10-K/A 1 v65545e10-ka.txt ANNUAL REPORT 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------------------- FORM 10-K\A AMENDMENT #1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 Commission File Number 0-20540 ---------------------------- ON ASSIGNMENT, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4023433 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 26651 West Agoura Road Calabasas, California 91302 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (818) 878-7900 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements of the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the 9,424,063 shares of voting stock (based on the closing price reported by the Nasdaq Stock Market on January 31, 2000) held by non-affiliates of the registrant as of January 31, 2000 was approximately $294,502,000. For purposes of this disclosure, shares of common stock held by persons who own 5% or more of the shares of outstanding common stock and shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be "affiliates" as that term is defined under the Rules and Regulations of the Act. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of January 31, 2000, the registrant had outstanding 10,839,311 shares of Common Stock, $0.01 par value. DOCUMENT INCORPORATED BY REFERENCE Portions of the On Assignment, Inc. Proxy Statement for the registrant's Annual Meeting of Stockholders scheduled to be held on June 13, 2000 are incorporated by reference into Part III of this Report on Form 10-K\A. ================================================================================ 2 PART I ITEM 1. BUSINESS This Annual Report on Form 10-K\A contains forward-looking statements regarding the future financial condition and results of operations and the Company's business operations. The words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. Such statements involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors that May Affect Future Results" in item 1 of this report, as well as those discussed elsewhere in this report and the registrant's other filings with the Securities and Exchange Commission. GENERAL On Assignment, Inc. (the "Company"), through its first operating division, Lab Support, is a leading nationwide provider of temporary scientific professionals to laboratories in the biotechnology, pharmaceutical, food and beverage, chemical and environmental industries. In July 1998, the Company acquired substantially all of the assets, offices and operations of LabStaffers, Inc., which were added to the Lab Support division. In January 1994, the Company established its second operating division, Finance Support, with the acquisition of 1st Choice Personnel, Inc. The Finance Support division was expanded in December 1994, with the acquisition of substantially all of the assets, offices and operations of Sklar Resource Group, Inc. With a shift in Finance Support's business development focus to medical billing and collections, in January 1997 the name of the Finance Support division was changed to Healthcare Financial Staffing. In March 1996, the Company established its third operating division, EnviroStaff, with the acquisition of EnviroStaff, Inc., which specializes in providing temporary environmental professionals to the environmental services industry. On May 12, 1997, the Company formed Assignment Ready Inc., a Canadian corporation and wholly owned subsidiary of the Company, and commenced operations in Toronto as Lab Support Canada, during the third quarter of 1997. On February 2, 1999, the Company formed On Assignment UK Limited, a United Kingdom corporation and wholly owned subsidiary of the Company. On February 16, 1999, On Assignment UK Limited formed Lab Support (UK) Limited, a United Kingdom corporation and wholly owned subsidiary of On Assignment UK Limited, and commenced operations as Lab Support UK during the first quarter of 1999. In the third quarter 1999, the Company established its fourth division, Clinical Lab Staff, which provides scientific and medical professionals to hospitals, physicians' offices, clinics, reference laboratories and HMOs. The Company has two operating segments: Lab Support and Healthcare Financial Staffing. The Lab Support operating segment includes the combined results of the Lab Support, Clinical Lab Staff and EnviroStaff divisions, as they have similar economic characteristics and they meet the aggregation criteria of SFAS No. 131. As of December 31, 1999, the Company served 68 operational markets through a network of 144 branch offices. The Company's principal executive offices are located at 26651 West Agoura Road, Calabasas, California 91302 and its telephone number is (818) 878-7900. ON ASSIGNMENT'S APPROACH The Company's strategy is to serve the needs of targeted industries for quality assignments of temporary professionals. In contrast to the mass market approach used for temporary office/clerical and light industrial personnel, the Company believes effective assignments of temporary professionals require the person making assignments to have significant knowledge of the client's industry and be able to assess the specific needs of the client as well as the temporary professionals' qualifications. As a result, the Company has developed a tailored approach to the assignment process -- the Account Manager System. Unlike traditional approaches, the Account Manager System is based on the use of experienced professionals, Account Managers, to manage the assignment process. Account Managers meet with clients' managers to understand position descriptions and workplace environments, and with temporary employee candidates to assess their qualifications and interests. With this information, Account Managers can make quality assignments of temporary professionals to clients, typically within 24 to 48 hours of client requests. The Company's corporate office performs many functions that allow Account Managers to focus more effectively on the assignment of temporary professionals. These functions include recruiting, ongoing training and coaching, appointment making, business development and administrative support. The corporate office also selects, opens and maintains branch offices according to a standardized model. 2 3 Temporary personnel assigned to clients are employees of the Company, though clients provide on-the-job supervisors for temporary personnel. Therefore, clients control and direct the work of temporary personnel and approve hours worked, while the Company is responsible for many of the activities typically handled by the client's personnel department. BRANCH OFFICE NETWORK At December 31, 1999, the Company had 70 Lab Support branch offices, 44 Healthcare Financial Staffing branch offices, 21 EnviroStaff branch offices, and 9 Clinical Lab Staff branch offices. Of this total of 144 branch offices, 106 branch offices involve shared office space among divisions. Through this network of branch offices, the Company served the following operational markets:
----------------------------------------------------------------------------------------------------------------------------- Allentown, PA Dallas, TX London, United Kingdom Philadelphia, PA San Francisco, CA Ann Arbor, MI Denver, CO Los Angeles, CA Phoenix, AZ San Jose, CA Atlanta, GA Des Moines, IA Louisville, KY Piscataway, NJ Seattle, WA Austin, TX Detroit, MI Madison, WI Pittsburgh, PA St. Louis, MO Baltimore, MD Ft. Lauderdale, FL Manchester, United Kingdom Pleasanton, CA Tampa, FL Birmingham, United Kingdom Ft. Worth, TX Memphis, TN Portland, OR Tulsa, OK Boston, MA Greensboro, NC Miami, FL Princeton, NJ Toronto, ON, Canada Buffalo, NY Greenville, SC Milwaukee, WI Providence, RI Vancouver, BC, Canada Charlotte, NC Harrisburg, PA Minneapolis, MN Raleigh-Durham, NC Ventura, CA Chicago, IL Houston, TX Montreal, QC, Canada Richmond, VA Washington, DC Cincinnati, OH Indianapolis, IN Nashville, TN Sacramento, CA Westport, CT Cleveland, OH Jacksonville, FL New Orleans, LA Salt Lake City, UT White Plains, NY Columbus, OH Kansas City, MO Oklahoma City, OK San Antonio, TX Costa Mesa, CA Las Vegas, NV Orlando, FL San Diego, CA -----------------------------------------------------------------------------------------------------------------------------
CLIENTS The Lab Support operating segment includes the combined results of the Lab Support, Clinical Lab Staff, and EnviroStaff divisions. Lab Support's clients primarily include biotechnology, pharmaceutical, food and beverage, chemical and environmental companies. Clinical Lab Staff's clients primarily include companies engaged in the healthcare services industry and companies providing medical laboratory and medical technologist services. EnviroStaff's clients primarily include companies in the environmental services industry. Healthcare Financial Staffing's clients include companies engaged in the healthcare services industry. During the year ended December 31, 1999, the Company provided assignment professionals to approximately 5,000 clients. All temporary assignments, regardless of their planned length, may be terminated without prior notice by the client or the temporary employee. THE TEMPORARY PROFESSIONAL The skill and experience levels of Lab Support's temporary professional employees range from scientists with bachelor and/or masters degrees and considerable laboratory experience to technicians with limited chemistry or biology background and lab experience. The skill and experience levels of Clinical Lab Staff's temporary professional employees range from medical and laboratory clinical technologists to phlebotomists and medical assistants. The skill and experience levels of EnviroStaff's temporary professional employees range from engineers, geologists, industrial hygienists and safety professionals with bachelor and/or masters degrees and several years of experience to field technicians with some applicable experience. The skill and experience levels of Healthcare Financial Staffing's temporary professional employees typically include two or more years of medical billing and collection experience. Hourly wage rates are established according to local market conditions. The Company pays the related costs of employment including social security taxes, federal and state unemployment taxes, workers' compensation insurance and other similar costs. After minimum service periods and hours worked, the Company also provides paid holidays, allows participation in the Company's 401(k) Retirement Savings Plan and Employee Stock Purchase Plan, creates eligibility for an annual bonus, and facilitates access to health insurance for its temporary employees. EXPANSION IN EXISTING PROFESSIONS AND INTO OTHER PROFESSIONS The Company intends to expand its services domestically and internationally in the laboratory and scientific, clinical laboratory and medical staffing, environmental health and safety and medical billing and 3 4 collections fields it currently serves and to apply its approach to the assignment of temporary professionals in other fields. The Company believes that its experience with the Account Manager System and centralized operational support will enable it to enter new markets effectively. The Company continually reviews opportunities in various industries, evaluating the current volume and profitability of temporary assignments, the length of assignments, the degree of specialization necessary to be successful, the competitive environment and the applicability of its Account Manager approach. If attractive markets are identified, the Company may enter these markets through acquisition or internal growth. The Company's January 1994 acquisition of 1st Choice Personnel, Inc., December 1994 acquisition of substantially all of the assets of Sklar Resource Group, Inc., March 1996 acquisition of EnviroStaff, Inc., and July 1998 acquisition of substantially all of the assets of LabStaffers, Inc. were consistent with this ongoing activity, and the Company periodically engages in discussions with possible acquisition candidates. COMPETITION The temporary services industry is highly competitive and fragmented and has low barriers to entry. The Company believes its Lab Support division is one of the few nationwide temporary service providers that specialize exclusively in scientific laboratory personnel. Although other nationwide temporary personnel companies compete with the Company with respect to scientific, clinical laboratory and medical technologist, environmental services and medical billing and collecting personnel, many of these companies focus on office/clerical and light and heavy industrial personnel, which account for approximately 80% of the overall temporary personnel services market. These companies include Manpower, Inc., Kelly Services, Inc., The Olsten Corporation, Adecco, and Aerotech, Inc., each of which is larger and has substantially greater financial and marketing resources than the Company. The Company also competes with temporary personnel agencies on a regional and local basis. Frequently, the strongest competition in a particular market is a local company with established relationships. The Company also competes with its clients that directly advertise or seek referrals of qualified candidates on their own behalf. The principal competitive factors in attracting qualified candidates for temporary employment are salaries and benefits, speed, quality and duration of assignments and responsiveness to the needs of employees. The Company believes that many persons seeking temporary employment through the Company are also pursuing employment through other means, including other temporary employment service firms. Therefore, the speed and availability of appropriate assignments is an important factor in the Company's ability to complete assignments of qualified candidates. In addition to having high quality temporary personnel to assign in a timely manner, the principal competitive factors in obtaining and retaining clients in the temporary services industry are correctly understanding the client's specific job requirements, the appropriateness of the temporary personnel assigned to the client, the price of services and the monitoring of client satisfaction. Although the Company believes it competes favorably with respect to these factors, it expects competition to increase. EMPLOYEES At December 31, 1999, the Company employed approximately 250 regular employees, including Account Managers and corporate office employees. During the year ended December 31, 1999, the Company employed approximately 15,000 temporary employees. None of the Company's employees, including its temporary employees, are represented by a collective bargaining agreement. The Company believes its employee relations are good. REGULATION The Company's operations are subject to applicable state and local regulations governing the provision of personnel placement services which require personnel companies to be licensed or separately registered. To date, the Company has not experienced any material difficulties in complying with such regulations. State mandated workers' compensation and unemployment insurance premiums, which the Company pays for its temporary and regular employees, can have a direct effect on the Company's cost of services and thereby, profitability. PROPRIETARY RIGHTS The Company has registered its Lab Support and EnviroStaff service marks with the United States Patent and Trademark Office and applied for registration of its Healthcare Financial Staffing and Clinical Lab Staff service marks. The Company has also registered "The Quality Assignment" mark with the United States Patent and Trademark Office. The Company has also registered its Lab Support service mark in Canada and has applied for the use of the Lab Support service mark in the United Kingdom and the Netherlands. The Company has rights in other trademarks used in connection with its business 4 5 and has other applications pending for the international use of its service marks. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS The Company operates in a highly competitive environment that involves a number of risks, many of which are beyond the Company's control. The following discussion highlights some of the risks that may affect the Company's future results. Uncertainty of Future Operating Results, Quarterly Fluctuations and Seasonality. Future operating results will depend on many factors, including demand for the Company's services, the market's acceptance of price changes, the productivity, recruitment and retention of Account Managers, the results of the Company's expansion into new geographic markets, the degree and nature of competition, the effectiveness of the Company's expansion into other professions, and the Company's ability to control costs and manage its accounts receivable. The Company and the temporary services industry as a whole typically experience seasonal declines in demand from the year-end holiday season through early February and during June, July and August. The Company has experienced variability in the duration and depth of these seasonal declines, which in turn have materially affected period-to-period and current period-to-prior period comparisons of its financial and operating performance. As a result of these and other factors, there can be no assurance that the Company will be able to grow in future periods, sustain its past rate of revenue growth or maintain profitability on a quarterly or annual basis. If in some future quarter or quarters the Company's operating results are below the expectations of public market analysts or investors, the market price of its common stock may decline significantly. Reliance on and Ability to Attract, Develop and Retain Account Managers. The Company relies significantly on the performance of its Account Managers, who have primary responsibility for all aspects of the process of assigning the Company's temporary employees to clients. The Company is highly dependent on its ability to hire, develop and retain qualified Account Managers, as well as on the productivity of its Account Managers. The available pool of qualified Account Manager candidates is limited. In addition, prior to joining the Company, the typical Account Manager has no prior experience in the temporary employment industry. The Company commits substantial resources to the recruitment, training, development and operational support of its Account Managers. There can be no assurance that the Company will be able to continue to recruit, train and retain sufficient numbers of qualified Account Managers or that Account Managers will achieve desired productivity levels. Failure to achieve planned numbers of Account Managers or productivity of Account Managers could result in a material adverse effect on the Company's financial condition, results of operations and business. Expansion in Existing Professions and into Other Professions. The Company plans to expand its services domestically and internationally within the laboratory and scientific, clinical laboratory and medical staffing, environmental health and safety and medical billing and collections fields it currently serves and to other professional fields. The success of the Company's expansion efforts will depend on a number of factors, including the Company's ability to adapt the Account Manager system used in its divisions to other industries and professions, recruit and train new Account Managers with the particular industry or professional experience, establish client relationships in new industries and successfully recruit, qualify and orient new temporary professionals. The ability to manage these factors may be more difficult or take more resources than the Company anticipates, particularly since they may involve industries, clients and professionals that the Company has no experience with. The Company may decide to pursue future expansion by internal growth or acquisition. The rate at which the Company establishes new services may significantly affect the Company's operating and financial results, especially in the quarters of and immediately following expansion into new domestic and international professional markets or the integration of acquired operations. There can be no assurance that the Company will be able to successfully expand its services in the fields it currently serves, identify new professional fields suitable for expansion or continue to grow. Furthermore, in the event the Company pursues an acquisition, there can be no assurance that the Company will identify suitable acquisition candidates on reasonable terms, that the Company will be able to successfully integrate acquisitions, that anticipated benefits of the acquisition will be achieved, or that diversion of management attention to the acquisition and integration process will not have an adverse effect on the Company's existing businesses. Planned International Operations Face Special Risks. In the first quarter of 1999, the Company expanded its operations to the United Kingdom and intends to expand its operations to other countries in Europe in the future. The Company has limited experience in marketing, selling and supporting its services outside of North America. Development of such 5 6 skills may be more difficult or take longer than the Company anticipates, especially due to the fact that its centralized support functions in Calabasas, California will not be able to provide the same level of support to operations outside of North America as it does to its current North American operations. In addition to establishing operations support functions outside North America, the Company will have to address language barriers and different regulations of temporary employment. Moreover, international operations are subject to a variety of additional risks associated with conducting business internationally that could seriously harm the Company's financial condition and results of operations. These risks may include the following: problems in collecting accounts receivable; the impact of recessions in economies outside the United States; unexpected changes in regulatory requirements; fluctuations in currency exchange rates; seasonal reductions in business activity during the summer months in Europe; and potentially adverse tax consequences. Dependence on Availability of Qualified Temporary Professional Employees. The Company is dependent upon continuing to attract qualified laboratory and scientific, clinical laboratory and medical technologist, environmental services and medical billing and collecting personnel with a broad range of skills and experience in order to meet client needs. The Company competes for such personnel with other temporary personnel companies, as well as actual and potential clients, some of which seek to fill positions with either regular or temporary employees. In addition, the Company's temporary employees sometimes become regular employees of the Company's clients. There can be no assurance that qualified laboratory and scientific, clinical laboratory and medical technologist, environmental services, and medical billing and collections personnel will be available to the Company in adequate numbers. Highly Competitive Market. The temporary services industry is highly competitive and fragmented, with limited barriers to entry. The Company competes in national, regional and local markets with full-service agencies and in regional and local markets with specialized temporary services agencies. Several of these companies have significantly greater marketing and financial resources than those of the Company. As the Company expands into new geographic markets, its success will depend in part on its ability to gain market share from competitors. The Company expects that competition will increase in the future and there can be no assurance that the Company will remain competitive. Effect of Fluctuations in the General Economy. Demand for temporary services is significantly affected by the general level of economic activity. As economic activity slows, many companies reduce their usage of temporary employees before undertaking layoffs of their regular employees. As economic activity increases, many clients convert their temporary employees to regular employees which, depending on the Company's agreement with the client and when such conversion occurs, may not result in any conversion fee revenue for the Company. The Company is unable to predict the level of economic activity at any particular time and its effect on the Company's operating and financial results. Terminability of Client Arrangements. The Company's arrangements with clients are terminable at will and do not require clients to use the Company's services. All temporary assignments, regardless of their planned length, may be terminated without advance notice. There can be no assurance that existing clients will continue to use the Company's services at historical levels, if at all. Employment Liability Risks. The Company employs and assigns temporary employees to the workplaces of other businesses. Inherent risks of such activity include possible claims of errors and omissions, misuse of customers' proprietary information, discrimination and harassment, theft of client property, and other criminal activity or torts by temporary employees. The Company seeks to reduce its liability for the acts of its temporary employees by providing in its arrangements with most clients that temporary personnel work under the client's supervision, control and direction. There can be no assurance that such arrangements will be enforceable or that, if enforceable, would be sufficient to preclude liability as a result of the actions of the Company's temporary personnel. In addition, there can be no assurance that current liability insurance coverage will be adequate or will continue to be available in sufficient amounts. Workers' Compensation Expense. The Company maintains a partially self-insured workers' compensation program. In connection with this program, the Company pays a base premium plus actual losses incurred up to certain levels, and is insured for losses greater than certain levels per occurrence and in the aggregate. The Company seeks to minimize the impact of workers' compensation losses through a proactive claims management and accident reduction program. While the Company believes that current loss reserves are reasonable based on claims filed and an estimate of claims incurred but not yet reported, there can be no assurance that loss reserves and insurance coverage will be adequate in amount to cover all workers' compensation claims. 6 7 Dependence on Key Officers. The Company's future success depends in significant part upon the continued service of its key officers. Competition for such personnel is intense and there can be no assurance that the Company will retain its key officers or that it can attract or retain other highly qualified managerial personnel in the future. The loss of any of its key officers could have a material adverse effect upon the Company's business, operating results and financial condition. Government Regulations. In many states, the temporary services industry is regulated, and firms such as the Company must be registered or qualify for an exemption from registration. While these regulations have not materially effected the conduct of the Company's business to date, there can be no assurance that future regulations will not have such effect. State mandated workers' compensation and unemployment insurance premiums, which the Company pays for its temporary as well as its regular employees, can have a direct effect on cost of services and thereby, profitability. In the past, federal legislative proposals for national health insurance have included provisions extending health insurance benefits to temporary employees and some states could impose sales taxes or raise sales tax rates on temporary services. Further increases in such premiums or rates or the introduction of new regulatory provisions could substantially raise the costs associated with hiring temporary employees and there is no assurance that these increased costs could be passed on to clients without a significant decrease in the demand for temporary employees. Year 2000. The Company developed and implemented a Year 2000 Readiness Plan to address the Year 2000 issues, particularly with respect to its critical systems. The Company believes that all critical internal business systems have been upgraded to meet "Year 2000" requirements. The Company has not experienced significant Year 2000 issues subsequent to 1999's fiscal year end and is not aware of any significant Year 2000 issues for which it is not adequately prepared. However, there can be no assurance that the Company's business, operating results, or financial condition will not be adversely affected by issues surrounding the Year 2000 conversion. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Readiness Disclosure." ITEM 2. PROPERTIES The Company has leased approximately 30,500 square feet of office space through March 2004, for its corporate headquarters in Calabasas, California. In addition, the Company leases office space in 81 branch office locations in the metropolitan areas listed under the caption "Branch Office Network" in Item 1 hereof. A branch office typically occupies space ranging from approximately 1,200 to 1,500 square feet with lease terms that typically range from six months to five years. ITEM 3. LEGAL PROCEEDINGS (a) There is no material legal proceeding to which the Company is a party or to which its properties are subject. (b) No material legal proceedings were terminated in the fourth quarter of 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 8 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company and their ages as of December 31, 1999 were:
---------------------------------------------------------------------------------------------------------------------------- Name Age Position ---------------------------------------------------------------------------------------------------------------------------- H. Tom Buelter 58 Chairman of the Board and Chief Executive Officer Kathy J. West 48 President and Chief Operating Officer Ronald W. Rudolph 56 Senior Vice President, Finance and Chief Financial Officer (1) Carrie S. Nebens 42 Executive Vice President, U.S. Operations ----------------------------------------------------------------------------------------------------------------------------
(1) Executive Vice President, Finance and Chief Financial Officer, effective March 13, 2000. H. TOM BUELTER has served as Chief Executive Officer and a director of the Company since he joined the Company in March 1989. Mr. Buelter was elected Chairman of the Company's Board of Directors in December 1992. Mr. Buelter also held the title of President from March 1989 to September 1997. From 1983 to 1989, he was Senior Vice President of Kelly Services, Inc. ("Kelly Services"), a temporary personnel firm, and Chief Operating Officer of Kelly Assisted Living, a division of Kelly Services which provides temporary home-care personnel. KATHY J. WEST has served as President and Chief Operating Officer since September 1997. From March 1995 to September 1997, Ms. West served as the Company's Senior Vice President, Chief Operating Officer. From October 1993 to March 1995, Ms. West served as the Company's Senior Vice President, Operations. From April 1993 to October 1993, Ms. West served as the Company's Senior Vice President, Employee and Business Services and, from January 1992 to April 1993, as the Company's Vice President, Employee and Business Services. Ms. West joined the Company in 1990, as Director of Branch Operations. From 1987 to 1990, she served as the founding principal of Performance Training Systems, a training services firm. From 1973 to 1987, she was employed by Kelly Services, where she held a variety of field operating and corporate positions. Her responsibilities included field sales, corporate branch operations, training and developing international sales and service schools. RONALD W. RUDOLPH has served as Executive Vice President, Finance and Chief Financial Officer since March 13, 2000. From January 1, 1999 through March 12, 2000, Mr. Rudolph served as Senior Vice President, Finance and Chief Financial Officer. From October 1996 through December 1998, Mr. Rudolph served as Senior Vice President, Finance and Operations Support, and Chief Financial Officer. From January 1996 through October 1996, Mr. Rudolph served as Senior Vice President, Finance and Administration, and Chief Financial Officer. Mr. Rudolph joined the Company in April 1995, as Vice President, Finance and Administration, and Chief Financial Officer. From April 1987 to September 1994, Mr. Rudolph was Vice President, Finance and Administration, and Chief Financial Officer of Retix, a manufacturer of enterprise networking devices, and from June 1993 to September 1994, Mr. Rudolph was a director of Retix. CARRIE S. NEBENS has served as Executive Vice President, U.S. Operations since January 1, 1999. From July 1, 1998 through December 1998, Ms. Nebens served as Senior Vice President, Strategic Operations. From September 1997 through June 1998, she served as Senior Vice President and General Manager, Lab Support division. From October 1996 through September 1997, Ms. Nebens served as Vice President and General Manager, Lab Support division. From January 1996 through October 1996, Ms. Nebens served as Vice President, Support Services. From April 1995 through December 1996, she served as Vice President, Assignment Services and Training, and was designated an executive officer of the company in September 1995. From June 1993 to March 1995, she was Vice President, Field Operations for the Company's Lab Support division. From January 1992 to May 1993, Ms. Nebens served as Vice President, Operations of the Company. From 1991 to 1992, Ms. Nebens served as Director, Branch Operations for the Company. Ms. Nebens joined the Company in 1988, as an Account Manager, served from 1988 to 1990, as the regional Manager for the Chicago office, and in 1991, was promoted to Regional Director and Director of Field Services. 8 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the Nasdaq Stock Market under the symbol ASGN. The following table sets forth the range of high and low sales prices, as reported on the Nasdaq Stock Market for the period from January 1, 1998 to December 31, 1999. At January 31, 2000, the Company had approximately 85 holders of record of its Common Stock (although the Company has been informed there are in excess of approximately 2,800 beneficial owners) and 10,839,311 shares outstanding.
--------------------------------------------------------------------------------------------------------------------------- Price Range of Common Stock High Low --------------------------------------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 1998 First Quarter 32-1/8 21-3/8 Second Quarter 34-15/16 28-1/4 Third Quarter 37-3/4 32-1/16 Fourth Quarter 37-1/2 22-5/8 Fiscal Year Ended December 31, 1999 First Quarter 38-1/2 23-15/16 Second Quarter 31-7/8 21-9/16 Third Quarter 33-1/2 24 Fourth Quarter 29-7/8 23 ---------------------------------------------------------------------------------------------------------------------------
On September 24, 1997, the Board of Directors authorized a two-for-one stock split, effected as a 100 percent common stock dividend, distributed on October 20, 1997 to shareholders of record on October 13, 1997. All references to number of shares, sales prices and per share amounts of the Company's common stock have been retroactively restated to reflect the increased number of common shares outstanding. On March 7, 2000, the Board of Directors authorized a two-for-one stock split, effected as a 100 percent common stock dividend, to be distributed on April 3, 2000 to shareholders of record as of March 27, 2000. Based on a distribution date which occurs subsequent to the issuance of the financial statements, references to number of shares, sales prices and per share amounts of the Company's common stock have not been retroactively restated to reflect the increased number of common shares outstanding. Since inception, the Company has not declared or paid any cash dividends on its Common Stock and currently plans to retain all earnings to support the development and expansion of its business. The Company has no present intention of paying any dividends on its Common Stock in the foreseeable future. However, the Board of Directors of the Company periodically reviews the Company's dividend policy to determine whether the declaration of dividends is appropriate. 9 10 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial data of the Company. This historical data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K\A.
--------------------------------------------------------------------------------------------------- Years Ended December 31, (in thousands, except per share data) 1995 1996 1997 1998 1999 --------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Revenues $ 72,617 $ 88,188 $107,849 $132,741 $159,473 Cost of services 50,812 61,231 74,748 90,705 107,652 -------- -------- -------- -------- -------- Gross profit 21,805 26,957 33,101 42,036 51,821 Selling, general and administrative expenses 14,950 17,699 20,714 25,308 30,428 -------- -------- -------- -------- -------- Operating income 6,855 9,258 12,387 16,728 21,393 Acquisition costs -- 401 -- -- -- -------- -------- -------- -------- -------- Income before interest and income taxes 6,855 8,857 12,387 16,728 21,393 Interest income, net 410 549 833 1,336 1,635 -------- -------- -------- -------- -------- Income before income taxes 7,265 9,406 13,220 18,064 23,028 Provision for income taxes 2,924 3,800 4,954 6,748 8,566 -------- -------- -------- -------- -------- Net income $ 4,341 $ 5,606 $ 8,266 $ 11,316 $ 14,462 -------- -------- -------- -------- -------- Basic earnings per share $ 0.44 $ 0.55 $ 0.78 $ 1.04 $ 1.32 -------- -------- -------- -------- -------- Weighted average number of common shares outstanding 9,974 10,207 10,561 10,860 10,953 -------- -------- -------- -------- -------- Diluted earnings per share $ 0.41 $ 0.51 $ 0.75 $ 1.00 $ 1.29 -------- -------- -------- -------- -------- Weighted average number of common and common equivalent shares outstanding 10,530 10,898 11,031 11,302 11,186 -------- -------- -------- -------- -------- BALANCE SHEET DATA Cash, cash equivalents and current portion of marketable securities $ 6,892 $ 14,102 $ 23,709 $ 30,466 $ 35,271 Working capital 14,702 23,709 35,225 43,987 54,769 Total assets 23,922 31,874 44,864 62,028 71,740 Long-term liabilities -- -- -- -- -- Stockholders' equity 20,148 27,635 39,272 54,226 63,447 ---------------------------------------------------------------------------------------------------
10 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion in this Report contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, management of growth, particularly in international markets, risks inherent in expansion into new international markets and new professions, the integration of acquired operations, the Company's ability to attract, train and retain qualified Account Managers and temporary employees in the laboratory, science, financial and environmental fields, and other risks discussed in "Risk Factors That May Affect Future Results" in Item 1 of this Annual Report, beginning on page 4, as well as those discussed elsewhere in this Report and from time to time in the Company's other reports filed with the Securities and Exchange Commission. SEASONALITY The Company's results have historically been subject to seasonal fluctuations. Demand for the Company's temporary employees typically declines from the year-end holiday season through February, resulting in a corresponding decrease in revenues, operating income and net income. Demand for the Company's temporary employees also often declines in June, July and August due to decreases in clients' activity during vacation periods and the availability of students to perform temporary work. As a result, the Company has experienced slower growth or declines in revenues, operating income and net income during the first quarter and from the second quarter to third quarter of prior years. YEARS ENDED DECEMBER 31, 1998 AND 1999 REVENUES. Revenues increased by 20.1% from $132,741,000 in the year ended December 31, 1998, to $159,473,000 in the year ended December 31, 1999, as a result of the increased revenues of the Lab Support and the Healthcare Financial Staffing segments. Lab Support segment's revenues increased by 8.8% from $110,644,000 in the year ended December 31, 1998, to $120,380,000 in the year ended December 31, 1999. The increase in revenue was primarily attributable to a 5.3% increase in the number of temporary employees on assignment from December 31, 1998 to December 31, 1999 and to a lesser extent to a 3.5% increase in average hourly billing rates during 1999. The increase in the number of temporary employees on assignment was primarily attributable to the strong performance in most of the markets in which the Lab Support segment has older, better established branches and to a lesser extent the contribution of new offices opened in the past year. The increase in the Lab Support segment's revenues was partially offset by a decrease in the EnviroStaff division's revenues by 43.2% from $7,580,000 in the year ended December 31, 1998 to $4,302,000 in the year ended December 31, 1999. The decrease in revenue was primarily attributable to the continuing transition of the division's business away from serving clients in the remediation business and the resulting planned decline in remediation assignments, partially offset by increases in average hourly billing rates and average weekly hours worked during 1999. Healthcare Financial Staffing segment's revenues increased by 76.9% from $22,097,000 in the year ended December 31, 1998 to $39,093,000 in the year ended December 31, 1999. The increase in revenue was primarily attributable to a 75.6% increase in the number of temporary employees on assignment and to a lesser extent to a 3.8% increase in average hourly billing rates during 1999. The increase in the number of temporary employees on assignment was primarily attributable to the strong performance in most of the markets in which the Healthcare Financial Staffing segment has older, better established branches and to a lesser extent the contribution of new offices opened in the past year. COST OF SERVICES. Cost of services consists solely of compensation for temporary employees and payroll taxes, benefits and employment related expenses paid by the Company in connection with such compensation. Cost of services increased 18.7% from $90,705,000 in 1998 to $107,652,000 in 1999. The Lab Support segment's cost of services as a percentage of revenues decreased by 1.1% from 68.6% in 1998 to 67.5% in 1999. This decrease was primarily attributable to a 0.8% decrease in temporary employee compensation and payroll taxes and a 0.5% decrease in workers' compensation in 1999, partially offset by a 0.2% increase in employer paid benefits. The Healthcare Financial Staffing segment's cost of service as a percentage of revenues increased by 0.4% from 67.0% in 1998 to 67.4% in 1999. This increase was primarily attributable to a 0.6% increase in temporary employee compensation and payroll taxes, and a 0.2% increase in employer paid benefits in 1999, partially offset by a 0.4% decrease in workers' compensation expense. The decrease in workers' compensation expense in both segments resulted 11 12 from a decline in actual workers' compensation claims reported and estimated incurred but not yet reported claims in 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses include the costs associated with the Company's network of Account Managers and branch offices, including Account Manager compensation, rent, other office expenses and advertising for temporary employees, and corporate office expenses, such as the salaries of corporate operations and support personnel, management compensation, Account Manager recruiting and training expenses, corporate advertising and promotion, rent and other general and administrative expenses. Selling, general and administrative expenses increased 20.2% from $25,308,000 in 1998 to $30,428,000 in 1999. Selling, general and administrative expenses as a percentage of revenues remained consistent at 19.1% in the 1998 and 1999 periods. This result was primarily attributable to leveraging a centralized support system over a larger revenue base, offset by investments in Account Manager training and recruiting, expenses for international expansion into Canada and the UK, and an increase in the hiring of new Account Managers for the opening of new offices and the expansion of existing offices. INTEREST INCOME. Interest income increased 22.4% from $1,336,000 in 1998 to $1,635,000 in 1999, primarily as a result of interest earned on higher interest-bearing cash, cash equivalent and marketable security account balances in 1999. PROVISION FOR INCOME TAXES. Provision for income taxes increased 26.9% from $6,748,000 in 1998 to $8,566,000 in 1999. The Company's effective tax rate remained relatively unchanged from 37.4% in 1998 compared to 37.2% in 1999. YEARS ENDED DECEMBER 31, 1997 AND 1998 REVENUES. Revenues increased by 23.1% from $107,849,000 in the year ended December 31, 1997, to $132,741,000 in the year ended December 31, 1998, as a result of the increased revenues of the Lab Support and the Healthcare Financial Staffing segments. Lab Support segment's revenues increased by 14.5% from $96,610,000 in the year ended December 31, 1997 to $110,644,000 in the year ended December 31, 1998. This increase in revenue was primarily attributable to a 9.8% increase in the number of temporary employees on assignment and to a lesser extent to a 4.8% increase in average hourly billing rates during 1998. The increase in the number of temporary employees on assignment was primarily attributable to the strong performance in most of the markets in which the Lab Support segment has older, better established branches and to a lesser extent the contribution of new offices opened in the past year. The increase in the Lab Support segment's revenues was partially offset by a decrease in the EnviroStaff division's revenues by 30.7% from $10,937,000 in the year ended December 31, 1997 to $7,580,000 in the year ended December 31, 1998. The decrease in revenue was primarily attributable to the continuing transition of the division's business away from serving clients in the remediation business and the resulting planned decline in remediation assignments, partially offset by increases in revenue from the division's higher margin regulatory compliance business and an increase in average hourly billing rates during 1998. Healthcare Financial Staffing segment's revenues increased by 96.6% from $11,239,000 in the year ended December 31, 1997 to $22,097,000 in the year ended December 31, 1998. The increase in revenue was primarily attributable to a 91.3% increase in the number of temporary employees on assignment and to a lesser extent to a 3.4% increase in average hourly billing rates during 1998. The increase in the number of temporary employees on assignment was primarily attributable to the strong performance in most of the markets in which the Healthcare Financial Staffing segment has older, better established branches and to a lesser extent the contribution of new offices opened in the past year. COST OF SERVICES. Cost of services consists solely of compensation for temporary employees and payroll taxes, benefits and employment related expenses paid by the Company in connection with such compensation. Cost of services increased 21.3% from $74,748,000 in 1997 to $90,705,000 in 1998. The Lab Support segment's cost of services as a percentage of revenues decreased by 0.8% from 69.4% in 1997 to 68.6% in 1998. This decrease was primarily attributable to a 0.3% decrease in temporary employee compensation and payroll taxes and a 0.7% decrease in workers' compensation expense in 1998, partially offset by an 0.2% increase in employer paid benefits. In addition, lower training and medical monitoring expenses in the Lab Support segment's EnviroStaff division, primarily as a result of the transition of the division's business away from remediation assignments, contributed to the decrease in 1998. The Healthcare Financial Staffing segment's costs of service as a percentage of revenues decreased by 1.2% from 68.2% in 1997 to 67.0% in 1998. This decrease was primarily attributable to a 1.1% decrease in temporary employee compensation and payroll taxes and a 0.5% decrease in workers' compensation expense in 1998, partially offset by a 0.4% 12 13 increase in employer paid benefits. The decrease in workers' compensation expense in both segments resulted from a decline in actual workers' compensation claims reported and estimated incurred but not yet reported claims in 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses include the costs associated with the Company's network of Account Managers and branch offices, including Account Manager compensation, rent, other office expenses and advertising for temporary employees, and corporate office expenses, such as the salaries of corporate operations and support personnel, management compensation, Account Manager recruiting and training expenses, corporate advertising and promotion, rent and other general and administrative expenses. Selling, general and administrative expenses increased 22.2% from $20,714,000 in 1997 to $25,308,000 in 1998. Selling, general and administrative expenses as a percentage of revenues decreased from 19.2% in 1997 to 19.1% in 1998. This result was primarily attributable to leveraging a centralized support system over a larger revenue base, partially offset by an increase in the hiring of new Account Managers for the opening of new offices and the expansion of existing offices. INTEREST INCOME. Interest income increased 60.4% from $833,000 in 1997 to $1,336,000 in 1998, primarily as a result of interest earned on higher interest-bearing cash, cash equivalent and marketable security account balances in 1998. PROVISION FOR INCOME TAXES. Provision for income taxes increased 36.2% from $4,954,000 in 1997 to $6,748,000 in 1998. The Company's effective tax rate remained relatively unchanged from 37.5% in 1997 compared to 37.4% in 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash in 1998 and 1999 were funds provided by operating activities. In 1998, operating activities provided $11,622,000 of cash compared to $10,110,000 in 1999. This decrease was primarily attributable to a smaller increase in accounts payable and accrued expenses, a larger increase in accounts receivable, a decrease in income taxes receivable, a larger increase in deferred income taxes, and a decrease in workers' compensation deposits. This decrease was partially offset by a higher net income and larger increases in depreciation and amortization in 1999 compared to 1998. Cash used for investing activities totaled $4,716,000 in 1998 compared to $7,934,000 in 1999. This increase was primarily attributable to lower proceeds from the maturity of marketable securities, higher purchases of marketable securities, higher purchases of furniture, equipment, and leasehold improvements and a disbursement for officer loan receivable in 1999. This increase was partially offset by cash payments of $808,000 for the acquisition of substantially all of the assets of LabStaffers, Inc. in 1998 compared to an installment payment of $360,000 in 1999. Cash provided by financing activities was $2,472,000 in 1998 compared to cash used for financing activities of $5,770,000 in 1999. The decrease was primarily attributable to repurchases of common stock. On August 28, 1998, the Company renewed its unsecured bank line of credit. The maximum borrowings allowable under this agreement were $7,000,000 and accrued interest at the bank's reference rate. The Company terminated the line of credit on July 1, 1999. No amounts were outstanding as of December 31, 1998. The Company believes that its cash balances, together with the funds from operations will be sufficient to meet its cash requirements through at least the next twelve months. YEAR 2000 READINESS DISCLOSURE The Company developed and implemented a Year 2000 Readiness Plan to address the Year 2000 issues, particularly with respect to its critical systems. Critical systems are those whose failure poses a risk of disruption to the Company's ability to provide employment for its temporary employees and temporary staffing services to its clients. The Company believes that all critical internal business systems have been upgraded to meet "Year 2000" requirements. The Company has not experienced significant Year 2000 issues subsequent to 1999's fiscal year end and is not aware of any significant Year 2000 issues for which it is not adequately prepared. However, there can be no assurance that the Company's business, operating results or financial condition will not be adversely affected by issues surrounding the Year 2000 conversion. To date, the costs incurred by the Company with respect to Year 2000 compliance have not been material. 13 14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks arising from transactions in the normal course of business, principally risks associated with interest rate and foreign currency fluctuations. The Company is exposed to interest rate risk from its held to maturity investments. The interest rate risk is immaterial due to the short maturity of those investments. The Company is exposed to foreign currency risk from the translation of foreign operations into U.S. dollars. Based on the relative size and nature of its foreign operations, the Company does not believe that a ten percent change in foreign currencies would have a material impact on its financial statements. 14 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS To the Board of Directors of On Assignment, Inc. Calabasas, California We have audited the accompanying consolidated balance sheets of On Assignment, Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1999, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of On Assignment, Inc. and subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP ------------------------- Deloitte & Touche LLP Los Angeles, California January 25, 2000 15 16 ON ASSIGNMENT, INC. CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------- December 31, 1998 1999 --------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 27,706,000 $ 24,120,000 Marketable securities 2,760,000 11,151,000 Accounts receivable, net of allowance for doubtful accounts of $1,009,000 (1998) and $1,216,000 (1999) 18,578,000 22,780,000 Advances and deposits 70,000 74,000 Prepaid expenses 1,149,000 1,800,000 Officer loan receivable (Note 3) -- 400,000 Income taxes receivable 254,000 681,000 Deferred income taxes (Note 8) 1,272,000 2,056,000 ------------ ------------ Total current assets 51,789,000 63,062,000 ------------ ------------ Office Furniture, Equipment and Leasehold Improvements, net (Note 2) 2,703,000 3,510,000 Marketable securities 5,325,000 2,256,000 Deferred income taxes (Note 8) 273,000 274,000 Workers' compensation restricted deposits (Note 6) 168,000 169,000 Goodwill, net (Note 4) 1,215,000 1,468,000 Other assets (Note 5) 555,000 1,001,000 ------------ ------------ Total Assets $ 62,028,000 $ 71,740,000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 309,000 $ 1,067,000 Accrued payroll 4,552,000 4,203,000 Deferred compensation (Note 5) 319,000 807,000 Accrued workers' compensation (Note 6) 1,437,000 1,447,000 Other accrued expenses 1,185,000 769,000 ------------ ------------ Total current liabilities 7,802,000 8,293,000 ------------ ------------ Commitments and Contingencies (Notes 5 and 6) -- -- Stockholders' Equity (Note 9): Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding in 1998 and 1999 -- -- Common Stock, $0.01 par value, 25,000,000 shares authorized, 10,944,040 issued and outstanding in 1998 and 11,162,525 issued and outstanding in 1999 109,000 111,000 Paid-in capital 15,752,000 18,015,000 Deferred compensation liability (Note 5) -- 294,000 Retained earnings 38,388,000 52,850,000 Accumulated other comprehensive income (23,000) (11,000) ------------ ------------ 54,226,000 71,259,000 Less Treasury Stock at cost, no shares in 1998 and 330,000 shares in 1999 -- 7,812,000 ------------ ------------ Total stockholders' equity 54,226,000 63,447,000 ------------ ------------ Total Liabilities and Stockholders' Equity $ 62,028,000 $ 71,740,000 ------------ ------------ ---------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements 16 17 ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF INCOME
------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1998 1999 ------------------------------------------------------------------------------------------------- Revenues $107,849,000 $132,741,000 $159,473,000 Cost of services 74,748,000 90,705,000 107,652,000 ------------ ------------ ------------ Gross profit 33,101,000 42,036,000 51,821,000 Selling, general and administrative expenses 20,714,000 25,308,000 30,428,000 ------------ ------------ ------------ Operating income 12,387,000 16,728,000 21,393,000 Interest income, net 833,000 1,336,000 1,635,000 ------------ ------------ ------------ Income before income taxes 13,220,000 18,064,000 23,028,000 Provision for income taxes (Note 8) 4,954,000 6,748,000 8,566,000 ------------ ------------ ------------ Net income $ 8,266,000 $ 11,316,000 $ 14,462,000 ------------ ------------ ------------ Basic earnings per share $ 0.78 $ 1.04 $ 1.32 ------------ ------------ ------------ Weighted average number of Common Shares Outstanding 10,561,000 10,860,000 10,953,000 ------------ ------------ ------------ Diluted earnings per share $ 0.75 $ 1.00 $ 1.29 ------------ ------------ ------------ Weighted average number of Common and Common Equivalent Shares Outstanding 11,031,000 11,302,000 11,186,000 ------------ ------------ ------------ -------------------------------------------------------------------------------------------------
PROFORMA EARNINGS PER SHARE CALCULATION (NOTE 1)
--------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1998 1999 --------------------------------------------------------------------------------------------- Basic earnings per share $ 0.39 $ 0.52 $ 0.66 -------------- -------------- -------------- Weighted average number of Common Shares Outstanding 21,123,000 21,721,000 21,907,000 -------------- -------------- -------------- Diluted earnings per share $ 0.37 $ 0.50 $ 0.65 -------------- -------------- -------------- Weighted average number of Common and Common Equivalent Shares Outstanding 22,063,000 22,604,000 22,372,000 -------------- -------------- -------------- ---------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
---------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1998 1999 ---------------------------------------------------------------------------------------------- Net income $ 8,266,000 $ 11,316,000 $ 14,462,000 Other comprehensive income: Foreign currency translation adjustment (6,000) (17,000) 12,000 ------------ ------------ ------------ Comprehensive income $ 8,260,000 $ 11,299,000 $ 14,474,000 ------------ ------------ ------------ ----------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements 17 18 ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock Paid-in Shares Amount Shares Amount Capital ------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 0 $ 0 10,311,120 $ 103,000 $ 8,726,000 Exercise of common stock -- -- 402,563 4,000 2,321,000 options Common stock issued-- Employee Stock Purchase Plan -- -- 13,552 -- 172,000 Disqualifying dispositions -- -- -- -- 880,000 Other comprehensive income-- Translation adjustments -- -- -- -- -- Net income -- -- -- -- -- -------------------------------- ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 0 0 10,727,235 107,000 12,099,000 Exercise of common stock -- -- 207,291 2,000 2,265,000 options Common stock issued-- Employee Stock Purchase Plan -- -- 9,514 -- 205,000 Disqualifying dispositions -- -- -- -- 1,183,000 Other comprehensive income-- Translation adjustments -- -- -- -- -- Net income -- -- -- -- -- -------------------------------- ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1998 0 0 10,944,040 109,000 15,752,000 Exercise of common stock -- -- 218,443 2,000 1,776,000 options Repurchases of Common Stock -- -- -- -- -- Deferred Compensation Liability -- -- (9,882) -- (294,000) Common stock issued-- Employee Stock Purchase Plan -- -- 9,924 -- 264,000 Disqualifying dispositions -- -- -- -- 517,000 Other comprehensive income-- Translation adjustments -- -- -- -- -- Net income -- -- -- -- -- -------------------------------- ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1999 0 $ 0 11,162,525 $ 111,000 $ 18,015,000 -------------------------------- ------------ ------------ ------------ ------------ ------------ -------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------- Accumulated Deferred Other Treasury Stock Compensation Retained Comprehensive Liability Earnings Income Shares Amount Total ----------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 $ -- $ 18,806,000 $ 0 0 $ 0 $ 27,635,000 Exercise of common stock -- -- -- -- -- 2,325,000 options Common stock issued-- Employee Stock Purchase Plan -- -- -- -- -- 172,000 Disqualifying dispositions -- -- -- -- -- 880,000 Other comprehensive income-- Translation adjustments -- -- (6,000) -- -- (6,000) Net income -- 8,266,000 -- -- -- 8,266,000 -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 -- 27,072,000 (6,000) 0 0 39,272,000 Exercise of common stock -- -- -- -- -- 2,267,000 options Common stock issued-- Employee Stock Purchase Plan -- -- -- -- -- 205,000 Disqualifying dispositions -- -- -- -- -- 1,183,000 Other comprehensive income-- Translation adjustments -- -- (17,000) -- -- (17,000) Net income -- 11,316,000 -- -- -- 11,316,000 -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1998 -- 38,388,000 (23,000) 0 0 54,226,000 Exercise of common stock -- -- -- -- -- 1,778,000 options Repurchases of Common Stock -- -- -- (330,000) (7,812,000) (7,812,000) Deferred Compensation Liability 294,000 -- -- -- -- -- Common stock issued-- Employee Stock Purchase Plan -- -- -- -- -- 264,000 Disqualifying dispositions -- -- -- -- -- 517,000 Other comprehensive income-- Translation adjustments -- -- 12,000 -- -- 12,000 Net income -- 14,462,000 -- -- -- 14,462,000 -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1999 $ 294,000 $ 52,850,000 $ (11,000) (330,000) $ (7,812,000) $ 63,447,000 -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ -----------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements 18 19 ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 1997 1998 1999 ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,266,000 $ 11,316,000 $ 14,462,000 Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions: Depreciation and amortization 815,000 948,000 1,158,000 Increase in allowance for doubtful accounts 451,000 593,000 738,000 Increase in deferred income taxes (250,000) (327,000) (785,000) Loss on disposal of furniture and equipment 141,000 215,000 7,000 Increase in accounts receivable (3,403,000) (3,934,000) (4,927,000) (Increase) Decrease in income taxes receivable (111,000) 1,040,000 86,000 Increase in accounts payable and accrued expenses 1,360,000 2,215,000 484,000 Increase in income taxes payable 873,000 -- -- Decrease (Increase) in workers' compensation restricted 147,000 428,000 (1,000) deposits Decrease (Increase) in prepaid expenses 2,000 (470,000) (651,000) Increase in other assets (10,000) (402,000) (461,000) ------------ ------------ ------------ Net cash provided by operating activities 8,281,000 11,622,000 10,110,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (7,250,000) (10,345,000) (10,777,000) Proceeds from the maturity of marketable securities 4,880,000 7,630,000 5,455,000 Acquisition of furniture, equipment and leasehold improvements (1,180,000) (1,193,000) (1,849,000) Proceeds from sale of furniture and equipment 8,000 2,000 1,000 Decrease (Increase) in advances and deposits 5,000 (2,000) (4,000) Acquisition (Note 12) -- (808,000) (360,000) Disbursements for officer loan receivable (Note 3) -- -- (400,000) Net cash used for investing activities (3,537,000) (4,716,000) (7,934,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of common stock options 2,325,000 2,267,000 1,778,000 Proceeds from issuance of common stock-- Employee Stock Purchase Plan 172,000 205,000 264,000 Repurchases of common stock -- -- (7,812,000) ------------ ------------ ------------ Net cash provided by (used for) financing activities 2,497,000 2,472,000 (5,770,000) ------------ ------------ ------------ Effect of exchange rate changes on cash and cash equivalents (Note 1) (4,000) (11,000) 8,000 ------------ ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents 7,237,000 9,367,000 (3,586,000) Cash and Cash Equivalents at Beginning of Period 11,102,000 18,339,000 27,706,000 ------------ ------------ ------------ Cash and Cash Equivalents at End of Period $ 18,339,000 $ 27,706,000 $ 24,120,000 ------------ ------------ ------------ Acquisition (Note 12): Fair value of assets acquired $ -- $ 58,000 $ -- Goodwill -- 750,000 360,000 ------------ ------------ ------------ Cash paid $ -- $ 808,000 $ 360,000 ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: Tax benefit of disqualifying dispositions (Note 8) $ 880,000 $ 1,183,000 $ 517,000 ------------ ------------ ------------ ------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements 19 20 ON ASSIGNMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. On Assignment, Inc. (the "Company"), has two operating segments: Lab Support and Healthcare Financial Staffing. The Lab Support operating segment includes the combined results of the Lab Support, Clinical Lab Staff and EnviroStaff divisions. The Lab Support segment provides temporary and permanent placement of scientific personnel with laboratories and other institutions, laboratory and medical staffing personnel to the healthcare industry, and environmental professionals to the environmental health and safety fields. The Company's Healthcare Financial Staffing segment provides temporary and permanent placement of medical billing and collection professionals to the healthcare industry. Significant accounting policies are as follows: Principles of Consolidation. The Consolidated Financial Statements include the accounts of the Company and its wholly owned domestic and foreign subsidiaries (see Note 12). All significant intercompany accounts and transactions have been eliminated. On January 1, 1997, the Company effected a corporate reorganization resulting in a consolidation of the Company's divisional field operations into Assignment Ready, Inc. ("ARI"), a Delaware corporation and wholly owned subsidiary of the Company, in order to centralize management functions into one entity, to optimize regional activities and achieve economies of scale. On May 12, 1997, the Company formed Assignment Ready Inc., a Canadian corporation and wholly owned subsidiary of the Company, and commenced operations in Toronto as Lab Support Canada during the third quarter of 1997. On February 2, 1999, the Company formed On Assignment UK Limited, a United Kingdom corporation and wholly owned subsidiary of the Company. On February 16, 1999, On Assignment UK Limited formed Lab Support (UK) Limited, a United Kingdom corporation and wholly owned subsidiary of On Assignment UK Limited, and commenced operations as Lab Support UK during the first quarter of 1999. Cash Flows and Marketable Securities. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Investments having a maturity of more than three months and less than twelve months are classified under current assets as marketable securities. Investments having a maturity of more than twelve months are classified under non-current assets as marketable securities. Marketable securities consist principally of Tax Exempt Municipal Bonds and Debt Securities issued by U.S. Government Agencies with maturity dates greater than three months when purchased. All marketable securities are classified as held to maturity and are recorded at amortized cost which approximated market at December 31, 1998 and 1999. Non-current marketable securities are expected to mature during 2001. 20 21 The amortized cost and estimated fair value of marketable securities at December 31, 1998 and 1999 are as follows:
----------------------------------------------------------------------------------------------- Gross Gross Unrealized Unrealized Estimated Amortized Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------- 1998: Current marketable securities $ 2,760,000 $ 44,000 $ -- $ 2,804,000 Non-current marketable securities 5,325,000 61,000 (7,000) 5,379,000 ----------- ----------- ----------- ----------- Total $ 8,085,000 $ 105,000 $ (7,000) $ 8,183,000 ----------- ----------- ----------- ----------- 1999: Current marketable securities $11,151,000 $ 9,000 $ (159,000) $11,001,000 Non-current marketable securities 2,256,000 8,000 (19,000) 2,245,000 ----------- ----------- ----------- ----------- Total $13,407,000 $ 17,000 $ (178,000) $13,246,000 -----------------------------------------------------------------------------------------------
Cash paid for income taxes (net of refunds) for the years ended December 31, 1997, 1998, and 1999 was $4,443,000, $6,035,000 and $9,262,000, respectively. Accounts Receivable. Accounts receivable are stated net of allowance for doubtful accounts of approximately $1,009,000 and $1,216,000 at December 31, 1998 and 1999, respectively. Allowance for doubtful accounts is established and maintained based on estimates made by management through its review of specific accounts and historical collection activity. The Company recorded bad debt expense of approximately $451,000, $593,000 and $738,000 for the years ended December 31, 1997, 1998 and 1999, respectively. Office Furniture, Equipment and Leasehold Improvements and Depreciation. Office furniture, equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, generally three to five years. Impairment of Long-Lived Assets. The Company evaluates long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the sum of the undiscounted future cash flows is less than the carrying amount of the asset, in which case a write-down is recorded to reduce the related asset to its estimated fair value. No such impairment losses have been recognized as of December 31, 1997, 1998 and 1999. Income Taxes. Deferred taxes result from temporary differences between the bases of assets and liabilities for financial and tax reporting purposes. Deferred tax assets and liabilities represent future tax consequences of these differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Revenue Recognition. Revenue from temporary assignments, net of credits and discounts, is recognized when earned, based on hours worked by the Company's temporary employees on a weekly basis. Permanent placement fees are recognized when earned, upon conversion of a temporary employee to a client's regular employee. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which provides additional guidance in applying generally accepted accounting principles to revenue recognition in the financial statements. The Company has evaluated the provisions of SAB 101 and believes its impact on their revenue recognition policy is immaterial. Cost of Services. Cost of services consist of compensation for temporary employees and the related payroll taxes and benefits incurred with respect to such compensation. Cost of services are recognized when incurred based on hours worked by the Company's temporary employees. 21 22 Foreign Currency Translation. Assets and liabilities of foreign operations, where the functional currency is the local currency, are translated into U.S. dollars at the rate of exchange in effect on the balance sheet date. Income and expenses are translated at the average rates of exchange prevailing during the period. The related translation adjustments are recorded as cumulative foreign currency translation adjustments in accumulated other comprehensive income as a separate component of stockholders' equity. Earnings per Share. Basic earnings per share are computed based upon the weighted average number of common shares outstanding and diluted earnings per share are computed based upon the weighted average number of common shares outstanding and dilutive common share equivalents (consisting of incentive stock options and non-qualified stock options) outstanding during the periods using the treasury stock method. Following is a reconciliation of the shares used to compute basic and diluted earnings per share:
----------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1998 1999 ----------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding used to compute basic earnings per share 10,561,000 10,860,000 10,953,000 Dilutive effect of stock options 470,000 442,000 233,000 ---------- ---------- ---------- Number of shares used to compute diluted earnings per share 11,031,000 11,302,000 11,186,000 ---------- ---------- ---------- -----------------------------------------------------------------------------------------------------
On September 24, 1997, the Board of Directors authorized a two-for-one stock split, effected as a 100 percent common stock dividend, distributed on October 20, 1997 to shareholders of record on October 13, 1997. All references in the accompanying consolidated financial statements to number of shares, sales prices and per share amounts of the Company's common stock have been retroactively restated to reflect the increased number of common shares outstanding. In addition, stockholders' equity has been restated to give retroactive recognition to the stock split by reclassifying from paid-in capital to common stock the par value of the additional shares arising from the split. On April 1, 1999, the Board of Directors authorized the Company to repurchase up to $15,000,000 of its common stock. The Company plans to make such purchases primarily in the open market, from time-to-time, at prevailing prices pursuant to rules and regulations of the Securities and Exchange Commission. At December 31, 1999, the Company had repurchased 330,000 shares of its common stock at a total cost of $7,812,000. On March 7, 2000, the Board of Directors authorized a two-for-one stock split, effected as a 100 percent common stock dividend, to be distributed on April 3, 2000 to shareholders of record as of March 27, 2000. Based on a distribution date which occurs subsequent to the issuance of the financial statements, references to number of shares, sales prices and per share amounts of the Company's common stock have not been retroactively restated to reflect the increased number of common shares outstanding. Proforma earnings per share calculations are included in the Consolidated Statements of Income. Stock-Based Compensation. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The Company has adopted only the disclosure portion of the statement (see Note 9). Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk. Financial instruments that potentially subject the Company to credit risks consist primarily of cash and cash equivalents, marketable securities, and trade receivables. The Company places its cash and cash equivalents and marketable securities with quality credit institutions, and limits the amount of credit exposure with any one institution. Concentration of credit risk with respect to accounts receivable are limited because of the large number of geographically dispersed customers, thus spreading the trade credit risk. The Company performs ongoing credit evaluations to identify risks and maintains an allowance to address these risks. 22 23 Fair Value of Financial Instruments. The recorded values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value based on their short-term nature. The fair values of marketable securities were estimated using quoted market prices. Derivative Instruments and Hedging Activities. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, which delays the effective date of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133, which requires that all derivatives be recognized as assets or liabilities in the consolidated balance sheet measured at fair value, is effective for the Company starting in its fiscal year 2001, but is currently not expected to have a significant impact. Reclassifications. Certain reclassifications have been made to the prior year consolidated financial statements to conform with the current year consolidated financial statement presentation. 2. OFFICE FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Office furniture, equipment and leasehold improvements at December 31, 1998 and 1999, consisted of the following: ----------------------------------------------------------------------------- 1998 1999 ----------------------------------------------------------------------------- Furniture and fixtures $ 1,202,000 $ 1,674,000 Computers and related equipment 2,592,000 3,276,000 Machinery and equipment 1,064,000 1,368,000 Leasehold improvements 726,000 1,041,000 Construction in progress 570,000 419,000 ----------- ----------- 6,154,000 7,778,000 Less accumulated depreciation and amortization (3,451,000) (4,268,000) ----------- ----------- Total $ 2,703,000 $ 3,510,000 ----------- ----------- ----------------------------------------------------------------------------- Depreciation and amortization expense for the years ended December 31, 1997, 1998 and 1999 was $753,000, $860,000 and $1,035,000, respectively. 3. OFFICER LOANS RECEIVABLE. In June 1999, the Company loaned an officer of the Company $400,000, bearing interest at 4.92%, compounded semi-annually. Principal and interest are payable on June 10, 2000. 4. GOODWILL. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired (see Note 12). Goodwill is stated net of accumulated amortization of $243,000 at December 31, 1998 and $352,000 at December 31, 1999. Goodwill is being amortized on a straight-line basis over fifteen years. The Company periodically reviews the value of its goodwill to determine if an impairment has occurred. The Company measures the potential impairment of recorded goodwill by the undiscounted value of expected future cash flows in relation to its net capital investment of the net assets acquired. Based on its review, the Company does not believe that an impairment of its goodwill had occurred as of December 31, 1998 and 1999. 5. 401(K) RETIREMENT SAVINGS PLAN, DEFERRED COMPENSATION PLAN AND CHANGE IN CONTROL SEVERANCE PLAN. Effective January 1, 1995, the Company adopted the On Assignment, Inc. 401(k) Retirement Savings Plan under Section 401(k) of the Internal Revenue Code, under which eligible employees may elect to have a portion of their salary deferred and contributed to the plan. The amount of salary deferred is not subject to Federal and State income tax at the time of deferral. The Plan covers all eligible employees and provides for matching or discretionary contributions at the discretion 23 24 of the Board of Directors. The Company made no matching or discretionary contributions to the plan during the years ended December 31, 1997, 1998 and 1999. Effective January 1, 1998, the Company implemented the On Assignment, Inc. Deferred Compensation Plan. The plan permits a select group of management or highly compensated employees or directors to annually elect to defer up to 100 percent of their base salary, annual bonus, stock option gain or fees on a pre-tax basis, and earn tax-deferred interest on these amounts. Distributions from the plan are made at retirement, death or termination of employment, in a lump sum, or over five, ten or fifteen years. At December 31, 1999, the liability under the plan was approximately $807,000. A life insurance policy is maintained on the participants relating to the plan, whereby the Company is the sole owner and beneficiary of such insurance. The cash surrender value of this life insurance policy, which is reflected in other assets, was approximately $754,000 at December 31, 1999. During 1999, a participant in the Deferred Compensation Plan performed a stock-for-stock exercise resulting in a gain to the participant of approximately $294,000. A stock certificate for 9,882 shares was issued into a rabbi trust in the Company's name. The employer stock held by the rabbi trust has been classified in equity in the same manner as treasury stock, with a reduction in shares outstanding and a corresponding reduction to Additional Paid-in Capital. The corresponding deferred compensation liability is also shown as a separate component in equity. There is no effect on the Consolidated Statements of Income as a result of this transaction. On February 12, 1998, the Company adopted the On Assignment, Inc. Change in Control Severance Plan ("the Plan") to provide severance benefits for officers and other eligible employees who are terminated following an acquisition of the Company. Under the Plan, if an eligible employee is involuntarily terminated within 18 months of a change in control, as defined in the Plan, then the employee will be entitled to salary plus target bonus payable in a lump sum. The amounts payable would range from one month to 18 months of salary and target bonus depending on the employee's length of service and position with the Company. 6. COMMITMENTS AND CONTINGENCIES. The Company leases its facilities and certain office equipment under operating leases which expire at various dates through 2004. Certain leases contain rent escalations and/or renewal options. The following is a summary of future minimum lease payments by year: Operating Leases ------------------- 2000 $ 2,013,000 2001 1,641,000 2002 1,427,000 2003 1,229,000 2004 257,000 ------------------- Total Minimum Lease Payments $ 6,567,000 ------------------- Rent expense for the years ended December 31, 1997, 1998 and 1999 was $1,433,000, $1,593,000 and $2,342,000, respectively. The Company and its subsidiaries are involved in various legal proceedings, claims and litigation arising in the ordinary course of business. However, based on the facts currently available, management believes that the disposition of matters that are pending or asserted will not have a materially adverse effect on the financial position of the Company. The Company is partially self-insured for workers' compensation expense. In connection with this program, the Company pays a base premium plus actual losses incurred up to certain levels, and is insured for losses greater than certain levels per occurrence and in the aggregate. The Company is required to maintain cash deposits for the payment of losses and as collateral amounting to $168,000 and $169,000 at December 31, 1998 and 1999, respectively. These workers' compensation deposits are restricted as to withdrawal and have therefore been classified as non-current assets in the accompanying Consolidated Balance Sheets. These funds are invested primarily in three-month treasury bills and are recorded at amortized cost which approximated market at December 31, 1998 and 1999. In addition, the Company has 24 25 provided a stand-by letter of credit amounting to approximately $878,000 at December 31, 1998 and 1999, in connection with this program. The self-insurance claim liability is determined based on claims filed and claims incurred but not yet reported. The Company accounts for claims incurred but not yet reported based on actuarial reports prepared by an independent third party who reviews historical experience and current trends of industry data. Changes in estimates and differences in estimates and actual payments for claims are recognized in the period which the estimates changed or payments were made. The self-insurance claim liability amounted to approximately $1,437,000 and $1,447,000 at December 31, 1998 and 1999, respectively. The Company's EnviroStaff subsidiary was operating under a loss-retro workers' compensation policy from July 1, 1995 through September 30, 1996. In connection with this program, EnviroStaff paid a base premium with an excess loss cap of $50,000 per occurrence. Medical and indemnity expenses are paid at cost plus administration fees and taxes. The insurance claim liability is determined based on claims filed and an estimate of claims incurred but not yet reported. In addition, EnviroStaff provided a standby letter of credit amounting to approximately $120,000 that expired on July 1, 1998. Effective October 1, 1996, EnviroStaff was added to the Company's workers' compensation program. 7. BORROWING ARRANGEMENTS. On August 28, 1998, the Company renewed its unsecured bank line of credit. The maximum borrowings allowable under this agreement were $7,000,000 and accrued interest at the bank's reference rate. The Company terminated the line of credit on July 1, 1999. No amounts were outstanding as of December 31, 1998. 8. INCOME TAXES. The provision for income taxes consists of the following:
--------------------------------------------------------------------- Years Ended December 31, 1997 1998 1999 --------------------------------------------------------------------- Federal: Current $ 4,166,000 $ 6,164,000 $ 8,196,000 Deferred (271,000) (290,000) (707,000) ----------- ----------- ----------- 3,895,000 5,874,000 7,489,000 ----------- ----------- ----------- State: Current 1,038,000 911,000 1,155,000 Deferred 21,000 (37,000) (78,000) ----------- ----------- ----------- 1,059,000 874,000 1,077,000 ----------- ----------- ----------- Total $ 4,954,000 $ 6,748,000 $ 8,566,000 ----------- ----------- ----------- ---------------------------------------------------------------------
Deferred income taxes arise from the recognition of certain assets and liabilities for tax purposes in periods different from those in which they are recognized in the financial statements. These differences relate primarily to workers' compensation, state taxes, bad debt, deferred compensation, and depreciation and amortization expenses. Deferred assets and liabilities are classified as current and non-current according to the nature of the assets or liabilities from which they arose. 25 26 The components of deferred tax assets (liabilities) are as follows:
------------------------------------------------------------------------------------------------------------- December 31, 1998 December 31, 1999 Federal State Federal State ------------------------------------------------------------------------------------------------------------- Deferred tax assets: Current: Allowance for doubtful accounts $ 343,000 $ 49,000 $ 416,000 $ 62,000 Employee related accruals 59,000 8,000 515,000 76,000 State taxes 297,000 -- 385,000 -- Workers' compensation loss reserve 499,000 71,000 524,000 78,000 ----------- ----------- ----------- ----------- Total current deferred tax assets 1,198,000 128,000 1,840,000 216,000 ------------------------------------------------ ----------- ----------- ----------- ----------- Non-current: Depreciation and amortization expense 205,000 30,000 139,000 21,000 Other 37,000 1,000 114,000 -- ------------------------------------------------ ----------- ----------- ----------- ----------- Total deferred tax assets 1,440,000 159,000 2,093,000 237,000 Deferred tax liabilities: Current: Other (54,000) -- -- -- ----------- ----------- ----------- ----------- Net deferred tax asset $ 1,386,000 $ 159,000 $ 2,093,000 $ 237,000 ------------------------------------------------ ----------- ----------- ----------- ----------- -------------------------------------------------------------------------------------------------------------
The net operating loss carryforwards included in other non-current deferred tax assets at December 31, 1998 and 1999, were acquired through the 1994 acquisition of 1st Choice Personnel, Inc. These carryforwards are available to offset future taxable income, subject to annual limitations, through the year 2007. The reconciliation between the amount computed by applying the U.S. federal statutory tax rate of 35% in 1997, 1998 and 1999 to income before income taxes and the actual income taxes is as follows:
---------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1998 1999 ---------------------------------------------------------------------------------------------------- Income tax expenses at the statutory rate $ 4,627,000 $ 6,322,000 $ 8,060,000 State income taxes, net of federal income tax benefit 401,000 575,000 1,119,000 Tax-free interest and other (74,000) (149,000) (613,000) ----------- ----------- ----------- Total $ 4,954,000 $ 6,748,000 $ 8,566,000 ----------- ----------- ----------- ----------------------------------------------------------------------------------------------------
The Company receives a tax deduction as the result of disqualifying dispositions made by directors, officers and employees. A disqualifying disposition occurs when stock acquired through the exercise of incentive stock options or the Employee Stock Purchase Plan is disposed of prior to the required holding period or upon exercise of a non-qualified stock option. At December 31, 1998 and 1999, net income taxes payable and additional paid-in capital include tax benefits amounting to $1,183,000 and $517,000, respectively, resulting from disqualifying dispositions by directors, officers and employees. 9. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLAN. Under its Stock Option Plan, the Company may grant employees, contractors, and non-employee members of the Board of Directors incentive or non-qualified stock options to purchase an aggregate of up to 4,000,000 shares of its common stock. Optionees, option prices, option amounts, grant dates and vesting are established by the Compensation Committee of the Board of Directors. The option prices may not be less than 85% of the fair market value of the stock at the time the option is granted. Stock options granted to date generally become exercisable over a pro rata period of four years and have a maximum term of ten years measured from the grant date. 26 27 The following summarizes stock option activity for the years ended December 31, 1997, 1998 and 1999:
--------------------------------------------------------------------------- Weighted Non- Average Incentive Qualified Exercise Stock Stock Price Options Options Per Share --------------------------------------------------------------------------- Outstanding at January 1, 1997 1,126,770 321,710 $10.05 Granted 409,968 161,032 $20.46 Exercised (335,358) (67,201) $ 5.77 Canceled (405,573) (29,392) $14.14 ---------- ---------- Outstanding at December 31, 1997 795,807 386,149 $15.04 Granted 340,192 142,958 $32.37 Exercised (136,843) (70,448) $10.94 Canceled (199,784) (1,500) $21.53 ---------- ---------- Outstanding at December 31, 1998 799,372 457,159 $21.34 Granted 418,911 168,539 $26.85 Exercised (210,442) (14,763) $ 8.99 Canceled (198,030) (10,447) $27.98 ---------- ---------- Outstanding at December 31, 1999 809,811 600,488 $24.63 ---------- ---------- ---------------------------------------------------------------------------
The following summarizes pricing and term information for options outstanding as of December 31, 1999:
---------------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ---------------------------------------------------------- ------------------------------------ Weighted Weighted Weighted Number Average Average Average Range of Outstanding at Remaining Exercise Exercisable at Exercise Exercise Prices December 31, 1999 Contractual Life Price December 31, 1999 Price -------------------------- --------------------- ------------------ ----------- --------------------- ------------ $ 4.875 to $ 19.50 319,128 6.0 years $ 14.45 300,366 $ 14.44 19.625 to 23.00 297,387 8.3 years 22.74 123,206 22.71 23.375 to 27.375 319,262 9.8 years 26.44 51,519 25.16 27.625 to 32.438 423,522 9.1 years 31.01 105,848 31.64 32.625 to 36.75 51,000 8.7 years 34.95 18,785 34.88 -------------------------- --------------------- ------------------ ----------- --------------------- ------------ $ 4.875 to $ 36.75 1,410,299 8.4 years $ 24.63 599,724 $ 20.74 -------------------------- --------------------- ------------------ ----------- --------------------- ------------ ----------------------------------------------------------------------------------------------------------------------------
The Employee Stock Purchase Plan allows eligible employees to purchase Common Stock of the Company, through payroll deductions, at 85% of the lower of the market price on the first day or the last day of the semi-annual purchase period. Eligible employees may contribute up to 10% of their base earnings toward the purchase of the stock. During 1997, 1998 and 1999, shares issued under the plan were 13,552, 9,514 and 9,924, respectively. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its Stock Option Plan and Employee Stock Purchase Plan and accordingly, no compensation cost has been recognized for its stock option and purchase plans. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). The estimated fair value of 27 28 options granted during 1997, 1998 and 1999 pursuant to SFAS No. 123 was approximately $5,530,000, $7,342,000 and $7,693,000, respectively, and the estimated fair value of stock purchased under the Company's Employee Stock Purchase Plan was approximately $60,000, $72,000 and $93,000, respectively. Had compensation cost for the Company's Stock Option Plan and its Employee Stock Purchase Plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's pro forma net income would have been $7,368,000, $9,771,000 and $11,993,000 and pro forma earnings per share would have been $0.68, $0.87 and $1.08 for 1997, 1998 and 1999, respectively. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of options granted under the Company's Stock Option Plan during 1997, 1998 and 1999 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: (i) no dividend yield in 1997, 1998 or 1999, (ii) expected volatility of approximately 48% in 1997, 49% in 1998 and 50% in 1999, (iii) risk-free interest rate of approximately 6.2% in 1997, 5.0% in 1998 and 5.8% in 1999, and (iv) expected lives of the options of approximately 5 years in 1997, 1998 and 1999. Pro forma compensation cost of shares purchased under the Employee Stock Purchase Plan is measured based on the discount from market value. 10. BUSINESS SEGMENTS. Indicated below is the information required to comply with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company has two reportable operating segments: Lab Support and Healthcare Financial Staffing. The Lab Support operating segment includes the combined results of the Lab Support, Clinical Lab Staff and EnviroStaff divisions, as they have similar economic characteristics and they meet the aggregation criteria of SFAS No. 131. The Lab Support segment provides temporary and permanent placement services of laboratory and scientific professionals to the biotechnology, pharmaceutical, food and beverage, chemical and environmental industries, laboratory and medical staffing professionals to the healthcare industry and environmental professionals to the environmental health and safety fields. The Healthcare Financial Staffing segment provides temporary and permanent placement services of medical billing and collection professionals to the healthcare industry. The Company's management evaluates performance of each segment primarily based on revenues and operating income (before acquisition costs, interest and income taxes). The Company's management does not evaluate, manage or measure performance of segments using asset information, accordingly, asset information by segment is not disclosed. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note 1). The information in the following table is derived directly from the segments' internal financial reporting used for corporate management purposes. Certain corporate expenses are not allocated to and/or among the operating segments.
-------------------------------------------------------------------------------------- Years Ended December 31, 1997 1998 1999 -------------------------------------------------------------------------------------- Revenues: Lab Support $ 96,610,000 $110,644,000 $120,380,000 Healthcare Financial Staffing 11,239,000 22,097,000 39,093,000 ------------ ------------ ------------ $107,849,000 $132,741,000 $159,473,000 ------------ ------------ ------------ Gross Profit: Lab Support $ 29,528,000 $ 34,750,000 $ 39,089,000 Healthcare Financial Staffing 3,573,000 7,286,000 12,732,000 ------------ ------------ ------------ $ 33,101,000 $ 42,036,000 $ 51,821,000 ------------ ------------ ------------ Operating Income: Lab Support $ 11,367,000 $ 13,532,000 $ 14,731,000 Healthcare Financial Staffing 1,020,000 3,196,000 6,662,000 ------------ ------------ ------------ $ 12,387,000 $ 16,728,000 $ 21,393,000 ------------ ------------ ------------ --------------------------------------------------------------------------------------
28 29 11. UNAUDITED QUARTERLY RESULTS. The following table presents unaudited quarterly financial information for each of the eight quarters ended December 31, 1999. In the opinion of management, the quarterly information contains all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation thereof. The operating results for any quarter are not necessarily indicative of the results for any future period.
---------------------------------------------------------------------------------------------------------------------------------- (Unaudited) (in thousands, except per share data) Quarter Ended Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, 1998 1998 1998 1998 1999 1999 1999 1999 ---------------------------------------------------------------------------------------------------------------------------------- Revenues $ 28,567 $ 32,508 $ 35,535 $ 36,131 $ 34,789 $ 39,272 $ 42,227 $ 43,185 Cost of services 19,754 22,261 24,192 24,498 23,569 26,524 28,450 29,109 ---------------------------------------------------------------------------------------------- Gross profit 8,813 10,247 11,343 11,633 11,220 12,748 13,777 14,076 Selling, general and administrative expenses 5,397 6,230 6,966 6,715 6,791 7,613 8,177 7,847 ---------------------------------------------------------------------------------------------- Operating income 3,416 4,017 4,377 4,918 4,429 5,135 5,600 6,229 Interest income 302 322 357 355 395 411 414 415 ---------------------------------------------------------------------------------------------- Income before income taxes 3,718 4,339 4,734 5,273 4,824 5,546 6,014 6,644 Provision for income taxes 1,400 1,614 1,772 1,962 1,794 2,063 2,231 2,478 ---------------------------------------------------------------------------------------------- Net income $ 2,318 $ 2,725 $ 2,962 $ 3,311 $ 3,030 $ 3,483 $ 3,783 $ 4,166 ---------------------------------------------------------------------------------------------- Basic earnings per share $ 0.22 $ 0.25 $ 0.27 $ 0.30 $ 0.28 $ 0.32 $ 0.35 $ 0.38 ---------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding 10,767 10,842 10,898 10,934 11,013 11,054 10,919 10,839 ---------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.21 $ 0.24 $ 0.26 $ 0.29 $ 0.27 $ 0.31 $ 0.34 $ 0.38 ---------------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding 11,202 11,296 11,361 11,332 11,340 11,245 11,137 11,025 ---------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------
12. ACQUISITIONS. On July 20, 1998, the Company acquired substantially all of the assets of LabStaffers, Inc., a provider of temporary science and medical laboratory professionals through its branches in Greensboro and Charlotte, N.C. The LabStaffers, Inc. offices and operations acquired have been added to the Company's Lab Support division. This acquisition has been accounted for using the purchase method of accounting. The results of operations of the acquired company are included in the Consolidated Statements of Income from the date of acquisition. Pro Forma information is not presented as the impact on revenues, net income and earnings per share are not significant. Consideration for the purchase consisted of $808,000 in cash paid on the purchase date. The excess of the purchase price over the fair value of the net assets acquired has been allocated to goodwill. In addition, in July 1999 the Company paid an additional $360,000 in cash in accordance with the agreement, bringing the total consideration for the purchase to $1,168,000 at December 31, 1999. This contingent consideration has been added to goodwill in the accompanying Consolidated Balance Sheets. Additional consideration not to exceed $480,000 may be paid 25 months after the closing date, contingent on certain revenue targets, and any contingent consideration will also be added to goodwill. 29 30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT Information regarding the Company's directors will be set forth under the caption "Proposal One -- Election of Directors" in the Company's proxy statement for use in connection with its Annual Meeting of Stockholders scheduled to be held on June 13, 2000 (the "2000 Proxy Statement") and is incorporated herein by reference. The 2000 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year. Information regarding the Company's executive officers is set forth in Part I of this Annual Report on Form 10-K\A and is incorporated herein by reference. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Information regarding compliance with Section 16(a) of the Exchange Act will be set forth under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's 2000 Proxy Statement to be filed within 120 days after the end of the Company's fiscal year and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding remuneration of the Company's directors and officers will be set forth under the captions "Proposal One -- Election of Directors," and "Executive Compensation and Related Information" in the Company's 2000 Proxy Statement to be filed within 120 days after the end of the Company's fiscal year and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management will be set forth under the captions "General Information for Stockholders -- Record Date, Voting and Share Ownership" in the Company's 2000 Proxy Statement to be filed within 120 days after the end of the Company's fiscal year and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions will be set forth under the caption "Executive Compensation and Related Information -- Certain Relationships and Related Transactions" in the Company's 2000 Proxy Statement to be filed within 120 days after the end of the Company's fiscal year and is incorporated herein by reference. 30 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT PAGE 1. Financial Statements: Report of Independent Auditors 15 Consolidated Balance Sheets at December 31, 1998 and 1999 16 Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 1997, 1998 and 1999 17 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1998 and 1999 18 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999 19 Notes to Consolidated Financial Statements 20 2. Financial Statement Schedule: Schedule II-- Valuation and Qualifying Accounts 34 Schedules other than those referred to above have been omitted because they are not applicable or not required under the instructions contained in Regulation S-X or because the information is included elsewhere in the financial statements or notes thereto. (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the three months ended December 31, 1999.
31 32 (C) EXHIBITS
-------------------------------------------------------------------------------------------------------------------------------- NUMBER FOOTNOTE DESCRIPTION -------------------------------------------------------------------------------------------------------------------------------- 3.1 (1) Amended and Restated Certificate of Incorporation of the Company. 3.2 (2) Amended and Restated Bylaws of the Company. 4.2 (3) Specimen Common Stock Certificate. 10.1 (3) Form of Indemnification Agreement. 10.2 (4) Restated 1987 Stock Option Plan, as amended. 10.3 (5) 1992 Employee Stock Purchase Plan. 10.9 (6) Office lease dated December 7, 1993, by and between the Company and Malibu Canyon Office Partners, LP. 21.1 Subsidiaries of the Registrant. 24.1 Consent of Deloitte & Touche LLP. --------------------------------------------------------------------------------------------------------------------------------
(1) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K (File No. 0-20540) filed with the Securities and Exchange Commission on March 30, 1993. (2) Incorporated by reference from an exhibit filed with the Company's Current Report on Form 8-K (File No. 0-20540) filed with the Securities and Exchange Commission on February 4, 1998. (3) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-1 (File No. 33-50646) declared effective by the Securities and Exchange Commission on September 21, 1992. (4) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K (File No. 0-20540) filed with the Securities and Exchange Commission on March 28, 1997. (5) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 (File No. 33-57078) filed with the Securities and Exchange Commission on January 19, 1993. (6) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K (File No. 0-20540) filed with the Securities and Exchange Commission on March 24, 1994. 32 33 SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Amendment #1 to report to be signed on its behalf by the undersigned, thereunto duly authorized, in Calabasas, California on this 12th day of September, 2000. ON ASSIGNMENT, INC. By: /s/ H. Tom Buelter ----------------------------------------------- H. Tom Buelter Chairman of the Board and Chief Executive Officer 33 34 ON ASSIGNMENT, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
----------------------------------------------------------------------------------------------------------------------------------- Balance at Charged to Charged to Balance at beginning of costs and other end of Description period expenses accounts Deductions period ----------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1997 Allowance for doubtful accounts $ 553,000 451,000 -- (270,000) $ 734,000 Year ended December 31, 1998 Allowance for doubtful accounts $ 734,000 593,000 -- (318,000) $1,009,000 Year ended December 31, 1999 Allowance for doubtful accounts $ 1,009,000 738,000 -- (531,000) $1,216,000 -----------------------------------------------------------------------------------------------------------------------------------
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