1
EXHIBIT 99.2
TO
8-K OF
TEAMSTAFF, INC.
AUDITED FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998 TOGETHER
WITH REPORT OF ARTHUR ANDERSEN LLP
INDEPENDENT ACCOUNTANTS
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99.2
TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998
TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Teamstaff Companies, Inc. and
Affiliated Companies
We have audited the accompanying combined balance sheet of Teamstaff Companies,
Inc. and Affiliated Companies (as defined in Note 1) as of December 31, 1998 and
the related combined statements of operations, shareholders' deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Teamstaff Companies, Inc. and
Affiliated Companies as of December 31, 1998 and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
Roseland, New Jersey
March 19, 1999
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TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET -- DECEMBER 31, 1998
ASSETS
CURRENT ASSETS:
Cash $ 417,000
Accounts receivable, net of allowance for doubtful accounts of $2,000 2,249,000
Prepaid expenses and other current assets 505,000
Notes receivable from shareholders 380,000
Deposits with workers' compensation insurer 85,000
-----------
Total current assets 3,636,000
-----------
FURNITURE, FIXTURES AND EQUIPMENT:
Computer equipment 424,000
Furniture and fixtures 124,000
Leasehold improvements 25,000
-----------
Total furniture, fixtures and equipment 573,000
ACCUMULATED DEPRECIATION AND AMORTIZATION (348,000)
-----------
Total furniture, fixtures and equipment, net 225,000
-----------
NOTE RECEIVABLE FROM SHAREHOLDER 1,800,000
OTHER ASSETS 484,000
-----------
Total assets $ 6,145,000
===========
The accompanying notes are an integral part of this combined balance sheet.
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TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET -- DECEMBER 31, 1998
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 859,000
Accrued expenses 1,590,000
Accrued salaries, wages and payroll taxes 1,943,000
Income taxes payable 29,000
Current maturities of note payable 28,000
Current maturities of notes payable to shareholders 847,000
-----------
Total current liabilities 5,296,000
ACCRUED WORKERS' COMPENSATION CLAIMS 484,000
NOTE PAYABLE, less current portion 65,000
NOTES PAYABLE TO SHAREHOLDERS, less current portion 2,300,000
CLIENT DEPOSITS 45,000
-----------
Total liabilities 8,190,000
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred stock 1,800,000
Common stock 47,000
Additional paid-in capital 1,977,000
Accumulated deficit (5,869,000)
-----------
Total shareholders' deficit (2,045,000)
-----------
Total liabilities and shareholders' deficit
balance sheet. $ 6,145,000
===========
The accompanying notes are an integral part of this combined balance sheet
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TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
REVENUES $ 113,501,000
DIRECT COSTS:
Salaries and wages of worksite employees 97,205,000
Benefits and payroll taxes 12,156,000
-------------
Total direct costs 109,361,000
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GROSS PROFIT 4,140,000
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OPERATING EXPENSES:
Administrative personnel 2,282,000
General and administrative expenses 2,156,000
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Total operating expenses 4,438,000
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LOSS FROM OPERATIONS (298,000)
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OTHER INCOME (EXPENSE):
Interest expense (447,000)
Interest income 346,000
Other income 6,000
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Total other income (expense) (95,000)
Loss before provision for income taxes (393,000)
PROVISION FOR INCOME TAXES (29,000)
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Net loss ($ 422,000)
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The accompanying notes are an integral
part of this combined statement.
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TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1998
Additional
Preferred Common Paid-In Accumulated
Stock Stock Capital Deficit Total
----- ----- ------- ------- -----
Balance at December 31,
1997 $ 1,800,000 $ 47,000 $ 1,777,000 ($5,447,000) ($1,823,000)
Shareholder contribution -- -- 200,000 -- 200,000
Net loss -- -- -- (422,000) (422,000)
----------- ----------- ----------- ----------- -----------
Balance at December 31,
1998 $ 1,800,000 $ 47,000 $ 1,977,000 ($5,869,000) ($2,045,000)
=========== =========== =========== =========== ===========
The accompanying notes are an integral
part of this combined statement.
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TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 422,000)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 121,000
Provision for doubtful accounts 2,000
Changes in assets and liabilities-
Accounts receivable 429,000
Prepaid expenses and other current assets (505,000)
Notes receivable from shareholders (41,000)
Deposits with workers' compensation insurer 249,000
Other assets (169,000)
Accounts payable 399,000
Accrued expenses 1,254,000
Accrued salaries, wages and payroll taxes (1,505,000)
Income taxes payable 29,000
Accrued workers' compensation claims (379,000)
Other liabilities (15,000)
Client deposits 11,000
-----------
Net cash used in operating activities (542,000)
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CASH FLOWS FROM INVESTING ACTIVITIES --
Purchase of furniture, fixtures and equipment (107,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to shareholders 28,000
Proceeds from note payable 22,000
Payments of notes payable to shareholders (19,000)
Payments of note payable (27,000)
Shareholder contribution 200,000
-----------
Net cash provided by financing activities 204,000
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Net decrease in cash (445,000)
CASH, beginning of year 862,000
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CASH, end of year $ 417,000
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 112,000
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The accompanying notes are an integral
part of this combined statement.
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TEAMSTAFF COMPANIES, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) NATURE OF THE BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
Teamstaff Companies, Inc. and Affiliated Companies (collectively referred
to as "the Company" or "Teamstaff") are professional employer
organizations ("PEO") which provide professional employer services
through its service arrangements with its clients. The Company provides
human resource management services, including payroll processing,
personnel administration, employee benefits administration, workers'
compensation insurance coverage and claims management, risk management,
and other human resource services. The Company earns a fee for providing
human resource services, generally computed as a percentage of gross
wages of payroll processed. The majority of the Company's clients are
located in the State of Florida.
The following are the significant accounting policies followed by the
Company in preparing its combined financial statements.
Principles of Combination-
The accompanying combined financial statements of Teamstaff
Companies, Inc. and Affiliated Companies include the accounts of The
Teamstaff Companies, Inc., Teamstaff, Inc., Teamstaff II, Inc.,
Teamstaff III, Inc., Teamstaff IV, Inc., Teamstaff V, Inc., Teamstaff
U.S.A., Inc., Teamstaff Insurance Services, Inc., and Employer
Support Services, Inc. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates-
In preparing the Company's financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the 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. The more significant estimates relate to the Company's
accrued workers' compensation claims. Actual results could differ
from those estimates.
Cash and Cash Equivalents-
For purposes of the statement of cash flows, the Company considers
cash in banks and certificates of deposit with maturities of ninety
days or less at the time of purchase to be cash equivalents. There
were no cash equivalents at December 31, 1998.
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Revenue Recognition-
Revenues and expenses and the related receivables and payables are
recognized during the period in which the worksite employee earns
wages. The Company's client service contracts generally provide for the
billing and collection of revenues prior to or concurrent with the
delivery of payrolls. Ordinarily, the Company does not grant credit to
its clients; however, credit is granted on a case-by-case basis at the
discretion of management.
Accounts receivable consists primarily of billed receivables of
approximately $283,000 and unbilled receivables of approximately
$1,968,000 at December 31, 1998.
Furniture, Fixtures and Equipment-
Furniture, fixtures and equipment are stated at cost. Depreciation and
amortization is computed utilizing the straight-line method over the
shorter of the estimated useful lives of the assets or the remaining
lease term, principally ranging from 5-7 years.
Other Current Assets-
Included in prepaid expenses and other current assets is approximately
$45,000 of advances to a shareholder and the shareholder's family at
December 31, 1998.
Reserves for Workers' Compensation Claims-
Client employees were covered under an insurance policy with Northbrook
Insurance Company (Northbrook) until August 1996, at which time the
coverage was changed to a policy with American International Group
(AIG). The Northbrook policy provided a specific loss limitation of
$500,000 per occurrence. The AIG policy provides for a range of premium
costs depending on the claims activity during the policy year and
limits the aggregate claims exposure to a percentage of workers'
compensation payroll.
From January 1, 1991 through December 31, 1993, all client employees
were covered under fully insured policies with either United States
Employer Consumer Association, Inc. Self-insured Fund (USEC), which is
currently in receivership or Associated Industries Insurance Company,
Inc. (AIF). From January 1, 1994 through July 31, 1994, all client
employees were covered under USEC. (See Note 7)
Claims for workers' compensation benefits covered through the USEC,
Northbrook and AIG policies, are administered by the respective
workers' compensation insurers (the Insurers). The Insurers evaluate
all workers' compensation claims and pay qualifying claims. The Company
employs a staff of risk managers responsible for assisting the Insurers
in the review and evaluation of claims.
Reserves for workers' compensation claims represent the Company's
estimated undiscounted liability for the settlement of workers'
compensation claims, both reported and incurred but not reported, as of
the balance sheet date. The Company's reserves are based upon
information provided by the Company's Insurers. Management believes
that the reserves for workers' compensation claims are adequate. While
management uses available information, including historical loss ratios
to estimate reserves future adjustments may be necessary based on
actual losses.
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Income Taxes-
Teamstaff Companies, Inc. and Affiliated Companies are Subchapter S
corporations, except for Teamstaff V, Inc. which is a C Corporation.
The Company's policy is to record income tax expenses on the C
Corporation financial statements based on applicable statutory rates.
The C Corporation uses the asset and liability method to account for
income taxes. The objective of the assets and liability method is to
establish deferred tax assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or settled. The
principal temporary difference between the basis of assets and
liabilities for financial reporting and tax purposes relates to
reserves for workers' compensation and health insurance claims and net
operating loss carryforwards. Net deferred tax assets related to such
differences have been offset by a valuation allowance due to the
uncertainty of their ultimate realization.
The Subchapter S Corporations do not provide for income taxes in the
accompanying combined financial statements because those companies'
results of operations are allocated directly to their shareholders.
Fair Value of Financial Instruments-
The carrying amounts of the Company's accounts receivable, notes
receivable from shareholders and notes payable at December 31, 1998,
approximate fair value due to the short-term nature of these items.
(2) LIQUIDITY:
During 1998, the Company's net loss was $422,000 and at December 31, 1998
the accumulated deficit totaled $5,869,000.
Management intends to continue improving the operating results by better
controlling its health insurance-related costs and increasing gross
client revenues. Management believes that these steps will result in
economies of scale and greater contribution to net income.
Subsequent to year-end the Company was sold (see Note 11).
(3) NOTES RECEIVABLE FROM SHAREHOLDERS:
The notes receivable from shareholders relate to ten notes outstanding
from two shareholders. The notes have fixed interest rates ranging from
8% to 10%, payable quarterly or at the due date. All principal on these
notes are due on June 30, 1999, December 31, 1999 and January 31, 2000.
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(4) NOTES PAYABLE TO SHAREHOLDERS:
A summary of notes payable to shareholders at December 31, 1998 is as
follows-
Note payable to shareholder, dated December 27, 1996, principal due on January 31,
2000, interest due quarterly at 10% $1,800,000
Notes payable to shareholder, dated December 27, 1996, principal due on January 31,
2000, interest due quarterly at 10% 500,000
Note payable to shareholder, dated November 15, 1994, principal due on December 31,
1999, interest due annually at 7.25% 50,000
Note payable to shareholder, dated July 31, 1995, principal due on December 31, 1999,
interest due quarterly at LIBOR (5.10% at December 31, 1998) plus 1% 350,000
Note payable to shareholder, dated December 29, 1993, principal due on December 31,
1999, interest due monthly at 8% 132,000
Note payable to shareholder, dated December 31, 1997, principal due on December 31,
1999, interest due annually at 9% 100,000
Note payable to shareholder, dated December 29, 1993, principal due on December 31,
1999, interest due monthly at 9% 100,000
Note payable to shareholder, dated December 31, 1997, principal due on December 31,
1999, interest due annually at 9% 50,000
Note payable to shareholder, dated December 29, 1993, principal due on December 31,
1999, interest due monthly at 9% 65,000
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3,147,000
Less- Current portion (847,000)
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$2,300,000
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The maturity dates of the above uncollateralized notes have been extended
numerous times.
(5) NOTE PAYABLE:
The note payable is to a bank, dated August 5, 1997 with principal due on
August 5, 2000. Interest is due quarterly at LIBOR (5.10% at December 31,
1998) plus 1% $93,000
Less- Current portion (28,000)
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$65,000
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(6) EMPLOYEE BENEFIT PLANS:
401(k) Contribution Plan-
In 1996, the Company established a deferred compensation plan (the
Plan) under Section 401(a)(g) of the Internal Revenue Code. Generally,
any employee of the Company, including those leased to clients, is
eligible to participate in the Plan upon completion of a year of
service and after attaining the age of 21 years. At its discretion, the
Company may make matching contributions to the Plan. Generally,
employees become partially vested in Company contributions after 2
years of service and are fully vested after six years of service. In
1998 approximately $226,000 were contributed by the Company to the
Plan.
(7) COMMITMENTS AND CONTINGENCIES:
Deposits with Workers' Compensation Insurer-
As security under the Northbrook insurance policy described previously,
the Company had pledged a certificate of deposit of $900,000 to
Northbrook. During 1997, this certificate was redeemed and the funds
were transferred to Northbrook to use for claim payments. As of
December 31, 1998 the certificate of deposit balance was $10,000. In
addition, as required under the Northbrook policy, the Company also
maintains a $75,000 deposit with the insurer, which is used to fund all
claims.
Workers' Compensation Claim-
The Company has a contingent liability for a potential assessment from
a former workers' compensation insurer, which is currently in
receivership. The Company used the insurer for policy years prior to
1994. The Company is a member of the insured group and was originally
given an assessment of $1.03 million on July 18, 1996 for its portion
of the $38 million assessed to the group. On January 15, 1999 this
amount was reassessed to $1.6 million of the revised $45 million
assessed to the group. The Company is currently in litigation regarding
this assessment and management, after consultation with legal counsel,
has recorded a reserve of approximately $484,000 based upon the
Company's original assessment of $1.03 million and the results of other
members' settlements. In the event that other parties of the group are
unable to satisfy their assessments, additional assessments could be
made against the Company as the overall assessment is joint and
several.
Operating Leases-
The Company has various operating lease agreements for their offices
and equipment. Future minimum lease payments required under these
operating leases for the years ended December 31, are as follows-
1999 $138,000
2000 14,000
2001 11,000
2002 7,000
Thereafter 0
The leases provide for payment of taxes and other expenses by the
Company. Rent expense was approximately $157,000 for the year ended
December 31, 1998.
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(8) COMMITMENTS AND CONTINGENCIES:
LEGAL PROCEEDINGS-
Various legal actions and proceedings are pending or threatened against
the Company and include suits relating to its professional employer
services. While the final outcome of these matters cannot be predicted
at this time and many of them may take a number of years to resolve,
management believes, after consultations with counsel, that these
proceedings are subject to meritorious defenses, are covered by
insurance, or, if not so covered, any ultimate liability will not have
a material adverse effect on the combined financial position, results
of operations, or liquidity of the Company.
(9) CAPITAL STOCK:
Preferred and common stock balances consist of the following at
December 31, 1998
Preferred Common
Stock Stock
----- -----
The Teamstaff Companies, Inc. -- Common stock - authorized 10,000 shares of
$1.00 par value; issued and outstanding 29,000 shares $ 0 $29,000
Employer Support Services, Inc. -- Common stock - authorized 10,000 shares
of $1.00 par value; issued and outstanding 3,800 shares 0 3,800
Teamstaff II, Inc. -- Common stock - authorized 10,000 shares of $1.00 par
value; issued and outstanding 100 shares 0 100
Teamstaff III, Inc. -- Common stock - authorized 10,000 shares of $1.00 par
value; issued and outstanding 100 shares 0 100
Teamstaff IV, Inc. -- Common stock - authorized 10,000 shares of $1.00 par
value; issued and outstanding 100 shares 0 100
Teamstaff V, Inc. -- Preferred stock - 8% cumulative - $1,000 par value;
authorized 10,000 shares; issued and outstanding 1,800 shares - Common
stock - authorized 10,000 shares of $1.00 par value; issued and
outstanding 100 shares 1,800,000 100
Teamstaff Insurance, Inc. -- Common stock - authorized 10,000 shares of
$1.00 par value; issued and outstanding 100 shares 0 100
Teamstaff U.S.A., Inc. -- Common stock - authorized 10,000 shares of $1.00 par
value; issued and outstanding 3,800 shares 0 3,800
Teamstaff, Inc. -- Common stock - authorized 10,000 shares of $1.00 par
value; issued and outstanding 9,700 shares 0 9,700
---------- -------
$1,800,000 $46,800
========== =======
All companies have authorized 10,000 shares of $1,000 preferred stock;
with the exception of those issued above, no shares are issued and
outstanding.
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(10) RELATED PARTY TRANSACTION:
In 1996, a shareholder paid the Company $1,800,000 in exchange for
10,000 shares of preferred stock in Teamstaff V, Inc. Teamstaff V, Inc.
then loaned the $1,800,000 to the shareholder (resulting in the
$1,800,000 long-term note receivable) who in turn loaned the $1,800,000
to Teamstaff, Inc. (resulting in the $1,800,000 note payable). The
interest rates on the note receivable and note payable are identical.
The preferred stock has an 8% cumulative dividend rate. Cumulative
dividend in arrears approximate $289,000 as of December 31, 1998. The
preferred stock does not give the holder any voting rights and does not
contain conversion features. In the event of liquidation, the preferred
shareholder is entitled to a liquidation preference of $1,800,000.
(11) SUBSEQUENT EVENT:
On January 25, 1999 the Company was sold to Teamstaff, Inc. (formerly
Digital Solutions, Inc.) in exchange for 8,233,334 shares of Teamstaff,
Inc.'s common stock. In addition, Teamstaff, Inc. purchased the
Company's preferred stock and repaid the note payable and the net notes
payable to (receivable from) shareholders.
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