SEC Company Response from DLH Holdings Corp. (DLHC) (CIK 0000785557) (DLHC) — Aug 8, 2006
DLH Holdings Corp. (DLHC) (CIK 0000785557)
Date: Aug. 8, 2006 · CIK: 0000785557 · Accession: 0000950136-06-006463
AI Filing Summary & Sentiment
Reasoning
Referenced dates: July 11, 2006
Letter
August 8, 2006 PRIVATE AND CONFIDENTIAL Mr. Larry Spirgel Assistant Director Division of Corporate Finance Securities and Exchange Commission Washington, DC 20549
Re: Teamstaff, Inc. Form 10-K for Fiscal Year Ended September 30, 2005 Form 10-Q for Fiscal Quarter Ended December 31, 2005 and March 31, 2006 File No. 0-18492
Dear Mr. Spirgel:
We are responding to your letter dated July 11, 2006 concerning SEC review and comments on the above-referenced filings. Please be advised that on July 25, 2006, we were granted a ten (10) business day extension by Nicole Holden, Staff Accountant, to respond to your letter. Teamstaff makes every attempt to comply with applicable accounting and disclosure requirements and we welcome the opportunity to respond.
Item 9A. Controls and Procedures, page 30
1. We confirm that our disclosure controls and procedures are effective to ensure that the information required to be disclosed in the reports that the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and that our controls and procedures are also effective to ensure that the information required to be disclosed in the reports that the Company files and/or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. We will amend wording for future filings accordingly.
2. We confirm that there were no changes in the Company's internal controls that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting for its Form 10-K for the fiscal year ended September 30, 2005. We will amend wording for future filings accordingly.
Financial Statements
Consolidated Statements of Operations and Comprehensive Operations, page F-5
3. Direct expenses are considered expenses directly related to the revenue generated by the Company. Included in this amount are costs such as wages and payroll taxes for staffed professionals; and housing, travel, and other benefit-related expenses for staffed professionals.
Operating expenses are those that relate to the operations of the Company and are not directly related to any revenue streams. Operating expenses consists of wages and payroll taxes and benefit expenses for our regular office employees; occupancy (office-related) costs; professional fees and selling related expenses. We believe all our operating costs are "selling, general and administrative" by nature of the expense. At September 30, 2005, operating expenses were comprised of the following categories: Employee Costs, Occupancy Costs, General and Administrative Expense and New Business Expense. The Company is willing to change the caption "operating expenses" to "Selling, General and Administrative expenses" in its statement of operations in future filings. As a supplement to this letter, we are attaching a detailed list of the items included in both "direct expenses" and "operating expenses."
Consolidated Statements of Cash Flows, Page F-7
4.
a. We understand and agree with your comment and will correct presentation for future filings. We however, do not believe the current overall presentation of the cash flows is misleading as the information for net loss and the activity from discontinued operations that would be added back to arrive at the net loss from continuing operations is adequately disclosed and presented in the Company's statement of operations.
b. The amount of $1.336 million for discontinued operations presented in the operating section represents the change in the liabilities from discontinued operations balance from 2004 to 2005 of $541K and net loss from discontinued operations of $795K. The liabilities from discontinued operations represent future rent commitments (offset by sublease rental income) on certain non-cancelable office leases. These liabilities were recorded in accordance with FAS 146: Accounting for Costs Associated with Exit or Disposal Activities, upon the fiscal year 2004 sale of our former PEO subsidiaries. The entities that were comprised in this sale are: DSI Staff ConnXions Northeast, Inc., DSI Staff ConnXions Southwest, Inc., TeamStaff Solutions, Inc., TeamStaff I, Inc., TeamStaff II, Inc., TeamStaff III, Inc., TeamStaff IV, Inc., TeamStaff V, Inc., TeamStaff VI, Inc., TeamStaff VIII, Inc., TeamStaff IX, Inc., and HR2, Inc. The loss recognized from discontinued operations primarily relates to ongoing legal fees associated with litigation involving another discontinued subsidiary, Brightlane.com, Inc.; and prepaid workers' compensation adjustments to reflect settled claims on former workers' compensation programs that were required for our discontinued PEO subsidiaries. The workers' compensation expense was the result of an adverse claim development that required an increase from our originally estimated amount. The nature of these additional expenses has been explained in Note 10: Commitments and Contingencies, contained in the Notes to Consolidated Financial Statements. We believe both these items are operating activities and are appropriately presented in the operating section of the statement of cash flows. We agree however, to
modify for future filings the caption for the line item to appropriately reflect the nature of cash flows, as operating activities related to discontinued operations.
c. We understand and agree with the comment and will change for future filings. We deem the overall impact of moving the item from financing to operating (as a non-cash item) to be immaterial to the FY 2005 consolidated statement of cash flows.
d. The restricted cash represents collateral required for our current workers' compensation programs, which is a significant operational expense necessary for staffing our professionals in order to generate revenue. We have considered the fact that the restricted cash is invested in an interest-earning certificate of deposit. However, it is not considered a voluntary investment for the Company; it is mandated and solely attached to our operating assets (prepaid workers' compensation). We submit that the current classification is appropriate for these reasons.
(2) Summary of Significant Accounting Policies
Goodwill, page F-12
5. Goodwill at September 30, 2005 is completely related to one reporting segment, "staffing services". We will add a sentence for future filings that will incorporate the fact that the total goodwill is solely allocated to the "staffing services" segment.
(3) Business Combinations, page F-15
6. The Company followed the guidelines set forth in SFAS No. 141 when it allocated the excess of the cost of acquisition over the fair value of the two acquisitions made in fiscal year 2005 to goodwill. Goodwill recorded on acquisition of Nursing Innovations and RS Staffing was $1.7 million and $6.7 million, respectively.
For Nursing Innovations, Inc., the intangible assets acquired were its trade name, customer lists, customer contracts, non-contractual customer relationships and an assembled workforce. A non-compete agreement was also entered into with the former owners. The Company considered the value of each of the items and came to the following conclusions:
Trade Name - Nursing Innovations is one of many companies in the travel nurse industry. This industry is highly fragmented with many different entities engaged in it. With the exception of the local market in Memphis, Tenn., we believe the trade name has immaterial value and did not separate its value from goodwill.
Customer Contracts, Related and Non-Related Customer Relationships and Customer Lists - The typical customer contract is a 13-week assignment with significant turnover in the customer base. Approximately 50% of the contracts do not renew after the 13-week assignment ends. Due to the relatively short duration of the contracts, the non-renewal factor and the limited usage of customer lists, the Company did not believe a material value could be ascribed to the customer contracts, customer relationships and customer lists.
Non-Compete Agreement - The agreement contains contingent financial incentives such as earn-outs, stock options and employment agreements provided to the former owner.
The Company deemed any allocation of the purchase price to the non-compete agreement to be immaterial.
Assembled Workforce - Travel nurses are highly trained and have been in short supply for several years. As a result, many open positions within hospitals and the travel nurse industry are difficult to fill. The existing contracted workforce in a medical staffing company has value. Without the inherited workforce of travelers, it would be impractical to fill open orders. Therefore, value should be ascribed to the workforce at the time of purchase. Because the value of the workforce is combined with goodwill for reporting purposes, the Company did not allocate purchase price to the workforce.
For RS Staffing, as in Nursing Innovations, the intangible assets acquired were its trade name, customer lists, customer contracts, non-contractual customer relationships and an assembled workforce. The Company considered the value of each of the items and came to the following conclusions:
Trade Name-Government staffing is a niche market place within the staffing industry. RS Staffing's name and reputation does have value in the market place and was considered in the purchase price allocation. Since the trade name is not amortizable, the Company decided not to break out the trade name separately and included it instead in the calculation of goodwill.
Customer Contracts, Related and Non-related Customer Relationships and Customer Lists - Government contracts are usually renewable annually. The government maintains the right to cancel an agreement at any time with or without cause. The government awards staffing contracts only after a rigorous bidding process is followed. Due to the annual renewals and the government's process in awarding contracts, the Company believes an allocation of purchase price to these intangible assets would be immaterial.
Non-Compete Agreement - Due to the financial incentives (earn-out, company stock and employment agreement) provided to the former owners of RS Staffing, the Company deemed any allocation of purchase price to the non-compete agreement to be immaterial.
Assembled Workforce - As with Nursing Innovations, RS Staffing relies very heavily on maintaining the inherited contracted employees when an assignment begins. Without these employees, it would be extremely difficult for RS Staffing to fulfill its contractual staffing obligations. In addition, the knowledge the former owners of RS Staffing have is valuable in navigating the government bidding process. As a result, they were both given employment agreements post-acquisition. Because the value of the workforce is combined with goodwill for reporting purposes, the Company did not allocate purchase price to an assembled workforce.
It is important to note that the Company assesses whether goodwill is impaired in accordance with paragraphs 26-28 of SFAS No. 142, "Goodwill and Other Intangible Assets". As of September 30, 2005, December 31, 2005 and March 31, 2006, the Company determined that an impairment of the goodwill did not exist.
The Company has engaged a valuation firm to review the purchase price allocation for both Nursing Innovations and RS Staffing. The Company will share the results with the SEC if requested.
(5) Income Taxes, page F-17
7. In making the assessment that it would be more likely than not that the Company would realize its deferred tax assets, it prepared a five (5)-year projection that considered the following:
o Acquisition of stronger profitable subsidiaries. During the 2005 fiscal year, the Company acquired Nursing Innovations (November 2004) and RS Staffing (June 2005). Combined, these companies had a net profit of approximately $1.1 million for 2005 and $2.1 million for the first nine months of fiscal 2006. These acquisitions are intended to bring more exposure in the temporary placement industry and particularly the government sector, and therefore, increasing profitability.
o A conservative growth rate in revenues that was less than the growth rate in the industry predicted by the Staffing Industry Analysts, Inc. at its 2005 conference.
o The potential sale of DSI Payroll Services (DSI). In September 2005, the Company formally engaged investment advisory consultants to assist the Company in strategic alternatives for the sale of DSI. The expected sale of DSI indicated an ability to use approximately seven (7) million dollars of the NOL. The sale of DSI was consummated in June 2006 at a gain that was somewhat above the estimated price used in the projection.
Based upon this forecast, the Company concluded that substantially all of the temporary differences would reverse within the
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filename1.htm
August 8, 2006
PRIVATE AND CONFIDENTIAL
Mr. Larry Spirgel
Assistant Director
Division of Corporate Finance
Securities and Exchange Commission
Washington, DC 20549
Re: Teamstaff, Inc.
Form 10-K for Fiscal Year Ended September 30, 2005
Form 10-Q for Fiscal Quarter Ended December 31, 2005
and March 31, 2006
File No. 0-18492
Dear Mr. Spirgel:
We are responding to your letter dated July 11, 2006 concerning SEC review and
comments on the above-referenced filings. Please be advised that on July 25,
2006, we were granted a ten (10) business day extension by Nicole Holden, Staff
Accountant, to respond to your letter. Teamstaff makes every attempt to comply
with applicable accounting and disclosure requirements and we welcome the
opportunity to respond.
Item 9A. Controls and Procedures, page 30
1. We confirm that our disclosure controls and procedures are effective
to ensure that the information required to be disclosed in the reports
that the Company files under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Commission's rules and forms and that our controls and procedures are
also effective to ensure that the information required to be disclosed
in the reports that the Company files and/or submits under the
Exchange Act is accumulated and communicated to the Company's
management, including the Company's chief executive officer and chief
financial officer, to allow timely decisions regarding required
disclosures. We will amend wording for future filings accordingly.
2. We confirm that there were no changes in the Company's internal
controls that materially affected, or were reasonably likely to
materially affect, the Company's internal control over financial
reporting for its Form 10-K for the fiscal year ended September 30,
2005. We will amend wording for future filings accordingly.
Financial Statements
Consolidated Statements of Operations and Comprehensive Operations, page F-5
3. Direct expenses are considered expenses directly related to the
revenue generated by the Company. Included in this amount are costs
such as wages and payroll taxes for staffed professionals; and
housing, travel, and other benefit-related expenses for staffed
professionals.
Operating expenses are those that relate to the operations of the
Company and are not directly related to any revenue streams. Operating
expenses consists of wages and payroll taxes and benefit expenses for
our regular office employees; occupancy (office-related) costs;
professional fees and selling related expenses. We believe all our
operating costs are "selling, general and administrative" by nature of
the expense. At September 30, 2005, operating expenses were comprised
of the following categories: Employee Costs, Occupancy Costs, General
and Administrative Expense and New Business Expense. The Company is
willing to change the caption "operating expenses" to "Selling,
General and Administrative expenses" in its statement of operations in
future filings. As a supplement to this letter, we are attaching a
detailed list of the items included in both "direct expenses" and
"operating expenses."
Consolidated Statements of Cash Flows, Page F-7
4.
a. We understand and agree with your comment and will correct
presentation for future filings. We however, do not believe the
current overall presentation of the cash flows is misleading as
the information for net loss and the activity from discontinued
operations that would be added back to arrive at the net loss
from continuing operations is adequately disclosed and presented
in the Company's statement of operations.
b. The amount of $1.336 million for discontinued operations
presented in the operating section represents the change in the
liabilities from discontinued operations balance from 2004 to
2005 of $541K and net loss from discontinued operations of $795K.
The liabilities from discontinued operations represent future
rent commitments (offset by sublease rental income) on certain
non-cancelable office leases. These liabilities were recorded in
accordance with FAS 146: Accounting for Costs Associated with
Exit or Disposal Activities, upon the fiscal year 2004 sale of
our former PEO subsidiaries. The entities that were comprised in
this sale are: DSI Staff ConnXions Northeast, Inc., DSI Staff
ConnXions Southwest, Inc., TeamStaff Solutions, Inc., TeamStaff
I, Inc., TeamStaff II, Inc., TeamStaff III, Inc., TeamStaff IV,
Inc., TeamStaff V, Inc., TeamStaff VI, Inc., TeamStaff VIII,
Inc., TeamStaff IX, Inc., and HR2, Inc. The loss recognized from
discontinued operations primarily relates to ongoing legal fees
associated with litigation involving another discontinued
subsidiary, Brightlane.com, Inc.; and prepaid workers'
compensation adjustments to reflect settled claims on former
workers' compensation programs that were required for our
discontinued PEO subsidiaries. The workers' compensation expense
was the result of an adverse claim development that required an
increase from our originally estimated amount. The nature of
these additional expenses has been explained in Note 10:
Commitments and Contingencies, contained in the Notes to
Consolidated Financial Statements. We believe both these items
are operating activities and are appropriately presented in the
operating section of the statement of cash flows. We agree
however, to
modify for future filings the caption for the line item to
appropriately reflect the nature of cash flows, as operating
activities related to discontinued operations.
c. We understand and agree with the comment and will change for
future filings. We deem the overall impact of moving the item
from financing to operating (as a non-cash item) to be immaterial
to the FY 2005 consolidated statement of cash flows.
d. The restricted cash represents collateral required for our
current workers' compensation programs, which is a significant
operational expense necessary for staffing our professionals in
order to generate revenue. We have considered the fact that the
restricted cash is invested in an interest-earning certificate of
deposit. However, it is not considered a voluntary investment for
the Company; it is mandated and solely attached to our operating
assets (prepaid workers' compensation). We submit that the
current classification is appropriate for these reasons.
(2) Summary of Significant Accounting Policies
Goodwill, page F-12
5. Goodwill at September 30, 2005 is completely related to one reporting
segment, "staffing services". We will add a sentence for future
filings that will incorporate the fact that the total goodwill is
solely allocated to the "staffing services" segment.
(3) Business Combinations, page F-15
6. The Company followed the guidelines set forth in SFAS No. 141 when it
allocated the excess of the cost of acquisition over the fair value of
the two acquisitions made in fiscal year 2005 to goodwill. Goodwill
recorded on acquisition of Nursing Innovations and RS Staffing was
$1.7 million and $6.7 million, respectively.
For Nursing Innovations, Inc., the intangible assets acquired were its
trade name, customer lists, customer contracts, non-contractual
customer relationships and an assembled workforce. A non-compete
agreement was also entered into with the former owners. The Company
considered the value of each of the items and came to the following
conclusions:
Trade Name - Nursing Innovations is one of many companies in the
travel nurse industry. This industry is highly fragmented with
many different entities engaged in it. With the exception of the
local market in Memphis, Tenn., we believe the trade name has
immaterial value and did not separate its value from goodwill.
Customer Contracts, Related and Non-Related Customer
Relationships and Customer Lists - The typical customer contract
is a 13-week assignment with significant turnover in the customer
base. Approximately 50% of the contracts do not renew after the
13-week assignment ends. Due to the relatively short duration of
the contracts, the non-renewal factor and the limited usage of
customer lists, the Company did not believe a material value
could be ascribed to the customer contracts, customer
relationships and customer lists.
Non-Compete Agreement - The agreement contains contingent
financial incentives such as earn-outs, stock options and
employment agreements provided to the former owner.
The Company deemed any allocation of the purchase price to the
non-compete agreement to be immaterial.
Assembled Workforce - Travel nurses are highly trained and have
been in short supply for several years. As a result, many open
positions within hospitals and the travel nurse industry are
difficult to fill. The existing contracted workforce in a medical
staffing company has value. Without the inherited workforce of
travelers, it would be impractical to fill open orders.
Therefore, value should be ascribed to the workforce at the time
of purchase. Because the value of the workforce is combined with
goodwill for reporting purposes, the Company did not allocate
purchase price to the workforce.
For RS Staffing, as in Nursing Innovations, the intangible assets
acquired were its trade name, customer lists, customer contracts,
non-contractual customer relationships and an assembled workforce. The
Company considered the value of each of the items and came to the
following conclusions:
Trade Name-Government staffing is a niche market place within the
staffing industry. RS Staffing's name and reputation does have
value in the market place and was considered in the purchase
price allocation. Since the trade name is not amortizable, the
Company decided not to break out the trade name separately and
included it instead in the calculation of goodwill.
Customer Contracts, Related and Non-related Customer
Relationships and Customer Lists - Government contracts are
usually renewable annually. The government maintains the right to
cancel an agreement at any time with or without cause. The
government awards staffing contracts only after a rigorous
bidding process is followed. Due to the annual renewals and the
government's process in awarding contracts, the Company believes
an allocation of purchase price to these intangible assets would
be immaterial.
Non-Compete Agreement - Due to the financial incentives
(earn-out, company stock and employment agreement) provided to
the former owners of RS Staffing, the Company deemed any
allocation of purchase price to the non-compete agreement to be
immaterial.
Assembled Workforce - As with Nursing Innovations, RS Staffing
relies very heavily on maintaining the inherited contracted
employees when an assignment begins. Without these employees, it
would be extremely difficult for RS Staffing to fulfill its
contractual staffing obligations. In addition, the knowledge the
former owners of RS Staffing have is valuable in navigating the
government bidding process. As a result, they were both given
employment agreements post-acquisition. Because the value of the
workforce is combined with goodwill for reporting purposes, the
Company did not allocate purchase price to an assembled
workforce.
It is important to note that the Company assesses whether goodwill is
impaired in accordance with paragraphs 26-28 of SFAS No. 142,
"Goodwill and Other Intangible Assets". As of September 30, 2005,
December 31, 2005 and March 31, 2006, the Company determined that an
impairment of the goodwill did not exist.
The Company has engaged a valuation firm to review the purchase price
allocation for both Nursing Innovations and RS Staffing. The Company
will share the results with the SEC if requested.
(5) Income Taxes, page F-17
7. In making the assessment that it would be more likely than not that
the Company would realize its deferred tax assets, it prepared a five
(5)-year projection that considered the following:
o Acquisition of stronger profitable subsidiaries. During the
2005 fiscal year, the Company acquired Nursing Innovations
(November 2004) and RS Staffing (June 2005). Combined, these
companies had a net profit of approximately $1.1 million for
2005 and $2.1 million for the first nine months of fiscal
2006. These acquisitions are intended to bring more exposure
in the temporary placement industry and particularly the
government sector, and therefore, increasing profitability.
o A conservative growth rate in revenues that was less than
the growth rate in the industry predicted by the Staffing
Industry Analysts, Inc. at its 2005 conference.
o The potential sale of DSI Payroll Services (DSI). In
September 2005, the Company formally engaged investment
advisory consultants to assist the Company in strategic
alternatives for the sale of DSI. The expected sale of DSI
indicated an ability to use approximately seven (7) million
dollars of the NOL. The sale of DSI was consummated in June
2006 at a gain that was somewhat above the estimated price
used in the projection.
Based upon this forecast, the Company concluded that substantially all
of the temporary differences would reverse within the