$0.2 million in policy issuance costs to TeamStaff, the matter remains unresolved between the parties. In the future, similar problems from our insurance carriers may result in adjustments to our reserves. In addition, these reserves are for claims that have not been sufficiently developed due to their relatively young age, and such variables as timing of payments and investment returns thereon are uncertain or unknown, actual results may vary from current estimates. TeamStaff will continue to monitor the development of these reserves, the actual payments made against the claims incurred, the timing of these payments, the interest accumulated in TeamStaff's prepayments and adjust the reserves as deemed appropriate.
TeamStaff accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the balance sheet when it is determined that it is more likely than not that the asset will be realized.
TeamStaff's revenues for the three months ended December 31, 2004 and 2003 were $10.2 million and $9.7 million, respectively, which represents an increase of $0.5 million, or 4.8%, from first fiscal quarter 2004 to first fiscal quarter 2005. The Medical Staffing division revenues for the three months ended December 31, 2004 and 2003 were $8.9 million and $8.4 million, respectively, which represents an increase of $0.5 million, or 5.3% from first fiscal quarter 2004 to first fiscal quarter 2005. Revenues for the first quarter of fiscal 2005 include $1.6 million related to the acquisition of certain of the assets of Nursing Innovations, a Memphis, Tennessee-based provider of travel and per diem nurses on November 14, 2004 (See Note 5). This helped offset a decrease in the allied healthcare portion of our Medical Staffing division. The Payroll Services division revenues for the three months ended December 31, 2004 and 2003 were virtually unchanged at $1.3 million.
We believe hospitals continue to focus on cost efficiencies by placing greater reliance on existing full time staff. This, in turn, has led to less demand for temporary health care professionals. We also believe that, during the recent economic downturn, certain healthcare providers who once traveled for temporary assignments have taken full time jobs, which they view as being more stable or secure. This has provided facilities with a greater pool of full time staff on which to rely. Additionally, we believe decreased hospital admissions nationwide in our first fiscal quarter may have had an adverse impact on demand for our temporary medical staffing services for this period. Longer term, we believe the demand for temporary medical personnel will increase, driven in part, by an aging population and an improving economy, although we continued to see suppressed demand for certain temporary allied healthcare professionals in our first fiscal quarter. We believe demand will increase as more states introduce legislation for mandatory minimum nurse to patient ratios and overtime limitations. The acquisition of certain of the assets of Nursing Innovations provides TeamStaff with the opportunity to benefit from these industry changes that, we believe, impact our temporary nurse staffing business most significantly. Additionally, we continue to substantially expand our sales and marketing efforts in order to increase our contact with current and prospective clients. We recently employed Mr. Delaney (See Note 4) on a full-time basis to continue the development of and to market our vendor management services.
Direct expenses for the three months ended December 31, 2004 and 2003 were $7.6 million and $7.5 million, respectively, which represents an increase of $0.1 million, or 1.4%. As a percentage of revenue, direct expenses for the three months ended December 31, 2004 and 2003 were 74.6% and 77.1%, respectively.
Gross profits for the three months ended December 31, 2004 and 2003 were $2.6 million and $2.2 million, respectively, which represents an increase of $0.4 million, or 16.1%. This increase is attributable to the growth by acquisition in our Medical Staffing business as well as more prudent
expense management and selected price increases in both the Medical Staffing and Payroll Services division. Gross profits, as a percentage of revenue, increased to 25.4% from 22.9%, for the three months ended December 31, 2004 and 2003, respectively. This increase is primarily due to improved margins in the Medical Staffing division from 16.1% in the first fiscal quarter of 2004, to 18.8% in the first fiscal quarter of 2005.
Operating expenses for each of the three months ended December 31, 2004 and 2003 were $3.1 million. This represents no increase despite the $0.2 million of operating expenses absorbed by the acquisition of Nursing Innovations during the first fiscal quarter of 2005. Operating expenses, as a percentage of revenue, were 30.7% and 31.6%, for the three months ended December 31, 2004 and 2003, respectively.
Depreciation and amortization for the three months ended December 31, 2004 and 2003 was $148,000 and $73,000, respectively. This increase is due to additional depreciation related to capital leases as well as fixed assets acquired as part of the acquisition of certain of the assets of Nursing Innovations.
Other income for the three months ended December 31, 2004 and 2003 was approximately $60,000 and $49,000, respectively, representing an increase of approximately $11,000.
Income tax benefit from continuing operations for the three months ended December 31, 2004 and 2003 was $0.2 million and $0.3 million, respectively. These tax benefits are a result of losses from operations.
Loss from continuing operations for the three months ended December 31, 2004 was $0.4 million, or $(0.02) per fully diluted share, as compared to loss from continuing operations for the three months ended December 31, 2003 of $0.5 million, or $(0.04) per fully diluted share. This represents a decreased loss of 26.8% from the first fiscal quarter 2004 to the first fiscal quarter 2005.
Loss from discontinued operations, net of tax, for the three months ended December 31, 2004 was $0.2 million, or $(0.01) per fully diluted share, as compared to loss from discontinued operations, net of tax, for the three months ended December 31, 2003 of $1.3 million, or $(0.08) per fully diluted share. Loss from operations from the discontinued business unit, net of tax, for the three months ended December 31, 2004 and 2003 was $0.2 million and $0.5 million, respectively. In the first fiscal quarter of 2005, the loss is due to previously unbilled legal fees and non-cancelable software licenses related to the discontinued business unit. In the first fiscal quarter of 2004, TeamStaff generated revenue from the discontinued business unit for only the first six weeks, while certain costs associated with the operation of that business unit continued throughout the quarter. Loss on disposal, net of tax, for the three months ended December 31, 2004 and 2003, was $0.0 million and $0.8 million, respectively. For the first fiscal quarter of 2004, the loss is attributable to the writedown of goodwill and fixed assets, salary, severance and stay bonus payouts to affected employees, accruals for losses from lease obligations in offices no longer used by TeamStaff's continuing operations offset by estimated sublease of unoccupied office space, investment banking fees and other expenses required to dispose of the discontinued business unit.
Net loss for the three months ended December 31, 2004 was $0.6 million, or ($0.03) per fully diluted share, as compared to a net loss of $1.8 million, or $(0.12) per fully diluted share, for the three months ended December 31, 2003.
Liquidity and Capital Resources
Net cash used in operating activities for the three months ended December 31, 2004 was $2.9 million compared to virtually $0.0 in the three months ended December 31, 2003. Use of cash during the three months ended December 31, 2004 includes increased accounts receivable of $1.6 million primarily due to the operations of Nursing Innovations subsequent to the acquisition, increased other assets of $0.6 million, and losses in continuing and discontinued operations.
Cash used in investing activities for the three months ended December 31, 2004 was $1.9 million compared to virtually $0.0 in the three months ended December 31, 2003. Use of cash was primarily for the purchase of certain of the assets of Nursing Innovations.
20
Cash provided by financing activities for the three months ended December 31, 2004 was $4.0 million compared to virtually $0.0 in the three months ended December 31, 2003. During the first fiscal quarter of 2005, TeamStaff entered into Securities Purchase Agreements with several accredited investors for the private sale under Section 4(2) of the Securities Act of 1933 and/or Regulation D of securities for an aggregate purchase price of $4.3 million. The offering consisted of the sale of 2,392,000 shares of Common Stock and 598,000 common stock warrants.. The investors in the transaction received one three-year warrant to purchase an additional share of common stock at a price of $2.50 per share for every four shares of common stock purchased in the transaction. Closing of the offering occurred on Wednesday, November 10, 2004. TeamStaff received net proceeds of approximately $4.0 million, after payment of commissions and related offering expenses. SunTrust Robinson Humphrey Capital Markets and Maxim Group LLC served as selling agents on TeamStaff's behalf and received combined commissions of 6.5% of the gross proceeds.
As of December 31, 2004, TeamStaff had unrestricted cash and cash equivalents of $2.2 million and net accounts receivable of $4.6 million. As of December 31, 2004, TeamStaff had working capital of $6.4 million. Management believes its existing cash and funds generated by operations will be sufficient to support cash needs for at least the next twelve months. However, as previously announced, TeamStaff does not believe it will be able to fully execute on its acquisition and growth strategy without implementing a credit facility in the amount of approximately $3.0 million and obtaining the release of $1.8 million currently securing the letter of credit that collateralizes TeamStaff's prior Zurich workers' compensation program obligations.
Effects of Inflation
Inflation and changing prices have not had a material effect on TeamStaff's net revenues and results of operations in the last three fiscal years, as TeamStaff has been able to modify its prices and cost structure to respond to inflation and changing prices.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TeamStaff does not undertake trading practices in securities or other financial instruments and therefore does not have any material exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk or other similar risks, which might otherwise result from such practices. TeamStaff has no material interest rate risk, except with respect to our prior workers' compensation programs, and is not materially subject to fluctuations in foreign exchange rates, commodity prices or other market rates or prices from market sensitive instruments. In connection with TeamStaff's prior workers' compensation programs, prepayments of future claims were deposited into trust funds for possible future payments of these claims in accordance with the policies. The interest income resulting from these prepayments is for the benefit of TeamStaff, and is used to offset workers' compensation expense. If interest rates in these periods' decrease, TeamStaff's workers' compensation expense would increase because TeamStaff would be entitled to less interest income on the deposited funds.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) as of the end of the period covered by this report on Form 10-Q. Based on their evaluation, which included an evaluation of the disclosure controls and procedures both in place and implemented with respect to the business of Nursing Innovations that we purchased on November 14, 2004, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2004, our disclosure controls and procedures are effective to ensure that all material information required to be filed in this Quarterly Report on Form 10-Q has been made known to them.
21
Changes in Internal Controls:
There has been no change in our internal controls over financial reporting identified in connection with our evaluation referred to above that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.
Part II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2000, TeamStaff made claims for indemnification against the selling shareholders of the TeamStaff Companies (the Sellers), which were acquired by TeamStaff in January 1999. The claims consisted of various potential liabilities and expenses incurred based on breaches of representations and warranties contained in the acquisition agreement. The Sellers disputed these claims and attempted to assert claims of their own. On January 12, 2001, TeamStaff entered into a settlement agreement with the Sellers. Under the settlement agreement, the Sellers agreed to be liable and responsible for certain potential liabilities estimated at approximately $0.5 million and agreed that 55,000 shares of TeamStaff common stock, which had been held in escrow since the acquisition, were to be cancelled and TeamStaff agreed to release 29,915 escrow shares to the Sellers. TeamStaff retains 75,000 shares in escrow to provide security for the Seller's obligations. Each party agreed to release each other from all other claims under the acquisition agreements. No third parties have contacted TeamStaff seeking payment in the last fiscal year for these potential liabilities. In the event that TeamStaff incurs liability to third parties with respect to the claims, TeamStaff would declare an event of default under the settlement agreement and seek collection from the Sellers.
TeamStaff's subsidiary, BrightLane, is party to a suit brought by one of its former shareholders (Atomic Fusion, Inc. v. BrightLane.com, Inc. Civil Action No ONS02246OE, Fulton County State Court, Georgia). The plaintiff seeks damages for alleged unpaid contractual services provided to BrightLane, alleging that the shares (both in number and value) of BrightLane stock provided to the plaintiff in payment of services were inadequate to pay for the alleged agreed upon value of services. TeamStaff and BrightLane intend to defend themselves vigorously in this matter and believe that they have meritorious and valid defenses to plaintiff's claims. In addition, the former shareholders of BrightLane have placed approximately 158,000 shares in escrow to provide indemnification for any claims made by TeamStaff under the acquisition agreement, subject to a $0.3 million threshold. Some or all of these shares may be canceled in an amount equal to the amount of any claim or expense in excess of the threshold. Under the terms of the agreements between TeamStaff and BrightLane, the value of the shares held in escrow is $8.10 per share. It is possible that an award in favor of Atomic Fusion would result in monetary damages against TeamStaff, which could not be recovered under the indemnification provisions because cancellation of the shares in escrow is the sole method of satisfying these indemnification obligations. On November 20, 2003, the Fulton County Superior Court (to which the action was transferred) awarded summary judgment in BrightLane's favor on all counts of Atomic Fusion's complaint except for a beach of contract claim. A trial was held on Atomic Fusion's breach of contract claim before a jury over four days, from August 16 through August 19, 2004. The jury returned a verdict in Atomic Fusion's favor, awarding $534,246 in damages and $116,849 in attorney's fees, for a total verdict of $651,095, including interest and costs. BrightLane has filed a motion for judgment notwithstanding the verdict, which currently is pending before the court. BrightLane believes that the jury's award of damages and attorneys fees was not supported by Georgia law. BrightLane also has filed a motion to recover certain of its attorneys' fees expended in pursuing its motion for summary judgment. This motion also is pending before the court. Depending upon the outcome of these motions, BrightLane intends to appeal the jury's verdict on liability or damages or both.
In connection with TeamStaff's acquisition of BrightLane effective as of August 31, 2001, persons holding BrightLane options to acquire approximately 2.1 million BrightLane shares (the equivalent of approximately 481,000 TeamStaff shares) exercised their options. BrightLane made recourse loans of approximately $1.0 million principal amount to the holders of these options to assist them in payment
22
of tax obligations incurred with exercise of the options. The loans were repayable upon the earlier of (i) sale of the TeamStaff shares or (ii) three years. As of December 31, 2004 approximately $0.7 million of these loans has been repaid or forgiven. All loans were to be repaid in cash with the exception of one loan. Under the terms of TeamStaff's employment agreement with an executive officer of TeamStaff's BrightLane subsidiary, the loan ($131,000) was forgiven over a two-year period of time. We are pursuing litigation against two of the debtors to recover amounts due.
As a commercial enterprise and employer and with respect to its employment-related businesses in particular, TeamStaff is engaged in litigation from time to time during the ordinary course of business in connection with employment-relations issues, workers' compensation and other matters. Generally, TeamStaff is entitled to indemnification or repayment from its former PEO clients for claims brought by worksite employees related to their employment. However, there can be no assurance that the client employer will have funds or insurance in amounts to cover any damages or awards, and as co-employer, TeamStaff may be subject to liability. Additionally, in connection with its medical staffing business, TeamStaff is exposed to potential liability for the acts, errors or omissions of its temporary medical employees. Although TeamStaff believes it has procured insurance that is reasonable under the circumstances to protect it from liability for such claims, there can be no assurance that such insurance will be adequate to cover all potential claims.
TeamStaff is engaged in no other litigation, the effect of which would be anticipated to have a material adverse impact on TeamStaff's financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES; USE OF PROCEEDS AND PURCHASE OF EQUITY SECURITIES
On July 22, 1999, the Board of Directors authorized the repurchase up to 3% of the outstanding shares of TeamStaff's common stock. On November 19, 2002, the Board of Directors authorized an additional repurchase of up to $1.0 million in common stock. Since inception we have repurchased 581,470 shares at an average cost of $4.18 per share for a total cost of $2.4 million. No shares were repurchased during the first fiscal quarter of 2005. As of December 31, 2004, TeamStaff retired 574,470 of the 581,470 shares of treasury stock.
The Registrant previously reported the sale of equity securities on Form 8-K dated November 12, 2004. See the description contained in the Form 8-K or also in the notes to financial statements above which are incorporated by reference to this Item 2.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
| | | | | | |
| 10.1 | | Form of Employee Non-Qualified Stock Option Certificate and Agreement dated as of November 17, 2004 between TeamStaff, Inc. and T. Kent Smith |
| 10.2 | | Form of Employee Incentive Stock Option Certificate and Agreement dated as of November 17, 2004 between TeamStaff, Inc. and T. Kent Smith |
| 10.3 | | Form of Employee Incentive Stock Option Certificate and Agreement dated as of January 18, 2005 between TeamStaff, Inc. and Martin Delaney |
| 10.4 | | Form of Employee Offer Letter dated as of January 5, 2005 between TeamStaff, Inc. and Martin Delaney |
| 31.1 | | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
(b) Reports on Form 8-K
The following reports were filed during the quarter ended December 31, 2004.
| | | | | | |
| Date of Report | | Item Reported |
| November 12, 2004 | | Item 1 Entry into Material Definitive Agreement; Item 3 Unregistered Sales of Equity Securities; Item 7 Regulation FD / Item 8 Other Events; Item 9 Financial Statements and Exhibits (in connection with private placement offering) |
| November 18, 2004 | | Item 2 Completion of Acquisition of Assets; Item 9 Financial Statements and Exhibits (in connection with the acquisition of certain of the assets of Nursing Innovations, Inc.) |
| December 22, 2004 | | Item 2 Results of Operations and Financial Condition; Item 7 Regulation FD Disclosure; Item 9 Financial Statements and Exhibits (in connection with TeamStaff's earnings release for the fiscal year ended September 30, 2004) |
|
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TEAMSTAFF, INC.
(Registrant) |
| /s/ T. Kent Smith
T. Kent Smith
President and Chief Executive Officer |
| /s/ Rick Filippelli
Rick Filippelli
Vice President, Finance and Chief Financial Officer |
Date: February 11, 2005
25
![[X]](https://capedge.com/proxy/10-Q/0000950136-05-000793/xbox.gif){kind=small}
![[ ]](https://capedge.com/proxy/10-Q/0000950136-05-000793/ebox.gif){kind=small}