EX-99.2 3 dex992.htm ONSTAFF COMBINED FINANCIAL STATEMENTS OnStaff Combined Financial Statements
Table of Contents
 
EXHIBIT 99.2
 
ONSTAFF GROUP
 
TABLE OF CONTENTS
 
 

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INDEPENDENT AUDITORS’ REPORT
 
To the Stockholders of
OnStaff, Inc.
Healthcare Staffing Resources, Inc.
Boardnetwork.com, Inc.
 
We have audited the accompanying combined balance sheet of OnStaff, Inc. and related companies as of December 31, 2001, and the related combined statements of operations, stockholders’ equity, and cash flows for the year then ended. The combined financial statements include the accounts of OnStaff, Inc. and two related companies, Healthcare Staffing Resources, Inc. and Boardnetwork.com, Inc. These companies are under common ownership and common management. These financial statements are the responsibility of the Companies’ management. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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, such financial statements present fairly, in all material respects, the combined financial position of OnStaff, Inc. and related companies as of December 31, 2001, and the combined results of their operations and their combined cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
 
 
/s/    Deloitte & Touche LLP        
 
 
October 22, 2002

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ONSTAFF GROUP
 
COMBINED BALANCE SHEETS
July 31, 2002 (Unaudited) and December 31, 2001
 
    
July 31,
2002
     
December 31, 2001
  
    
(Unaudited)
         
ASSETS
                  
CURRENT ASSETS:
                  
Cash and cash equivalents
   
$
221,591
 
   
$
 
 
Accounts receivable, net of allowance for doubtful accounts of $331,567 (unaudited) at July 31, 2002 and $381,800 at December 31, 2001, respectively.
   
 
3,004,540
 
   
 
3,690,658
 
Prepaid expenses and other
   
 
183,258
 
   
 
148,642
 
    
  
Total current assets
   
 
3,409,389
 
   
 
3,839,300
 
PROPERTY AND EQUIPMENT—Net
   
 
260,517
 
   
 
161,124
 
OTHER ASSETS
   
 
91,818
 
   
 
75,844
 
    
  
TOTAL ASSETS
   
$
3,761,724
 
   
$
4,076,268
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
CURRENT LIABILITIES:
                  
Accounts payable and accrued expenses
   
$
1,433,448
 
   
$
1,603,468
 
Accrued compensation and related benefits
   
 
1,266,298
 
   
 
753,350
 
Bank line of credit
   
 
482,645
 
   
 
890,000
 
Deferred revenue
   
 
100,431
 
   
 
99,012
 
Current portion of capital lease obligations
   
 
18,274
 
   
 
20,770
 
Deferred income taxes
   
 
28,000
 
   
 
28,000
 
    
  
Total current liabilities
   
 
3,329,096
 
   
 
3,394,600
 
    
  
CAPITAL LEASE OBLIGATIONS, Net of current portion
   
 
83,670
 
   
 
30,704
 
STOCKHOLDERS’ EQUITY:
                  
Common stock
   
 
21,322
 
   
 
21,322
 
Additional paid-in capital
   
 
1,634,178
 
   
 
1,634,178
 
Stockholder notes receivable
   
 
(429,309
)
   
 
(414,889
)
Accumulated deficit
   
 
(877,233
)
   
 
(589,647
)
    
  
Total stockholders’ equity
   
 
348,958
 
   
 
650,964
 
    
  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   
$
3,761,724
 
   
$
4,076,268
 
    
  
 
See notes to combined financial statements.

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ONSTAFF GROUP
 
COMBINED STATEMENTS OF OPERATIONS
Seven Months Ended July 31, 2002 (Unaudited) and
2001 (Unaudited) And Year Ended December 31, 2001
 
    
Seven Months Ended
     
Year Ended December 31, 2001
  
    
July 31,
2002
     
July 31,
2001
     
    
(Unaudited)
     
(Unaudited)
         
NET REVENUES
   
$
22,586,754
 
   
$
18,768,245
 
   
$
35,064,936
 
COST OF REVENUES
   
 
15,673,778
 
   
 
13,389,354
 
   
 
24,644,375
 
    
  
  
GROSS PROFIT
   
 
6,912,976
 
   
 
5,378,891
 
   
 
10,420,561
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
   
 
7,758,003
 
   
 
4,048,898
 
   
 
10,005,894
 
    
  
  
INCOME (LOSS) FROM OPERATIONS
   
 
(845,027
)
   
 
1,329,993
 
   
 
414,667
 
INTEREST EXPENSE
   
 
(22,906
)
   
 
(31,284
)
   
 
(34,909
)
INTEREST INCOME
   
 
41,859
 
   
 
11,742
 
   
 
62,131
 
    
  
  
INCOME (LOSS) BEFORE INCOME TAXES
   
 
(826,074
)
   
 
1,310,451
 
   
 
441,889
 
INCOME TAX PROVISION
   
 
29,370
 
   
 
4,349
 
   
 
23,413
 
    
  
  
NET INCOME (LOSS)
   
$
(855,444
)
   
$
1,306,102
 
   
$
418,476
 
    
  
  
 
See notes to combined financial statements.

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ONSTAFF GROUP
 
COMBINED STATEMENTS OF STOCKHOLDERS’ EQUITY
Seven Months Ended July 31, 2002 (Unaudited) and
Year Ended December 31, 2001
 
    
Common Stock
   
Additional Paid-in
Capital
   
Stockholder Notes
Receivable
     
Retained Earnings (Accumulated
Deficit)
     
Total Stockholders’
Equity
  
BALANCE,
                                         
December 31, 2000
   
$
20,750
   
$
559,750
   
$
(391,403
)
   
$
335,342
 
   
$
524,439
 
DISTRIBUTIONS TO STOCKHOLDERS
                          
 
(1,343,465
)
   
 
(1,343,465
)
STOCK COMPENSATION
   
 
572
   
 
1,074,428
                     
 
1,075,000
 
NONCASH INTEREST
                 
 
(23,486
)
            
 
(23,486
)
NET INCOME
                          
 
418,476
 
   
 
418,476
 
    
  
  
  
  
BALANCE,
                                         
December 31, 2001
   
 
21,322
   
 
1,634,178
   
 
(414,889
)
   
 
(589,647
)
   
 
650,964
 
CONTRIBUTIONS FROM STOCKHOLDERS (Unaudited)
                          
 
573,158
 
   
 
573,158
 
DISTRIBUTIONS TO STOCKHOLDERS (Unaudited)
                          
 
(5,300
)
   
 
(5,300
)
NONCASH INTEREST (Unaudited)
                 
 
(14,420
)
            
 
(14,420
)
NET LOSS (Unaudited)
                          
 
(855,444
)
   
 
(855,444
)
    
  
  
  
  
BALANCE,
                                         
July 31, 2002 (Unaudited)
   
$
21,322
   
$
1,634,178
   
$
(429,309
)
   
$
(877,233
)
   
$
348,958
 
    
  
  
  
  
 
 
See notes to combined financial statements.

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ONSTAFF GROUP
 
COMBINED STATEMENTS OF CASH FLOWS
Seven Months Ended July 31, 2002 (Unaudited) and
2001 (Unaudited) and Year Ended December 31, 2001
 
    
Seven Months Ended
     
Year Ended December 31, 2001
  
    
July 31, 2002
     
July 31, 2001
     
    
(Unaudited)
     
(Unaudited)
         
CASH FLOWS FROM OPERATING ACTIVITIES:
                           
Net income (loss)
   
$
(855,444
)
   
$
1,306,102
 
   
$
418,476
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                           
Depreciation and amortization
   
 
47,277
 
   
 
25,093
 
   
 
49,129
 
Noncash interest income
   
 
(14,420
)
   
 
(11,742
)
   
 
(23,486
)
Noncash stock compensation
                     
 
1,075,000
 
Other
            
 
1,197
 
   
 
596
 
Changes in operating assets and liabilities:
                           
Accounts receivables
   
 
686,118
 
   
 
(529,913
)
   
 
(1,305,000
)
Prepaid expenses and other
   
 
(34,616
)
   
 
(104,916
)
   
 
(136,014
)
Other assets
   
 
(15,974
)
   
 
(36,518
)
   
 
(42,633
)
Accounts payable
   
 
(170,021
)
   
 
(113,800
)
   
 
554,861
 
Accrued expenses and other liabilities
   
 
512,948
 
   
 
321,100
 
   
 
981,747
 
Deferred revenue
   
 
1,419
 
   
 
76,521
 
   
 
76,521
 
    
  
  
Net cash provided by operating activities
   
 
157,287
 
   
 
933,124
 
   
 
1,649,197
 
    
  
  
CASH FLOWS FROM INVESTING ACTIVITIES:
                           
Purchase of property and equipment
   
 
(70,634
)
   
 
(18,399
)
   
 
(81,267
)
    
  
  
Net cash used in investing activities
   
 
(70,634
)
   
 
(18,399
)
   
 
(81,267
)
    
  
  
CASH FLOWS FROM FINANCING ACTIVITIES:
                           
Line of credit borrowings
   
 
2,147,646
 
   
 
5,005,000
 
   
 
6,470,000
 
Line of credit repayments
   
 
(2,555,000
)
   
 
(5,985,774
)
   
 
(6,560,774
)
Repayments of capital lease obligations
   
 
(25,566
)
   
 
(1,433
)
   
 
(7,773
)
Shareholder advances, net
            
 
(125,918
)
   
 
(125,918
)
Distributions to stockholders
   
 
(5,300
)
            
 
(1,343,465
)
Contributions from stockholders
   
 
573,158
 
   
 
193,400
 
         
    
  
  
Net cash provided by (used in) financing activities
   
 
134,938
 
   
 
(914,725
)
   
 
(1,567,930
)
    
  
  
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
 
221,591
 
   
 
—  
 
   
 
—  
 
CASH AND CASH EQUIVALENTS, Beginning of period
                           
    
  
  
CASH AND CASH EQUIVALENTS, End of period
   
$
221,591
 
   
$
 
 
   
$
 
 
    
  
  
CASH PAID DURING THE PERIOD
                           
Interest
   
$
22,096
 
   
$
30,996
 
   
$
34,909
 
Income taxes
   
 
29,370
 
   
 
4,349
 
   
 
23,413
 
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
                           
Purchase of equipment under capital leases
   
$
76,036
 
   
$
21,000
 
   
$
58,000
 
 
 
See notes to combined financial statements.

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ONSTAFF GROUP
 
NOTES TO COMBINED FINANCIAL STATEMENTS
Seven Months Ended July 31, 2002 (Unaudited) and 2001 (Unaudited) and
Year Ended December 31, 2001
 
1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Organization—The accompanying combined financial statements of OnStaff Group include the accounts of OnStaff, Inc. (“OSI”), Healthcare Staffing Resources, Inc. (“HCSR”) and Boardnetwork.com, Inc. (“BNI”) (collectively, the “Companies”). All of the Companies are California S corporations. The Companies provide contract and permanent staffing in the real estate, finance and healthcare industries through their 28 office locations in 12 states and their online recruiting and placement websites.
 
Combined Financial Statements—The accompanying financial statements are presented on a combined basis, because OSI, HCSR and BNI are under common ownership and common management. The combined financial statements include the accounts of OSI, HCSR and BNI. All significant intercompany accounts and transactions have been eliminated in combination.
 
Fiscal Year—The fiscal year of the Companies is the 52/53 week period ending the Saturday nearest to December 31 or month end for the interim periods. References to the year ended December 31, 2001 in these combined financial statements is for the 52 weeks ended December 29, 2001. References to the seven months ended July 31, 2002 and 2001 in these combined financial statements is for the seven months ended July 27, 2002 and July 28, 2001.
 
Interim Combined Financial Statements (unaudited)—The combined financial statements as of July 31, 2002 and for the seven months ended July 31, 2002 and 2001 are unaudited and include all adjustments, consisting only of normal and recurring accruals, that management considers necessary for a fair presentation of its combined financial position, operating results and cash flows. Results for the seven months ended July 31, 2002 are not necessarily indicative of results to be expected for the full fiscal year 2002 or for any future period.
 
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 for the periods presented. Actual results could differ from those estimates.
 
Concentration of Credit Risk—Financial instruments that potentially subject the Companies to concentrations of credit risk consist principally of accounts receivable. Receivables arising from services provided to clients are not collateralized and, accordingly, the Companies perform ongoing credit evaluations of their clients to reduce the risk. A customer represented approximately 14.7% (unaudited) and 15.6% of combined revenue for the seven months ended July 31, 2002 and for the year ended December 31, 2001. The same customer represented 13.1% (unaudited) and 34.0% of combined accounts receivable at July 31, 2002 and December 31, 2001.
 
Fair Value of Financial Instruments—The Companies financial instruments include cash and cash equivalents, accounts receivable, accounts payable and debt. The carrying amounts of these items at July 31, 2002 and December 31, 2001 are a reasonable estimate of their fair values.

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Cash and cash equivalents include time deposits and highly liquid investments with original maturities of three months or less. The Companies were in an overdraft position at the beginning of each period and at July 31, 2001 and December 31, 2001. Overdrawn cash is included in accounts payable and accrued expenses on the accompanying combined balance sheets.
 
Property and Equipment—Property and equipment are stated at cost. Depreciation and amortization is calculated over the estimated useful life of the asset, generally ranging from two to five years.
 
Income Taxes—The Companies have elected to be treated as S corporations for federal and state income tax purposes. Pursuant to these elections, the taxable income or loss of the Companies is included in the income tax returns of the stockholders. Consequently, no federal income tax provision is recorded in the accompany combined financial statements. However, a franchise tax equal to 1.5 percent of the California taxable income is imposed upon S corporations. Deferred taxes are provided on items for which there are temporary differences in recording such items for financial and income tax reporting purposes.
 
Revenue Recognition—Revenue from contract placements is recognized as services are performed. Revenue from permanent placements which do not include a guarantee are recognized upon commencement of employment. Revenue from permanent placements which do include a guarantee are recognized over the 90 day guarantee period. The Company charges membership fees to employers for the right to access the online recruiting and placement websites. Membership terms vary from one month to one year. Revenue from the online recruiting and placement websites is recognized over the term of membership.
 
Deferred Revenue represents advance payments received from employers for the right to access the online recruiting and placement websites.
 
Deferred Rent—The Companies lease certain office facilities under operating leases that provide for increases in rent based on specified amounts. Rent expense associated with these leases is recognized on a straight-line basis over the life of the lease. Deferred rent is included in accounts payable and accrued expenses on the accompanying balance sheets.
 
Impairment of Long-Lived Assets—The Companies review long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on undiscounted future cash flows.
 
Advertising Costs—Advertising costs are expensed as incurred and were $120,185 (unaudited), $139,346 (unaudited) and $214,175 for the seven months ended July 31, 2002 and 2001 and for the year ended December 31, 2001.
 
Comprehensive Income (loss) is equal to net income (loss) for all periods presented.
 
Recent Accounting Pronouncements—In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase accounting method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangibles assets acquired outside of a business combination and the accounting of goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested at least annually for impairment. The Companies adopted SFAS No. 142 effective January 1, 2002. The adoption of SFAS No. 142 did not have a significant impact on the financial statements.
 
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets

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and for Long-Lived Assets to be Disposed Of and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principals Board Opinion No. 30. This statement is effective beginning January 1, 2002. The adoption of SFAS No. 144 did not have a significant impact on the financial statements.
 
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addressed accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3, which stated that a liability for an exit cost should be recognized at the date of the Company’s commitment to an exit plan. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Companies do not expect that the adoption of SFAS No. 146 will have a significant impact on the financial statements.
 
2.    PROPERTY AND EQUIPMENT
 
Property and equipment consist of the following:
 
    
July 31, 2002
     
December 31, 2002
  
    
(Unaudited)
         
Equipment
   
$
296,313
 
   
$
197,302
 
Furniture and fixtures
   
 
116,855
 
   
 
86,922
 
Construction in progress
   
 
58,679
 
   
 
40,950
 
    
  
Total
   
 
471,847
 
   
 
325,174
 
Less accumulated depreciation and amortization
   
 
(211,330
)
   
 
(164,050
)
    
  
Property and equipment—net
   
$
260,517
 
   
$
161,124
 
    
  
 
Included in property and equipment are capitalized leases with a cost of $133,971 (unaudited) and $57,934 and accumulated depreciation of $21,222 (unaudited) and $7,412 at July 31, 2002 and December 31, 2001, respectively.
 
3.    BANK CREDIT LINE
 
The Companies have a $1,500,000 credit facility with a commercial bank which is payable upon demand with 30 day notice. Interest under the credit facility accrues at the bank’s base rate plus 0.75%. The weighted average interest rate for the seven months ended July 31, 2002 and for the year ended December 31, 2001 were 5.5% (unaudited) and 8.3%, respectively. The debt is secured by substantially all of the assets of the Companies and is personally guaranteed by the stockholders up to $850,000. The line of credit is subject to the Companies meeting certain financial ratio covenants. As of July 31, 2002 and December 31, 2001, outstanding borrowings were $482,645 (unaudited) and $890,000, respectively.
 
4.    COMMITMENTS AND CONTINGENCIES
 
Operating Leases—The Companies lease office space, and other office equipment under noncancelable operating leases. Leases expire at various dates through 2006. Rent expense for the seven months ended July 31, 2002 and 2001 and the year ended December 31, 2001 was $361,100 (unaudited) $210,423 (unaudited) and $439,137.

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Minimum future annual rental payments for operating leases are as follows:
 
Year ending December 31:
       
2002
   
$
368,557
2003
   
 
156,342
2004
   
 
74,189
2005
   
 
18,714
2006
   
 
2,535
    
Total
   
$
620,337
    
 
Capital Leases—The Companies lease certain equipment under capital leases. Future minimum rental commitments that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2001 are as follows:
 
Year ending December 31:
         
2002
   
$
22,277
 
2003
   
 
20,757
 
2004
   
 
11,645
 
    
Future minimum commitments
   
 
54,679
 
Less interest
   
 
(3,205
)
    
Present value of minimum lease payments
   
 
51,474
 
Less current portion of capital lease obligation
   
 
(20,770
)
    
Total
   
$
30,704
 
    
 
Litigation—The Companies are a party to various legal actions and subject to various claims arising in the ordinary course of business. The Companies believe that the disposition of these matters will not have a material adverse effect on the combined financial statements of the Companies taken as a whole.
 
5.    EMPLOYEE BENEFIT PLAN
 
The Companies have a 401(k) salary deferral program for eligible employees who have met certain service requirements. Employees are permitted to contribute up to a maximum of 15% of their salary to the plan. The Companies made matching contributions to the plan of $34,272 for the year ended December 31, 2001.
 
6.    STOCKHOLDER NOTES RECEIVABLE
 
The Companies have two notes receivable outstanding from an officer and stockholder which are due on February 1, 2005 and are presented as a contra-equity in the accompanying combined financial statements. The outstanding principal balance including accrued interest were $429,309 (unaudited) and $414,889 at July 31, 2002 and December 31, 2001, respectively. The notes were issued in exchange for the sale of stock to the president and the stock is pledged to secure the notes. The notes are full recourse obligations of the officer and accrue interest at a rate of 6% per annum on the outstanding principal and accrued but unpaid interest.

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7.    STOCK COMPENSATION
 
The Companies issued a common stock bonus to their president in December 2001. The common stock was valued at $1,075,000, based upon an independent valuation. Additionally, the Companies were obligated to reimburse the president for income taxes related to the stock bonus in the amount of $800,000. The total of $1,875,000 is included in selling, general and administrative expenses in 2001.
 
8.    SALE OF THE COMPANIES
 
On August 9, 2002, Hall Kinion & Associates, Inc., a Delaware corporation (“Hall Kinion”) acquired the assets, and assumed certain liabilities of the Companies in exchange for $18.1 million in cash and 363,057 shares of Hall Kinion common stock. In addition, Hall Kinion agreed to pay the Companies up to $13.0 million over three years contingent upon the achievement of certain milestones.
 
 
 
 
* * * * * *

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