ms. Presuto for “good reason,” as those terms are defined in the employment agreement, or in the event her employment is terminated due to her disability, she would be entitled to: (a) a severance payment of 12 months of base salary; (b) continued participation in our health and welfare plans for a period not to exceed 12 months from the termination date; and (c) all compensation accrued but not paid as of the termination date. In addition, in the event of termination for disability, she would also receive a pro-rata bonus, as described below.
 In the event of the termination of her employment due to her death, Ms. Presuto’s estate would be entitled to receive: (a) all compensation accrued but not paid as of the termination date; (b) continued participation in our health and welfare plans for a period not to exceed 12 months from the termination date; and (c) payment of a “Pro Rata Bonus”, which is defined as an amount equal to the maximum bonus Ms. Presuto had an opportunity to earn multiplied by a fraction, the numerator of which shall be the number of days from the commencement of the fiscal year to the termination date, and the denominator of which shall be the number of days in the fiscal year in which she was terminated.
 If Ms. Presuto’s employment is terminated by us for “cause” or by her without “good reason,” she is not entitled to any additional compensation or benefits other than her accrued and unpaid compensation.
 In the event that within 180 days of a “Change in Control” as defined in the employment agreement, (a) Ms. Presuto is terminated, or (b) her status, title, position or responsibilities are materially reduced and she terminates her employment, the Company shall pay and/or provide to her, the following compensation and benefits:
(A) The Company shall pay Ms. Presuto, in lieu of any other payments due hereunder, (i) the accrued compensation; (ii) the continuation benefits; and (iii) as severance, base salary for a period of 12 months, payable in equal installments on each of the Company’s regular pay dates for executives during the twelve months commencing on the first regular executive pay date following the termination date; and
(B) The conditions to the vesting of any outstanding incentive awards (including restricted stock, stock options and granted performance shares or units) granted to Ms. Presuto under any of the Company’s plans, or under any other incentive plan or arrangement, shall be deemed void and all such incentive awards shall be immediately and fully vested and exercisable. Further, any such options shall be deemed amended to provide that in the event of termination after a change of control, the options shall remain exercisable for the duration of their term.
 Upon the effective date of an event constituting a change of control, the Company shall pay Ms. Presuto, in one lump sum upon the first day of the month immediately following such event, an amount equal to her then current base salary. Ms. Presuto shall be entitled to such payment whether or not her employment with the Company continues after the change of control.
 If the payments due in the event of a change in control would constitute an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the aggregate of such credits or payments under the employment agreement and other agreements shall be reduced to the largest amount as will result in no portion of such aggregate payments being subject to the excise tax imposed by Section 4999 of the Code. The priority of the reduction of excess parachute payments shall be in the discretion of Ms. Presuto.
 Pursuant to the employment agreement, Ms. Presuto is subject to customary confidentiality, non-solicitation of employees and non-competition obligations that survive the termination of such agreements.

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Kevin Wilson
On October 3, 2008, we entered into an employment agreement with Mr. Kevin Wilson, the President of our TeamStaff GS subsidiary. The employment agreement is for an initial term expiring September 30, 2010. Under the employment agreement, Mr. Wilson will receive a base salary of $200,000. The term of the agreement is effective as of October 1, 2008. Mr. Wilson may receive a bonus in the sole discretion of the Management Resources and Compensation Committee of the Board of Directors and will have an opportunity to earn a cash bonus of up to 70% of his base salary for each fiscal year of employment. The bonus will be based on performance targets and other key objectives established by the Chief Executive Officer. Thirty percent of the bonus shall be based on achieving revenue targets, sixty percent shall be based on achieving EBITDA targets, and ten percent shall be based on achieving corporate goals established by the Chief Executive Officer. Additional terms of his agreement are as follows:
 Grant of 30,000 shares of restricted common stock. The vesting schedule applicable to the restricted stock is as follows: one-third of the restricted shares vest on the date of the agreement; one-third vest on September 30, 2009, upon satisfaction of performance targets and other key objectives established by the Chief Executive Officer for fiscal 2009; and one-third vest on September 30, 2010, upon the satisfaction of the performance targets determined for fiscal 2010. However, in the event of a change in control (as defined in the employment agreement), the conditions to the vesting of the restricted stock awards shall be deemed void and all such shares shall be immediately and fully vested.
 In the event of the termination of employment by us without “cause” or by Mr. Wilson for “good reason,” as those terms are defined in the employment agreement, or in the event his employment is terminated due to his disability, he would be entitled to: (a) a severance payment of 6 months of base salary; (b) continued participation in our health and welfare plans for a period not to exceed 6 months from the termination date; and (c) all compensation accrued but not paid as of the termination date. In addition, in the event of termination for disability, he would also receive a pro-rata bonus, as described below.
 In the event of the termination of his employment due to his death, Mr. Wilson’s estate would be entitled to receive: (a) all compensation accrued but not paid as of the termination date; (b) continued participation in our health and welfare plans for a period not to exceed 6 months from the termination date; and (c) payment of a “Pro Rata Bonus”, which is defined as an amount equal to the lesser of (i) $75,000, and (ii) the Targeted Bonus multiplied by a fraction, the numerator of which shall be the number of days from the commencement of the fiscal year to the termination date, and the denominator of which shall be the number of days in the fiscal year in which his employment was terminated. If his employment is terminated by us for “cause” or by him without “good reason,” he is not entitled to any additional compensation or benefits other than his accrued and unpaid compensation.
 In the event that within 90 days of a “Change in Control” as defined in the employment agreement, (a) Mr. Wilson is terminated, or (b) his status, title, position or responsibilities are materially reduced and he terminates his employment, we shall pay and/or provide to him the following compensation and benefits: (A) (i) the accrued compensation; (ii) the continuation benefits; and (iii) as severance, base salary for a period of 6 months, payable in equal installments on each of the Company’s regular pay dates for executives during the six months commencing on the first regular executive pay date following the termination date; and (B) The conditions to the vesting of any outstanding incentive awards (including restricted stock, stock options and granted performance shares or units) granted to Mr. Wilson shall be deemed void and all such awards shall be immediately and fully vested.

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 In addition, in the event the Company serves a “Notice of Retention” and Mr. Wilson diligently performs his duties during the “Retention Period” (as those terms are defined in the employment agreement), the Company shall pay him, in one lump sum on the first day of the month immediately following the month in which the Retention Period ends, an amount equal to 50% of his then current base salary. In the event the Company fails to serve a Notice of Retention, the Company shall pay him in one lump sum on the first day of the month immediately following the change of control, an amount equal to 50% of his then current base salary.
 Notwithstanding the foregoing, if the payments due in the event of a change in control would constitute an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the aggregate of such credits or payments under the employment agreement and other agreements shall be reduced to the largest amount as will result in no portion of such aggregate payments being subject to the excise tax imposed by Section 4999 of the Code.
 Pursuant to the employment agreement, Mr. Wilson is subject to customary confidentiality, non-solicitation of employees and non-competition obligations that survive the termination of such agreements.
Dale West
On December 3, 2008, we entered into an employment agreement with Ms. Dale West, the President of our TeamStaff Rx subsidiary. The employment agreement is for an initial term expiring September 30, 2010.
However, as reported above, Ms. West’s employment with TeamStaff terminated in connection with the closing of the sale of the operating assets of TeamStaff Rx to Advantage RN, which occurred January 4, 2010. Ms. West will receive severance payments and benefits as provided for in this agreement. Under the employment agreement, Ms. West received a base salary of $200,000. The term of the agreement is effective as of October 1, 2008. Ms. West may receive a bonus in the sole discretion of the Management Resources and Compensation Committee of the Board of Directors and will have an opportunity to earn a cash bonus (“Targeted Bonus”) of up to 70% of her base salary for each fiscal year of employment. The bonus will be based on performance targets and other key objectives established by the Chief Executive Officer. Thirty percent (30%) of the bonus shall be based on achieving revenue targets, sixty percent (60%) shall be based on achieving EBITDA targets, and ten percent (10%) shall be based on achieving corporate goals established by the Chief Executive Officer. Additional terms of her agreement are as follows:
 Grant of 30,000 shares of restricted common stock. The vesting schedule applicable to the restricted stock is as follows: one-half vest on September 30, 2009, upon satisfaction of performance targets and other key objectives established by the Chief Executive Officer for 2009; and one-half vest on September 30, 2010, upon the satisfaction of the performance targets determined for 2010. However, in the event of a change in control (as defined in the employment agreement), the conditions to the vesting of the restricted stock awards shall be deemed void and all such shares shall be immediately and fully vested.
 Ms. West was eligible to receive a quarterly stock bonus equal to $12,500 of the Company’s common stock at the end of each calendar quarter of employment for satisfaction of performance criteria and other key objectives established by the Chief Executive Officer, provided that the first two quarterly bonuses were deemed earned if she is continuously employed by the Company during such quarters and shall not be conditioned on the achievement of any other performance criteria. Such shares of common stock were valued on the last trading day of each quarter and were deemed vested and earned on the first business day following the close of the quarter.
 In the event of the termination of employment by us without “cause” or by Ms. West for “good reason,” as those terms are defined in the employment agreement, or in the event her employment is terminated due to her disability, she would be entitled to: (a) a severance payment of 6 months of base salary; (b) continued participation in our health and welfare plans for a period not to exceed 6 months from the termination date; and (c) all compensation accrued but not paid as of the termination date. In addition, in the event of termination for disability, she would also receive a pro-rata bonus, as described below.

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 In the event of the termination of her employment due to her death, Ms. West’s estate would be entitled to receive: (a) all compensation accrued but not paid as of the termination date; (b) continued participation in our health and welfare plans for a period not to exceed 6 months from the termination date; and (c) payment of a “Pro Rata Bonus”, which is defined as an amount equal to the lesser of (i) $75,000, and (ii) the Targeted Bonus multiplied by a fraction, the numerator of which shall be the number of days from the commencement of the fiscal year to the termination date, and the denominator of which shall be the number of days in the fiscal year in which she was terminated. If her employment is terminated by us for “cause” or by her without “good reason,” she is not entitled to any additional compensation or benefits other than her accrued and unpaid compensation.
 In the event that within 90 days of a “Change in Control” as defined in the employment agreement, (a) Ms. West’s employment is terminated, or (b) her status, title, position or responsibilities are materially reduced and she terminates her employment, the Company shall pay and/or provide to her, the following compensation and benefits: (A) (i) the accrued compensation; (ii) the continuation benefits; and (iii) as severance, base salary for a period of 6 months, payable in equal installments on each of the Company’s regular pay dates for executives during the six months commencing on the first regular executive pay date following the termination date; and (B) the conditions to the vesting of any outstanding incentive awards (including restricted stock, stock options and granted performance shares or units) granted to Ms. West shall be deemed void and all such awards shall be immediately and fully vested.
 In addition, in the event the Company serves a “Notice of Retention” and Ms. West diligently performs her duties during the “Retention Period” (as those terms are defined in the employment agreement), the Company shall pay her, in one lump sum on the first day of the month immediately following the month in which the Retention Period ends, an amount equal to 50% of her then current base salary. In the event the Company fails to serve a Notice of Retention, the Company shall pay her in one lump sum on the first day of the month immediately following the Change in Control, an amount equal to 50% of her then current base salary.
 Notwithstanding the foregoing, if the payments due in the event of a Change in Control would constitute an “excess parachute payment” as defined in Section 280G of the Code, the aggregate of such credits or payments under the employment agreement and other agreements shall be reduced to the largest amount as will result in no portion of such aggregate payments being subject to the excise tax imposed by Section 4999 of the Code.
 Pursuant to the employment agreement, Ms. West is subject to customary confidentiality, non-solicitation of employees and non-competition obligations that survive the termination of such agreements. In addition, Ms. West was provided an advance to reimburse her for living expenses not to exceed $3,200 in any month or $36,000 in the aggregate.
Stock Option Plans
2000 Employee Stock Option Plan
In the fiscal year 2000, the Board of Directors and shareholders approved the adoption of the 2000 Employee Plan to provide for the grant of options to purchase up to 1,714,286 shares of TeamStaff’s common stock to all employees, including senior management. The 2000 Employee Plan replaced the 1990 Employee Plan and Senior Management Plans, both of which expired. Under the terms of the approved 2000 Employee Plan, options granted there under may be designated as options which qualify for incentive stock option treatment (“ISOs”) under Section 422A of the Code, or options which do not so qualify (“Non-ISOs”). As of September 30, 2009, there were 4,500 options outstanding under the 2000 Employee Plan.
The 2000 Employee Plan is administered by the Management Resources and Compensation Committee designated by the Board of Directors. The Management Resources and Compensation Committee has the discretion to determine the eligible employees to whom, and the times and the price at which, options will be granted; whether such options shall be ISOs or Non-ISOs; the periods during which each option will be exercisable; and the number of shares subject to each option. The Committee has full authority to interpret the 2000 Employee Plan and to establish and amend rules and regulations relating thereto.

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Under the 2000 Employee Plan, the exercise price of an option designated, as an ISO shall not be less than the fair market value of the common stock on the date the option is granted. However, in the event an option designated as an ISO is granted to a ten percent (10%) shareholder (as defined in the 2000 Employee Plan), such exercise price shall be at least 110% of such fair market value. Exercise prices of Non-ISO options may be less than such fair market value.
The aggregate fair market value of shares subject to options granted to a participant, which are designated as ISOs and which become exercisable in any calendar year shall not exceed $100,000.
The Management Resources and Compensation Committee may, in its sole discretion, grant bonuses or authorize loans to or guarantee loans obtained by an optionee to enable such optionee to pay the exercise price or any taxes that may arise in connection with the exercise or cancellation of an option. The Management Resources and Compensation Committee can also permit the payment of the exercise price in the common stock of the Company held by the optionee for at least six months prior to exercise.
2000 Non-Executive Director Option Plan
In fiscal year 2000, the Board of Directors and stockholders approved the adoption of the 2000 Non-Executive Director Plan (the “2000 Non-Executive Director Plan”) to provide for the grant of options to non-employee directors of TeamStaff. Under the terms of the 2000 Non-Executive Director Plan, each non-executive director is automatically granted an option to purchase 5,000 shares upon joining the Board and each September lst, pro rata, based on the time the director has served in such capacity during the previous year. The 2000 Non-Executive Director Plan also provides that directors, upon joining the Board, and for one (1) year thereafter, will be entitled to purchase restricted stock from TeamStaff at a price equal to 80% of the closing bid price on the date of purchase up to an aggregate purchase price of $50,000. The 2000 Non-Executive Director Plan replaced the previous director plan that expired in April 2000.
Under the 2000 Non-Executive Director Plan, the exercise price for options granted under the 2000 Non-Executive Director Plan shall be 100% of the fair market value of the common stock on the date of grant. Until otherwise provided in such Plan, the exercise price of options granted under the 2000 Non-Executive Director Plan must be paid at the time of exercise, either in cash, by delivery of shares of common stock of TeamStaff or by a combination of each. The term of each option commences on the date it is granted and unless terminated sooner as provided in the 2000 Non-Executive Director Plan, expires five (5) years from the date of grant. The Compensation Committee has no discretion to determine which non-executive director or advisory board member will receive options or the number of shares subject to the option, the term of the option or the exercisability of the option. However, the Compensation Committee will make all determinations of the interpretation of the 2000 Non-Executive Director Plan. Options granted under the 2000 Non-Executive Director Plan are not qualified for incentive stock option treatment. As of September 30, 2009, there were 10,625 options held by directors outstanding under the 2000 Non-Executive Director Plan.
Effective January 19, 2007, the 2000 Non-Executive Director Plan was suspended due to a change in the compensation terms for non-employee Board members. For additional information regarding our director compensation policy, see below under the caption “Director Compensation”.
2006 Long Term Incentive Plan
The Board of Directors adopted the 2006 Long-Term Incentive Plan on January 17, 2006. The shareholders approved the 2006 Long Term Incentive Plan at the annual meeting on April 27, 2006. The Company reserved an aggregate of 5,000,000 shares of common stock for issuance under the 2006 Long Term Incentive Plan. The maximum number of shares of common stock that may be delivered to participants under the 2006 Long-Term Incentive Plan equals the sum of: (a) 5,000,000 shares of common stock; (b) any shares subject to awards granted under the 2000 Employee Plan and the 2000 Non-Executive Director Plan (collectively, the “2000 Plans”), which are forfeited, expired, canceled or settled in cash without delivery of such shares to the participant or otherwise is terminated without a share issuance; (c) any shares tendered by participants or withheld in payment of the exercise price of options or to satisfy withholding taxes under the 2000 Plans; and (d) any shares repurchased with the proceeds of options exercised under the 2000 Plans. As of September 30, 2009, there were 545,778 shares of common stock granted pursuant to awards under the 2006 Long Term Incentive Plan.

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Administration. The 2006 Long Term Incentive Plan is administered by the Compensation Committee. The 2006 Long Term Incentive Plan authorizes the Compensation Committee to select those participants to whom awards may be granted, to determine whether and to what extent awards are granted, to determine the number of shares of common stock or other considerations to be covered by each award, to determine the terms and conditions of awards, to amend the terms of outstanding awards, and to take any other action consistent with the terms of the 2006 Long Term Incentive Plan as the Committee deems appropriate.
Terms and Conditions of Awards. The Compensation Committee is authorized to make any type of award to a participant that is consistent with the provisions of the Plan. Awards may consist of options, stock appreciation rights, restricted stock, restricted stock units, performance shares, cash awards or any combination of these types of awards.
Subject to the terms of the 2006 Long Term Incentive Plan, the Compensation Committee determines the provisions, terms and conditions of each award. The Committee may grant awards subject to vesting schedules or restrictions and contingencies in the company’s favor. However, the awards may be subject to acceleration such that they become fully vested, exercisable and released from any restrictions or contingencies upon the occurrence of a change of control (as defined in the Plan). The Committee may provide that stock-based awards earn dividends or dividend equivalents, which may be paid in cash or shares or may be credited to an account designated in the name of the participants. Participants may also be required or permitted to defer the issuance of shares or cash settlements under awards including under other deferred compensation arrangements of the company. Each option granted under the Plan will be designated as either an incentive stock option or a non-statutory stock option. No option or stock appreciation right may be granted with a term of more than 10 years from the date of grant.
Performance shares or cash awards will depend on achievement of performance goals based on one or more performance measures determined by the Committee over a performance period as prescribed by the Committee of not less than one year and not more than five years. Performance goals may be established on a corporate-wide basis or as to one or more business units, divisions or subsidiaries, and may be in either absolute terms or relative to the performance of one or more comparable companies on an index covering multiple companies. “Performance measures” means criteria established by the Committee from time to time prior to granting the performance shares or cash awards.
Exercise Price. The Plan authorizes the Compensation Committee to grant options and stock appreciation rights at an exercise price of not less than 100% of the fair market value of the shares on the date of grant. The Committee has the right to provide post-grant reduction in exercise price to reflect any floating index as specified in an award agreement. The exercise price is generally payable in cash, check, surrender of pre-owned shares of common stock, broker-dealer exercise and sale, or by such other means determined by the Committee.
Option Repricing Prohibited. The exercise price for any outstanding option or stock appreciation right may not be decreased after the date of grant, nor may any outstanding option or stock appreciation right be surrendered as consideration for the grant of a new option or stock appreciation right with a lower exercise price.
Director Compensation
Effective as of October 1, 2007, our Board determined to reinstitute a cash compensation policy for non-executive directors. Accordingly, our non-executive directors are compensated as follows.
The annual director fee for our non-executive directors is $15,000;
the Chairman of Board and the Audit Committee Chairman shall receive an additional $3,500 per year;
the Vice Chairman of the Board, Chairman of the Management Resources and Compensation Committee and Chairman of the Nominating and Corporate Governance Committee shall each receive an additional $2,500 per year;

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each non-executive director shall be awarded an annual grant of 3,750 shares of restricted common stock pursuant to the Company’ 2006 Long Term Incentive Policy following the Company’s annual meeting of shareholders held in 2008, provided that such award shall vest as follows: (A) 50% of the Award shall vest when the volume-weighted average share price over any 20 consecutive trading days exceeds the price per share of common stock on the date of grant by 20%; and (B) 50% of the Award shall vest one year from the vesting specified in (A) above;
each non-executive director shall be eligible for an additional annual grant of 1,250 shares of restricted stock for each committee membership held by a non-executive director following the Company’s annual meeting to be held in 2008, with such under the Company’s 2006 Long Term Incentive Plan, with such additional award to be fully vested on the date of grant;
Reasonable and customary expenses incurred in attending the board and committee meetings are reimbursable.
In addition, on February 12, 2009, our Board approved an increase in the cash fees payable to our non-executive directors from $15,000 to $20,000 per annum, effective as of such date. A summary of non-executive director compensation for the year ended September 30, 2009 is as follows:
Summary of Non-Executive Director Compensation
                             
                  Change in       
                  Pension Value       
                  and Nonqualified       
  Fees Earned          Non-Equity  Deferred       
  or Paid in  Stock  Option  Incentive Plan  Compensation  All Other    
  Cash  Awards  Awards  Compensation  Earnings  Compensation  Total 
Name (1) (3) (4) ($)  ($) (2)  ($)  ($)  ($)  ($)  ($) 
                             
T. Stephen Johnson
 $21,250  $8,375              $  $29,625 
                             
Karl W. Dieckmann
 $20,833  $11,725              $1,557  $34,115 
                             
William H. Alderman
 $20,833  $8,375              $1,762  $30,970 
                             
Peter Black
 $20,833  $10,050              $  $30,883 
                             
Martin J. Delaney
 $18,333  $8,375              $698  $27,406 
                             
Frederick G. Wasserman
 $22,417  $10,050              $  $32,467 
(1)As of September 30, 2009, each director had the following number of Director Plan options outstanding: Mr. Johnson — 3,750; Mr. Dieckmann — 3,750; Mr. Alderman — 0; Mr. Black — 3,125; Mr. Delaney — 2,500; Mr. Wasserman — 0
(2)No restricted stock awards were granted to our non-executive directors during the 2009 fiscal year. Following the end our 2009 fiscal year, on October 13, 2009, we granted an aggregate of 42,500 shares of restricted stock to our non-executive directors as follows: Mr. Johnson — 6,250 shares; Mr. Dieckmann — 8,750 shares; Mr. Alderman — 6,250 shares; Mr. Black — 7,500 shares; Mr. Delaney — 6,250 shares; and Mr. Wasserman — 7,500 shares. The closing price of our common stock on such date was $1.34.

52


Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The following table sets forth certain information as of January 5, 2010 with respect to each director, each of the named executive officers as defined in Item 402(a) (3), and directors and executive officers of TeamStaff as a group, and to the persons known by TeamStaff to be the beneficial owner of more than five percent of any class of TeamStaff’s voting securities. At January 5, 2010, TeamStaff had 4,940,982 shares of common stock outstanding. The figures stated below are based upon Schedule 13Ds, Schedule 13D/As, Form 3s, and Form 4s filed with the Securities and Exchange Commission by the named persons.
         
  Number of Shares  Percent of Company’s 
Name Currently Owned (1)  Outstanding Stock 
 
William H. Alderman (2)  11,938   * 
c/o TeamStaff, Inc.
1 Executive Drive
Somerset, NJ 08873
        
         
Peter Black (3)(12)  22,000   * 
c/o TeamStaff, Inc.
1 Executive Drive
Somerset, NJ 08873
        
         
Martin J. Delaney (4)  22,432   * 
c/o TeamStaff, Inc.
1 Executive Drive
Somerset, NJ 08873
        
         
Karl W. Dieckmann (5)  42,731   * 
c/o TeamStaff, Inc.
1 Executive Drive
Somerset, NJ 08873
        
         
Rick J. Filippelli (6)  147,500   2.89%
c/o TeamStaff, Inc.
1 Executive Drive
Somerset, NJ 08873
        
         
T. Stephen Johnson (7)  82,877   1.64%
c/o TeamStaff, Inc.
1 Executive Drive
Somerset, NJ 08873
        
         
Frederick G. Wasserman (8)  16,563   * 
c/o TeamStaff, Inc.
1 Executive Drive
Somerset, NJ 08873
        
         
Cheryl Presuto (9)  45,000   * 
c/o TeamStaff, Inc.
1 Executive Drive
Somerset, NJ 08873
        
         
Kevin Wilson (10)  30,000   * 
c/o TeamStaff, Inc.
1 Executive Drive
Somerset, NJ 08873
        
         
Bernard J. Korman (11)  729,146   14.48%
2129 Chestnut Street
Philadelphia, PA 19103
        
         
Wynnefield Partners Small Cap Value LP (12)(13)  332,097   6.59%
450 Seventh Ave
New York, NY 10123
        
         
Wynnefield Partners Small Cap Value LP I (12)(14)  428,850   8.52%
450 Seventh Ave
New York, NY 10123
        
         
Wynnefield Partners Small Cap Value Offshore Fund, Ltd. (12)(15)  428,072   8.5%
450 Seventh Ave
New York, NY 10123
        

53


         
  Number of Shares  Percent of Company’s 
Name Currently Owned (1)  Outstanding Stock 
         
Wynnefield Capital Profit Sharing Plan (12)(16)  92,563   1.84%
450 Seventh Ave
New York NY 10123
        
         
Channel Partnership II, LP (12)(17)  12,500   * 
450 Seventh Ave
New York NY 10123
        
         
Hummingbird Value Fund (11)  145,060   2.88%
460 Park Avenue, 12th Flr.
New York NY 10022
        
         
Hummingbird Microcap Value Fund (11)  129,340   2.57%
460 Park Avenue, 12th Flr.
New York NY 10022
        
         
All officers and directors as a group (9) persons (2, 3, 4, 5, 6, 7, 8, 9, 10, 12)  1,715,123   33.45%
*Less than 1 percent.
1.Ownership consists of sole voting and investment power except as otherwise noted.
2.Includes 4,063 unvested shares of restricted stock which may vest within 60 days. Excludes 4,063 shares of restricted stock which are unvested and subject to vesting requirements. Includes 7,500 shares of restricted stock that are vested.
3.Includes options to purchase 3,125 shares of TeamStaff’s common stock. Includes 4,375 unvested shares of restricted stock which may vest within 60 days. Excludes 4,375 shares of restricted stock which are unvested and subject to vesting requirements. Includes 10,000 shares of restricted stock that are vested. Mr. Black is a member of the Company’s Board of Directors and is an Investment Analyst and Portfolio Manager at Wynnefield Capital, Inc. Mr. Black expressly disclaims beneficial ownership of the securities owned by Wynnefield Capital and its affiliates.
4.Includes options to purchase 1,250 shares of TeamStaff’s common stock. Includes 4,375 unvested shares of restricted stock which may vest within 60 days. Excludes 4,375 shares of restricted stock which are unvested and subject to vesting requirements. Includes 6,250 shares of restricted stock that are vested.
5.Includes options to purchase 2,500 shares of TeamStaff’s common stock. Includes 5,000 unvested shares of restricted stock which may vest within 60 days. Excludes 5,000 shares of restricted stock which are unvested and subject to vesting requirements. Includes 13,750 shares of restricted stock that are vested.
6.Includes options to purchase 30,000 shares of TeamStaff’s common stock which may vest within 60 days. Includes 82,500 shares of restricted stock which are vested and 35,000 shares of restricted stock which may vest within 60 days.
7.Includes an aggregate of 36,947 shares owned by or on behalf of certain of the holder’s family members and as to which shares the listed holder expressly disclaims beneficial ownership. Includes options to purchase 2,500 shares of TeamStaff’s common stock. Includes 4,375 unvested shares of restricted stock which may vest within 60 days. Excludes 4,375 shares of restricted stock which are unvested and subject to vesting requirements. Includes 10,000 shares of restricted stock that are vested.
8.Includes 4,063 unvested shares of restricted stock which may vest within 60 days. Excludes 4,063 shares of restricted stock which are unvested and subject to vesting requirements. Includes 8,750 shares of restricted stock that are vested.
9.Includes 45,000 shares of restricted stock which are vested. Excludes 20,000 shares of restricted stock which are unvested and subject to vesting requirements.
10.Includes 30,000 shares of restricted stock which are vested. Excludes 30,000 shares of restricted stock which are unvested and subject to vesting requirements.
11.Beneficial ownership is based on Schedule 13D filed with the SEC.
12.Beneficial ownership is based upon Schedule 13D, Schedule 13D/As, Form 3, and Form 4s filed with the SEC. Mr. Peter Black, one of our directors, is an affiliate of Wynnefield Capital and its affiliated entities. Mr. Black expressly disclaims beneficial ownership of the securities owned by Wynnefield Capital and its affiliates.
13.Listed shares are directly beneficially owned by Wynnefield Partners Small Cap Value, L.P., as members of a group under Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Wynnefield Capital Management, LLC, as the sole general partner of Wynnefield Partners Small Cap Value, L.P., has an indirect beneficial ownership interest in the shares of Common Stock that Wynnefield Partners Small Cap Value L.P. directly beneficially owns. Nelson Obus and Joshua Landes, as co-managing members of Wynnefield Capital Management, LLC, have an indirect beneficial ownership interest in such shares of Common Stock.
14.Listed shares are directly beneficially owned by Wynnefield Partners Small Cap Value, L.P. I, as members of a group under Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Wynnefield Capital Management, LLC, as the sole general partner of Wynnefield Partners Small Cap Value, L.P. I, has an indirect beneficial ownership interest in the shares of Common Stock that Wynnefield Partners Small Cap Value L.P. I directly beneficially owns. Nelson Obus and Joshua Landes, as co-managing members of Wynnefield Capital Management, LLC, have an indirect beneficial ownership interest in such shares of Common Stock.

54


15.Listed shares are directly beneficially owned by Wynnefield Small Cap Value Offshore Fund, Ltd., as members of a group under Section 13(d) of the Exchange Act. Wynnefield Capital, Inc. as the sole investment manager of Wynnefield Small Cap Value Offshore Fund, Ltd., has an indirect beneficial ownership interest in the shares of Common Stock that Wynnefield Small Cap Value Offshore Fund, Ltd. directly beneficially owns. Mr. Obus and Mr. Landes, as principal executive officers of Wynnefield Capital, Inc., have an indirect beneficial ownership interest in the shares of Common Stock that Wynnefield Small Cap Value Offshore Fund, Ltd. directly beneficially owns.
16.Wynnefield Capital Inc. Profit Sharing Plan directly beneficially owns 92,563 shares of common stock of TeamStaff. Mr. Obus has the power to vote and dispose of Wynnefield Capital, Inc. Profit Sharing Plan’s investments in securities and has an indirect beneficial ownership interest in the shares of Common Stock that Wynnefield Capital, Inc. Profit Sharing Plan directly beneficially owns.
17.Listed shares of Common Stock are directly beneficially owned by Channel Partnership II, L.P., as members of a group under Section 13(d) of the Exchange Act. Nelson Obus, as the sole general partner of Channel Partnership II, L.P., has an indirect beneficial ownership interest in the shares of Common Stock that Channel Partnership II, L.P. directly beneficially owns.
Item 13.Certain Relationships and Related Transactions
For information concerning employment and severance agreements with, and compensation of, the Company’s present executive officers and directors, see “Executive Compensation.” The Directors’ Plan provides that directors, upon joining the Board, and for one year thereafter, will be entitled to purchase restricted stock from TeamStaff at a price equal to 80% of the closing bid price on the date of purchase up to an aggregate purchase price of $50,000.
Approval for Related Party Transactions
Although we have not adopted a formal policy relating to the approval of proposed transactions that we may enter into with any of our executive officers, directors and principal stockholders, including their immediate family members and affiliates, our Audit Committee, all of the members of which are independent, reviews the terms of any and all such proposed material related party transactions. The results of this review are then communicated to the entire Board of Directors, which has the ultimate authority as to whether or not we enter into such transactions. We will not enter into any material related party transaction without the prior consent of our Audit Committee and our Board of Directors. In approving or rejecting the proposed related party transaction, our Audit Committee and our Board of Directors shall consider the relevant facts and circumstances available and deemed relevant to them, including, but not limited to the risks, costs and benefits to us, the terms of the transaction, the availability of other sources for comparable services or products, and, if applicable, the impact on a director’s independence. We shall approve only those agreements that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as our Audit Committee and our Board of Directors determine in the good faith exercise of their discretion.
Independence of our Board of Directors and its Committees
The listing rules established by the Nasdaq Stock Market, LLC require that a majority of the members of a listed company’s board of directors qualify as “independent” as affirmatively determined by the board, meaning that each independent director has no direct or indirect material relationship with a company other than as a director and/or a stockholder. Our Board of Directors consults with legal counsel to ensure that our Board’s determination with respect to the definition of “independent” is consistent with current Nasdaq listing rules.
Our Board of Directors reviewed all relevant transactions or relationships between each director, or any of his family members, and our company and has affirmatively determined that each of our directors, other than Rick Filippelli (our Chief Executive Officer) are independent directors under the applicable guidelines noted above. Our Board of Directors has five committees: the Audit Committee, the Management Resources and Compensation Committee, the Nominating and Corporate Governance Committee, the Strategic Planning and the Executive Committee. All of the members of our Audit, Nominating and Corporate Governance and Management Resources and Compensation Committees meet the standards for independence required under current Nasdaq Stock Market listing rules, SEC rules, and applicable securities laws and regulations.

55


Item 14.Principal Accountant Fees and Services
The following table presents the total fees billed for professional audit and non-audit services rendered by our independent auditors for the audit of our annual financial statements as of and for the years ended September 30, 2009 and September 30, 2008, and fees billed for other services rendered by our independent auditors during those periods.
         
  Fiscal Years Ended September 30, 
  2009  2008 
         
Audit Fees (1) $175,000  $170,000 
         
Audit-Related Fees (2)      
         
Tax Fees (3)  103,000   106,000 
         
All Other Fees (4)  15,500   13,000 
       
         
Total $293,500  $289,000 
       
(1)Audit services consist of work performed in the examination of financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, including attest services and consultation regarding financial accounting and/or reporting standards.
(2)Audit-related services consist of assurance and related services that are traditionally performed by the independent auditor, including due diligence related to mergers and acquisitions and special procedures required to meet certain regulatory requirements.
(3)Tax services consist of all services performed by the independent auditor’s tax personnel, except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.
(4)Other services consist of those service not captured in the other categories, principally audit services for the Company’s 401(k) plan.
Our Audit Committee has determined that the services provided by our independent auditors and the fees paid to them for such services has not compromised the independence of our independent auditors.
Consistent with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent auditor. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent auditor. Prior to engagement of the independent auditor for the next year’s audit, management will submit a detailed description of the audit and permissible non-audit services expected to be rendered during that year for each of four categories of services provided by the independent auditor to the Audit Committee for approval. The four categories of services provided by the independent auditor are as defined in the footnotes to the fee table set forth above. In addition, management will also provide to the Audit Committee for its approval a fee proposal for the services proposed to be rendered by the independent auditor. Prior to the engagement of the independent auditor, the Audit Committee will approve both the description of audit and permissible non-audit services proposed to be rendered by the independent auditor and the budget for all such services. The fees are budgeted and the Audit Committee requires the independent auditor and management to report actual fees versus the budget periodically throughout the year by category of service.
During the year, circumstances may arise when it may become necessary to engage the independent auditor for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires separate pre-approval before engaging the independent auditor. To ensure prompt handling of unexpected matters, the Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report any pre-approval decisions to the Audit Committee at its next scheduled meeting.

56


PART IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1)Financial Statements
The financial statements and schedules of TeamStaff are included in Part II, Item 8 of this report beginning on page F-1 and including page S-1.
(a)(2)Financial Statement Schedule
Valuation of qualifying accounts. See Schedule I annexed to the financial statements. All other schedules have been omitted since the required information is not applicable or because the information required is included in the Consolidated Financial Statements or the notes thereto.
(a)(3)Exhibits
The exhibits designated with an asterisk (*) are filed herewith. All other exhibits have been previously filed with the Commission and, pursuant to 17 C.F.R. Secs. 20l.24 and 240.12b-32, are incorporated by reference to the document referenced in brackets following the descriptions of such exhibits. The exhibits designated with a number sign (#) indicate a management contract or compensation plan or arrangement.
Exhibit No.Description
 2.1 Agreement and Plan of Merger by and among TeamStaff, Inc., TeamSub, Inc and BrightLane.com, Inc., dated as of March 6, 2001, as amended by Amendment No. 1 dated as of March 21, 2001 and Amendment No. 2 dated as of April 6, 2001 (filed as Appendix A to the Proxy Statement/prospectus filed on August 7, 2001, SEC File no. 333-61730, as part of Registrant’sRegistrant's Registration Statement on Form S-4).

 

2.2.1

 
2.2.1
Form of Asset Purchase Agreement between TeamStaff, Inc and Gevity HR, Inc. dated as of November 14, 2003 (filed as Exhibit 2 to Form 8-K dated November 14, 2003).

 

2.3

 
2.3
Asset Purchase Agreement, dated as of January 29, 2008, by and among Temps, Inc., TeamStaff, Inc. and TeamStaff Rx, Inc. (previously filed as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on February 5, 2008).

 

2.4

 
2.4
Asset Purchase Agreement, dated as of December 28, 2009, by and among Advantage RN, LLC, TeamStaff, Inc. and TeamStaff Rx, Inc. (previously filed as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on December 30, 2009).

 

3.1

 
3.1
Amended and Restated Certificate of Incorporation (filed as Exhibit A to Definitive Proxy Statement dated May 1, 2000 as filed with the Securities and Exchange Commission).

 

3.2

 
3.2Form of Certificate of Designation of Series A Preferred Stock (filed as Exhibit 3.1 to Form 8-K dated April 6, 2001).
3.3
Amended By-Laws of Registrant adopted as of May 15, 2001 (filed as Exhibit 3.4 to the Registration Statement on Form S-4 File No. 333-61730).

 

3.3

 
3.4
Amended and restated By-Laws of Registrant adopted as of August 29, 2001 (filed as Exhibit 3.5 to the Registrant’sRegistrant's Form S-3 filed on December 27, 2001).

 

3.4

 
3.5
Amendment to By-Laws of Registrant adopted November 8, 2007 (filed as Exhibit 3.1 to the Registrant’sRegistrant's Current Report on Form 8-K filed on November 13, 2007).

57


Exhibit No.

3.5
Description

 
3.6
Amendment to Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit B to Definitive Proxy Statement dated March 13, 2008 as filed with the Securities and Exchange Commission).

 

3.6

 

Amendment to Amended and Restated Certificate of Incorporation of the Company filed June 25, 2012 (filed as Exhibit 3.1 to Current Report on Form 8-K filed on June 26, 2012).

Table of Contents

Exhibit No.Description
 4.1# Convertible Debenture issued to Wynnefield Small Cap Value, LP I (filed as Exhibit 4.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011).

 

4.2


Convertible Debenture issued to Wynnefield Small Cap Value, LP (filed as Exhibit 4.2 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011).


4.3


Common Stock Purchase Warrant issued to Wynnefield Small Cap Value, LP I (filed as Exhibit 4.3 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011).


4.4


Common Stock Purchase Warrant issued to Wynnefield Small Cap Value, LP (filed as Exhibit 4.4 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011).


4.5


Form of Warrant Issued in October 2011 (filed as Exhibit 4.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2011).


4.6


Form of Subscription Rights Certificate (filed as Exhibit 4.5 to Registration Statement on Form S-1/A filed on April 26, 2012).


4.7


Form of Subscription Agent Agreement by and between Teamstaff, Inc. and Continental Stock Transfer & Trust Company (filed as Exhibit 4.6 to Registration Statement on Form S-1 filed on March 16, 2012).


10.1

#

2000 Employee Stock Option Plan (filed as Exhibit B to the Proxy Statement dated as of March 8, 2000 with respect to the Annual meeting of Shareholders held on April 13, 2000).

 

10.2

#
4.2
2000 Non-Executive Director Stock Option Plan (filed as Exhibit B to the Proxy Statement dated as of March 8, 2000 with respect to the Annual meeting of Shareholders held on April 13, 2000).

 

10.3

 
4.32006 Long Term Incentive Plan (filed as Exhibit 10.1 to the Form 10-Q filed on May 15, 2006).
10.1Lease dated May 30, 1997 for office space at 300 Atrium Drive, Somerset, New Jersey (Exhibit 10.6.1 to Form 10-K for the fiscal year ended September 30, 1997).
10.2
Form of Stock Purchase Agreement dated as of April 6, 2001 between TeamStaff, Inc. and BrightLane.com, Inc. with respect to purchase of Series A Preferred Stock (filed as Exhibit 10.1 to Form 8-K dated April 6, 2001).

 

10.4

 
10.3
Form of Escrow Agreement between TeamStaff, Inc. and BrightLane Shareholders with respect to the placement of 150,000 shares into escrow by the BrightLane shareholders (filed as Appendix B to the proxy statement/prospectus filed on August 7, 2001 SEC File No. 333.61730).

 

10.5

#
10.4Form of Securities Purchase Agreement dated as of November 5, 2004 including Form of Warrant (filed as Exhibit 10.1 to the Form 8-K filed on November 12, 2004).
10.5Form of Asset Purchase Agreement by and among Nursing Innovations, Inc., Vitriarc, Inc., and William L. Booth and TeamStaff Rx, Inc. dated as of November 5, 2004 (filed as Exhibit 10.1 to the Form 8-K filed on November 18, 2004).
10.6Form of Agreement for Sale of Goodwill dated as of November 5, 2004 by and between William Lee Booth and TeamStaff Rx, Inc. (filed as Exhibit 10.2 to the Form 8-K filed on November 18, 2004).
10.7Form of Client Transfer Agreement as of November 14, 2004, by and among Nursing Innovations, Inc., Vitriarc, Inc., and William L. Booth and TeamStaff Rx Inc. (filed as Exhibit 10.3 to the Form 8-K filed on November 18, 2004).
10.8
Form of Employee Incentive Stock Option Certificate and Agreement (filed as Exhibit 10.13 to the Form 10-K filed on December 23, 2004).

 

10.6

#
10.9
Form of Employee Non-Qualified Stock Option Certificate and Agreement (filed as Exhibit 10.14 to the Form 10-K filed on December 23, 2004).

 

10.7

#
10.10

Form of 2000 Director Plan Non-Qualified Stock Option Agreement (filed as Exhibit 10.15 to the Form 10-K filed on December 23, 2004).

 

10.8

 
10.11Form of Lease for our business premises located at 18167 U.S. Highway 19N, Suite 400, Clearwater, Fl 33764 (filed as Exhibit 10.1 to Form 8-K dated February 29, 2005).
10.12
Form of Stock Purchase Agreement among TeamStaff, Inc. and the Shareholders of RS Staffing Services, Inc. dated as of May 26, 2005 (filed as Exhibit 10.1 to Form 8-K dated June 8, 2005).

 

10.9.1

 
10.12.1
Form of Note dated June 8, 2005 issued by TeamStaff, Inc. to Roger Staggs (filed as Exhibit 10.2 to the Form 10-Q filed on August 12, 2005).

 

10.9.2

 
10.12.2
Form of Note dated June 8, 2005 issued by Team Staff, Inc. to Barry Durham (filed as Exhibit 10.2 to the Form 10-Q filed on August 12, 2005).

Table of Contents

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Exhibit No.Description
 
10.13Form of Revolving Credit Agreement, Promissory Notes and related documents between TeamStaff, Inc. and PNC Bank, NA, dated as of June 8, 2005 (filed as Exhibits 10.4 and 10.5 to the Form 10-Q filed on August 12, 2005).
10.1410.10#Form of Employment Agreement between TeamStaff, Inc. and Rick J. Filippelli, dated as of June 30, 2005 (filed as Exhibit 10.2 to the Form 8-K filed on July 14, 2005).
10.15Form of Settlement Agreement between TeamStaff, Inc. and the CNA Entities dated as of October 10, 2005 (filed as Exhibit 10.1 to the Form 8-K filed on October 20, 2005).
10.16Form of Lease dated as of November 18, 2005 between TeamStaff, Inc. and One Peachtree Pointe Associates, LLC (file as Exhibit 10.1 to the Form 10-Q filed on February 14, 2006).
10.17Form Notice of Restricted Stock Bonus Award and Restricted Stock Agreement (filed as Exhibit 10.2 to the Form 10-Q filed on May 15, 2006).

 

10.11

#
10.18Form of Asset Purchase Agreement, Exhibits and Schedules re: sale of DSI Payroll Services to CompuPay, Inc. (filed as Exhibit 10.1 to the Form 8-K filed on June 1, 2006).
10.19Form of Settlement Agreement and Exhibits (Stock Purchase Agreement and Lock-Up Agreement re:
TeamStaff, Inc. and Atomic Fusion filed as Exhibit 10-1 to the Form 8-K filed on June 6, 2006).
10.20
Form of Director Stock Option Agreement for options granted September 1, 2006. (filed as Exhibit 10.26 to the Company’sCompany's Form 10-K filed on December 21, 2006).

 

10.12

#
10.21Form of Amendment to Revolving Credit and Security Agreement dated December 13, 2006 between TeamStaff, Inc. and PNC Bank, N.A. (filed as Exhibit 10.1 to the Form 10-Q filed on February 14, 2007).
10.22Lease, dated as of December 4, 2006, for our business premises located at 6555 Quince Road, Suite 303, Memphis, Tennessee (filed as Exhibit 10.2 to the Form 10-Q filed on February 14, 2007).
10.23
Separation Agreement with T. Kent Smith dated as of January 19, 2007 (filed as Exhibit 99.1 to the
Form 8-K filed on February 1, 2007).
10.24Form of Letter of Agreement with Rick Filippelli dated as of January 10, 2007 (filed as Exhibit 99.1 to the Form 8-K filed on February 20, 2007).
10.25Form of Letter of Agreement with James Houston dated as of January 10, 2007 (filed as Exhibit 99.2 to the Form 8-K filed on February 20, 2007).
10.26Form of Agreement and Release with James Houston dated as of May 11, 2007 (filed as Exhibit 10.29 to the Form 10-Q filed on May 15, 2007).
10.27Lease, dated as of April 13, 2007, for our business premises located at 1 Executive Drive, Suite 130, Somerset, New Jersey (filed as Exhibit 10.1 to the Form 10-Q filed August 14, 2007).
10.28Lease dated as of March 27, 2008 between TeamStaff Government Solutions, Inc. and West Walton Properties, Inc. (filed as Exhibit 10.1 to the Form 10-Q filed May 15, 2008).
10.29Amended and Restated Loan and Security Agreement dated March 28, 2008 between TeamStaff, Inc. and Business Alliance Capital Company, a division of Sovereign Bank. (filed as Exhibit 10.2 to the Form 10-Q filed May 15, 2008).

59


Exhibit No.Description
10.30Amended and Restated Revolving Credit Master Promissory Note dated March 28, 2008 between TeamStaff, Inc. and Business Alliance Capital Company, a division of Sovereign Bank. (filed as Exhibit 10.3 to the Form 10-Q filed May 15, 2008).
10.31Employment Agreement between the Company and Rick FilippelliZachary C. Parker, dated as of April 17, 2008February 9, 2010 (filed as Exhibit 10.1 to Current Report on Form 8-K filed on April 22, 2008)February 11, 2010).

 

10.13

#

Form of Stock Option Award under 2006 Long Term Incentive Plan (filed as Exhibit 10.6 to Quarterly Report on Form 10-Q filed on February 16, 2010).

 
10.32
10.14

Employment
Loan and Security Agreement, between the Company and Cheryl Presuto dated as of July 30, 200829, 2010, between Teamstaff Government Solutions, Inc. and Presidential Financial Corporation (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q filed on August 16, 2010).


10.15


Secured Promissory Note, dated July 29, 2010, executed by TeamStaff Government Solutions, Inc.(filed as Exhibit 10.2 to Quarterly Report on Form 10-Q filed on August 16, 2010).


10.16


Corporate Guaranty Agreement, dated July 29, 2010, executed by TeamStaff, Inc. (filed as Exhibit 10.3 to Quarterly Report on Form 10-Q filed on August 16, 2010).


10.17


Amendment to Secured Promissory Note and Loan and Security Agreement with Presidential Financial Corporation (filed as Exhibit 10.1 to Current Report on Form 8-K, filed on August 4, 2008)27, 2010).

 

10.18

 
10.33Employment
Second Amendment to Secured Promissory Note and Loan and Security Agreement between the Company and Kevin Wilson dated October 3, 2008with Presidential Financial Corporation (filed as Exhibit 10.1 to Current Report on Form 8-K, filed on October 8, 2008)November 30, 2010).

 

10.19

#
10.34
Employment Agreement between the Company and Dale WestJohn E. Kahn, dated December 3, 2008September 22, 2010 (filed as Exhibit 10.33 to Annual Report on Form 10-K for the fiscal year ended September 30, 2010).


10.20

#

Employment Agreement between the Company and John F. Armstrong, dated February 7, 2011 (filed as Exhibit 10.34 to Annual Report on Form 10-K for the fiscal year ended September 30, 2010).


10.21


Third Amendment to Secured Promissory Note and Loan and Security Agreement with Presidential Financial Corporation, dated February 9, 2011 (filed as Exhibit 10.35 to Annual Report on Form 10-K for the fiscal year ended September 30, 2010).


10.22


Form of Subscription Agreement (filed as Exhibit 10.3 to Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011).


10.23


Form of Subscription Agreement (filed as Exhibit 10.4 to Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011).


10.24


Form of Settlement Agreement dated as of July 22, 2011 (filed as Exhibit 10.1 to Current Report on Form 8-K dated July 28, 2011).


10.25

#

2006 Long Term Incentive Plan, as amended (filed as Exhibit A to the Proxy Statement dated July 18, 2011) with respect to the Annual Meeting of Shareholders held on August 18, 2011).


10.26


Debenture Purchase Agreement dated as of June 1, 2011 (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011).

Table of Contents

Exhibit No.Description
10.27Amendment to Employment Agreement between the Company and Zachary C. Parker (filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011).


10.28


Amendment to Employment Agreement between the Company and John E. Kahn (filed as Exhibit 10.3 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011).


10.29


Amendment to Employment Agreement between the Company and John F. Armstrong (filed as Exhibit 10.4 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011).


10.30


Creditor Subordination Agreement by TeamStaff Government Solutions, Inc., TeamStaff, Inc., Presidential Financial Corporation and Wynnefield Partners SmallCap Value LP (filed as Exhibit 10.5 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011).


10.31


Creditor Subordination Agreement by TeamStaff Government Solutions, Inc., TeamStaff, Inc., Presidential Financial Corporation and Wynnefield Partners SmallCap Value LP I (filed as Exhibit 10.6 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011).


10.32

#

Employment Agreement between the Company and Kevin Wilson (filed as Exhibit 10.1 to Current Report on Form 8-K dated October 4, 2011).


10.33


Fourth Amendment to Secured Promissory Note and Loan and Security Agreement with Presidential Financial Corporation dated November 30, 2011 (filed as Exhibit 10.44 to Annual Report on Form 10-K for the fiscal year ended September 30, 2011).


10.34


Standby Purchase Agreement dated May 2, 2012 (filed as Exhibit 10.1 to Current Report on Form 8-K filed on December 9, 2008)May 3, 2012).

 

10.35

 

Form of Registration Rights Agreement, dated May 2, 2012 (filed as Exhibit 10.2 to Current Report on Form 8-K filed May 3, 2012).

 
10.35
10.36
#*
 
Employment Agreement between the Company
Amendment to Secured Promissory Note and Rick Filippelli dated as of November 2, 2009.
10.36ModificationLoan Agreement dated as of January 8, 2010 between TeamStaff, Inc. and Sovereign Business Capital, Division of Sovereign Bank.May 18, 2012 (filed as Exhibit 10.1 to Current Report on Form 8-K filed May 24, 2012).

 

10.37

#

Employment Agreement with Kathryn M. JohnBull (filed as Exhibit 10.1 to Current Report on Form 8-K filed June 29, 2012).

 
10.37
10.38

#
Amended and Restated Revolving Credit Master Promissory Note
Separation Agreement with John E. Kahn dated January 8, 2010 between TeamStaff, Inc. and Sovereign Business Capital, Divisionas of Sovereign Bank.August 23, 2012 (filed as Exhibit 10.1 to Current Report on Form 8-K filed August 29, 2012)

 

10.39

#

Amendment to Employment Agreement with Zachary C. Parker (filed as Exhibit 10.1 to Current Report on Form 8-k filed November 12, 2013).

 

14

 

Code of Ethics (Exhibit 14.1 to Annual Report on Form 10-K for the fiscal year ended September 30, 2003).

 

21

*
21
Subsidiaries of Registrants.

 

23.1

*
23.1
Consent of WithumSmith+Brown, PC

 

31.1

*
31.1
Certification of Chief Executive Officer pursuant to Section 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a).

Table of Contents

Exhibit No.Description
 31.2*Certification of Chief Financial Officer pursuant to Section 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a).

 

32.1

*
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 17 CFR 240.13a-14(b) or 17 CFR 240.15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.


101

##

The following financial information from the DLH Holdings Corp. Annual Report on Form 10-K for the fiscal year ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements Of Shareholders' Equity and, (v) the Notes to the Consolidated Financial Statements.

Portions of this exhibit were omitted and filed separately with the Secretary of the Commission pursuant to an application for confidential treatment filed with the Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

##
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Table of Contents


Signatures

        

60


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.

 DLH HOLDINGS CORP.

 
TEAMSTAFF, INC.

By:

/s/ Rick J. Filippelli  

 Rick J. Filippelli 

/s/ ZACHARY C. PARKER


Zachary C. Parker
Chief Executive Officer
(Principal Executive Officer)

Dated: January 19, 2010

December 13, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature
Capacity
Date





 
SignatureCapacityDate
/s/ FREDERICK G. WASSERMAN

Frederick G. Wasserman
Frederick G. Wasserman
 Chairman of the Board January 19, 2010December 13, 2012
/s/ Karl W. Dieckmann
Karl W. Dieckmann
Vice-Chairman of the Board January 19, 2010

/s/ T. Stephen Johnson
STEPHEN JOHNSON

T. Stephen Johnson

 

Director

 
January 19, 2010
December 13, 2012

/s/ PETER BLACK

Peter Black

 

Director

 

December 13, 2012

/s/ Peter Black
Peter Black
Director January 19, 2010
/s/ MARTIN J. DELANEY

Martin J. Delaney
Martin J. Delaney

 

Director

 
January 19, 2010
December 13, 2012

/s/ WILLIAM H. ALDERMAN

William H. Alderman
William H. Alderman

 

Director

 
January 19, 2010
December 13, 2012

/s/ AUSTIN J. YERKS III

Austin J. Yerks III

 

Director

 

December 13, 2012

/s/ Rick J. Filippelli
Rick J. Filippelli
ZACHARY C. PARKER

Zachary C. Parker

 

Chief Executive Officer,
President and Director

 
January 19, 2010
December 13, 2012

/s/ Cheryl Presuto
Cheryl Presuto
KATHRYN M. JOHNBULL

Kathryn M. Johnbull

 

Chief Financial Officer and
Principal Accounting Officer

 
January 19, 2010
December 13, 2012

61

Table of Contents



TeamStaff, Inc.DLH Holdings Corp. and Subsidiaries


Index to Consolidated Financial Statements


Page

Report of Independent Registered Public Accounting Firm

  F-2 

Consolidated Balance Sheets As Of September 30, 20092012 and 2008

2011

  F-3 

Consolidated Statements Of Operations and Comprehensive Income (Loss) For the Years Ended September 30, 20092012 and 2008

2011

  F-5 
F-6
2011

  F-7F-6 
Notes To

Consolidated Financial Statements

F-8
2011

  S-1F-7 

Notes To Consolidated Financial Statements

  
Schedules other than those listed above have been omitted as they are either not required or because the related information has been included in the notes to consolidated financial statementsF-8 

        Schedules have been omitted as they are either not required or because the related information has been included in the notes to consolidated financial statements


F-1

Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of TeamStaff, Inc.

DLH Holdings Corp.

We have audited the accompanying consolidated balance sheets of TeamStaff, Inc.DLH Holdings Corp. and Subsidiaries as of September 30, 20092012 and 2008,2011, and the related consolidated statements of operations, and comprehensive income (loss), shareholders’shareholders' equity and cash flows for each of the years then ended. Our audits also included the consolidated financial statement schedule as listed in the index. These financial statements and schedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TeamStaff,DLH Holdings Corp., Inc. and Subsidiaries as of September 30, 20092012 and 2008,2011, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ WithumSmith+Brown,WITHUMSMITH+BROWN, PC


WithumSmith+Brown, PC
Morristown, New JerseyYork, New York
January 19, 2010December 13, 2012


F-2

Table of Contents


TEAMSTAFF, INC.
DLH HOLDINGS CORP. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(AMOUNTS IN THOUSANDS)

        
 September 30, September 30, 
 2009 2008 
ASSETS
  September 30,
2012
 September 30,
2011
 
 
CURRENT ASSETS:
  
Cash and cash equivalents $2,992 $5,213  $3,089 $763 
Accounts receivable, net of allowance for doubtful accounts of $0 as of September 30, 2009 and 2008 11,427 11,881 
Prepaid workers’ compensation 517 562 

Accounts receivable, net of allowance for doubtful accounts of $0 as of September 30, 2012 and September 30, 2011

 13,028 11,112 

Prepaid workers' compensation

 516 513 
Other current assets 257 505  133 184 
Assets from discontinued operations 1,418 3,878 
          
Total current assets
 16,611 22,039  16,766 12,572 
     
      
EQUIPMENT AND IMPROVEMENTS:
  
Furniture and equipment 2,262 2,262  139 177 
Computer equipment 255 249  126 102 
Computer software 788 725  408 260 
Leasehold improvements 9 9  24 21 
          
 3,314 3,245  697 560 
 
Less accumulated depreciation and amortization  (3,054)  (2,945) 
(429

)
 
(346

)
          
Equipment and improvements, net
 260 300  268 214 
          

GOODWILL

 8,595 8,595 

OTHER ASSETS

 

Deferred financing costs, net

 9 26 

Other assets

 784 510 
      
TRADENAME
 3,924 3,924 
 
GOODWILL
 8,595 8,595 
 
OTHER ASSETS
 267 136 
     

Total other assets

 793 536 
      
TOTAL ASSETS
 $29,657 $34,994  $26,422 $21,917 
          

The accompanying notes are an integral part of these consolidated financial statements.


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS EXCEPT PAR VALUE OF SHARES)

LIABILITIES AND SHAREHOLDERS' EQUITY
 September 30,
2012
 September 30,
2011
 

CURRENT LIABILITIES:

       

Bank loan payable

 $2,363 $740 

Notes payable

    711 

Current portion of capital lease obligations

  51  8 

Accrued payroll

  10,555  10,318 

Accounts payable

  2,296  1,983 

Accrued expenses and other current liabilities

  2,817  2,134 

Liabilities from discontinued operation

  185  235 
      

Total current liabilities

  18,267  16,129 
      

LONG TERM LIABILITIES

       

Convertible debenture, net

  202  46 

Derivative financial instruments, at fair value

  119  182 

Other long term liability

  84  6 
      

Total long term liabilities

  405  234 
      

Total liabilities

  18,672  16,363 
      

COMMITMENTS AND CONTINGENCIES

       

SHAREHOLDERS' EQUITY:

       

Preferred stock, $.10 par value; authorized 5,000 shares; none issued and outstanding

     

Common stock, $.001 par value; authorized 40,000 shares; issued 9,266 at September 30, 2012 and 6,023 at September 30, 2011, outstanding 9,264 at September 30, 2012 and 6,021 at September 30, 2011

  9  6 

Additional paid-in capital

  75,207  70,988 

Accumulated deficit

  (67,442) (65,416)

Treasury stock, 2 shares at cost at September 30, 2012 and 2 shares at September 30, 2011

  (24) (24)
      

Total shareholders' equity

  7,750  5,554 
      

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $26,422 $21,917 
      

The accompanying notes are an integral part of these consolidated financial statements.


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 
 For the Year Ended 
 
 September 30,
2012
 September 30,
2011
 

REVENUES

 $49,193 $41,923 

DIRECT EXPENSES

  43,596  36,025 
      

GROSS PROFIT

  5,597  5,898 

GENERAL AND ADMINISTRATIVE EXPENSES

  7,361  7,425 

SEVERANCE

  267   

IMPAIRMENT CHARGE—INTANGIBLE ASSETS

    2,583 

DEPRECIATION AND AMORTIZATION

  120  113 
      

Loss from operations

  (2,151) (4,223)
      

OTHER INCOME (EXPENSE)

       

Interest income

  13  8 

Interest expense

  (298) (291)

Amortization of deferred financing costs

  (195) (56)

Change in fair value of financial instruments

  105  107 

Loss on retirement of assets

  (2) (45)

Settlement of note payable

  486    

Other income, net

  16  6 

Legal expense related to pre-acquisition activity of acquired company

    (96)
      

  125  (367)
      

Loss from continuing operations before income taxes

  (2,026) (4,590)

INCOME TAX EXPENSE

     
      

Loss from continuing operations

  (2,026) (4,590)
      

GAIN FROM DISCONTINUED OPERATION

    270 
      

NET LOSS

 $(2,026)$(4,320)
      

NET GAIN (LOSS) PER SHARE—BASIC AND DILUTED

       

Loss from continuing operations

 $(0.29)$(0.84)

Gain from discontinued operation

    0.05 
      

Net loss per share

 $(0.29)$(0.79)
      

WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING

  7,026  5,460 
      

The accompanying notes are an integral part of these consolidated financial statements.


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

 
 For the Year Ended 
 
 September 30,
2012
 September 30,
2011
 

CASH FLOWS FROM OPERATING ACTIVITIES

       

Net loss

 $(2,026)$(4,320)

Adjustments to reconcile net loss to net cash used in operating activities, net of divested business:

       

Depreciation and amortization including debt costs

  275  146 

Impairment charge

     2,583 

Change in fair value of derivative financial instruments

  (105) (107)

Compensation expense related to employee stock option grants

  179  398 

Compensation expense related to employee restricted stock grants

  50  14 

Compensation expense related to director restricted stock grants

  123  20 

Share based expense on non employee options

  25   

Warrants issued to consultants

  12   

Other non cash compensation

  6  12 

Loss on retirement of equipment

  2  45 

Gain on settlement of notes payable

  (486)  

Changes in operating assets and liabilities, net of divested business:

       

Accounts receivable

  (1,916) 212 

Other current assets

  48  160 

Other assets

  (258) (150)

Accounts payable, accrued payroll, accrued expenses and other current liabilities

  1,233  (1)

Other long term liabilities

  56  1 
      

Net cash used in operating activities

  (2,782) (987)
      

CASH FLOWS FROM INVESTING ACTIVITIES

       

Purchase of equipment, leasehold improvements and software

  (68) (37)
      

Net cash used in investing activities

  (68) (37)
      

CASH FLOWS FROM FINANCING ACTIVITIES

       

Net advances on revolving line of credit

  1,623  378 

Settlement of notes payable

  (225) (200)

Rights offering proceeds

  4,197   

Rights offering expenses

  (335)  

Payments on capital lease obligations

  (37) (18)

Issuance of convertible debentures, net of direct costs $32

    318 

Proceeds from exercise of stock options

    30 

Proceeds from sale of common stock, net

  3  146 

Cash flows from discontinued operation

  (50) (54)
      

Net cash provided by financing activities

  5,176  600 
      

Net increase/(decrease) in cash and cash equivalents

  2,326  (424)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

  763  1,187 
      

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 $3,089 $763 
      

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

       

Cash paid during the period for interest

 $298 $229 
      

Cash paid during the period for income taxes

 $11 $17 
      

NON CASH FINANCING ACTIVITIES

       

Equipment acquired under capital lease

 $102 $ 
      

The accompanying notes are an integral part of these consolidated financial statements.


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the year ended September 30, 2012

(AMOUNTS IN THOUSANDS)

 
 Common Stock  
  
 Treasury Stock  
 
 
 Additional
Paid-In
Capital
 Accumulated
Deficit
 Total
Shareholders'
Equity
 
 
 Shares Amount Shares Amount 

BALANCE, September 30, 2010

  5,103 $5 $69,503 $(61,096) 2 $(24)$8,388 

Director restricted stock grants

  
35
     
20
           
20
 

Exercise of stock options

  30     30           30 

Proceeds of non cash considerations from sale of common stock

  459  1  161           162 

Issuance of shares for services

  51     25           25 

Expense related to employee stock option grants

        398           398 

Issuance of common shares in settlement of note payable

  300     795           795 

Warrants issued on convertible debentures

        42           42 

Expense related to employee restricted stock grants

  43     14           14 

Net loss

           (4,320)       (4,320)
                

BALANCE, September 30, 2011

  6,021 $6 $70,988 $(65,416) 2 $(24)$5,554 
                

Director restricted stock grants

  54     123           123 

Proceeds from sale of commons stock

                     

Issuance of shares for services

        12           12 

Expense related to employee stock option grants

        179           179 

Fees related to rights offering

        (292)          (292)

Non-employee options

        25           25 

Warrants issued on convertible debentures

        (34)          (34)

Expense related to employee restricted stock grants

        50           50 

Rights offering

  3,231  3  4,196           4,199 

Purchase of common stock

  (40)    (40)          (40)

Net loss

           (2,026)       (2,026)
                

BALANCE, September 30, 2012

  9,266 $9 $75,207 $(67,442) 2 $(24)$7,750 
                

The accompanying notes are an integral part of these consolidated financial statements


F-3

Table of Contents


TEAMSTAFF, INC.
DLH HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PAR VALUE)
         
  September 30,  September 30, 
  2009  2008 
LIABILITIES AND SHAREHOLDERS’ EQUITY
        
         
CURRENT LIABILITIES:
        
Notes payable $1,500  $1,500 
Current portion of capital lease obligations  20   29 
Accrued payroll  10,694   10,408 
Accrued pension liability     70 
Accounts payable  1,890   2,578 
Accrued expenses and other current liabilities  1,241   1,910 
Liabilities from discontinued operations  392   381 
       
Total current liabilities
  15,737   16,876 
         
CAPITAL LEASE OBLIGATIONS, net of current portion
  27   45 
         
OTHER LONG TERM LIABILITY, net of current portion
  13   14 
         
LONG TERM LIABILITIES FROM DISCONTINUED OPERATIONS
  64   173 
       
         
Total Liabilities
  15,841   17,108 
       
         
COMMITMENTS AND CONTINGENCIES
        
         
SHAREHOLDERS’ EQUITY:
        
Preferred stock, $.10 par value; authorized 5,000 shares; none issued and outstanding      
Common Stock, $.001 par value; authorized 40,000 shares; issued 4,900 at September 30, 2009 and 4,874 at September 30, 2008, respectively; outstanding 4,898 at September 30, 2009 and 4,843 at September 30, 2008, respectively  5   5 
Additional paid-in capital  69,124   68,844 
Accumulated deficit  (55,289)  (50,934)
Accumulated comprehensive loss     (5)
Treasury stock, 2 shares at cost at September 30, 2009 and September 30, 2008  (24)  (24)
       
Total shareholders’ equity  13,816   17,886 
       
         
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 $29,657  $34,994 
       
The accompanying notes are an integral part of these consolidated financial statements

F-4


TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
         
  For the Year Ended 
  September 30,  September 30, 
  2009  2008 
REVENUES
        
Operating revenues $46,021  $47,747 
Non-recurring retroactive billings     10,772 
       
Total revenue  46,021   58,519 
       
DIRECT EXPENSES
        
Operating direct expense  39,019   39,495 
Non-recurring retroactive billings     10,080 
       
Total direct expense  39,019   49,575 
       
GROSS PROFIT
        
Operating gross profit  7,002   8,252 
Non-recurring retroactive billings     692 
       
Total gross profit  7,002   8,944 
       
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
  6,505   5,930 
         
DEPRECIATION AND AMORTIZATION
  111   150 
       
         
Income from operations
  386   2,864 
         
OTHER INCOME (EXPENSE)
        
Interest income  45   40 
Interest expense  (222)  (147)
Settlement of prior periods’ payroll tax contingencies     716 
Other income, net  160    
Legal expense related to pre-acquisition activity of acquired company  (21)  (218)
       
   (38)  391 
       
         
Income from continuing operations before taxes
  348   3,255 
         
INCOME TAX BENEFIT (EXPENSE)
  28   (60)
       
         
Income from continuing operations
  376   3,195 
       
         
LOSS FROM DISCONTINUED OPERATIONS
        
Loss from operations  (4,731)  (2,049)
       
         
Loss from discontinued operations
  (4,731)  (2,049)
       
         
NET (LOSS) INCOME
  (4,355)  1,146 
         
OTHER COMPREHENSIVE INCOME
        
Pension liability adjustment  5   28 
       
         
COMPREHENSIVE (LOSS) INCOME
 $(4,350) $1,174 
       
      ��  
(LOSS) EARNINGS PER SHARE — BASIC
        
Income from continuing operations $0.08  $0.66 
Loss from discontinued operations  (0.97)  (0.42)
       
Net (loss) earnings per share $(0.89) $0.24 
       
(LOSS) EARNINGS PER SHARE — DILUTED
        
Income from continuing operations $0.07  $0.66 
Loss from discontinued operations  (0.93)  (0.42)
       
Net (loss) earnings per share $(0.86) $0.24 
       
         
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING
  4,900   4,866 
       
         
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING
  5,085   4,875 
       
The accompanying notes are an integral part of these consolidated financial statements

F-5


TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
(AMOUNTS IN THOUSANDS)
                                 
          Additional              Other  Total 
  Common Stock  Paid-In  Accumulated  Treasury Stock  Comprehensive  Shareholders’ 
  Shares  Amount  Capital  Deficit  Shares  Amount  Loss  Equity 
BALANCE, September 30, 2007
  4,823  $5  $68,726  $(52,080)  2  $(24) $(33) $16,594 
                         
                                 
Pension liability adjustment                          28   28 
Return of shares related to settlement          (41)                  (41)
Expense related to director restricted stock grants          30                   30 
Expense related to employee restricted stock grants  21       129                   129 
Fractional shares related to reverse stock split  (1)                           
Net income              1,146               1,146 
                         
                                 
BALANCE, September 30, 2008
  4,843   5   68,844   (50,934)  2   (24)  (5)  17,886 
                         
                                 
Pension liability adjustment                          5   5 
Return of shares related to settlement  (38)                           
Director restricted stock grants  14                            
Expense related to employee restricted stock grants  79       280                   280 
Net income              (4,355)              (4,355)
                         
                                 
BALANCE, September 30, 2009
  4,898  $5  $69,124  $(55,289)  2  $(24) $0  $13,816 
                         
The accompanying notes are an integral part of these consolidated financial statements

F-6


TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
         
  For the Twelve Months Ended 
  September 30,  September 30, 
  2009  2008 
CASH FLOWS FROM OPERATING ACTIVITIES
        
Net (loss) income $(4,355) $1,146 
Adjustments to reconcile net income to net cash (used in) provided by operating activities, net of divested businesses:        
Depreciation and amortization  111   150 
Settlement of prior periods’ payroll tax contingencies     (716)
Compensation expense related to director restricted stock grants     30 
Compensation expense related to employee restricted stock grants  221   188 
Recovery of doubtful accounts     (6)
Loss on retirement of equipment     8 
Changes in operating assets and liabilities, net of divested businesses:        
Accounts receivable  454   (5,949)
Other current assets  293   (137)
Other assets  (131)  69 
Accounts payable, accrued payroll, accrued expenses and other current liabilities  (1,012)  8,876 
Other long term liabilities  (1)  (18)
Pension liability  (70)  (276)
Cash flow from discontinued operations  2,400   1,237 
       
Net cash (used in) provided by operating activities  (2,090)  4,602 
       
CASH FLOWS FROM INVESTING ACTIVITIES
        
Purchase of equipment, leasehold improvements and software  (69)  (140)
Cash flow from discontinued operations     357 
       
Net cash (used in) provided by investing activities  (69)  217 
       
CASH FLOWS FROM FINANCING ACTIVITIES
        
Repayments on capital lease obligations  (27)  (27)
Loan fees     (146)
Net comprehensive income on pension  5   28 
Cash flows from discontinued operations  (40)  (22)
       
Net cash used in financing activities  (62)  (167)
       
         
Net (decrease) increase in cash and cash equivalents  (2,221)  4,652 
         
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  5,213   561 
       
         
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,992  $5,213 
       
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for interest $50  $159 
       
Cash paid during the period for income taxes $124  $86 
       
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
In the year ended September 30, 2009, an accrued liability was reduced (and additional paid-in-capital was increased) by $59 to reflect the issuance of stock to settle the liability.
The accompanying notes are an integral part of these consolidated financial statements

F-7


TEAMSTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 20092012 AND 20082011

(1) ORGANIZATION AND BUSINESS:

BUSINESS:

        For more than 25 years, DLH Holdings Corp. ("DLH" formerly TeamStaff Inc.), has provided professional services to the U.S. Government. Headquartered in Atlanta, Georgia, DLH employs approximately 1,100 skilled technicians, logisticians, engineers, healthcare and support personnel at more than 25 locations around the United States. DLH's operating subsidiary, DLH Solutions, Inc. is organized into three broad integrated business areas: Healthcare Delivery Solutions, Logistics and Technical Services, and Contingency / Staff Augmentation Services. Our customers, a majority of whom are within the Departments of Defense ("DoD") and Veterans Affairs ("DVA"), benefit from proven leadership processes, technical excellence, and cost management. The remaining portion of DLH's business is comprised of customers within the Center for Disease Control and Prevention, Departments of Justice, Agriculture, Interior and Federal Emergency Management Agency, at locations throughout the United States.

        In February 2012, the Company's shareholders approved a proposal to change its corporate name to DLH Holdings Corp. On June 25, 2012 the Company filed an amendment to its certificate of incorporation to implement the change in its corporate name to DLH Holdings Corp. (together with its subsidiaries, (“TeamStaff”"DLH" or the “Company”,"Company" and also referred to as “we,” “us”"we," "us" and “our”"our"), provide staffing services to the United States Department of Veterans Affairs (“DVA”) and other US governmental entities. TeamStaff’s. DLH's primary operations are located inmanaged from Loganville, Georgia and its principal executive office isoffices are located at 1 Executive Drive, Suite 130, Somerset,1776 Peachtree Street, Atlanta, Georgia 30309.

Corporate History

        DLH Holdings Corp. was originally incorporated in New Jersey 08873 where its telephone number is (877) 523-9897. TeamStaff, Inc., a New Jersey corporation, was founded in 1969 as a payroll service companystaffing company. Through several strategic transactions over recent decades, the Company has evolved considerably and evolved into a national provider of contract and permanent medical and administrative staffing services. Its principal operations are conducted throughin early 2010, made the strategic decision to build the Company around its subsidiary,government services entity, DLH Solutions, Inc. (formerly, TeamStaff Government Solutions, (“TeamStaff GS”Inc.), The Company is now completely focused on government services both as a prime contractor as well as a partner with other government contractors. The Company's other wholly-owned subsidiary of TeamStaff, Inc. TeamStaff GS changedsubsidiaries are not actively operating.

(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Liquidity

        In recent years, the Company has sought to finance its name from RS Staffing Services, Inc on February 12, 2008 to reflect the subsidiary’s expanding service offerings.

On December 28, 2009, TeamStaffoperations and TeamStaff Rx, Inc. (“TeamStaff Rx”), its wholly-owned subsidiary, entered into a definitive Asset Purchase Agreement with Advantage RN, LLC, an Ohio limited liability company (“Advantage RN”), providing forcapital expenditures through the sale of substantially allequity securities, convertible notes and more recently, through the proceeds from a rights offering. The Company's immediate sources of liquidity include cash and cash equivalents, accounts receivable, unbilled receivables and access to its asset-based credit facility with Presidential Financial Corporation. The Company's operating liabilities are largely predictable and consist of vendor and payroll related obligations. The Company's operations require substantial working capital to fund the future growth of its business model with expanded business development efforts, and planned capital expenditures to support a larger customer base.

        At September 30, 2012, the Company had a net working capital deficit of approximately $1.5 million and an accumulated deficit of approximately $67.4 million. For the year ended September 30, 2012, the Company incurred an operating loss and a net loss of approximately $2.0 million and $2.0 million, respectively.


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

        In fiscal 2011 the Company completed measures to enhance its liquidity by approximately $1,000,000 as a result of increasing the maximum availability of its credit facility and receiving funding of and/or commitments for additional equity and/or debt financing. In that regard, our largest shareholder, Wynnefield Capital, Inc., and certain of our directors and executive officers collectively provided a total of $500,000 of additional capital to the Company. As described in Note 10, $150,000 of such capital was provided through equity investments on March 31, 2011 and $350,000 of such capital was provided in July 2011 by Wynnefield Capital through the sale of convertible debentures. In addition, as described in Note 6, on February 9, 2011, the Company entered into an amendment of its Loan and Security Agreement with Presidential Financial Corporation, pursuant to which they agreed to increase the maximum availability under the Loan and Security Agreement by an additional $500,000 and provide an unbilled receivable facility within the limits of the operating assetsLoan and Security Agreement. Further, in May 2012, the Company entered into another amendment to the Loan Agreement pursuant to which the Lender agreed to increase the available line of TeamStaff Rx relatedcredit from $3,000,000 to TeamStaff Rx’s businessa maximum amount of providing travel nurse$6,000,000 and allied healthcare professionals for temporary assignments to Advantage RN. The closingincrease the maximum amount available under the unbilled accounts facility of this transaction occurred on January 4, 2010. The Asset Purchasethe Loan Agreement provides thatfrom $500,000 to $1,000,000. However, as described in greater detail in Note 6 below, the purchased assets were acquired by Advantage RN for a purchase price of upCompany's ability to $425,000, of which: (i) $350,000 in cash was paid atborrow against the closing, and (ii) $75,000increased available credit is subject to an escrowed holdbackthe satisfaction of a number of conditions, and presently, the maximum availability under this loan facility is $3,000,000; subject to eligible accounts receivable.

        At September 30, 2012, the amount of unused availability was $344,000. The amount outstanding on the loan facility as describedof September 30, 2012 was $2,363,000.

        On March 16, 2012, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission for a rights offering in which its existing stockholders received non-transferable rights to purchase $4.2 million of additional shares of the Asset Purchase Agreement. Additionally, Advantage RN will make rent subsidy payments to TeamStaff Rx totaling $125,000, consisting of (i) $25,000 paid at closing, and (ii) an additional $100,000 payable in 10 equal monthly installments beginning on March 1, 2010.Company's common stock. Under the terms of the Assetrights offering, the Company distributed to the holders of its common stock non- transferable subscription rights for each share of common stock owned on the record date. Each subscription right entitled the holder to purchase 0.532 shares of the Company's common stock at a price of $1.30 per share. In connection with the rights offering, on May 2, 2012, the Company entered into a standby purchase agreement with Wynnefield Capital, Inc. ("Wynnefield Capital"), which owned, prior to the rights offering, approximately 21% of the Company's common stock (excluding common stock warrants and a convertible note) through certain affiliated entities. Pursuant to the standby purchase agreement, Wynnefield Capital (or affiliated assignees) agreed to acquire from the Company in the rights offering, subject to the satisfactions of specified conditions, the shares of common stock that related to any rights that remained unexercised at the expiration of the rights offering. The closing of the rights offering occurred on June 15, 2012 and the Company raised gross proceeds of $4.2 million from the sale of 3,230,769 shares of common stock.

        Management believes, at present, that: (a) cash and cash equivalents of approximately $3.1 million as of September 30, 2012; (b) the amounts available under its line of credit (which, in turn, is limited by a portion of the amount of eligible assets); (c) forecasted operating cash flow; (d) the ultimate non-payment of certain liabilities and recorded guarantees currently contested by the Company or not expected to be settled in cash (see Note 6 to the accompanying consolidated financial statements) (classified as current at September 30, 2012) in fiscal 2013; and (e) effects of cost reduction programs and initiatives should be sufficient to support the Company's operations for twelve months from the


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

date of these financial statements. However, should any of the above- referenced factors not occur substantially as currently expected, there could be a material adverse effect on the Company's ability to access the level of liquidity necessary for it to sustain operations at current levels for the next twelve months. In such an event, management may be forced to make further reductions in spending or seek additional sources of capital to support our operations. If the Company raises additional funds by selling shares of common stock or convertible securities, the ownership of its existing shareholders would be diluted.

        Presently, the Company derives all of its revenue from agencies of the Federal government and the Company has derived a substantial portion of its revenues through various contracts awarded by the DVA. The Company currently provides services to the DVA under a single source Blanket Purchase Agreement Advantage RN didawarded in fiscal 2011 that has a ceiling value of approximately $145,000,000 and is scheduled to expire on October 31, 2016. The agreement is subject to the Federal Acquisition Regulations, and there can be no assurance as to the actual amount of services that the Company will ultimately provide under the agreement. This agreement represented approximately 51% of its revenue in the fiscal year ended September 30, 2012. In addition, the Company also holds contractual order cover through September 30, 2013 in respect of DVA contracts that generated an additional 44% of its revenue in the fiscal year ended September 30, 2012, which are not assume any debts, obligations or liabilitiescurrently the subject of TeamStaff Rx nor did it purchase any accounts receivable outstanding as ofrequests for proposals and may in due course be further extended by the closing date. As described in note 4 to these consolidated financial statements, theDVA on a sole source basis, although no assurances can be given that this will occur. The Company's results of operations, cash flows and related assets and liabilities of TeamStaff Rx have been reclassifiedfinancial condition would be materially adversely affected in the accompanying consolidated financial statements from those of continuing businesses for all periods presented.

Following the disposition of its TeamStaff Rx business, TeamStaff provides specialized medical, nursing, logistics and administrative staffing services by supplying allied healthcare and nursing professionals, logistics and administrative personnelevent that we are unable to U.S. government entities through TeamStaff GS. The staffing services offered by TeamStaff are provided through independent Federal Supply Schedule (“FSS”) contracts through the United States General Services Administration (“GSA”). The provision of logistical and administrative personnel is accomplished through the Logistics Worldwide Schedule and medical personnel are supplied through the Professional and Allied Healthcare Staffing Services Schedule. TeamStaff also provides its staffing services to federal government agencies through competitively bid contracts and has a GSA schedule contract to provide information technology professional services. TeamStaff provides these services tocontinue our relationships with the DVA or suffer a significant diminution in the US Departmentquantity of Defense and other US governmental agencies and placed contract employees at over 40 facilities duringservices that they procure from the 2009 fiscal year.
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 VIII, Inc., TeamStaff IX, Inc., Digital Insurance Services, Inc., HR2, Inc. and BrightLane.com, Inc. As a result of the sale of our Professional Employer Organization business in fiscal year 2004 and other Company business changes, these “other” subsidiaries are not actively operating.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Company.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements include the accounts of TeamStaff, Inc.DLH and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

All references to common stock, options, share based arrangements, exercise price, fair values and related data within this Form 10-K have been retroactively amended so as to incorporate the effect of the one-to-four reverse stock split effective April 21, 2008.

consolidation.

F-8


Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of goodwill, and other intangible assets, expected settlement amounts of accounts receivable, measurement of prepaid workers’workers' compensation, valuation allowances established against accounts receivable and deferred tax assets and measurement of payroll tax contingencies, accounts payable, workers’workers' compensation claims and accrued expenses.expenses and the valuation of financial instruments associated with debt agreements. Actual results could differ from those estimates. As disclosedIn particular, a material reduction in Note 10, the Company reduced liabilities established for certain prior period payroll tax contingenciesfair value of goodwill would have a material adverse effect on the Company's financial position and results of operations.


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Revenue Recognition

        DLH's revenue is derived from professional and other specialized service offerings to US Government agencies through a variety of contracts, some of which are fixed-price in nature and/or sourced through Federal Supply Schedules administered by $0.7 million in fiscal 2008the General Services Administration ("GSA") at fixed unit rates or hourly arrangements. We generally operate as a prime contractor, but have also entered into contracts as a subcontractor. The recognition of revenue from fixed rates is based upon objective criteria that generally do not require significant estimates that may change over time. Other types of US Government contracts may include cost reimbursable contracts, fixed price or flexibly priced contracts requiring estimates based on resolutionpercentage-of-completion methods of such matters with the Internal Revenue Service.

Revenue Recognition
TeamStaff accounts for its revenues in accordance with ACS 605-45,Reporting Revenues Gross as a Principal Versus Net as an Agent,recognizing revenue and SAB 104, Revenue Recognition. TeamStaff recognizes all amounts billed to its contract staffing customers as gross revenue because, among other things, TeamStaff is the primary obligor in the contract staffing arrangement; TeamStaff has pricing latitude; TeamStaff selects contract employees for a given assignment from a broad pool of individuals; TeamStaff isprofit. These contracting vehicles do not, at risk for the payment of its direct costs; and TeamStaff assumesthis time, represent a significant amountportion of other risksour revenue nor require estimating techniques that would materially impact our revenue reported herein. DLH recognizes and liabilities asrecords revenue on government contracts when it is realized, or realizable, and earned. DLH considers these requirements met when: (a) persuasive evidence of an employer of its contract 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 toarrangement exists; (b) the services performed by contract employees which have not yet been billeddelivered to the customer ascustomer; (c) the sales price is fixed or determinable and free of the end of the accounting period.
contingencies or significant uncertainties; and (d) collectability is reasonably assured.

Revenues related to retroactive billings in 2008 (see Note 10 to the Consolidated Financial Statements) from an agency of the Federal government were recognized when: (1) the Company developed and calculated an amount for such prior period services and had a contractual right to bill for such amounts under its arrangements, (2) there were no remaining unfulfilled conditions for approval of such billings and (3) collectability is reasonably assured based on historical practices with the DVA. The related direct costs, principally comprised of salaries and benefits, are recognizedwere accrued to match the recognized reimbursements from the Federal agency; upon approval, wages will be processed for payment to the employees.

During the year ended September 30, 2008, TeamStaffDLH recognized revenues of $10.8 million and direct costs of $10.1 million related to these non-recurring arrangements. At September 30, 20092012 and 2008,September 30, 2011, the amount of the remaining accounts receivable with the DVA approximated $9.3 million and accrued liabilities for salaries to employees and related benefits totaled $8.7 million. The $9.3 million in accounts receivable was unbilled to the DVA at September 30, 20092012 and 2008. AtSeptember 30, 2011. Although the timing cannot be guaranteed, at present the Company expects to bill and collect such amounts by the end of the second quarter ofduring fiscal 20102013, based on current discussions with the DVA and collection efforts.

Staffing (whether medical or administrative) revenue is recognized

        In April 2012, the Company received formal contract modifications from the DVA, dated April 16, 2012, concerning the retroactive billing matter. The contract modifications from the DVA incorporate relevant wage determinations covering largely 2006 and 2007 applying to the Company's historical contracts with DVA during those periods. These government modifications initiate the procedures whereby the Company may invoice the DVA in accordance with the modified wage determinations and subsequently make timely retroactive payments to employees (active and inactive) covering work performed at the certain locations. The Company expects to follow the same process implemented as service is rendered. TeamStaff bills its clients based on an hourly rate. The hourly rate is intendeddirected by and in conjunction with the Department of Labor and the DVA when similar wage determination-related contract modifications were made to cover TeamStaff’s direct labor costsother sites (also for the periods of 2006 and 2007) in 2008.


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

        The Company continues to support the Government's review of the contract employees, plusdetailed supporting calculations for the retroactive billings and to negotiate an estimateincremental final amount related to indirect costs and fees applied to these retroactive billings. As such, there may be additional revenues recognized in future periods once the final approval for overhead expensessuch additional amounts is obtained. The additional indirect costs and a profit margin. Additionally, commissions from permanent placements (principally TeamStaff Rx)fees are included in revenue as placements are made. Commissions from permanent placements result from the successful placement of a medical staffing employeeestimated to a customer’s workforce as a permanent employee.be between $0.4 million and $0.6 million. The Company also reviewshas developed these estimates under the status of such placementssame contractual provisions applied to assess the Company’s future performance obligations under such contracts.

Direct costs of services are reflectedsites that were settled in TeamStaff’s Consolidated Statements of Operations as “direct expenses” and are reflective of2008. However, because these amounts remain subject to government review, no assurances can be given that any amounts that we may receive will be within the type of revenue being generated. Direct costs of the contract staffing business include wages, employment related taxes and reimbursable expenses.
range specified above.

Concentrations of Credit Risks

Financial instruments that potentially subject TeamStaffDLH to concentrations of credit risk consist principally of cash and accounts receivable. TeamStaffDLH maintains substantially all its cash balances in a limited number of financial institutions. The balances are insured by the Federal Deposit Insurance Corporation up to $250,000 (effectivein respect of interest bearing accounts and without limit for other accounts through December 31, 2013).2012. At times the deposits in banks may exceed the amount of insurance provided on such deposits. TeamStaffDLH monitors the financial health of these banking institutions. At September 30, 2009,2012, the Company’sCompany's uninsured cash balances approximated $1.2$0.3 million. Historically, the Company has not experienced any losses on deposits.

TeamStaff

        DLH provides staffing services to the DVA, the US Department of Defense and other US governmental agencies and placed contract employeesoperated at over 40 facilities during the 2009 fiscal 2011 year. Substantially all of the business of TeamStaff GSDLH Solutions is accomplished through FSSFederal Supply Schedule contracts with the GSA and DVA. Credit, when given, is generally granted on an unsecured basis.

TeamStaff maintains

        The Company's policy is to maintain an allowance for doubtful accounts, if any, for estimated losses resulting from the inability of its customers to pay. However, if the financial condition of TeamStaff’sDLH's customers were to deteriorate rapidly, resulting in nonpayment, TeamStaffDLH could be required to provide for additional allowances, which would decrease operating results in the period that such determination was made.

F-9


Cash Equivalents

For purposes of the Consolidated Statements of Cash Flows, TeamStaffDLH considers all liquid investments purchased with a maturity of three months or less to be cash equivalents.

Allowance for Doubtful Accounts

Accounts receivable are unsecured and carried at fair value, which is net of an allowance for doubtful accounts. The allowance for doubtful accounts is determined based on a specific identification methodology. Generally an account receivable is deemed uncollectible based upon the aging of the receivable and/or specific identification. Interest is not typically charged on past due accounts and the specific identification method takes into account the Company’sCompany's assessment of the default risk based upon recent events in the customer’scustomer's business, economic status and changes in credit status. With respect to receivables owed by agencies of the U.S. Government, the Company believes that the risk of loss on these accounts is minimal (See Note 14)13).


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Before accounts are deemed uncollectible, demand letters are sent and, if that does not result in payment, the receivable is placed for collection with a collection agency. The Company’sCompany's last attempt at collection would be legal action, depending upon the customer’scustomer's financial situation. If the Company is unsuccessful at collection after these steps, the receivable is written-off.

Fair Value

TeamStaff

        DLH has financial instruments, principally accounts receivable, accounts payable, loan payable, notes payable and accrued expenses. TeamStaffDLH estimates that the fair value of allthese financial instruments at September 30, 20092012 and 20082011 does not differ materially from the aggregate carrying values of these financial instruments recorded in the accompanying consolidated balance sheets. However, because the Company presents certain common stock warrants and embedded conversion features (associated with Convertible Debentures—See Note 6) and accounts for such derivative financial instruments at fair value, such derivatives are materially impacted by the market value of the Company's stock and therefore subject to a high degree of volatility. The Company's future results may be materially impacted by changes in the Company's closing stock price as of the date it prepares future periodic financial statements.

        In accordance with authoritative guidance the Company categorized its assets and liabilities based on the priority of the inputs to the valuation technique into a three-level fair value hierarchy as set forth below. The three levels of the hierarchy are defined as follows:

            Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities. The Company currently does not have any Level 1 financial assets or liabilities.

            Level 2—Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for substantially the full term of the asset or liability. The Company currently does not have any Level 2 financial assets or liabilities.

            Level 3—Unobservable inputs reflecting management's own assumptions about the input used in pricing the asset or liability.

        The following table presents the Company's September 30, 2012 and 2011 assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (all Level 3):

 
 September 30, 
 
 2012 2011 

Asset:

       

Tradenames

 $0 $0 
      

Liability:

       

Derivative financial instruments

 $119 $182 
      

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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

        The following is a summary of activity as of and for the years ended September 30, 2012 and 2011 for these assets and liabilities measured at fair value on a recurring basis:

Asset: Tradenames

    

Balance, September 30, 2010

 $2,583 

Impairment loss included in results of operations

  (2,583)
    

Balance, September 30, 2011

   

Impairment loss included in results of operations

   
    

Balance, September 30, 2012

 $ 
    

Liability: Fair Value of Derivative Financial Instruments

    

Balance, September 30, 2010

 $ 

Fair value of warrants

  (289)

Change in fair value included in results of operations

  107 
    

Balance, September 30, 2011

 $(182)

Fair value of warrants

  (42)

Change in fair value included in results of operations

  105 
    

Balance, September 30, 2012

 $(119)
    

        The major assumptions used in determining the associated fair values using level 3 inputs (unobservable) are discussed in Notes 2 and 6. The aforementioned impairment losses included in the results of operations are discussed below.

Equipment and Improvements

Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 5 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements. During 2008, the Company retired fixed assets with a carrying value of $20,000Maintenance and accumulated depreciation of $12,000 that resulted in a loss of $8,000 (included in other income, net).

repair costs are charged to expense as incurred.

Advertising Costs

The Company’sCompany's advertising expenses consist primarily of online advertising, health care professional trade magazines and various other various print media, promotional material and direct mail marketing. The Company expenses advertising costs as they are incurred. Total advertising costs for continuing operations were $0.2 million$19 and $0.1 million$5 for the fiscal years ended September 30, 20092012 and 2008,2011, respectively.

Occupancy Lease Commitments

The Company has occupancy leases with various payment terms to include a fixed payment schedule over the lease term, variable payment schedule over the lease term, or a lease that may have rent escalations, an abatement or “rent holiday”"rent holiday" periods. The Company records occupancy expense using the straight-line method over the lease term, regardless of actual payment terms.


Long-Lived Assets
TeamStaff reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount

Table of an asset mayContents


DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Goodwill

        In accordance with applicable accounting standards, DLH does not be recoverable. If such events or changes in circumstances are present, a loss is recognizedamortize goodwill. DLH continues to the extent that the carrying value of the asset is in excess of the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition.

As a result of the decision to divest TeamStaff Rx, the Company recognized an impairment charge of $2.3 million to reduce the carrying value of long lived assets (equipment, tradename and goodwill) to estimated fair value. The estimated fair value was derived from the terms of the sale of these assets to Advantage RN, as described in Note 1. The impairment charge is included in the 2009 loss from discontinued operations.

F-10


Acquired Intangible Assets
Acquired intangible assets consist of trade name of $3.9 million at September 30, 2009 and 2008. Tradename of $0.7 million related to TeamStaff RX has been reclassified to “Assets from Discontinued Operations” for all periods presented.
TeamStaff will continue to annually test and review its remaining indefinite life intangible assetsgoodwill for possible impairment or loss of value.
Goodwill
Goodwill is assigned to specific reporting units and is reviewed for possible impairmentvalue at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’sunit's carrying amount may beis greater than its fair value. At September 30, 2012, we performed a goodwill impairment evaluation. We performed both a qualitative and quantitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test. Based on the results of the work performed, the Company has concluded that no impairment loss was warranted at September 30, 2012. Additional impairment analyses at future dates may be performed to determine if indicators of impairment are present, and if so, such amount will be determined and the associated charge will be recorded to the consolidated statement of operations.

        Factors including non-renewal of a major contract (see Note 2—Liquidity and Note 13) or other substantial changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to future periods' results of operations. If an impairment write off of all the goodwill became necessary in future periods, a charge of up to $8.6 million would be expensed in the Consolidated Statement of Operations. All remaining goodwill is attributable to continuing staffing services reporting units. Goodwillthe DLH Solutions operating subsidiary.

Intangible Assets

        As required by applicable accounting standards, DLH did not amortize its tradenames, an indefinite life intangible asset. DLH reviewed its indefinite life intangible assets for possible impairment or loss of $1.6value at least annually or more frequently upon the occurrence of an event or when circumstances indicated that an asset's carrying amount was greater than its fair value. On September 15, 2011, the Board of Directors of DLH approved the change of the corporate name of TeamStaff GS to DLH Solutions and also approved a plan to change the corporate name of the Company to DLH Holdings Corp. In connection with these actions, the Company ceased further use of the TeamStaff trademark and implemented new marketing and branding initiatives associated with the new corporate identity being adopted by the Company. As a result of the corporate name change, abandoning the use of the TeamStaff name and associated rebranding efforts being implemented by the Company, the Company concluded that it was required to record a non-cash impairment charge with respect to the value of the "TeamStaff" trademark of $2.6 million related to TeamStaff RX has been reclassified to “Assets from Discontinued Operations” for all periods presented.

Workers’ Compensation
Forfully write-off the remaining open years through November 17, 2003, the datevalue of sale of its discontinued PEO business, TeamStaff applies loss-development factors to workers’ compensation incurred losses in order to estimate fully developed losses as well as other formula driven methodologies supplied by its current third party administrator (See Note 10).
this trademark.

Income Taxes

TeamStaff accounts for income taxes in accordance with the “liability”"liability" method, whereby 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 consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. At September 30, 20092012 and 2008,2011, the Company recorded a 100% valuation allowance against its net deferred tax assets (See Note 5).


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Reclassifications
DLH HOLDINGS CORP. AND SUBSIDIARIES

Certain reclassifications

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

        The Financial Accounting Standards Board ("FASB") has issued authoritative guidance that clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Measurement of the tax uncertainty occurs if the recognition threshold has been met. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosures. The Company conducts business solely in the U.S. and, as a result, also files income taxes in various states and other jurisdictions. Given the substantial net operating losses and the related valuation allowance established against such amounts, the Company has concluded that it does not have any uncertain tax positions. There have been madeno income tax related interest or penalties for the periods presented in these consolidated financial statements. In the normal course of business, the Company and its subsidiaries are subject to prior years’ amountsexamination by Federal and state taxing authorities. The Company's income tax returns for years subsequent to conform to the current year presentationfiscal 2008 are currently open, by statute, for review by authorities. However, there are no examinations currently in progress and the effectsCompany is not aware of the reverse stock split. As discussed in Note 4, the TeamStaff Rx operations were reclassified in 2009 and 2008 as discontinued operations.

any pending audits.

Stock-Based Compensation

Compensation costs for the portion of equity awards (for which the requisite service has not been rendered) that are outstanding are recognized as the requisite service is rendered. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated for recognition purposes under applicable guidance. There was no share-based compensation expense for options for the years ended September 30, 2009 and 2008. As of September 30, 2009,2012, there was nois $0.2 million remaining unrecognized compensation expense related to non-vested stock optionbased awards to be recognized in future periods.

        For options that vest based on the Company's common stock achieving and maintaining defined market prices, the Company values these awards with a binomial model that utilizes various probability factors and other criterion in establishing fair value of the grant. The related compensation cost is recognized over the derived service period determined in the valuation.

From time to time, the Company grants restricted stock awards to non-employee directors and employees under existing plans. The Company recognizes non cash compensation expense over the various vesting periods.

        Stock compensation expense totaled $0.2 million in each of fiscal 2009for all awards for the year ended September 30, 2012, and 2008.totaled $0.4 million for all awards for the year ended September 30, 2011. Certain awards vest upon satisfaction of certain performance criteria. As permitted, the Company will not recognize expense on the performance based shares until it is probable that these conditions will be achieved. Such charges could be material in future periods.

        Warrants are issued from time-to-time to non-employee third parties in order to induce then to enter in certain transactions with the Company. The Company recognizes non-cash expense related to such activity over the estimated period of performance.

Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding and restricted stock


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

grants that vested or are likely to vest during the period. Diluted earnings (loss) per share is calculated by dividing income (loss) available to common shareholders by the weighted average number of basic common shares outstanding, adjusted to reflect potentially dilutive securities.

        

F-11


The respective determination of weighted average shares used in the computation of earnings (loss) per share is as follows (amounts in table show in thousands);

         
  2009  2008 
Basic:        
Income from continuing operations  4,900   4,866 
Loss from Discontinued operations  4,900   4,866 
         
Diluted:        
Income from continuing operations  5,085   4,875 
Loss from Discontinued operations  5,085   4,875 
 
 2012 2011 

Basic and Diluted:

       

Loss from continuing operations

  7,026  5,460 

Gain (loss) from discontinued operation

  N/A  5,460 
Under guidance

        The effects of common stock equivalents of 1,436,346 are anti-dilutive for determining earnings (loss) per share, thefiscal 2012. The effects of common stock equivalents of approximately 185,0001,643,846 are anti-dilutive for fiscal 2011.

(3) RECENT ACCOUNTING STANDARDS:

        In May 2011, the FASB amended existing guidance on fair value measurements to clarify certain disclosure requirements and 9,000, are included (even though the shares are anti dilutive) for 2009 and 2008, in the calculation of loss per share for discontinued operations.

Accumulated Comprehensive Income (Loss) and Pension Liability Adjustment
A pension liability adjustmentimprove consistency with international reporting standards. This amendment is required when the actuarial present value of accumulated benefit obligation exceeds the plan assets and accrued pension liabilities. The pension liability adjustment, net of income taxes, is recorded as a component of “Accumulated comprehensive loss” on the balance sheetto be applied prospectively and is reflected in the Statement of Comprehensive Income (Loss) as “Pension liability adjustment”. The Company used a discount rate of 3.0% to calculate the projected benefit obligation and the periodic benefit cost calculationeffective for the respective years presented.Company's fiscal quarter ending March 31, 2012. The Company recorded a reduction in the net liability from such adjustment, net of tax of $5,000 and $28,000 for the years ended September 30, 2009 and 2008, respectively. The accumulated comprehensive loss on the consolidated balance sheets reflects the cumulative balance due to the pension liability adjustment. As of September 30, 2009, the liability was paid off and thus, there was no remaining accumulated comprehensive loss to be recognized in future periods.
(3) RECENT ACCOUNTING STANDARDS:
In June 2006, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Measurement of the tax uncertainty occurs if the recognition threshold has been met. This Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. TeamStaff conducts business solely in the U.S. and, as a result, files income tax returns for U.S., New Jersey and various other states and jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities. The Company’s tax returns for years subsequent to fiscal 2005 are open, by statute, for review by authorities. However, at present, there are no ongoing income tax audits or unresolved disputes with the various tax authorities that the Company currently files or has filed with. Given the Company’s substantial net operating loss carryforwards, which are subject to a full valuation allowance, as well as the historical operating losses in prior periods, the adoption of this guidance on October 1, 2007 did not have anya material effect on ourthe financial position, resultsstatements.

        The FASB amended existing guidance on reporting comprehensive income in June 2011 to require entities to present the total of operationscomprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or cash flows asin two separate but consecutive statements. The amendment does not change the items that must be reported in other comprehensive income or when an item of the adoption date or for subsequent periods.

In September 2006, the FASB issued a standard which defines fair value, established a framework for measuring fair value in accordance withother comprehensive income must be reclassified to net income under current accounting principles generally accepted in the United States and expanded disclosures about fair value measurements.of America. This standardguidance was effective for financial statements issued forthe Company's fiscal years beginning after November 15, 2007, with earlier application encouraged. Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. In February 2008, the FASB issued supplemental guidance in the form of a staff position, which delayed the effective date of the initial standard for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company adopted this standard on October 1, 2008 with no effect on its financial position, results of operations and cash flows.
In February 2007, the FASB issued a standard that permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each reporting date. This standard was effective for fiscal years beginning after November 15, 2007, the provisions of which are required to be applied prospectively. The Company adopted this standard on October 1, 2008 with no effect on its financial position, results of operations and cash flows.
Inquarter ending March 2008, the FASB issued a standard which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable users of the financial statements to better understand the effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for interim periods beginning after November 15, 2008, with early application encouraged.31, 2012. The adoption of this standard did not have a material effect on our consolidatedprospective financial statements.

In June 2009,August 2011, the FASB approved a revised accounting standard to simplify the testing of goodwill for impairment. The guidance permits an entity to first assess defined qualitative factors in determining whether it is necessary to perform the goodwill impairment test. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company has elected to adopt this guidance for the fiscal year ended September 30, 2012.

        In December 2011, the FASB amended disclosure concerning offsetting assets and liabilities. The amendments in the update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements.


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(3) RECENT ACCOUNTING STANDARDS: (Continued)

The amendment is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is currently evaluating the prospective effects, if any, of adopting this guidance.

        In July 2012, the FASB further amended existing guidance on testing indefinite lived intangible assets for impairment. The amendments are intended to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. This update applies to all entities, both public and nonpublic, that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued. The Company is currently evaluating the prospective effects, if any, of adopting this guidance.

        In August 2012, the FASB issued a standard which stipulated theFASB Accounting Standards Codification™ is the source of authoritative U.S. GAAP recognized by the FASBtechnical amendments and corrections to be applied by nongovernmental entities. This standard isSEC sections, effective for financial statements issued for interim and annual periods ending afterthe period ended September 15, 2009.30, 2012. The implementationadoption of this standardguidance did not have a material impacteffect on the Company’s financial position, resultsstatements.

        In October 2012, the FASB issued technical corrections and improvements, which include revisions to prior guidance on numerous topics, including Convertible Debentures. The effective date of these revisions is for fiscal years beginning after December 15, 2012. The Company is currently evaluating the prospective effects, if any, of adopting this guidance.

(4) DISCONTINUED OPERATION:

Non-Recurring Gain

        There were no non-recurring gains from discontinued operations for the fiscal year ended September 30, 2012. The Company recognized a non-recurring gain from discontinued operations for fiscal year ended September 30, 2011 of $270,000, related to escheated funds refunded by the State of Florida. The Company's right to the funds arose in connection with the Company's former PEO operations that were accounted for as a discontinued operation in fiscal 2003 and, cash flows.

F-12


(4) DISCONTINUED OPERATIONS:
Sale of Nursing Innovations Division
Effective January 27, 2008, TeamStaff, Inc. completed the sale of its per diem nurse staffing business located in Memphis, Tennessee and operating under the name of Nursing Innovations, to Temps, Inc. Under the terms of the definitive Asset Purchase Agreement, dated as of January 29, 2008 (“Asset Purchase Agreement”),accordingly, the Company received a cash purchase price of $447,000 forhas recognized the acquired business and related assets. Of the purchase price, a defined amount was escrowed for a period of six monthsamounts as income from the closing date. Temps, Inc. released approximately $89,000 escrow to Teamstaffdiscontinued operation in the fourth quarter of 2008.
Net revenues and net loss forcurrent period after concluding that the Nursing Innovations per diem operations for 2008 were $0.7 million and $42,000 respectively.
Sale of TeamStaff Rx
Based on an analysis of historical and forecasted results and the Company’s strategic initiativeamount involved was not material to focus on core business, in the fourth quarter of fiscal 2009, the Company approved and committed to a formal plan to divest the operations of TeamStaff Rx, our wholly-owned subsidiary, based at its Clearwater, Florida location. In evaluating the facets of TeamStaff Rx’s operations, management concluded that this business component meets the definition of a discontinued operation. Accordingly, the results of operations cash flows and related assets and liabilities of TeamStaff Rx for all periods presented have been reclassified in the accompanying consolidated financial statements from thoseyear of continuing businesses.discontinuance.


Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(4) DISCONTINUED OPERATION: (Continued)

Condensed Financial Information

Condensed financial statement information and results of the discontinued operationsoperation are as follows:

         
  For the Fiscal Years Ended 
  September 30,  September 30, 
(amounts in thousands) 2009  2008 
Revenues $8,342  $14,766 
Direct expenses  6,537   11,649 
Selling, general and administrative expenses  4,152   5,142 
Impairment charge-intangible assets  2,305    
Other expense, net  79   24 
       
Net loss $(4,731) $(2,049)
       
There were no tax benefits associated with the losses from these discontinued operations.
 
 Year Ended 
(amounts in thousands)
 September 30,
2012
 September 30,
2011
 

Revenues

 $ $ 

Direct expenses

     

General and administrative expenses

     

Other expense, net

     
      

Loss from operations

     

Loss from disposal

     

Other income

  0  270 
      

Net gain (loss)

 $0 $270 
      

        

F-13


In previous periods, the Company has accrued expenses related to the shut down of discontinued businesses. The following chart details assets and liabilities from allthe discontinued operationsoperation (amounts in thousands):

         
  September 30,  September 30, 
  2009  2008 
ASSETS        
Cash $245  $ 
Accounts receivable  674   1,011 
Other current assets  124   102 
       
Total current assets  1,043   1,113 
       
Fixed assets  1,878   1,859 
Accumulated depreciation  (1,602)  (1,464)
       
Net fixed assets  276   395 
       
Goodwill and intangibles  99   2,355 
       
Other assets     15 
       
Total assets $1,418  $3,878 
       
         
Liabilities        
Current portion capital leases $44  $40 
Accrued payroll  237   177 
Accrued expenses and other current liabilities  111   164 
       
Total current liabilities  392   381 
       
Long term capital leases  39   83 
       
Other long term liabilities  25   90 
       
Total liabilities $456  $554 
       
Liabilities
 September 30,
2012
 September 30,
2011
 

Accrued expenses and other current liabilities

 $185 $235 
      

Total liabilities

 $185 $235 
      
Activity

        The fiscal 2012 decrease in the liabilities of discontinued operations is as follows:

                 
  September 30,  Expensed  Paid This  September 30, 
  2007 Balance  This Period  Period  2008 Balance 
Current portion capital leases $45  $4  $(9) $40 
Accrued payroll  279       (102)  177 
Accrued expenses and other current liabilities  228   135   (199)  164 
Capital leases  140      (57)  83 
Other long term liabilities  123       (33)  90 
             
Total $815  $139  $(400) $554 
             
                 
  September 30,  Expensed  Paid This  September 30, 
  2008 Balance  This Period  Period  2009 Balance 
Current portion capital leases $40  $4  $  $44 
Accrued payroll  177   60      237 
Accrued expenses and other current liabilities  164   2   (55)  111 
Capital leases  83      (44)  39 
Other long term liabilities  90      (65)  25 
             
Total $554  $66  $(164) $456 
             
Management anticipates that the Company will report a net lossliability arises from discontinued operations through the effective date of the sale to Advantage RN, which will include an estimated charge of $0.2 million for severance to certain TeamStaff Rx employees. Although there are certain conditions on the collection of amounts that are held in escrow, the Company expects to settle such matters in the second quarter of the fiscal year ending September 30, 2010. In addition, management estimates that the Company will incur a loss on the disposal of TeamStaff Rx approximating $0.3 million principally from recognition of the remaining unfunded operating lease payments. The measurement date for recording this liability is December 31, 2009. These amounts are preliminary and subject to change based on future events; the ultimate amount could significantly differ from these current estimates.

(5) INCOME TAXES:

        

F-14


(5) INCOME TAXES:
TeamStaffDLH accounts for income taxes in accordance with the “liability”"liability" method. Under this method, 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. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized.
In the fiscal year ended September 30, 2006, after

        After an assessment of all available evidence (including historical and forecasted operating results), management has concluded that realization of the Company’sCompany's net operating loss carryforwards (which includesincluded those amounts acquired in previous years’years' business combinations, collectively “NOLs”"NOLs"), tax credits and other deferred tax assets, could not be considered more likely than not. Accordingly, for the fiscal years ended September 30, 2009, 20082012 and 2007,2011, the Company did not record a tax benefit for NOLs.NOLs and other deferred tax assets.


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(5) INCOME TAXES: (Continued)

Based on similar assessments, the Company increased (decreased) the valuation allowance established on deferred tax assets by approximately $1.8$0.8 million and $(0.5)$1.0 million in 20092012 and 2008,2011, respectively. The increase in the valuation allowance is primarily due to increased Federal and state NOLs and stock based compensation expense (not currently deductible) for the fiscal yearyears ended September 30, 2009 was principally due to the Federal NOL and the asset impairment charge while the net decrease of $0.5 in 2008 related to the Federal NOL, offset by a decrease of approximately $1.1 representing adjustments to state NOLs and other fully reserved deferred tax assets. The primary reason for the NOL generated in 2008 relates to the realized tax loss (unrealized in 2007) on the sale of the Nursing Innovations discontinued operation’s assets (see Note 4).

Based on an assessment performed as of September2012 andSeptember 30, 2009 and 2008, the Company has maintained a full valuation allowance against remaining NOLs and other deferred tax assets; as the realization of such amounts, at those dates, could not be considered more likely than not.2011.

        In prospective periods, there may be reductions to the valuation allowance to the extent that the Company concludes that it is more likely thatthan not that all or a portion of the deferred tax assets can be utilized (subject to annual limitations and prior to the expiration of such NOLs), to offset future periods’periods' taxable income.

In the fiscal yearyears ended September 30, 2009,2012 and 2011, the Company recognizeddid not recognize a tax benefit of $28,000 related to a refund from a state. In the fiscal year ended September 30, 2008 the Company recorded tax expense of $60,000 related to certain estimated state taxes due which could not be offset by an NOL from those specific states.

or benefit.

At September 30, 20092012 the Company had net operating losses of approximately $30.4 million, $15.1$ 40.2 million and $.7$28.2 million for U.S., New Jersey and other states’state tax return purposes, respectively, and unutilized tax credits approximateof approximately $1.1 million. As a result of previous business combinations and changes in its ownership, there is a substantial amount of U.S. NOLs that are subject to annual limitations on utilization. The U.S. NOLs begin to expire in 2021 and continue to expire through 2029.

2032.

An analysis of TeamStaff’sDLH's deferred tax asset and liability (including those related to TeamStaff Rx) is as follows (Amounts(amounts in thousands):

        
 Years Ended September 30,  Years Ended
September 30,
 
 2009 2008  2012 2011 
Deferred income tax asset: 

Deferred income tax asset (liability):

 
Net operating loss carry forwards and tax credits $12,977 $12,102  $16,459 $15,669 
Workers’ compensation reserves  (115)  (160)
Occupancy leases  55 
Pension  28 

Prepaid workers' compensation

 111 55 
Deferred rent 35 37  3 4 
Accrued liabilities 335 235  474 445 
Stock based compensation 133 68  424 372 
Fixed and intangible assets  (252)  (997) (1,460) (1,276)
Other items, net 7 1  12 (11)
Valuation allowance  (13,120)  (11,369) (16,023) (15,258)
          
 $ $  $ $ 
          

        

F-15


The significant components of the expense (benefit) for income taxes from continuing operations are summarized as follows-follows:

         
  Years Ended September 30, 
(Amounts in thousands) 2009  2008 
Current expense (benefit) $(28) $60 
Deferred expense (benefit)      
       
Total expense (benefit) $(28) $60 
       

Years Ended
September 30,
(amounts in thousands)
20122011

Current expense (benefit)

$$

Deferred expense (benefit)

Total expense (benefit)

$$

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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(5) INCOME TAXES: (Continued)

The following table indicates the significant differences between the Federal statutory ratesrate and TeamStaff’sDLH's effective tax rate for continuing operations-operations:

        
 Years Ended September 30,  Years Ended
September 30,
 
(Amounts in thousands) 2009 2008 
(amounts in thousands)
 2012 2011 
Federal statutory rate $157 $1,139  $(689)$(1,561)
State taxes, net  (28) 60    

Tradename impairment

   878 

Other permanent items

 13 18 
Valuation allowance  (157)  (1,139) 676 665 
          
 $(28) $60  $ $ 
          

(6) DEBT:

AND CAPITAL LEASES:

Current Bank Loan Facility (See Note 9—Government Assignments of Contracts)

On March 28, 2008, weJuly 29, 2010, DLH Solutions entered into an Amended and Restateda Loan and Security Agreement dated as of March 28, 2008 (the “Loan Agreement”"Loan Agreement") with Business Alliance Capital Company (“BACC”), a division of Sovereign Bank (“Sovereign” or “Lender”Presidential Financial Corporation (the "Lender"). Effective April 1, 2008, BACC changed its name to Sovereign Business Capital. Under the Loan Agreement, the Lender agreed to provide a revolving credittwo (2) year secured loan facility to the CompanyDLH Solutions in an aggregate amount of up to $3,000,000, subject to$1.5 million, upon the further terms and subject to the conditions of the Loan Agreement. In November, 2010, the Lender agreed by means of an amendment to the Loan Agreement to increase the maximum amount available under the facility from $1.5 million to $2.5 million and on February 9, 2011, we entered into a further amendment to the Loan Agreement pursuant to which the Lender agreed to further increase our maximum availability under the Loan Agreement from $2.5 million to $3.0 million and to provide an unbilled receivable facility within the limits of the Loan Agreement. The February 2011 amendment also extended the initial term of the Loan Agreement by 12 months, to July 29, 2013, and will automatically renew annually unless terminated by either party.

        In May 2012, the Company entered into a further amendment to the Loan Agreement (the "Fifth Amendment") pursuant to which the Lender agreed to increase the available line of credit from $3,000,000 to a maximum amount of $6,000,000 and to increase the maximum amount available under the unbilled accounts facility of the Loan Agreement from $500,000 to $1,000,000. The Company's ability to borrow against the increased available credit, however, is subject to the satisfaction of certain conditions. The Fifth Amendment provides for an initial sublimit under the maximum loan amount of $3,000,000 (the "Initial Sublimit") and an adjusted sublimit of $4,000,000 (the "Adjusted Sublimit"). The Initial Sublimit of $3,000,000 will remain in effect until the satisfaction of the following conditions: (i) the repayment of the $500,000 over-advance accommodation agreed to by Lender as of May 9, 2012, (ii) the Company's demonstration of the need for the increase, (iii) the Company's continued compliance with the Loan Agreement, and (iv) Lender, in its sole discretion, agrees to increase the Initial Sublimit. In the event that the foregoing conditions are satisfied, the credit available to under the Loan Agreement shall remain subject to the Adjusted Sublimit until the parties receive any required waivers or consents from the holders of the Company's subordinated Convertible Debentures issued as of July 28, 2011 and Lender, in its sole discretion, agrees to such further increase. In addition,


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(6) DEBT AND CAPITAL LEASES: (Continued)

the increased availability under the unbilled accounts facility of the Loan Agreement is subject to the satisfaction of the same conditions that are applicable to Initial Sublimit. Accordingly, until these conditions are satisfied, the current borrowing limits remain in effect.

        An interest rate premium of 2% is payable in respect of any advances secured by unbilled accounts receivable, which are subject to a sub-facility limit of $500,000 and an advance rate of 75%. The loan is secured by a first prioritysecurity interest and lien on all of DLH Solutions' cash accounts, account deposits, letters of credit and investment property, chattel paper, furniture, fixtures and equipment, instruments, investment property, general intangibles, deposit accounts, inventory, other property, all proceeds and products of the Company’s assets. Previously in 2005,foregoing (including proceeds of any insurance policies and claims against third parties for loss of any of the Companyforegoing) and PNC Bank, National Association (“PNC”) had entered into an $8,000,000 revolving credit facility (“PNC Loan Facility”). Pursuant to the Loan Agreement, the Lender (i) acquired by assignment from PNC all right, titlebooks and interest of PNC under the PNC Loan Facility, the PNC note andrecords related loan documentation, and (ii) restructured the PNC Loan Facility into a $3,000,000 revolving credit facility with a 3 year term. The Company’sthereto. DLH Solutions' ability to request loan advances under the Loan Agreement is subject to (i) computation of DLH Solutions' advance availability limit based on "eligible accounts receivables" (as defined in the Company’s advance limitLoan Agreement) multiplied by the "Accounts Advance Rate" established by the Lender which initially shall be 85% and may be increased or decreased by the Lender in exercise of its discretion; and (ii) compliance with the covenants and conditions of the loan. The facility is for a term

        Under the Loan and Security Agreement, interest accrues at the greater of 36 months and matures on March 31, 2011. Interest on amounts due accrue(a) 3.25% or (b) (i) 1.95% above the Wall Street Journal Prime rate on the daily unpaid balanceaccounts receivable portion of the loan advances at a per annum rate of 0.25% percentage pointcredit line and (ii) 3.95% above the Wall Street Journal Prime Raterate on the unbilled accounts portion. In addition, DLH Solutions will pay certain other related fees and expense reimbursements including a monthly service charge of 0.65% based on the average daily loan balance which shall accrue daily and be due and payable on the last day of each month so long as the Loan Agreement is outstanding. The interest rate in effect from time to time, but not less than 5.5% per annum.

at September 30, 2012 and 2011 was 5.2%. At September 30, 2012, based on current eligible accounts receivable, the amount of the unused availability under the line was $344,000. The facility is subject to certain restrictiveamount outstanding as of September 30, 2012 was $2,363,000.

        The Loan Agreement requires compliance with customary covenants including minimum debt service coverage ratio and contains restrictions on the Company’sCompany's ability to among other things, dispose of certain assets, engage in certain transactions,transactions. Among other matters, under the loan agreement we may not, without consent of the Lender, (i) merge or consolidate with another entity, form any new subsidiary or acquire any interest in a third party; (ii) acquire any assets except in the ordinary course of business; (iii) enter into any transaction outside the ordinary course of business; (iv) sell or transfer collateral; (v) make any loans to, or investments in, any affiliate or enter into any transaction with an affiliate other than on an arms-length basis; (vi) incur indebtedness andany debt outside the ordinary course of business; (vii) pay dividends.or declare any dividends or other distributions; or (viii) redeem, retire or purchase any of our equity interests exceeding $50,000. Further, without the consent of the Lender, the Company is also restricted from making any payments in respect of other outstanding indebtedness. The Lender agreed to eliminate the tangible net worth covenant as part of the Fifth Amendment. The Lender may terminate the Loan Agreement alsoat any time upon 60 days written notice after December 31, 2012 and the Loan Agreement provides for customary events of default following which the Lender may, at its option, terminate the loan agreement and accelerate the repayment of any amount outstanding. The defined events of default include, among other things, a material adverse change in the Company's circumstances, or if the Lender deems itself insecure in the ability of the Company to repay its obligations, or as to the sufficiency of the collateral.


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(6) DEBT AND CAPITAL LEASES: (Continued)

        On May 9, 2012, Presidential Financial Corporation agreed to allow the Company to borrow up to $500,000 under its facility with the Company in excess of the eligible collateral, but subject to the maximum loan amount of $3,000,000. This arrangement expired with the closing of the rights offering on June 15, 2012. There were no advances against this facility.

        In consideration of the Lender entering into the Fifth Amendment, we agreed to pay a monthly collateral monitoring fee, a documentation fee and at the time that we may borrow amounts outstandingin excess of the Initial Sublimit, an origination fee of 1% of the increased availability.

        The Company has concurrently executed a Corporate Guaranty Agreement with Lender pursuant to which it has guaranteed all of the obligations of DLH Solutions under the Loan Agreement.

Notes Payable

        DLH and DLH Solutions entered into a settlement agreement dated as of July 22, 2011 (the "Agreement") with Roger Staggs and E. Barry Durham, the former principals of RS Staffing Services, Inc. (together, the "Sellers"). The Sellers were the holders of certain promissory notes issued by DLH in the aggregate principal amount of $1,500,000 (the "Notes"). The claims resolved by the Settlement Agreement concerned DLH's claim of indemnification of approximately $1,800,000 arising out of the acquisition by DLH of RS Staffing Services, Inc. in June 2005 and certain counterclaims by the Sellers against DLH, including payment under the Notes. Pursuant to the Agreement, the Company paid $200,000 in cash to the Sellers, and issued them an aggregate of 300,000 shares of common stock of DLH, valued at $795,000, the fair value of the stock at July 22, 2011. The Company also agreed to permit the Sellers to resell an aggregate of 201,724 other shares of common stock of DLH presently held by them, against which the Company had previously placed a stop order to prevent their resale. The Sellers agreed to orderly sale limitations with respect to their ability to resell all their shares of common stock of DLH In addition, DLH provided guarantees to the Sellers that the net proceeds to be received by them from the resale of all of the shares of common stock of DLH sold by them pursuant to the Agreement would not be less than certain minimum guarantees. With respect to the shares of common stock of DLH owned by them prior to the effective date of the Agreement (the "Old DLH Shares"), DLH guaranteed to each Seller net proceeds of $100,000, and with respect to the shares of common stock of DLH issued under the Agreement (the "New DLH Shares"), DLH guaranteed net proceeds of $375,000 to each. The payments of all amounts under the Agreement were secured by the Notes. In addition, the parties agreed to release each other from any further claims that either may have against the other, except to enforce the Agreement. The guarantees in respect of the Old DLH Shares were satisfied in full as of September 30, 2011. The guarantees in respect of the New DLH Shares were satisfied in full as of September 30, 2012.

        At September 27, 2012, the guarantees and the remaining value of the Notes have been satisfied through a combination of the repurchase of certain of the shares of the Company's common stock owned by one of the note holders and the expiration of the guarantee period under the Agreement. Following the completion of the sale of 100,000 shares of common stock of the Company by this holder to members of DLH's management team, the Company's retirement of 40,000 shares of its common stock against the payment of an additional $40,000 and the payment by the Company of $225,000, the Company fully satisfied its minimum guarantee obligations related to the Notes. Accordingly, the


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(6) DEBT AND CAPITAL LEASES: (Continued)

Company recorded a gain of approximately $486,000 in the fiscal fourth quarter ending September 30, 2012.

        The Company recognized expenses related to legal representation and costs incurred in connection with the investigation and settlement in the amount of $0 and $96,000 during fiscal 2012 and 2011, respectively, as a component of other income (expense).

Convertible Debentures

        On June 1, 2011, the Company entered into a debenture purchase agreement (the "Debenture Purchase Agreement") with entities affiliated with Wynnefield Capital, Inc. (the "Debenture Purchasers"), providing for a standby commitment pursuant to which the Debenture Purchasers agreed to purchase convertible debentures (the "Convertible Debentures") in an aggregate principal amount of up to $350,000 (the "Total Commitment Amount"). In addition, the Company issued the Debenture Purchasers warrants to purchase an aggregate of 53,846 shares of common stock (the "Warrants") in consideration of their agreement to provide the Total Commitment Amount. On July 28, 2011, the Company drew down the entire amount of the Total Commitment amount available under the Debenture Purchase Agreement, of which $200,000 was used for the initial payments under the Debenture Purchase Agreement relating to the settlement with the former owners of RS Staffing, and on such date the Company issued the Convertible Debentures in the aggregate principal amount of $350,000 to the Debenture Purchasers, and received such funds.

        The Convertible Debentures will mature on the 27-month anniversary of issuance and bear interest at the rate of the greater of the prime rate plus 5%, or 10% per annum, payable at maturity or upon redemption of such Convertible Debentures. The interest rate at September 30, 2012 and September 30, 2011 was 10%. The Convertible Debentures are convertible into shares of the Company's common stock at an initial conversion price of $1.30 per share, and a post rights offering conversion price of $1.25 per share, which was in excess of the fair market value of the Company's common stock at that date. The conversion rate is subject to adjustment to account for certain customary events and also includes weighted-average anti-dilution protection for future issuances by the Company, subject to certain exclusions. The Company can also redeem the outstanding Convertible Debentures at any time at 120% of the remaining principal amount, plus accrued but unpaid interest. The Warrants will be exercisable for five years at an initial exercise price equal to $1.00, and a post rights offering exercise price of $0.96. The exercise price of the Warrants is subject to adjustment for certain customary events and includes weighted average anti-dilution protection for future issuances by the Company, subject to certain exclusions. In connection with the dispositionparties' entry into the Debenture Purchase Agreement, the Company, DLH Solutions, the Debenture Purchasers and Presidential Financial Corporation entered into subordination agreements concerning the terms of the assetssubordination of our TeamStaff Rx subsidiary, we were requiredthe Convertible Debentures to obtain the consent of Sovereign. On January 12, 2010 we were granted such consent. As a condition to such consent, however, Sovereign reduced the maximum amount available under suchsecured loan facility provided by Presidential Financial Corporation. Under the subordination agreements, the Company may not make payments to the Debenture Purchasers under the Convertible Debentures unless before and following such payments, no "Event of Default" exists under the secured loan facility.

        The Debenture Purchasers are entities affiliated with Wynnefield Capital, Inc., the Company's largest shareholder. Mr. Peter Black, a member of the Company's Board of Directors, is an employee of Wynnefield Capital. Direct costs associated with the Debenture Purchase Agreement totaled $32,000.


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(6) DEBT AND CAPITAL LEASES: (Continued)

These costs have been and will be capitalized as deferred financing costs and amortized over the period that such debentures are outstanding or the Debenture Agreement is effective. In addition, an initial value of $42,000 was ascribed to the warrants and it was determined that at July 28, 2011, because of appreciation in the Company's stock price, the embedded conversion feature included in the Convertible Debentures had a fair value of $289,000 at the time of issuance of the Convertible Debentures; such amount is also being expensed over the life of the Convertible Debentures and the unamortized amounts have been deducted from $3.0 million to $2.0 million. Asthe value of the Convertible Debentures as noted below. The value of the convertible debenture and warrants at September 30, 20092012, were $87,000 and 2008,$32,000, respectively.

        At September 30, 2012, there was no debtwere 53,846 warrants outstanding and the Debenture Purchasers have the right to convert the principal amount of the Convertible Debentures into 269,230 shares of common stock based on initial conversion rates, 280,682 shares of common stock based on post rights offering conversion rates, under the Loan Agreementterms of the conversion feature embedded in the Convertible Debentures. Because the warrants and unused availability (as defined) totaled $1.7 million and $1.8 million, respectively, netthe conversion feature embedded in the Convertible Debenture have a weighted average anti-dilution feature that in certain circumstances could provide the holders with protection against changes in the market value of the Company's common stock, they are required collateral reserves per the Loan Agreement for certain payroll and tax liabilities.

In addition, on January 11, 2010, we determined thatunder applicable accounting standards to be recorded at fair value as of the balance sheet date. At September 30, 2009, we were not2012, the Company evaluated the fair value of the Warrants and the embedded conversion feature of the Convertible Debentures using a binomial valuation model and recorded a loss of $105,000 and income of $107,000 at September 30, 2012 and September 30, 2011, respectively, to reflect the net difference between their initial carrying values (July 28, 2011) and their fair values on those dates.

        Assumptions used in compliancevaluing the warrants and the embedded conversion features at September 30, 2012 included the following:

 
 Warrants Embedded
Conversions
Features

Risk free interest rate

 0.62% 0.23%

Contractual term

 5 years 27 months

Dividend yield

 0% 0%

Expected lives

 5 years 27 months

Expected volatility

 70.3% 70.3%

Fair value per warrants per share or per $1.25 of debt

 $0.23 $0.05

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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(6) DEBT AND CAPITAL LEASES: (Continued)

        Assumptions used in valuing the warrants and the embedded conversion features at September 30, 2011 included the following:

 
 Warrants Embedded
Conversions
Features

Risk free interest rate

 1.60% 0.42%

Contractual term

 5 years 27 months

Dividend yield

 0% 0%

Expected lives

 5 years 27 months

Expected volatility

 70.9% 71.8%

Fair value per warrants per share or per $1.30 of debt

 $1.01 $0.63

        At September 30, 2012, the carrying value of the Convertible Debentures is as follows (amounts in thousands):

 
 September 30, 
 
 2012 2011 

Principal amount of Convertible Debentures

 $350 $350 

Less:

       

Value of financial instruments to Convertible Debentures purchasers

  (131) (268)

Value of warrants issued to Convertible Debentures purchasers

  (17) (36)
      

Carrying Value

 $202 $46 
      

        The payment of the entire $350,000 principal amount of the Convertible Debentures is contractually due in the fiscal year ending September 30, 2014. The Company has evaluated the likelihood of satisfying the liability associated with the debt service coverage ratio covenantfinancial instruments in fiscal 2013 and has concluded that the classification of the Loan Agreement. The Loan Agreement provides that following an event of default, Sovereign may, among other remedies provided for in the Loan Agreement, accelerate the amounts outstanding under the Loan Agreement, take such actions as it deems necessary to protect its security interest in the collateral, and terminate the Loan Agreement. In connection with its consent to the sale of the TeamStaff Rx assets and loan modification, Sovereign waived such non-compliance for the period endedthis liability is non- current at September 30, 2009. Sovereign, however, reserved its rights under the Loan Agreement with respect to any future non-compliance with the debt service coverage ratio for any future period or any other provision of the Loan Agreement.

2012.

Capital Leases:

        

F-16


(7) CAPITAL LEASES:
The Company leases certain office equipment under a non-cancelable capital lease agreementsagreement that expire at various dates throughexpires in fiscal year 2012. Terms range from 36 to 63 months. Interest rates range from 7.5% to 10.1%2014. The interest rate is 6.42%. As ofAt September 30, 20092012 and 2008,2011, the Company has recorded $1.0$0.1 million and $0.1 million, respectively, in gross capital leases and accumulated depreciation of $0.9$0.02 million and $0.8$0.1 million, respectively.
Future

        The Company's remaining lease obligation of $77,000 is payable through February 2014. Principal payments at Septemberof $51,000 and $26,000 are due in 2013 and 2014, respectively.


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2009 are as follows (amounts in thousands):

     
Years Ending September 30,    
2010 $24 
2011  20 
2012  9 
    
Total minimum lease payments  53 
Amounts representing interest  (6)
    
   47 
Less current portion  (20)
    
Long term portion $27 
    
(8) 2012 AND 2011

(7) OTHER CURRENT ASSETS:

ASSETS:

Other current assets at September 30, 20092012 and 20082011 consist of the following (amounts in thousands):

        
 2009 2008  2012 2011 
Miscellaneous receivables $87 $381  $43 $77 
Prepaid insurance 57 66  51 48 
Miscellaneous prepaid expense 34 20  39 59 
Security deposits 4 5 
Prepaid income taxes 43  
Other 32 33 
          
 $257 $505  $133 $184 
          
(9) 

(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:

LIABILITIES:

Accrued expenses and other current liabilities at September 30, 20092012 and 20082011 consist of the following (amounts in thousands):

        
 2009 2008  2012 2011 
Accrued benefits and incentives $406 $482  $1,326 $523 
Accrued bonus 50 588  236 357 
Accrued interest 75 75 
Accrued occupancy 50 72     
Accrued payroll taxes 70 66 

Accrued workers compensation

 569 429 
Accrued professional fees 487 297  217 439 
Other 103 330  469 386 
          
 $1,241 $1,910  $2,817 $2,134 
          
(10) 

(9) COMMITMENTS AND CONTINGENCIES (See Also Note 13):

:

Potential Contractual Billing Adjustments
At September 30, 2009, TeamStaff GS is seeking approval from the Federal government for gross profit on retroactive billing rate increases

        DLH has accrued revenue and costs associated with certain government contracts at which it has employees staffed on contract assignments.covered by the Service Contract Act. These adjustments are due to changes in the contracted wage determination rates for these contractcertain employees. A wage determination is the listing of wage rates and fringe benefit rates for each classification of laborers whom the Administrator of the Wage and Hour Division of the U.S. Department of Labor (“DOL”("DOL") has determined to be prevailing in a given locality. Contractors performing services for the Federal government under certain contracts are required to pay service employees in various classes no less than the wage rates and fringe benefits founddetermined to be prevailing in these localities. An audit by the DOL in fiscal 2008 at one of the facilities revealed that notification, as required by contract, was not provided to TeamStaff GSDLH Solutions in order to effectuate the wage increases in a timely manner. Wages for contract employees currently on assignment at the time have been adjusted prospectively to the prevailing rate and hourly billing rates to the DVA have been increased accordingly. During the fiscal year ended September 30, 2008, TeamStaffDLH recognized nonrecurring revenues of $10.8 million and direct costs of $10.1 million, based on amounts that are contractually due under its arrangements with the Federal agencies. At September 30, 2009,2012, the amount of the remaining accounts receivable with the DVA approximates $9.3 million.

        In April 2012, the Company received formal contract modifications from the DVA, dated April 16, 2012, concerning the retroactive billing matter. The contract modifications from the DVA incorporate


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(9) COMMITMENTS AND CONTINGENCIES (See Also Note 13): (Continued)

relevant wage determinations covering largely 2006 and 2007 applying to the Company's historical contracts with DVA during those periods. These government modifications initiate the procedures whereby the Company may invoice the DVA in accordance with the modified wage determinations and subsequently make timely retroactive payments to employees (active and inactive) covering work performed at the certain locations. The Company has beenexpects to follow the same process implemented as directed by and in conjunction with the Department of Labor and the DVA when similar wage determination-related contract modifications were made to cover other sites (also for the periods of 2006 and 2007) in 2008.

        The Company continues to be in discussions with representativessupport the Government's review of the DVA regardingdetailed supporting calculations for the matterretroactive billings and anticipates resolution during the second quarter of fiscal 2010. TeamStaff is currently in the process of negotiating ato negotiate an incremental final amount related to gross profit onindirect costs and fees applied to these adjustments.retroactive billings. As such, there may be additional revenues recognized in future periods once the final approval for such additional amounts is obtained. The ranges of additional revenueindirect costs and gross profitfees are estimated to be between $0.4 million and $0.6 million. At present,The Company has developed these estimates under the Company expectssame contractual provisions applied to collect such amounts during fiscal 2010. Becausethe sites that were settled in 2008. However, because these amounts areremain subject to government review, no assurances can be given that any amounts that we willmay receive any additional billings from our government contracts or that if additional amounts are received, that the amount will be within the range specified above.

Leases

        

F-17


Leases
Minimum payments, including those of discontinued businesses, net ofassuming no expected sublease payments, under non-cancelable operating lease obligations at September 30, 20092012 are as follows (amounts in thousands):

    
Years Ending September 30,   
 
 
2010 $474 
2011 285 
2012 132 
2013 85  $163 
2014 88  169 
2015 60  143 

2016

 86 

2017

 81 
      
 $1,124  $642 
      

Rent expense, net of sublease income, under all operating leases in fiscal year ended September 30, 2009,2012, was $483,000, of which $148,000 is attributed to continuing operations and $335,000 is attributed to discontinued operations.$173,000. Rent expense, net of sublease income, under all operating leases in fiscal year ended September 30, 2008,2011, was $542,000, of which $167,000 is attributed to continuing operations and $375,000 is attributed to discontinued operations. At September 30, 2009 there is one remaining occupancy sublease.

$155,000.

As discussed in Note 4, as part of the sale of TeamStaff Rx, Advantage RN will havehad the right to use, through February 28, 2011, the premises located in Clearwater, Florida that was used by TeamStaff Rx for its principal executive offices. In connection with such use, Advantage RN willwas obligated to make rent subsidy payments to TeamStaff Rx totaling $125,000, consisting of (i) $25,000 payable at the closing and (ii) an additional $100,000 payable in 10 equal monthly installments of $10,000 payable on the first day of each calendar month beginning on March 1, 2010 until December 1, 2010. In addition,Advantage RN has since vacated the premises and ceased making installment payments. The Company is pursuing a claim against Advantage RN for all amounts owed. The Company has provided an allowance of $50,000 for their estimate of uncollectible sub-lease funding.


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(9) COMMITMENTS AND CONTINGENCIES (See Also Note 13): (Continued)

Prepaid Workers' Compensation

        As part of the Company's discontinued PEO operations, DLH had a workers' compensation program with Zurich American Insurance Company ("Zurich") which covered the period from March 22, 2002 through November 16, 2003, inclusive. Payments for the policy were made to a trust monthly based on projected claims for the policy period. Interest on all assets held in the trust is credited to DLH. Payments for claims and claims expenses are made from the trust. From time-to-time, trust assets have been refunded to the Company anticipates incurringbased on Zurich's and managers' overall assessment of claims experience and historical and projected settlements. The final amount of trust funds that could be refunded to the Company is subject to a lossnumber of uncertainties (e.g. claim settlements and experience, health care costs, the extended statutory filing periods for such claims); however, based on the disposala third party's study of TeamStaff Rx principally from recognition ofclaims experience, DLH estimates that at September 30, 2012, the remaining unfunded operating lease payments at this facility. The measurement date for recording this liabilityprepaid asset of $0.3 million will be received within the next twelve to thirty-six months. This amount is December 31, 2009.

reflected on DLH's balance sheet as of September 30, 2012 as a current asset, in addition to approximately $0.2 million related to other policy deposits.

Prepaid Workers’Workers' Compensation Insurance

From November 17, 2003 through April 14, 2009, inclusive, TeamStaff’s workers’DLH's workers' compensation insurance program was provided by Zurich American Insurance Company (“Zurich”).Zurich. This program covered TeamStaff’sDLH's temporary, contract and corporate employees. This program was a fully insured, guaranteed cost program that contained no deductible or retention feature. The premium for the program was paid monthly based upon actual payroll and is subject to a policy year-end audit. Effective April 15, 2009, TeamStaffDLH entered into a partially self-funded workers’workers' compensation insurance program with a national insurance carrier for the premium year April 15, 2009 through April 14, 2010.2010 and has been renewed through April 14, 2013. The Company will paypays a base premium plus actual losses incurred, not to exceed certain stop-loss limits. The Company is insured for losses above these limits, both per occurrence and in the aggregate. The Company accrues for estimated claims incurred based on data provided by its insurance carrier.

As part of the Company’s discontinued PEO operations, TeamStaff had a workers’ compensation program with Zurich, which covered the period from March 22, 2002 through November 16, 2003, inclusive. Payments for the policy were made to the trust monthly based on projected claims for the policy period. Interest on all assets held in the trust is credited to TeamStaff. Payments for claims and claims expenses are made from the trust. From time-to-time, trust assets have been refunded to the Company based on Zurich’s and management’s overall assessment of claims experience and historical and projected settlements. In June 2009 and March 2008, Zurich reduced the collateral requirements on outstanding workers’ compensation claims and released $114,000 and $350,000, respectively, in trust account funds back to the Company. The final amount of trust funds that could be refunded to the Company is subject to a number of uncertainties (e.g. claim settlements and experience, health care costs, the extended statutory filing periods for such claims); however, based on a third party’s study of claims experience, TeamStaff estimates that at September 30, 2009, the remaining prepaid asset of $0.3 million will be received within the next twelve to thirty-six months. A portion of this is reflected on TeamStaff’s balance sheet as of September 30, 2009 as a current asset, in addition to approximately $0.2 million related to current policy deposits.

As of September 30, 20092012 and 2011, the adequacy of the workers’workers' compensation reserves (which(including those periods' amounts that are offset against the trust fund balances in prepaid assets) was determined, in management’smanagement's opinion, to be reasonable. In determining our reserves, we rely in part upon information regarding loss data received from our workers’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 and such variables as timing of payments and investment returns thereon are uncertain or unknown,unknown; therefore, actual results may vary from current estimates. TeamStaffDLH 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’sDLH's prepayments and adjust the related reserves as deemed appropriate.

F-18


Payroll Taxes
TeamStaff

        DLH has received notices from the Internal Revenue Service (“IRS”("IRS") claiming taxes, interest and penalties due related to payroll taxes predominantly from its former PEO operations which were sold in fiscal 2003. TeamStaffDLH 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 related to the former PEO operations, TeamStaffDLH operated through


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(9) COMMITMENTS AND CONTINGENCIES (See Also Note 13): (Continued)

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, TeamStaffDLH has been working with the IRS to resolve these discrepancies and has had certain interest and penalty claims abated. TeamStaffDLH has also received notices from the Social Security Administration claiming variances in wage reporting compared to IRS transcripts. TeamStaffDLH believes the notices from the Social Security Administration are directly related to the IRS notices received. TeamStaff had retained the services of Ernst & Young LLP as a consultant to assist in resolving certain of these matters with the IRS and Social Security Administration. TeamStaffDLH 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. In settling various years for specific subsidiaries with the IRS, the Company has received refunds for those specific periods; however, as the process of settling and concluding on other periods and subsidiaries is not yet completed, the potential exists for related penalties and interest. Based upon the most recent correspondence from the IRS and an assessment of open periods, we believe that ourThe remaining liability of $1.1($1.3 million at September 30, 2009 (recorded2012) has been recorded in accounts payable) is fairly stated. Interest expense would accrue on such amountspayable and includes estimated accrued penalties and interest totaling approximately $500,000.

        The Company believes it has accrued for the entire estimated remaining liability, inclusive of interest and penalties through the ultimate payment date unless waived byof the IRS. In fiscal 2009,financial statements. The Company may incur additional interest and may incur possible additional penalties through the Company paid $1.1 million, relatedfuture date that this obligation is settled, however, it is not currently possible to this matter.

Based on an assessment of periods settled and the status of open periods under review by the IRS, management reduced its estimated liability by $0.7 million in 2008. Such amount, accounted for as a change in estimate is included as a component of other income (expense)what, if any, additional amount(s) may be claimed in the accompanying 2008 statementfuture, given the uncertain timing and nature of operations.any future settlement negotiations. No payments were made in fiscal 2011 or fiscal 2012. Management believes that the ultimate resolution of these remaining payroll tax matters will not have a significant adverse effect on its financial position or future results of operations.
Legal Proceedings
RS Staffing Services, Inc.
On April 17, 2007, a Federal Grand Jury subpoena was issued by the Northern District of Illinois to the Company’s wholly-owned subsidiary, TeamStaff GS, formerly known as RS Staffing Services, requesting production of certain documents dating back to 1997, prior to the time the Company acquired RS Staffing Services. The subpoena statedCompany's intention is that it was issuedwill in connection with an investigation of possible violations of Federal criminal laws and related crimes concerning procurement at the DVA. Accordingdue course seek to the cover letter accompanying the subpoena, the U.S. Department of Justice, Antitrust Division (“DOJ”), alongnegotiate a mutually satisfactory payment plan with the DVA, Office of the Inspector General, are responsible for the current criminal investigation. RS Staffing Services provides contract staffing at certain DVA hospitals that may be part of the investigation. The return date for documents called for by the subpoena was May 17, 2007. In connection with the same investigation, agents with the DVA, Office of Inspector General, executed a search warrant at the Monroe, Georgia offices of RS Staffing Services.
The government has advised TeamStaff that the DOJ hasIRS, but there is no intent to charge TeamStaff or any of its subsidiaries or employees in connection with the Federal investigation of contract practices at various government owned/contractor operated facilities. TeamStaff remains committed to cooperate with the DOJ’s continued investigation of other parties.
The Company originally acquired RS Staffing Services in June 2005. As part of the purchase price of the acquisition, the Company issued to the former owners of RS Staffing Services a $3.0 million promissory note, of which $1.5 million and interest of $150,000 was paid in June 2006. On May 31, 2007, the Company sent a notice of indemnification claim to the former owners for costs that have been incurred in connection with the investigation. Effective June 1, 2007, the Company and former owners of RS Staffing Services reached an agreement to extend the due date from June 8, 2007 to December 31, 2008 with respect to the remaining $1.5 million note payable and accrued interest payable. Such agreement has been extended to February 28, 2010. As of September 30 2009, the amount has not been settled. The Company recognized expenses related to legal representation and costs incurred in connection with the investigation in the amount of $21,000 and $219,000 during fiscal 2009 and 2008, respectively, as a component of other income (expense). Cumulative costs related to this matter approximate $1.7 million. Pursuant to the acquisition agreement with RS Staffing Services, the Company has notified the former owners of RS Staffing Servicesassurance that it is the Company’s intention to exercise its right to setoff the payment of such expenses against the remaining principal and accrued interest due to the former owners of RS Staffing Services.
The Company will pursue the recovery as a right of offset in future periods. Management has a good faith belief that the Company will recover such amounts; however, generally accepted accounting principles preclude the Company from recording an offset to the note payable to the former owners of RS Staffing Services until the final amount of the claim is settled and determinable. At present, no assurances can be given that the former owners of RS Staffing Services would not pursue action against us or that the Company will be successful in doing so and the offset of such amounts against the outstanding debtCompany's future cash flows and accrued interest from notice date forward, if any. Accordingly, the Company has expensed costs incurred related to the investigation through September 30, 2009.
liquidity could therefore be materially affected by this matter.

Legal Proceedings

        

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Other Matters
On October 2, 2008, the United States Equal Employment Opportunity Commission (“EEOC”) issued a subpoena to TeamStaff GS regarding the alleged wrongful termination of certain employees who were employed at a federal facility staffed by TeamStaff GS contract employees. The wrongful termination is alleged to have occurred when the former employees were terminated because they could not satisfy English proficiency requirements imposed by the Federal government. TeamStaff GS has produced all documents that it believes were required by the subpoena and has submitted its position statement to the EEOC. It is unclear, at present, if or when the EEOC will respond.
As a commercial enterprise and employer, we are subject to various claims and legal actions in the ordinary course of business. These matters can include professional liability, employment-relations issues, workers’workers' compensation, tax, payroll and employee-related matters and inquiries and investigations by governmental agencies regarding our employment practices.practices or other matters. We are not aware of any pending or threatened litigation that we believe is reasonably likely to have a material adverse effect on our results of operations, financial position or cash flows.
In connection However, as the Company has previously reported, it was advised of a claim by the U.S. Attorney based on an alleged failure to pay certain classes of employees the prevailing wages as required by the Service Contract Act during the years 2003-2010. The Company is continuing to review the data allegedly supporting the claims with the U.S. Department of Justice in an effort to determine whether any wage adjustment is required. These claims appear, in part, to be part of the claims previously disclosed by the Company and related to services provided to the Department of Veterans Affairs by DLH. See "Risk Factors" in Part I and "Potential Contractual Billing Adjustments" in the Management Discussion and Analysis. Until the analysis of the data is complete, we cannot finally determine either the merits of the claim or the potential impact on the Company; however, the Company continues to believes it has acted in conformity with its medical staffing business, TeamStaffcontractual commitments and no wage adjustment is exposed to potential liability for the acts, errors or omissionsrequired. Nevertheless, there


Table of its contract 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 Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(9) COMMITMENTS AND CONTINGENCIES (See Also Note 13): (Continued)

can be no assurance that such insurance will be adequate to cover all potential claims.

TeamStaffan adverse decision or settlement would not have a material adverse impact on the Company.

        DLH is engaged in no other litigation, the effect of which would be anticipatedis expected to have a material adverse impact on TeamStaff’sDLH's results of operations, financial position or cash flows.

Employment Agreements

From time-to-time, we enter into employment agreements with certain key executives which provide for fixed compensation, criterion for earning bonuses and other incentives and, in certain instances, issuance of share based equity grants. These agreements generally continue until terminated by the employee or the Board of Directors or, upon the occurrence of defined certain events or circumstances (including a defined change in control), and provide for salary continuance for specified periods of generally no more than a year.

year and or lump sum payments in the event of a change of control of up to 150% of annual salary.

During the fiscal year ended September 30, 2009, the Company terminated certain management and staff personnel, and as a result, incurred severance related expenses of approximately $169,000, of which $165,000 is included in results of discontinued operations; at September 30, 2009 the remaining liability from these arrangements was approximately $108,000, which is included in accrued expenses.

During the fiscal year ended September 30, 2008,2012, the Company terminated certain executives, management and staff personnel, and as a result, incurred severance related expenses of approximately $0.2$0.3 million in staff personnel severance (included in selling, general and administrative expense); at At September 30, 20082012, the remaining liability from these arrangements was approximately $74,000,$0.2 million. With respect to the termination of the Company's former Chief Financial Officer, the Company entered into a separation agreement with him in August 2012, which was included in accrued expenses.
sets forth the terms of his departure from the Company.

Government Assignment of Contracts

Availability of funds under the SovereignPresidential Financial line of credit is directly related to the successful assignment of certain accounts receivable. Certain government accounts of TeamStaff GSDLH Solutions are required to execute “Acknowledgements"Acknowledgements of Assignment." There can be no assurance that every TeamStaff GSDLH Solutions 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 existing line of credit.

(11) SHAREHOLDERS’ EQUITY:

(10) SHAREHOLDERS' EQUITY:

        On March 31, 2011, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with a limited number of accredited investors pursuant to which the Company sold for $225,000 an aggregate of 459,181 shares of its Common Stock Warrants

Duringto such persons in a private transaction (the "Equity Investment"). The purchasers participating in the fiscal year ended September 30, 2009, TeamStaff granted no warrants, no warrants expired unexercised and no warrants were exercised. Duringtransaction are members of the fiscal year ended September 30, 2008, TeamStaff granted no warrants, 149,500 warrants expired unexercised and no warrants were exercised. At September 30, 2009, there are no warrants outstanding.

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Stock Option Plans
2000 Employee Stock Option Plan
During 2000, theCompany's Board of Directors and shareholders approvedmanagement team (the "Purchasers"). The transaction closed on March 31, 2011. Of this amount, the adoptionCompany received $150,000 in total cash proceeds for the purchase of the 2000 Employeesshares of Common Stock Option Plan (the “2000 Plan”)and three of the purchasers agreed with the Company to providepay the purchase price for the grant of options to purchase up to 1,714,286 shares of TeamStaff’s common stockCommon Stock by granting an offsetting credit to all employees, including senior management. The 2000 Plan replaces the 1990 Employee PlanCompany for an amount equal to the purchase price and Senior Management Plans, both of which expired. Underauthorizing the termsCompany to apply such credit against any obligation of the 2000 Plan, options granted thereunder may be designated as options which qualify for incentive stock option treatment (“ISOs”) under Section 422ACompany to such person within twelve months of the Code, or optionsclosing date, except for base salary. The shares to which do not so qualify (“Non-ISO’s”). As of September 30, 2009 and 2008, therethe credit relates were 4,500 and 17,000 options, respectively, outstanding under the 2000 Plan.
The 2000 Plan is administeredto be held by the Management ResourcesCompany until the credit is applied and Compensation Committee of the Board of Directors (“The Compensation Committee”). The Compensation Committee has the discretion to determine the eligible employees to whom, and the times and the price at which, options will be granted; whethercancelled upon the one-year anniversary to the extent the credit is not applied. The


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(10) SHAREHOLDERS' EQUITY: (Continued)

aggregate amount of such options shall be ISOs or Non-ISOs, subjectcredits totaled $75,000 and were fully exercised during 2012. The Company has used these cash proceeds for general working capital. The value ascribed to applicable law; the periods during which each option will be exercisable; and the number of shares subject to each option. The Compensation Committee has full authority to interpret the 2000 Plan and to establish and amend rules and regulations relating thereto.

Under the 2000 Plan, the exercise price of an option designated as an ISO shall not be less thanEquity Investment was based on the fair market value of the commonCompany's stock on March 31, 2011. On May 18, 2011, the date the option is granted. However, in the event an option designated as an ISO is grantedCompany issued 51,020 shares of Common Stock to a ten percent (10%) shareholder, as defined, such exercise price shall be at least 110% of such fair market value. Exercise prices of Non-ISO options may be less than such fair market value.
The aggregate fair market value of shares subject to options granted to a participant, which are designated as ISOs and which become exercisable in any calendar year shall not exceed $100,000.
The Compensation Committee may, in its sole discretion, grant bonuses or authorize loans to or guarantee loans obtained by an optionee to enable such optionee to pay the exercise price or any taxes that may arisecounsel in connection with an arrangement to cancel $25,000 of outstanding fees.

        On June 1, 2011, the exercise or cancellationCompany entered into a debenture purchase agreement (the "Debenture Purchase Agreement") with entities affiliated with Wynnefield Capital, Inc. (the "Debenture Purchasers"), providing for a standby commitment pursuant to which the Debenture Purchasers agreed to purchase convertible debentures (the "Convertible Debentures") in an aggregate principal amount of up to $350,000 (the "Total Commitment Amount"). In addition, the Company issued the Debenture Purchasers warrants to purchase an option. The Compensation Committee can also permitaggregate of 53,846 shares of common stock (the "Warrants") in consideration of their agreement to provide the paymentTotal Commitment Amount. On July 28, 2011, the Company drew down the entire amount of the exercise priceTotal Commitment amount available under the Debenture Purchase Agreement, of which $200,000 was used for the initial payments under the Debenture Purchase Agreement relating to the settlement with the former owners of RS Staffing, and on such date the Company issued the Convertible Debentures in the aggregate principal amount of $350,000 to the Debenture Purchasers, and received such funds.

        The Convertible Debentures will mature on the 27-month anniversary of issuance and bear interest at the rate of the greater of the prime rate plus 5%, or 10% per annum, payable at maturity or upon redemption of such Convertible Debentures. The interest rate at June 30, 2012 was 10%. The Convertible Debentures were initially convertible into shares of the Company's common stock of the Company held by the optionee for at least six months prior to exercise.

Non-Executive Director Plan
In fiscal year 2000, the Board of Directors and stockholders approved the adoption of the 2000 Non-Executive Director Stock Option Plan (the “2000 Director Plan”) to provide for the grant of options to non-employee directors of TeamStaff. Under the terms of the 2000 Director Plan, each non-executive director is automatically granted an option to purchase 5,000 shares upon joining the Board and each September lst, pro rata, based on the time the director has served in such capacity during the previous year. However, the granting of options to non-employee directors was suspended for fiscal 2007, 2008 and 2009. The 2000 Director Plan also provides that directors, upon joining the Board, and for one (1) year thereafter, will be entitled to purchase restricted stock from TeamStaff at a price equal to 80% of the closing bid price on the date of purchase up to an aggregate purchaseinitial conversion price of $50,000. For fiscal years 2005 through 2009 there were no purchases of discounted restricted stock. The 2000 Director Plan replaced the previous Director Plan that expired$1.30 per share, which was in April 2000. As of September 30, 2009 and 2008, there were 10,625 and 15,625 options, respectively, held by directors outstanding.
Under the 2000 Director Plan, the exercise price for options granted shall be 100%excess of the fair market value of the Company's common stock onat that date. The initial conversion rate is subject to adjustment to account for certain customary events and also includes weighted-average anti-dilution protection for future issuances by the dateCompany, subject to certain exclusions. The Company can also redeem the outstanding Convertible Debentures at any time at 120% of grant. Until otherwisethe remaining principal amount, plus accrued but unpaid interest. The Warrants are exercisable for five years at an initial exercise price equal to $1.00. The initial exercise price of the Warrants is subject to adjustment for certain customary events and includes weighted average anti-dilution protection for future issuances by the Company, subject to certain exclusions. In connection with the parties' entry into the Debenture Purchase Agreement, the Company, DLH Solutions, the Debenture Purchasers and Presidential Financial Corporation entered into subordination agreements concerning the terms of the subordination of the Convertible Debentures to the secured loan facility provided by Presidential Financial Corporation. Under the subordination agreements, the Company may not make payments to the Debenture Purchasers under the Convertible Debentures unless before and following such payments, no "Event of Default" exists under the secured loan facility.

        As a result of the rights offering, the conversion rate of the Convertible Debentures was adjusted to $1.25 and the exercise price of options granted under the 2000 Director Plan mustWarrants was adjusted from $1.00 to $0.96 per share.

        The Debenture Purchasers are entities affiliated with Wynnefield Capital, Inc., the Company's largest shareholder. Mr. Peter Black, a member of the Company's Board of Directors, is an employee of Wynnefield Capital.


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(10) SHAREHOLDERS' EQUITY: (Continued)

        Direct costs associated with the Debenture Purchase Agreement totaled $31,000. These costs have been and will be paidcapitalized as deferred financing costs and amortized over the period that such debentures are outstanding or the Debenture Agreement is effective. In addition, an initial value of $42,000 was ascribed to the warrants and it was determined that at July 28, 2011, because of appreciation in the Company's stock price, the embedded conversion feature included in the Convertible Debentures had a fair value of $289,000 at the time of exercise, eitherissuance of the Convertible Debentures; such amount is also being expensed over the life of the Convertible Debentures and the unamortized amounts have been deducted from the value of the Convertible Debentures as noted below. As a result of the rights offering the initial value of the warrants were revalued with minimal change and the value of the Convertible Debenture of $289,000 was revalued at $307,000.

        At September 30, 2012, there were 53,846 warrants outstanding and the principal amount of the Convertible Debentures is convertible into 280,682 shares of common stock under the terms of the conversion feature embedded in cash, by deliverythe Convertible Debentures. The amount of shares of common stock of TeamStaff or by a combination of each. The term of each option commences onunder the date it is granted and unless terminated sooner as providedconversion feature embedded in the 2000 Director Plan, expires five (5) yearsConvertible Debenture was revalued from the date269,230 shares to 280,682 as a result of grant. The Compensation Committee has no discretion to determine which non-executive director will receive options or the number of shares subjectadjustment to the option,conversion price due to the term ofrights offering. Because the option orwarrants and the exercisability of the option. However, the Compensation Committee will make all determinations of the interpretation of the 2000 Director Plan. Options granted under the 2000 Director Plan are not qualified for incentive stock option treatment.

The fair value of previously issued options at the date of grant historically was estimated using the Black-Scholes option pricing model. The Company took into consideration pertinent accounting guidance and SEC Staff Accounting Bulletin No. 107 when reviewing and updating assumptions. The expected volatility was based upon historical volatility of our stock and other contributing factors. The expected term was based upon observation of actual time elapsed between date of grant and exercise of options for all employees. Previously such assumptions were determined based on historical data.

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The following tables summarize the activity in TeamStaff’s various stock option plans for the years ended September 30, 2009 and 2008:
                 
          Weighted    
          Average  Aggregate 
      Weighted  Remaining  Pretax 
  Number of  Average  Contractual  Intrinsic 
  Shares  Exercise Price  Term  Value 
Options outstanding, September 30, 2007  59,125  $8.80   2.2  $0 
Granted              
Exercised              
Cancelled  (26,500) $9.47         
                
Options outstanding, September 30, 2008  32,625  $8.09   1.8  $0 
Granted              
Exercised              
Cancelled  (17,500) $9.12         
                
Options outstanding, September 30, 2009  15,125  $6.30   1.6  $0 
                
As of September 30, 2009 and 2008, all options had vested and were exercisable.
The aggregate intrinsic valueconversion feature embedded in the table above representsConvertible Debenture have a weighted average anti-dilution feature that in certain circumstances could provide the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the fiscal year and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised theirwith protection against changes in the money options on those dates.
This amount changes based on the fair market value of the Company’sCompany's common stock, they are required under applicable accounting standards to be recorded at fair value as of the balance sheet date. At September 30, 2012 and September 30, 2011, the Company evaluated the fair value of the Warrants and the embedded conversion feature of the Convertible Debentures using a binomial valuation model and recorded income in the amount of $105,000 for the year ended September 30, 2012 to reflect the net difference between their carrying values at September 30, 2011 and their fair values as of September 30, 2012 using the closing stock price of $1.06 as of September 30, 2012, for a total value of $119,000.

        The payment of the entire $350,000 principal amount of the Convertible Debentures is contractually due in the fiscal year ending September 30, 2014. The Company has evaluated the likelihood of satisfying the liability associated with the financial instruments in fiscal 2012 and has concluded that the classification of this liability is non-current at September 30, 2012

        On March 16, 2012, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission for a rights offering in which existing stockholders of the Company will receive non-transferable rights to purchase $4.2 million of additional shares of its common stock. Under the terms of the rights offering, the Company distributed, at no charge to the holders of its common stock as of the record date of April 10, 2012, non- transferable subscription rights for each share of common stock owned on the record date. Each subscription right entitled the holder to purchase 0.532 shares of the Company's common stock at a price of $1.30 per share. The rights offering also includes an over-subscription privilege, which entitled a holder who exercises its basic subscription privilege in full the right to purchase additional shares of common stock that remain unsubscribed at the expiration of the rights offering, subject to the availability andpro rata allocation of shares among persons exercising this over-subscription right.


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(10) SHAREHOLDERS' EQUITY: (Continued)

        In connection with the rights offering, on April 30, 2012, the Company entered into a standby purchase agreement with Wynnefield Capital, Inc. ("Wynnefield Capital"), which owned, prior to the rights offering, approximately 21% of the Company's Common Stock through certain affiliated entities. Pursuant to the standby purchase agreement, Wynnefield Capital (or affiliated assignees) agreed to acquire from us in the rights offering, subject to the satisfactions of specified conditions, the shares of common stock that relate to any rights that remain unexercised at the expiration of the rights offering. Mr. Peter Black, a member of our board of directors, is an employee of Wynnefield Capital. We entered into a registration rights agreement with Wynnefield Capital whereby we will, at our cost and expense, register for resale under the Securities Act of 1933, all shares of common stock beneficially owned by Wynnefield Capital, including shares purchased by Wynnefield Capital in the rights offering. We have agreed to file a registration statement with the SEC within 90 days of closing of the rights offering.

        The Company completed the closing of the rights offering on June 15, 2012 and raised gross proceeds of $4.2 million from the sale of 3,230,769 shares of its common stock. As a result, the total number of shares of the Company's common stock outstanding increased to 9,265,702 shares. Officers and directors purchased an aggregate of 137,678 shares in the rights offering and entities affiliated with Wynnefield Capital purchased a total of 2,840,251 shares of our common stock.

Stock Option Plans

2006 Long Term Incentive Plan (“("2006 Plan”Plan")

The Board of Directors adopted the 2006 Plan on January 17, 2006. The shareholders approved the 2006 Plan at the annual meeting on April 27, 2006. The2006 and the Company initially reserved an aggregate of 5,000,0001,250,000 shares of common stock for issuance under the 2006 Plan. In August 2011, the Company's shareholders approved amendments to the 2006 Plan pursuant to which the maximum number of shares eligible for issuance pursuant to awards granted under the 2006 Plan was increased to an initial reserve of 3,001,625 shares of common stock. The maximum number of shares of common stock that may be delivered to participants under the 2006 Plan as amended equals the sum of: (a) 5,000,0002,750,000 shares of common stock;stock under the 2006 Plan; (b) any251,625 shares subject to awards granted under the predecessor 2000 Plan and the 2000 Director Plan (collectively, the “2000 Plans”"2000 Plans"), which arewere forfeited, expired, canceled or settled in cash without delivery of such shares to the participant or otherwise is terminated without a share issuance; (c) any shares tendered by participants or withheld in payment of the exercise price of options or to satisfy withholding taxes under the 2000 Plans; and (d) any shares repurchased with the proceeds of options exercised under the 2000 Plans.

Shares that are subject to issuance upon exercise of an award granted under the 2006 Plan but which cease to be subject to such award (other than due to the exercise of such award), and shares that are subject to an award that is granted under the 2006 Plan but is subsequently forfeited, or that are subject to an award that terminates without shares being issued, will again be available for grant and issuance under the 2006 Plan.

Administration        Administration..    The 2006 Plan is administered by the Management Resources and Compensation Committee.Committee of the Board of Directors (the "Compensation Committee"). The 2006 Plan authorizes the Compensation Committee to select those participants to whom awards may be granted, to determine whether and to what extent awards are granted, to determine the number of shares of common stock


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DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(10) SHAREHOLDERS' EQUITY: (Continued)

or other considerations to be covered by each award, to determine the terms and conditions of awards, to amend the terms of outstanding awards, and to take any other action consistent with the terms of the 2006 Plan as the Compensation Committee deems appropriate.

The Compensation Committee may grant awards subject to vesting schedules or restrictions and contingencies in the Company's favor. However, the awards may be subject to acceleration such that they become fully vested, exercisable and released from any restrictions or contingencies upon the occurrence of a change of control (as defined in the 2006 Plan).

Terms and Conditions of AwardsAwards..    The Compensation Committee is authorized to make any type of award to a participant that is consistent with the provisions of the Plan. Awards may consist of options, stock appreciation rights, restricted stock, restricted stock units, performance shares, cash awards or any combination of these types of awards.

Options may be determined to be an "incentive stock option" ("ISO") or a non-qualified stock option. An option designated as an ISO is intended to qualify as such under Section 422 of the Internal Revenue Code.

Subject to the terms of the 2006 Plan, the Compensation Committee determines the provisions, terms and conditions of each award. The Compensation Committee may grant awards subject to vesting schedules or restrictions and contingencies in the company’sCompany's favor. However, the awards may be subject to acceleration such that they become fully vested, exercisable and released from any restrictions or contingencies upon the occurrence of a change of control (as defined in the 2006 Plan). The Compensation Committee may provide that stock-based awards earn dividends or dividend equivalents, which may be paid in cash or shares or may be credited to an account designated in the name of the participants. Participants may also be required or permitted to defer the issuance of shares or cash settlements under awards including under other deferred compensation arrangements of the company.Company. Each option granted under the 2006 Plan will be designated as either an incentive stock option or a non-statutory stock option. No option or stock appreciation right may be granted with a term of more than 10 years from the date of grant.

Performance shares or cash awards will depend on achievement of performance goals based on one or more performance measures determined by the Compensation Committee over a performance period as prescribed by the Compensation Committee of not less than one year and not more than five years. Performance goals may be established on a corporate-wide basis or as to one or more business units, divisions or subsidiaries, and may be in either absolute terms or relative to the performance of one or more comparable companies on an index covering multiple companies. “Performance measures”"Performance measures" means criteria established by the Compensation Committee from time to time prior to granting the performance shares or cash awards.

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Exercise PricePrice..    The 2006 Plan authorizes the Compensation Committee to grant options and stock appreciation rights at an exercise price of not less than 100% of the fair market value of the shares on the date of grant. The Compensation Committee has the right to provide post-grant reduction in exercise price to reflect any floating index as specified in an award agreement. The exercise price is generally payable in cash, check, surrender of pre-owned shares of common stock, broker-dealer exercise and sale, or by such other means determined by the Compensation Committee.

Option Repricing ProhibitedProhibited..    The exercise price for any outstanding option or stock appreciation right may not be decreased after the date of grant, nor may any outstanding option or stock


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(10) SHAREHOLDERS' EQUITY: (Continued)

appreciation right be surrendered as consideration for the grant of a new option or stock appreciation right with a lower exercise price.

        Duration, Amendment and Termination.    The 2006 Plan became effective upon its approval by the Company's shareholders in April 2006 and will terminate on the tenth anniversary of its effective date, unless sooner terminated by the Board of Directors. In addition to the power to terminate the 2006 Plan at any time, the Board of Directors also has the power to amend the 2006 Plan; provided, no amendment to the 2006 Plan may be made without stockholder approval if such approval is required by law or agreement, or if such change would: (i) expand the classes of persons to whom awards may be made under the 2006 Plan; (ii) increase the number of shares of Common Stock authorized for grant under the 2006 Plan; (iii) increase the number of shares which may be granted under awards to any one participant under the 2006 Plan; (iv) allow the creation of additional types of awards; or (v) decrease performance award criteria except to the extent permitted under the 2006 Plan.

        Eligibility.    The 2006 Plan, as amended, provides that awards may be granted to employees, non-employee directors and consultants of the Company as the Compensation Committee may determine.

Option Activity Table

        The following table summarizes the activity in DLH's various stock option plans for the years ended September 30, 2012 and 2011:

 
 Number of
Shares
 Weighted
Average
Exercise
Price
 Weighted
Average
Remaining
Contractual
Term
 Aggregate
Pretax
Intrinsic
Value
 

Options outstanding, September 30, 2010

  722,500 $1.13  9.4 $0 

Granted

  850,000 $1.42       

Exercised

  (30,000) 1.00       

Cancelled

  (5,000)$5.16       
             

Options outstanding, September 30, 2011

  1,537,500 $1.19  9.3 $743,745 

Granted

  275,000 $1.39       

Exercised

  0         

Cancelled

  (450,000)$1.34       
             

Options outstanding, September 30, 2012

  1,362,500 $1.19  8.6 $140,000 
             

        As of September 30, 2012, a total of 387,500 options outstanding were vested and 975,000 options were unvested. As of September 30, 2011, a total of 662,500 options outstanding were vested and 875,000 options were unvested. As of September 30, 2010, 172,500 options outstanding had vested and 550,000 options were unvested. As of September 30, 2012, approximately $186,000 of unrecognized compensation costs related to non-vested option awards are expected to be recognized in future periods.


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(10) SHAREHOLDERS' EQUITY: (Continued)

        The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company's closing stock price on the last trading day of the fiscal year and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their in the money options on those dates. This amount changes based on the fair market value of the Company's stock.

        During fiscal 2012 and fiscal 2011, the Company issued 200,000 and 472,000 options, respectively, that vest to the recipients when the market value of the Company's stock achieves and maintains defined levels. The Company used a binomial valuation model and various probability factors in establishing the fair value of the options.

        Weighted average assumptions used in the valuation of all option awards were as follows:

 
 2012 2011

Risk free interest rate

 .62% .95%

Contractual lives

 10 years 10 years

Dividend yield

 0% 0%

Expected lives (in years)

 10 years 10 years

Expected volatility

 70.3% 70.9%

Fair Value per Option

 $0.17 $.56

        Stock compensation related to option grants totaled $180,000 and $398,000 in 2012 and 2011, respectively; such amounts are included in General and Administrative expenses.

        Pre-Vesting Forfeitures.    Estimates of pre-vesting option forfeitures are based on Company experience. The Company will adjust its estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(10) SHAREHOLDERS' EQUITY: (Continued)

Restricted Stock Grants

A summary of activity in restricted stock is as follows:

        
 Weighted  Number Of
Shares
 Weighted
Average
Fair Value
Grant-Date
 
 Number Of Average Grant- 
 Shares Date Fair Value 
Restricted stock outstanding, September 30, 2007 55,000 $5.32 

Restricted stock outstanding, September 30, 2010

 95,000 $2.42 
Granted 147,500 $2.58  35,000 0.56 
Issued  (21,250) $3.32  (77,500) 1.29 
Cancelled  (28,334) $4.58     
          
Restricted stock outstanding, September 30, 2008 152,916 $3.09 

Restricted stock outstanding, September 30, 2011

 52,500 2.85 
Granted 341,612 $1.76  53,750 2.28 
Issued  (93,278) $3.11  (53,750) 2.28 
Cancelled  (10,000) $1.70     
          
Restricted stock outstanding, September 30, 2009 391,250 $1.96 

Restricted stock outstanding, September 30, 2012

 52,500 2.85 
          

During the year ended September 30, 2009, TeamStaff2012, DLH granted awards of restricted stock under its 2006 Plan. Anan aggregate of 341,61253,750 restricted shares were awarded to employees and non-employee directors at the closing price on the award dates.date. Of this award, 16,61253,750 shares vested immediately, resulting in a charge of $25,000; 10,000 shares were cancelled; and 315,000 shares will vest upon satisfaction of certain performance criteria. In addition, $196,000 related to current and prior periods’ grants was recognized as an expense. The Company will not recognize expense on 315,000 shares of these awards until it is probable that these performance conditions will be achieved. Such charges could be material in future periods. During the fiscal year ended September 30, 2009, 10,000 unvested shares were cancelled. As of September 30, 2009, approximately $282,000$122,500. Approximately $186,000 of unrecognized compensation costs related to non-vested non-performance based restricted stock awards is expected to be recognized in future periods.

During the year ended September 30, 2008, TeamStaff2011, DLH granted awards of restricted stock under its 2006 Plan. Anan aggregate of 147,50035,000 restricted shares were awarded to employees and non-employee directors at the closing price on the award dates.date. Of this award, 47,50035,000 shares vested immediately, resulting in a charge of $115,000; 23,750 shares vested at September 30, 2008 based upon satisfaction of certain performance criteria, resulting in a charge of $59,000 (included in accrued expenses at that date); and 76,250 shares will vest upon satisfaction of certain performance criteria.approximately $20,000. In addition, $44,000$14,000 related to prior periods’periods' grants to employees was recognized as an expense. Of the restricted shares awarded in fiscal 2008, 30,000 shares were awarded to the Company’s non-employee directors and are subject to vesting as follows: fifty percent of all such shares of restricted stock shall vest when the volume-weighted average share price of the Company’s common stock over any twenty consecutive trading days exceeds the price on the date of grant by 20%, with the remaining fifty percent vesting one year thereafter. As permitted, the Company will not recognize expense on 76,250 shares of these awards until it is probable that these performance conditions will be achieved. Such charges could be material in future periods. During the fiscal year ended September 30, 2008, 28,334 unvested shares were cancelled. As of September 30, 2008, approximately $23,000 of unrecognized compensation costs related to non-vested non-performance based restricted stock awards is expected to be recognized during fiscal 2009.

At September 30, 20092012 and 20082011 the number of unvested shares under this program totaled 391,250 and 82,084, respectively.52,500 for both years. At September 30, 20092012, the Company had reserved 6,160,4091,079,847 shares of common stock for issuance under various option, shares and warrant plans and arrangements.

        

F-23


During the fiscal year ended September 30, 2009,2012, the Company did not issue any equity grants of securitiesgranted warrants to its board members. However, on October 13, 2009, the Board of Directors approved the issuance of 42,500purchase 20,000 shares of restrictedcommon stock to the Company’s non-employee directors. Such shares were vested on the grant date. The estimated expense thata consultant for services, which warrants will be recognizedexpire in the first quarter of fiscal 2010 approximates $57,000.
Subsequent to September 30, 2009, the Company approved a grant of options to purchase 30,000 shares of Common Stock to the Company’s Chief Executive Officer in connection with his execution of a new employment agreement. The options awarded to Mr. Filippelli are exercisable for a period of five years atOctober 2016. These warrants have an exercise price of $1.00 per share. There will be a charge associated with this grant of approximately $14,000 in fiscal 2010. Such options will vest and become exercisable upon the termination date of this new employment agreement. In addition, on January 14, 2010, the Company granted options to purchase 75,000 shares of its Common Stock to the Company’s Chief Financial Officer in connection with the entering into of a new employment agreement on such date. Fifty percent of the options awarded to Ms. Presuto vest on the date of issuance and the balance vests on September 30, 2010, provided Ms. Presuto is in the Company’s employ as of such date. The options have a$2.28 per share exercise priceand vest in two equal annual installments.


Table of $1.06 and are exercisable for a period of five years. There will be a charge associated with this grant of approximately $37,000 in fiscal 2010.

Contents

(12)
DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(11) QUARTERLY FINANCIAL DATA (UNAUDITED):

(Amounts
(Amounts in thousands, except per share data)
 First Quarter Second Quarter Third Quarter Fourth Quarter 

Fiscal Year 2012

             

Net revenues

 $11,495 $12,619 $12,618 $12,461 

Gross profit

  1,567  1,298  1,590  1,142 

Loss from operations

  (210) (564) (625) (752)

Loss from continuing operations(1)

  (389) (715) (568) (354)

Loss from discontinued operations

         

Net loss

  (389) (715) (568) (354)

Basic and diluted loss per share from continuing operations(2)

 $(0.06)$(0.12)$(0.09)$(0.04)

Net loss per share—Basic and diluted(2)

 $(0.06)$(0.12)$(0.09)$(0.04)


 
 First Quarter Second Quarter Third Quarter Fourth Quarter 

Fiscal Year 2011

             

Net revenues

 $10,575 $10,444 $10,579 $10,325 

Gross profit

  1,318  1,508  1,513  1,559 

Loss from operations(3)(4)

  (275) (81) (275) (3,592)

Loss from continuing operations(3)(4)

  (337) (183) (410) (3,660)

Gain from discontinued operations

      270   

Net loss

  (337) (183) (140) (3,660)

Basic and diluted loss per share from continuing operations(2)

 $(0.07)$(0.04)$(0.07)$(0.62)

Net loss per share—Basic and diluted(2)

 $(0.07)$(0.04)$(0.02)$(0.62)

(1)
Includes gain in thousands, exceptthe fourth quarter of fiscal 2012 on settlement of notes payable of $0.5 million, not expected to recur.

(2)
Note that the sum of the quarterly net loss per share data)amounts does not equal the full fiscal year net loss per share amount due to the effect of changes during the year in the number of shares outstanding.

(3)
Reflects impairment charges in the fourth quarter of fiscal 2011 on tradename intangible assets of $2.6 million.

(4)
Includes strategic legal fees in the fourth quarter of fiscal 2011 of $0.6 million not expected to regularly reoccur at a similar magnitude. Fiscal 2011 also includes $0.4 million of non cash stock option expense of which $0.3 occurred in the fourth quarter.
                 
  First Quarter  Second Quarter  Third Quarter  Fourth Quarter 
Fiscal Year 2009                
Net revenues $12,013  $11,472  $11,344  $11,192 
Gross profit  2,122   1,715   1,719   1,446 
Income (loss) from operations  587   72   (42)  (231)
Income (loss) from continuing operations  569   53   126   (372)
Loss from discontinued operations (1)  (521)  (612)  (659)  (2,939)
Net income (loss)  48   (559)  (533)  (3,311)
Earnings (loss) per share from continuing operations — Basic $0.12  $0.01  $0.03  $(0.08)
Net earnings (loss) per share — Basic $0.01  $(0.11) $(0.11) $(0.68)
                 
  First Quarter  Second Quarter  Third Quarter  Fourth Quarter 
Fiscal Year 2008                
Net revenues (2) $10,465  $13,666  $14,634  $19,754 
Gross profit  1,700   2,195   2,648   2,401 
Income from operations  469   735   929   731 
Income from continuing operations  347   641   1,184   1,023 
Loss from discontinued operations  (312)  (577)  (643)  (517)
Net income  35   64   541   506 
Earnings per share from continuing operations — Basic and Diluted $0.07  $0.13  $0.25  $0.21 
Net earnings per share — Basic and Diluted $0.01  $0.01  $0.11  $0.11 
(1)Reflects impairment charge in the fourth quarter on TeamSTaff Rx intangible assets of $2.3 million.
(2)Revenues for the 2nd, 3rd and 4th quarter of fiscal 2008 include retroactive billings for Teamstaff GS in the amount of $1.5 million, $2.1 million and $7.2 million, respectively, described in Note 10.
(13)

(12) EMPLOYEE BENEFIT PLANS:

As of September 30, 2009, TeamStaff2012, DLH and its subsidiaries currently maintain a defined contribution and a supplemental pension plan.

As of January 1, 2004, TeamStaffDLH adopted the TeamStaffDLH 401(k) Plan (the “401(k) Plan”"401(k) Plan") for the benefit of its eligible employees. Any TeamStaffDLH corporate (non worksite) employee is immediately eligible upon hire


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(12) EMPLOYEE BENEFIT PLANS: (Continued)

for participation in the 401(k) Plan. TeamStaffDLH may provide a discretionary matching contribution of 25% of each of the first 4% of a participant’sparticipant's elective contributions under the 401 (k) Plan. TeamStaffDLH recorded related expense of $13,000 and $18,000 respectively,$54 in fiscal 20092012 and 2008.$7 in fiscal year 2011. A participant is always fully vested in his or her elective contributions and vestvests in Company matching contributions over a four year period.

F-24


Effective October 1, 2000, TeamStaff adopted a non-qualified, supplemental retirement plan covering certain corporate officers of TeamStaff (the “SERP”). Under the terms of the SERP, a participant received a benefit sufficient to provide lump sum annual payments equal to approximately one-third of the participant’s base salary on the date the participant became a participant. Payment of benefits was to commence when the participant reached 65 years of age. The benefit under the SERP was subject to a seven-year vesting schedule (0%,0%,20%,40%, 60%, 80%, 100%), based on the participant’s original date of employment with TeamStaff and was contingent on the participant’s reaching age 55; provided, however, a participant’s benefit became fully vested upon a change of control, as defined in the SERP, if within two years of the change of control there was a material change in the participant’s job title or responsibilities or if the participant’s employment was terminated by TeamStaff for any reason other than conviction for theft or embezzlement from TeamStaff. Additionally, if a participant retired by means of total disability (as defined in the SERP), the participant’s benefit became fully vested and benefit payments would have commenced as of the disability retirement date. The SERP did not provide a death benefit. At inception, TeamStaff’s former Chief Executive Officer and its former Chief Financial Officer were the only SERP participants.
SERP participants were also provided with a split dollar life insurance policy (“Policy”), insuring the life of the participant until the participant reached age 65. Although the participant was the owner of the Policy, TeamStaff paid all Policy premiums. Each participant collaterally assigned the Policy to TeamStaff to secure repayment of the premiums through either its cash surrender value or the Policy proceeds. The participant’s right to the Policy vested in accordance with the same schedule as the SERP and with similar change of control provisions. Upon the participant’s 65th birthday (and in certain other circumstances provided by the Policy agreement), TeamStaff was to release the collateral assignment of the Policy provided the participant released TeamStaff from all obligations the Company may have had with respect to the participant (including those under the SERP).
The following table illustrates TeamStaff’s changes in benefit costs and pension benefit obligations for the fiscal years ended September 30, 2009 and 2008 under the SERP:
         
  Fiscal Year 
(Amounts in thousands) 2009  2008 
Change in benefit obligation        
Benefit obligation at beginning of year $70  $346 
Service cost      
Interest Cost     4 
Benefits paid  (70)  (280)
Actuarial loss      
       
Benefit obligation at end of year $0  $70 
       
         
Change in plan assets        
Company contribution $70  $280 
Benefits paid  (70)  (280)
       
Fair value of plan assets at end of year $  $ 
       
         
Reconciliation of funded status        
Funded status $  $(70)
Unrecognized net actuarial (gain)/loss  5   28 
       
Net amount recognized $5  $(42)
       
         
Amounts recognized in the consolidated balance sheets consist of:        
Accrued benefit liability $  $(70)
Accumulated other comprehensive income  5   28 
       
Net amount recognized $5  $(42)
       
         
Discount rate used to determine benefit cost and obligations:  3.00%  3.00%

F-25


         
  2009  2008 
Components of net periodic benefit cost are as follows:        
Interest cost $  $4 
Recognized actuarial loss     9 
       
Net periodic benefit cost     13 
Settlement charges  8   38 
       
Total benefit cost $8  $51 
       
         
Other disclosure items at end of year:        
Projected benefit obligation $  $70 
       
Fair value of plan assets      
       
Increase in pension liability included in other comprehensive income $(8) $(46)
       
For unfunded plans, contributions to the SERP are the benefit payments made to participants. For years ended September 30, 2009 and 2008, TeamStaff made benefit payments of $70,000 and $280,000, respectively. There are no benefit payments remaining related to the SERP.
During fiscal year 2004, TeamStaff and plan participants agreed on optional payment forms effectively accelerating benefit payments. Beginning in fiscal year 2004 and ending in fiscal year 2009, the SERP settles liabilities by paying benefit obligations to participants. Each quarter, a settlement charge was recognized to account for settling of liabilities. A settlement charge of $8,000 and $38,000 was recognized during fiscal 2009 and 2008, respectively.
(14) (13) ECONOMIC DEPENDENCY:

A major customer is defined as a customer from which the Company derives at least 10% of its revenues. ForIn each of the fiscal yearyears ended September 30, 2009, Teamstaff GS generated2012 and 2011, revenue from the U.S. Government accounted, either directly or in-directly, for 100% of total revenue. Our largest service line is healthcare, which accounted for approximately 98.2%54% and 45% of revenue in fiscal 2012 and 2011, respectively. Within the U.S. Government, our largest customer in fiscal 2012 continued to be the DVA, accounting for 95% of revenue in fiscal 2012 and 94% in fiscal 2011, with whom the Company held over a dozen contracts and/or task orders for logistics, pharmaceutical, and medical services, all subject to the Federal Acquisition Regulations. As further discussed below, during fiscal 2011, the Company was awarded work of up to $145 million (unaudited) for pharmaceutical and other medical services during a period of up to five years which will both retain and expand its business with the DVA. Accordingly, DLH Solutions remains particularly dependent on the continuation of its relationship with the DVA.

        The largest component of the Company’s overall consolidated revenues from agenciesawards discussed above comprised the award in May 2011 to DLH Solutions of the United States Government. Through its FSS contracts primarilya competitively bid Blanket Purchase Agreement contract with the DVA for pharmaceutical services which retains and expands work that accounted for approximately 45% of revenues for fiscal 2011. Work under the new contract began on November 1, 2011 and is expected to continue for up to 5 years and generate revenue of up to $145 million (unaudited). The Company also was awarded a contract in September 2011 to provide other medical services to the DVA of approximately $10 million (unaudited) over five years. In addition, the Company had four specific customers who totaled 31%, 23%, 12% and 11% of the Company’s overall consolidated revenues. We anticipate thatalso provides further services to the DVA may release new requestsunder contracts which accounted for approximately 50% of revenues for fiscal 2012, which currently expire on September 30, 2013, in respect of which no request for proposals related to staffing services with these four customer facilities in 2010. In such an event,have yet been invited. Accordingly, the Company intends to submit a proposal to address any such solicitation. Althoughhas in the past, and anticipates in the future, receiving sole source extensions of this work for an additional period of time. While the Company believes it is well positioned to continue its relationship with the DVA, no assurances can be given that in the event the DVA issues such a solicitation,would further extend our current orders for the provision of services, that any purchase orderswe would be awardedsuccessful in any bid for new contracts to the Companyprovide such services or that if it iswe are granted subsequent orders, that such orders would be of a scope comparable to the services that the Company haswe have provided to date.

For the fiscal year ended September 30, 2008, Teamstaff GS generated approximately 96.7% of the Company’s overall consolidated revenues from agencies of the United States Government. Through its FSS contracts primarily with If the DVA does not further extend our current service contracts or we are not successful in our efforts to obtain contract awards pursuant to either the current or new solicitations for the provision of such services, our results of operations, cash flows and financial condition would be materially adversely affected. However, in such circumstances, the Company had three specific customers who totaled 39%, 17% and 10%may be able to avail itself of a right to continue for an additional period beyond the Company’s overall consolidated revenues.
expiration date as part of any protest filed by an interested party.

Accounts receivable from agencies of the United States Government totaled $11.4$13.0 million and $11.9$11.1 million at September 30, 20092012 and 2008, respectively.2011, respectively, of which $9.3 and $10.5 million was unbilled at September 30, 2012 and 2011, respectively, including $9.3 million for each period associated with potential contractual billings adjustments. As discussed in Note 10,9, included in revenue derived


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(13) ECONOMIC DEPENDENCY: (Continued)

from the Federal government in 2008 arewere retroactive adjustments that totaled $10.8 million.million; $9.3 million of this amount is included in accounts receivable (unbilled)at September 30, 2009.2012 and 2011. Such revenue is not expected to recur in future periods.

(15)SUBSEQUENT EVENTS:
Management evaluated subsequent events through January 19, 2010, the date the Company’s financial statements were issued. Based on this evaluation,

(14) MANAGEMENT TRANSITION:

        On June 25, 2012, the Company has determined that no subsequent events have occurred which require disclosure through January 19, 2010, which is the date that these financial statements are issued.

Disposition of TeamStaff Rx Assets
On December 28, 2009, TeamStaff and TeamStaff Rx, our wholly-owned subsidiary, entered into a definitive Asset Purchase Agreement with Advantage RN, providing for the sale of substantially all of the operating assets of TeamStaff Rx related to TeamStaff Rx’s business of providing travel nurse and allied healthcare professionals for temporary assignments to Advantage RN. The closing of this transaction occurred on January 4, 2010. The Asset Purchase Agreement provides that the purchased assets were acquired by Advantage RN for a purchase price of up to $425,000, of which (i) $350,000 in cash was paid at the closing, and (ii) $75,000 is subject to an escrowed holdback as described in the Asset Purchase Agreement. Additionally, Advantage RN will make rent subsidy payments to TeamStaff Rx totaling $125,000, consisting of (i) $25,000 payable at closing, and (ii) an additional $100,000 payable in 10 equal monthly installments beginning on March 1, 2010. Under the terms of the Asset Purchase Agreement, Advantage RN did not assume any debts, obligations or liabilities of TeamStaff Rx nor did it purchase any accounts receivable outstanding as of the closing date. Upon the completion of the sale, the employment agreement of Dale West, TeamStaff Rx’s President, was terminated, with an effective date as of December 28, 2009 in accordance with its terms. Ms. West will be entitled to receive certain termination compensation and benefitsKathryn M. JohnBull pursuant to suchwhich she became the Company's Chief Financial Officer commencing on June 25, 2012. On June 25, 2012, the Company's employment agreement.

F-26


Employment Agreement with Chief Executive Officer
On November 3, 2009, the Company announced in a press release that Mr. Rick J. Filippelli,of John E. Kahn, who hashad served as the Registrant’s President andits Chief ExecutiveFinancial Officer, since January 2007, has informed the Board of his intent to resign from such positions in connection with the Company’s strategic shift in its current business plan. Mr. Filippelli’s resignation as President and Chief Executive Officer will become effective at the end of January 2010. Mr. Filippelli has agreed to assist the Company with its transition to a new Chief Executive Officer. The Company’s Board has established a search committee to identify candidates for Chief Executive Officer. In connection with the foregoing, on November 2, 2009,terminated. On August 23, 2012, the Company entered into a newseparation agreement with Mr. Kahn, memorializing the terms of his departure from the Company.

        The following is a description of the Company's employment agreement with Ms. JohnBull, which is qualified in its entirety by reference to the full text of such agreement.

        The employment agreement is for an initial term of three years from its commencement date of June 25, 2012. Under the employment agreement, Ms. JohnBull will receive a base salary of $225,000 per annum and may receive an annual bonus of up to 50% of base salary based on performance targets and other key objectives established by the Management Resources and Compensation Committee of the board of directors; however, $31,000 of the annual bonus for her initial year of employment is guaranteed. The Company granted Ms. JohnBull options to purchase 250,000 shares of common stock under its 2006 Long Term Incentive Plan, as amended, subject to vesting.. In the event of the termination of employment by us without "cause" or by her for "good reason", she will be entitled to a severance payment of 12 months of base salary and will be entitled to a payment equal to 12 months of base salary if her employment is terminated in connection with a change in control of the Company.

(15) SUBSEQUENT EVENTS:

        Effective as of November 15, 2012, the Company granted an aggregate of 52,500 shares of restricted stock to its non-executive directors, consistent with its compensation policy for non-executive directors. These shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

        Effective as of November 20, 2012, the Board of Directors (the "Board") of the Company elected Austin J. Yerks III to serve as a director of the Company. Mr. Filippelli,Yerks was elected as a Class 2 director and will serve for an initial term expiring at the materialCompany's annual meeting of stockholders to be held in 2013 and until his successor shall have been duly elected and qualified. Mr. Yerks also was appointed to the Audit Committee and Strategic Planning Committee of the Board.

        On November 21, 2012, the Company entered into an agreement to amend certain of the terms and conditions of its existing employment agreement with its chief executive officer, Zachary C. Parker, the terms of which are summarized below. As used in the following summary, the term “Executive” shall refer to Mr. Filippelli. The following description of this employmentthe amendment agreement is qualified in its entirety by reference to the full text of such agreement. The newamendment provides for increases in Mr. Parker's base salary upon the achievement of certain performance conditions regarding the Company's operations and also extends the term of his current employment agreement supersedesto September 30, 2015. Pursuant to the Amendment, in the event the Company reports positive net income for a fiscal quarter ending prior to the expiration date of the amended term of the employment


Table of Contents


DLH HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2012 AND 2011

(15) SUBSEQUENT EVENTS: (Continued)

agreement, as determined in accordance with generally accepted accounting principles, Mr. Parker shall receive a 5% increase in his base salary. Further, in the event that the Company subsequently continues to report positive net income on a quarterly basis (as determined in accordance with generally accepted accounting principles) for two sequential quarterly periods, Mr. Parker's base salary shall be increased by an additional 5%. In addition, under the amendment, the Company and replacesMr. Parker have a mutual option, to be exercised prior to the new expiration date, to further extend the term of the employment agreement thatfor an additional one year period. If the Company entered into with Mr. Filippelli on April 17, 2008.

The new employment agreement is dated November 2, 2009, is effective as of October 1, 2009 and expires January 31, 2010, unless both parties agree to extendexercise this right, the term. Under the employment agreement, the Executive will receive a base salary of $290,000 per annum and may receive a bonus in the sole discretion of the Management Resources and Compensation Committee of the Board of Directors. Under the new employment agreement, Mr. Filippelli was granted options to purchase 30,000 shares of common stock. The options are exercisable for five years from theexpiration date of grant and vest upon the termination date, as defined in the new employment agreement, provided the Executive complies with the obligations described therein. The exercise price of the options shall be equal to closing price of the Company’s common stock on the execution date of the new employment agreement.
In the event of a termination of Executive’s employment by the Executive for good reason (as defined in the employment agreement), (a) the Executive’s right to purchase shares of common stock of the Company pursuant to any stock option or stock option plan shall immediately fully vest and become exercisable, (b) the exercise period in which he may exercise his options to purchase common stock shall be extended to the duration of their original term, as if he remained an employee of the Company,September 30, 2016 and (c) the terms of such options shall be deemed amended to reflect the foregoing provisions. Further, in the event of a termination of the Executive’s employment for cause, options granted and not exercised as of the termination date shall terminate immediately and be null and void. In the event of a termination of Executive’s employment due to his death or disability, the Executive’s (or his estate’s or legal representative’s) right to exercise any stock option, to the extent vested as of the termination date, shall remain exercisable for a period of twelve (12) months following the termination date, but in no event after the expiration of the exercise period. In the event of a termination of Executive’s employment other than for good reason, his right to exercise the stock options, to the extent vested as of the termination date, shall remain exercisable for a period of three months following the termination date, but in no event after the expiration of the exercise period.
The employment agreement further provides that in the event of a change in control (as defined in the employment agreement), or termination without cause by the Company or for good reason (as defined in the employment agreement) by the Executive, the conditions to the vesting of any outstanding restricted stock awards granted to the Executive shall be deemed void and all such shares shall be immediately and fully vested and delivered to the Executive.
In the event of the termination of employment by us without “cause” or by the Executive for “good reason,” as those terms are defined in the employment agreement, or in the event his employment is terminated due to his disability, the Executive would be entitled to: (a) a severance payment of 12 months of base salary; (b) continued participation in our health and welfare plans for a period not to exceed 18 months from the termination date; and (c) all compensation accrued but not paid as of the termination date. In the event of the termination of his employment due to his death, the Executive’s estate would be entitled to receive all compensation accrued but not paid as of the termination date and continued participation in our health and welfare plans for a period not to exceed 18 months from the termination date. If the Executive’s employment is terminated by us for “cause” or by him without “good reason,” he is not entitled to any additional compensation or benefits other than his accrued and unpaid compensation.

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In the event that within 180 days of a “Change in Control”, as defined in the employment agreement, (a) the Executive is terminated, or (b) his status, title, position or responsibilities are materially reduced and the Executive terminates his employment, the Company shall pay and/or provide to the Executive, the following compensation and benefits: (A) The Company shall pay the Executive, in lieu of any other payments due hereunder, (i) the accrued compensation; (ii) the continuation benefits; and (iii) as severance, base salary forMr. Parker a period of 12 months, payable in one lump sum following the termination date; and (B) The conditions to the vesting of any outstanding incentive awards (including restricted stock, stock options and granted performance shares or units) granted to the Executive under any of the Company’s plans, or under any other incentive plan or arrangement, shall be deemed void and all such incentive awards shall be immediately and fully vested and exercisable. Further, any such options shall be deemed amended to provide that in the event of termination after a change of control, the options shall remain exercisable for the duration of their term. Notwithstanding the foregoing, if the payments due in the event of a change in control would constitute an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the aggregate of such credits or payments under the employment agreement and other agreements shall be reduced to the largest amount as will result in no portion of such aggregate payments being subject to the excise tax imposed by Section 4999 of the Code. The priority of the reduction of excess parachute payments shall be in the discretion of the Executive.
Pursuant to the employment agreement, the Executive is subject to customary confidentiality, non-solicitation of employees and non-competition obligations that survive the termination of such agreement.
Employment Agreement with Chief Financial Officer
On January 14, 2010,$50,000 bonus.

        In addition, the Company entered into a new employment agreement with Ms. Presuto, the terms of which are summarized below. The following description of our new employment agreement with Ms. Presuto is qualified in its entirety by reference to the full text of such agreement.

The employment agreement is for an initial term expiring September 30, 2010. Under the employment agreement, Ms. Presuto will receive a base salary of $181,000. The term of the agreement is effective as of October 1, 2009. Upon any termination of the Employee’s employment on or after the expiration date, other than cause (as defined in the employment agreement), Ms. Presuto will be entitled to the severance payment described below. Ms. Presuto may receive a bonus in the sole discretion of the Management Resources and Compensation Committee of the Board of Directors of up to 50% of her base salary for each fiscal year of employment. The bonus will be based on performance targets and other key objectives established by the Management Resources and Compensation Committee.
Ms. Presuto received a grant ofgranted Mr. Parker options to purchase 75,000250,000 shares of common stock under the Company’sCompany's 2006 Long Term Incentive Plan.Plan, as amended. The vesting schedule applicableoptions, to the options is as follows: 50% of the optionsextent vested, shall vest on the date of the agreement and the balance shall vest on September 30, 2010, provided Ms. Presuto is an employee as of such date. The options arebe exercisable for a period of fiveten years at athe per share exercise price equal to the fair market value of the Company's common stock on the effective date of the amendment. The options will vest in full if the closing price of the Company’s common stock onCompany's Common Stock equals or exceeds the lesser of (i) $4.00 per share or (ii) a per share price equal to 200% of the exercise price, in each case for ten consecutive trading days. Other than as modified by the amendment, the provisions of Mr. Parker's original employment agreement remain in full force and effect.

        Management has evaluated subsequent events through the date of execution of the employment agreement.

In the event of the termination of her employment, the Options will be governed by the terms of the 2006 Plan, except that the following provisions shall apply: (a) in the event Ms. Presuto’s employment is terminated for cause, options granted and not exercised as of the termination date shall terminate immediately and be null and void; (b) in the event her employment withCompany's financial statements were issued. Based on this evaluation, the Company is terminated due to her death, or disability, her (or her estate’s or legal representative’s) right to purchase shares of common stock pursuant to any stock option or stock option plan to the extent vested as ofhas determined that no other subsequent events have occurred which require disclosure through the date of termination shall remain exercisable for a period of 12 months, but in no event after the expiration of the option; (c) in the event Ms. Presuto elects to terminate her employment other than for good reason (as defined in the agreement), her right to purchase shares of common stock of the Company pursuant to any stock option or stock option plan to the extent vested as of the date of termination shall remain exercisable for a period of three months following such termination date, but in no event after the expiration of option; and (d) in the event of (A) a Change of Control, as defined in the agreement, (B) employee’s termination by the Company without cause or; (C) termination by employee for good reason, the conditions to the vesting of any outstanding restricted stock awards or options granted under the agreement shall be deemed void and all such shares and options shall be immediately and fully vested and delivered to the employee and all outstanding options shall remain exercisable for a period of 24 months following the date of termination, but in no event after the expiration date of any such option.
In the event of the termination of employment by us without “cause” or by Ms. Presuto for “good reason,” as those terms are defined in the employment agreement, or in the event her employment is terminated due to her disability, she would be entitled to: (a) a severance payment of 12 months of base salary; (b) continued participation in our health and welfare plans for a period not to exceed 12 months from the termination date; and (c) all compensation accrued but not paid as of the termination date. In addition, in the event of termination for disability, she would also receive a pro-rata bonus, as described below.

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In the event of the termination of her employment due to her death, Ms. Presuto’s estate would be entitled to receive: (a) all compensation accrued but not paid as of the termination date; (b) continued participation in our health and welfare plans for a period not to exceed 12 months from the termination date; and (c) payment of a “Pro Rata Bonus”, which is defined as an amount equal to the maximum bonus Ms. Presuto had an opportunity to earn multiplied by a fraction, the numerator of which shall be the number of days from the commencement of the fiscal year to the termination date, and the denominator of which shall be the number of days in the fiscal year in which she was terminated. If Ms. Presuto’s employment is terminated by us for “cause” or by her without “good reason,” she is not entitled to any additional compensation or benefits other than her accrued and unpaid compensation.
In the event that within 180 days of a “Change in Control” as defined in the employment agreement, (a) Ms. Presuto is terminated, or (b) her status, title, position or responsibilities are materially reduced and she terminates her employment, the Company shall pay and/or provide to her, the following compensation and benefits: (A) The Company shall pay Ms. Presuto, in lieu of any other payments due hereunder, (i) the accrued compensation; (ii) the continuation benefits; and (iii) as severance, base salary for a period of 12 months, payable in equal installments on each of the Company’s regular pay dates for executives during the twelve months commencing on the first regular executive pay date following the termination date; and (B) The conditions to the vesting of any outstanding incentive awards (including restricted stock, stock options and granted performance shares or units) granted to Ms. Presuto under any of the Company’s plans, or under any other incentive plan or arrangement, shall be deemed void and all such incentive awards shall be immediately and fully vested and exercisable. Further, any such options shall be deemed amended to provide that in the event of termination after a change of control, the options shall remain exercisable for the duration of their term. Upon the effective date of an event constituting a change of control, the Company shall pay Ms. Presuto, in one lump sum upon the first day of the month immediately following such event, an amount equal to her then current base salary. Ms. Presuto shall be entitled to such payment whether or not her employment with the Company continues after the change of control.these financial statements were issued.


If the payments due in the event of a change in control would constitute an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the aggregate of such credits or payments under the employment agreement and other agreements shall be reduced to the largest amount as will result in no portion of such aggregate payments being subject to the excise tax imposed by Section 4999 of the Code. The priority of the reduction of excess parachute payments shall be in the discretion of Ms. Presuto. Pursuant to the employment agreement, Ms. Presuto is subject to customary confidentiality, non-solicitation of employees and non-competition obligations that survive the termination of such agreements.

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SCHEDULE I
TEAMSTAFF, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
(Amounts in thousands)
                 
    (c)       
      Additions       
  (b)  Charged to     (e) 
  Balance at  (reversed from)  (d)  Balance at 
(a) Beginning of  Costs and  Deductions –  End of 
Description Year  Expenses  Net Adjustments  Year 
                 
Year Ended September 30, 2009
                
                 
Allowance for doubtful accounts on trade receivables $  $  $  $ 
                 
Deferred tax valuation allowance $11,369  $1,751  $  $13,120 
                 
Year Ended September 30, 2008
                
                 
Allowance for doubtful accounts on trade receivables (1) $6  $4  $(10) $ 
                 
Deferred tax valuation allowance $11,843  $  $(474) $11,369 
(1)Reflects reclassification of discontinued operations in 2009.

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