UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2002 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
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Commission file number 0-20540
ON ASSIGNMENT, INC.
(Exact name of registrant as specified in its charter)
| Delaware (State of incorporation) |
95-4023433 (IRS Employer Identification No.) |
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26651 West Agoura Road, Calabasas, CA (Address of principal executive offices) |
91302 (zip code) |
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(818) 878-7900 (Registrant's telephone number, including area code) |
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Not Applicable (Former name, former address and former fiscal year, if changed since last report) |
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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 for the past 90 days. Yes ý No o
At September 30, 2002, the total number of outstanding shares of the Company's Common Stock ($0.01 par value) was 26,408,461.
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PAGE NUMBER |
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| PART I—FINANCIAL INFORMATION | ||||||
Item 1—Consolidated Financial Statements |
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| Consolidated Balance Sheets at September 30, 2002 (unaudited) and December 31, 2001 | 3 | |||||
| Consolidated Statements of Income and Comprehensive Income for the three months ended September 30, 2002 and September 30, 2001 (unaudited) | 4 | |||||
| Consolidated Statements of Income and Comprehensive Income for the nine months ended September 30, 2002 and September 30, 2001 (unaudited) | 5 | |||||
| Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and September 30, 2001 (unaudited) | 6 | |||||
| Notes to Consolidated Financial Statements (unaudited) | 8 | |||||
| Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations | 14 | |||||
| Item 3—Quantitative and Qualitative Disclosures about Market Risk | 19 | |||||
| Item 4—Disclosure Controls and Procedures | 20 | |||||
PART II—OTHER INFORMATION |
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Item 2—Changes in Securities and Use of Proceeds |
20 |
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| Item 6—Exhibits and Reports on Form 8-K | 20 | |||||
| Signatures | 21 | |||||
2
Item 1—Consolidated Financial Statements
ON ASSIGNMENT, INC.
CONSOLIDATED BALANCE SHEETS
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September 30, 2002 |
December 31, 2001 |
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(Unaudited) |
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| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 25,152,000 | $ | 65,694,000 | ||||
| Marketable securities | 2,000,000 | 22,886,000 | ||||||
| Accounts receivable, net | 37,874,000 | 22,782,000 | ||||||
| Advances and deposits | 168,000 | 149,000 | ||||||
| Prepaid expenses | 1,364,000 | 2,030,000 | ||||||
| Income taxes receivable | 2,637,000 | 123,000 | ||||||
| Deferred income taxes | 2,371,000 | 2,659,000 | ||||||
| Total current assets | 71,566,000 | 116,323,000 | ||||||
| Office furniture, equipment, software and leasehold improvements, net | 6,473,000 | 2,804,000 | ||||||
Marketable securities |
— |
2,000,000 |
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| Deferred income taxes | — | 454,000 | ||||||
| Identifiable intangible assets, net | 22,430,000 | 2,000 | ||||||
| Workers' compensation restricted deposits | 78,000 | 77,000 | ||||||
| Restricted cash—HPO earn-out provision | 2,500,000 | — | ||||||
| Goodwill, net | 119,757,000 | 1,542,000 | ||||||
| Other assets | 1,758,000 | 2,049,000 | ||||||
| Total Assets | $ | 224,562,000 | $ | 125,251,000 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Current portion of long-term debt | $ | 615,000 | $ | — | ||||
| Accounts payable | 2,671,000 | 557,000 | ||||||
| Accrued payroll | 8,289,000 | 4,740,000 | ||||||
| Deferred compensation | 1,249,000 | 1,736,000 | ||||||
| Accrued workers' compensation | 2,672,000 | 2,662,000 | ||||||
| Other accrued expenses | 1,225,000 | 777,000 | ||||||
| Total current liabilities | 16,721,000 | 10,472,000 | ||||||
Deferred income taxes |
8,635,000 |
— |
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| Total liabilities | 25,356,000 | 10,472,000 | ||||||
| Stockholders' Equity: | ||||||||
| Preferred stock | — | — | ||||||
| Common stock | 279,000 | 238,000 | ||||||
| Paid-in capital | 116,970,000 | 40,402,000 | ||||||
| Deferred compensation liability | 265,000 | 294,000 | ||||||
| Retained earnings | 99,532,000 | 89,137,000 | ||||||
| Accumulated other comprehensive income | 374,000 | 18,000 | ||||||
| 217,420,000 | 130,089,000 | |||||||
| Less: Treasury shares, at cost | 18,214,000 | 15,310,000 | ||||||
| Total stockholders' equity | 199,206,000 | 114,779,000 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 224,562,000 | $ | 125,251,000 | ||||
See accompanying Notes to Consolidated Financial Statements
3
ON ASSIGNMENT, INC.
CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended September 30, |
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2002 |
2001 |
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(Unaudited) |
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| Revenues | $ | 74,583,000 | $ | 46,943,000 | |||
| Cost of services | 52,732,000 | 31,803,000 | |||||
| Gross profit | 21,851,000 | 15,140,000 | |||||
| Selling, general and administrative expenses | 16,068,000 | 9,371,000 | |||||
| Operating income | 5,783,000 | 5,769,000 | |||||
| Interest income, net | 104,000 | 648,000 | |||||
| Income before income taxes | 5,887,000 | 6,417,000 | |||||
| Provision for income taxes | 2,236,000 | 2,358,000 | |||||
| Net income | $ | 3,651,000 | $ | 4,059,000 | |||
| Basic earnings per share | $ | 0.14 | $ | 0.18 | |||
| Weighted average number of common shares outstanding | 26,555,000 | 22,683,000 | |||||
| Diluted earnings per share | $ | 0.14 | $ | 0.18 | |||
| Weighted average number of common and common equivalent shares outstanding | 26,586,000 | 22,960,000 | |||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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Three Months Ended September 30, |
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2002 |
2001 |
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(Unaudited) |
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| Net income | $ | 3,651,000 | $ | 4,059,000 | |||
| Other comprehensive income: | |||||||
| Foreign currency translation adjustment | 11,000 | 54,000 | |||||
| Comprehensive income | $ | 3,662,000 | $ | 4,113,000 | |||
See accompanying Notes to Consolidated Financial Statements
4
ON ASSIGNMENT, INC.
CONSOLIDATED STATEMENTS OF INCOME
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Nine Months Ended September 30, |
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2002 |
2001 |
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(Unaudited) |
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| Revenues | $ | 184,294,000 | $ | 147,798,000 | |||
| Cost of services | 128,741,000 | 99,867,000 | |||||
| Gross profit | 55,553,000 | 47,931,000 | |||||
| Selling, general and administrative expenses | 39,363,000 | 28,902,000 | |||||
| Operating income | 16,190,000 | 19,029,000 | |||||
| Interest income, net | 634,000 | 2,147,000 | |||||
| Income before income taxes | 16,824,000 | 21,176,000 | |||||
| Provision for income taxes | 6,430,000 | 7,788,000 | |||||
| Net income | $ | 10,394,000 | $ | 13,388,000 | |||
| Basic earnings per share | $ | 0.41 | $ | 0.59 | |||
| Weighted average number of common shares outstanding | 25,165,000 | 22,697,000 | |||||
| Diluted earnings per share | $ | 0.41 | $ | 0.58 | |||
| Weighted average number of common and common equivalent shares outstanding | 25,289,000 | 23,136,000 | |||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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Nine Months Ended September 30, |
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2002 |
2001 |
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(Unaudited) |
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| Net income | $ | 10,394,000 | $ | 13,388,000 | |||
| Other comprehensive income: | |||||||
| Foreign currency translation adjustment | 356,000 | 61,000 | |||||
| Comprehensive income | $ | 10,750,000 | $ | 13,449,000 | |||
See accompanying Notes to Consolidated Financial Statements
5
ON ASSIGNMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended September 30, |
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2002 |
2001 |
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(Unaudited) |
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| Cash Flows From Operating Activities: | ||||||||||
| Net income | $ | 10,394,000 | $ | 13,388,000 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 3,468,000 | 1,157,000 | ||||||||
| Increase in allowance for doubtful accounts | 334,000 | 193,000 | ||||||||
| Increase in deferred income taxes | 62,000 | 313,000 | ||||||||
| Loss on disposal of office furniture and equipment | 6,000 | 1,000 | ||||||||
| Income tax benefit of disqualifying dispositions | 722,000 | 1,615,000 | ||||||||
| Changes in operating assets and liabilities: | ||||||||||
| (Increase) Decrease in accounts receivable | (3,526,000 | ) | 3,737,000 | |||||||
| Decrease (Increase) in income taxes receivable | 864,000 | (424,000 | ) | |||||||
| Increase (Decrease) in prepaid expenses | 775,000 | (125,000 | ) | |||||||
| Decrease in workers' compensation deposits | 39,000 | 159,000 | ||||||||
| (Decrease) Increase in accounts payable and accrued expenses | (2,114,000 | ) | 654,000 | |||||||
| Decrease (Increase) in other assets | 305,000 | (73,000 | ) | |||||||
| Net cash provided by operating activities | 11,329,000 | 20,595,000 | ||||||||
| Cash Flows From Investing Activities: | ||||||||||
| Purchase of marketable securities | (2,000,000 | ) | (20,116,000 | ) | ||||||
| Proceeds from the maturity of marketable securities | 24,886,000 | 14,432,000 | ||||||||
| Acquisition of office furniture, equipment, software and leasehold improvements | (3,233,000 | ) | (575,000 | ) | ||||||
| Proceeds from advances and deposits returned | 1,000 | 58,000 | ||||||||
| Cash used in acquisition, net of cash received | (66,315,000 | ) | — | |||||||
| Restricted cash—HPO earn-out provision | (2,500,000 | ) | — | |||||||
| Net cash used for investing activities | (49,161,000 | ) | (6,201,000 | ) | ||||||
| Cash Flows From Financing Activities: | ||||||||||
| Proceeds from exercise of common stock options | 4,799,000 | 4,041,000 | ||||||||
| Proceeds from issuance of common stock—Employee Stock Purchase Plan | 226,000 | 234,000 | ||||||||
| Repurchase of common stock | (2,903,000 | ) | (7,498,000 | ) | ||||||
| Payments on notes payable | (5,039,000 | ) | — | |||||||
| Payments on capital leases | (75,000 | ) | — | |||||||
| Net cash (used for) provided by financing activities | (2,992,000 | ) | (3,223,000 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 282,000 | 54,000 | ||||||||
| Net (Decrease) Increase In Cash and Cash Equivalents | (40,542,000 | ) | 11,225,000 | |||||||
| Cash and Cash Equivalents at Beginning of Period | 65,694,000 | 51,202,000 | ||||||||
| Cash and Cash Equivalents at End of Period | $ | 25,152,000 | $ | 62,427,000 | ||||||
See accompanying Notes to Consolidated Financial Statements
6
ON ASSIGNMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
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Nine Months Ended September 30, |
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2002 |
2001 |
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(Unaudited) |
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| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||
Acquisition: |
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| Fair value of assets acquired, net of cash received | $ | 24,663,000 | $ | — | |||
| Goodwill | 118,215,000 | — | |||||
| Long term debt assumed | (5,729,000 | ) | — | ||||
| Stock issued | (70,834,000 | ) | — | ||||
| Cash used in acquisition, net of cash received | $ | 66,315,000 | $ | — | |||
| Cash paid during the period for: | |||||||
| Interest | $ | 41,000 | $ | — | |||
| Income taxes, net of refunds | $ | 4,700,000 | $ | 6,319,000 | |||
| SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: | |||||||
| Deferred compensation liability stock disbursement | $ | 29,000 | $ | — | |||
See accompanying Notes to Consolidated Financial Statements
7
ON ASSIGNMENT, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMMBER 30, 2002 AND 2001 (UNAUDITED)
1. The accompanying consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). This Report on Form 10-Q should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 2001. Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations. The information reflects all normal and recurring adjustments which, in the opinion of the Company's management, are necessary for a fair presentation of the financial position of the Company and its results of operations for the interim periods set forth herein. The results for the three and nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year or any other period.
2. Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did not have an impact on the financial position, results of operations, or cash flows of the Company.
3. In April 2002 the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" which is effective for transactions occurring after May 15, 2002 and fiscal nine months beginning after May 15, 2002. SFAS No. 145 rescinds FASB Statement No. 4 "Reporting Gains and Losses from Extinguishments of Debt", and an amendment of that Statement, FASB Statement No. 64 "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and amends FASB Statement No. 13 "Accounting for Leases" to eliminate an inconsistency between the required accounting for sale-leaseback transaction and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transaction. The Company believes that the adoption of SFAS No. 145 will not have a significant impact on its financial statements.
4. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. SFAS No. 146 addresses financial accounting and reporting for the costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Costs to Exit and Disposal Activity (Including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, and establishes that fair value is the objective for initial measurements of the liability. The Company believes that the adoption of SFAS No. 146 will not have a significant impact on its financial statements.
5. The consolidated financial statements include the accounts of the Company and its wholly-owned domestic and foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated.
6. Accounts receivable are stated net of an allowance for doubtful accounts of $2,216,000 and $1,667,000 at September 30, 2002 and December 31, 2001, respectively.
7. Office furniture, equipment, software and leasehold improvements are stated net of accumulated depreciation and amortization of $5,214,000 and $4,686,000 at September 30, 2002 and December 31, 2001, respectively.
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The Company is currently implementing an enterprise information technology system. Under the provision of SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", the Company capitalizes costs associated with customized internal-use software systems that have reached the application stage and meet recoverability tests. Such capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related expenses for employees who are directly associated with the applications. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and ready for its intended purpose. The Company expects the current implementation project to be completed within the next twelve months. The Company has capitalized approximately $2,078,000 at September 30, 2002.
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the financial accounting and reporting issues for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121 but retains the fundamental provisions for (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sales. It is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a significant impact on its financial statements.
8. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations be accounted for using one method, the purchase method. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The adoption by the Company of SFAS No. 141 as of July 1, 2001 did not have a material impact on the Company's financial statements. SFAS No. 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. Other intangible assets will continue to be amortized over their useful lives. The Company adopted SFAS No. 142 as of January 1, 2002. The Company completed the transitional test of goodwill and indefinite lived intangible assets during the second quarter of 2002. Based on the results of this test, the Company determined that there was no impairment of goodwill or indefinite lived intangible assets as of January 1, 2002. Pursuant to SFAS No. 142, goodwill and other indefinite lived intangible assets will be tested for impairment at least annually and more frequently if an event occurs which indicates that the assets may be impaired. The Company intends to perform this test during the fourth quarter of 2002 and annually thereafter.
As of September 30, 2002 and December 31, 2001, the Company had the following acquired intangible assets:
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September 30, 2002 |
December 31, 2001 |
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Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Estimated Useful Life |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Estimated Useful Life |
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| Intangible assets subject to amortization: | ||||||||||||||||||||||
| Customer relations | $ | 11,100,000 | $ | 1,249,000 | $ | 9,851,000 | 7 years | $ | — | $ | — | $ | — | — | ||||||||
| Contractor relations | 3,900,000 | 350,000 | 3,550,000 | 5 years | — | — | — | — | ||||||||||||||
| Covenants not to compete | 737,000 | 193,000 | 544,000 | 2 years | 40,000 | 38,000 | 2,000 | 2 years | ||||||||||||||
| Employment agreements | 600,000 | 135,000 | 465,000 | 2 years | — | — | — | — | ||||||||||||||
| Backlog | 400,000 | 180,000 | 220,000 | 1 year | — | — | — | — | ||||||||||||||
| Total | $ | 16,737,000 | $ | 2,107,000 | $ | 14,630,000 | $ | 40,000 | $ | 38,000 | $ | 2,000 | ||||||||||
| Intangible assets not subject to amortization: | ||||||||||||||||||||||
| Goodwill | $ | 120,394,000 | $ | 637,000 | $ | 119,757,000 | $ | 2,179,000 | $ | 637,000 | $ | 1,542,000 | ||||||||||
| Trademarks and tradenames | 7,800,000 | — | 7,800,000 | — | — | — | ||||||||||||||||
| Total | $ | 128,194,000 | $ | 637,000 | $ | 127,557,000 | $ | 2,179,000 | $ | 637,000 | $ | 1,542,000 | ||||||||||
Amortization expense for intangible assets subject to amortization was $1,151,00 and $0 for the three months ended September 30, 2002 and 2001 respectively, and $2,069,000 and $2,000 for the nine
9
months ended September 30, 2002 and 2001, respectively. Estimated annual amortization for each of the years ended December 31, 2002 through December 31, 2006 is $3.3 million, $4.0 million, $3.1 million, $2.5 million and $2.1 million, respectively.
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. Goodwill is stated net of accumulated amortization of $637,000 at September 30, 2002 and December 31, 2001 and is all related to the Healthcare Staffing segment. The changes in the carrying amount of goodwill for the nine months ended September 30, 2002, are as follows:
| Balance as of December 31, 2001 | $ | 1,542,000 | |
| Goodwill acquired | 118,215,000 | ||
| Balance as of September 30, 2002 | $ | 119,757,000 | |
A reconciliation of reported net income to net income adjusted to reflect the adoption of SFAS No.142 is as follows:
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2002 |
2001 |
2002 |
2001 |
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| Reported net income | $ | 3,651,000 | $ | 4,059,000 | $ | 10,394,000 | $ | 13,388,000 | ||||
| Add back: goodwill amortization | — | 39,000 | — | 114,000 | ||||||||
| Adjusted net income | $ | 3,651,000 | $ | 4,098,000 | $ | 10,394,000 | $ | 13,502,000 | ||||
| Reported basic earnings per share | $ | 0.14 | $ | 0.18 | $ | 0.41 | $ | 0.59 | ||||
| Adjusted basic earnings per share | < | |||||||||||