-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DiHcCaPjVfm0Y6KGl+ClD0nE1hU51BSzKfGsUzIZ7Ud4T9XlXYWVxiu3eJnGY7Bo DSlLMC1q6qiuDXQZx6mQCw== 0000950148-98-000759.txt : 19980401 0000950148-98-000759.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950148-98-000759 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ON ASSIGNMENT INC CENTRAL INDEX KEY: 0000890564 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 954023433 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20540 FILM NUMBER: 98584219 BUSINESS ADDRESS: STREET 1: 26651 WEST AGOURA ROAD CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8188787900 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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 (IRS 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: Title of each class Name of exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value (Title and 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 7,443,976 shares of voting stock (based on the closing price reported by the Nasdaq Stock Market on February 27, 1998) held by non-affiliates of the registrant as of February 27, 1998 was approximately $218,667,000. 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 February 27, 1998, the registrant had outstanding 10,790,407 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 18, 1998 are incorporated by reference into Part III of this Report on Form 10-K. Sequentially numbered page 1 of 38 pages Exhibit index on sequentially numbered page 34 1 2 PART I ITEM 1. BUSINESS This Annual Report on Form 10-K 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, environmental, chemical, pharmaceutical, food and beverage and petrochemical industries. 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. As of December 31, 1997, the Company served 50 operational markets through a network of 100 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 industries' needs 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. 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, 1997, the Company had 56 Lab Support branch offices, 22 Healthcare Financial Staffing branch offices, and 22 EnviroStaff branch offices. Of this total of 100 branch offices, 71 branch offices involve shared office space among divisions. Through this network of branch offices, the Company served the following operational markets: 2 3 Allentown, PA Costa Mesa, CA Memphis, TN Piscataway, NJ San Antonio, TX Atlanta, GA Dallas, TX Miami, FL Pittsburgh, PA San Diego, CA Baltimore, MD Denver, CO Milwaukee, WI Pleasanton, CA San Francisco, CA Boston, MA Detroit, MI Minneapolis, MN Portland, OR San Jose, CA Buffalo, NY Greenville, SC Nashville, TN Princeton, NJ Seattle, WA Charlotte, NC Houston, TX New Orleans, LA Providence, RI St. Louis, MO Chicago, IL Indianapolis, IN New York, NY Raleigh-Durham, NC Tampa, FL Cincinnati, OH Kansas City, MO Oklahoma City, OK Richmond, VA Toronto, ON, Canada Cleveland, OH Los Angeles, CA Philadelphia, PA Sacramento, CA Washington DC Columbus, OH Louisville, KY Phoenix, AZ Salt Lake City, UT Westport, CT
CLIENTS Lab Support's clients include biotechnology, environmental, chemical, pharmaceutical, food and beverage, petrochemical and manufacturing companies. Healthcare Financial Staffing's clients include companies engaged in the healthcare services industry. EnviroStaff's clients include companies in the environmental services industry. During the year ended December 31, 1997, the Company provided assignment professionals to approximately 3,800 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 some chemistry or biology background and lab experience. The skill and experience levels of Healthcare Financial Staffing's temporary professional employees typically include three or more years of medical billing and collection experience. The skill and experience 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 and heavy equipment operators with some applicable 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 in the scientific, medical billing and collections, and environmental services 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, internal growth or direct investment. 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., and March 1996 acquisition of EnviroStaff, 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, medical billing and collections and environmental personnel, many of these companies focus on office/clerical and light and heavy industrial personnel, which accounted for approximately 80% of the overall temporary personnel services market. These companies include Manpower, Inc., Kelly Services, Inc., The Olsten Corporation, ADIA Services, Inc., and Aerotech, Inc., each of which is larger and has substantially greater financial and marketing resources than the Company. 3 4 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 and quality 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, 1997, the Company employed approximately 190 regular employees, including Account Managers and corporate office employees. During the year ended December 31, 1997, the Company employed approximately 10,700 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, have increased in recent years and have directly increased the Company's cost of services. 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. PROPRIETARY RIGHTS The Company has registered its Lab Support and EnviroStaff division's service marks with the United States Patent and Trademark Office and applied for registration of its Healthcare Financial Staffing division's service marks. The Company has also registered its "Quality Assignment" logo with the United States Patent and Trademark Office. 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 in 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 effected 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. Expansion in Existing Professions and into Other Professions. The Company plans to expand its services within the scientific, healthcare financial and environmental fields it currently serves and to other professional fields. The success of the Company's expansion efforts, including its Healthcare Financial Staffing division and EnviroStaff, will depend on a number of factors, including adapting On Assignment's approach used in its current divisions to other industries and professions, recruiting and training 4 5 new Account Managers with the particular industry or professional experience, establishing client relationships in new industries and successfully recruiting, qualifying and orienting new temporary professionals. The Company may decide to pursue future expansion by internal growth, direct investment 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 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 management attention on the acquisition and integration process will not have an adverse effect on the Company's existing businesses. 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 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 qualified Account Managers. Dependence on Availability of Qualified Temporary Professional Employees. The Company is dependent upon continuing to attract qualified scientific, healthcare financial and environmental services 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 scientific, medical billing and collections, and environmental services 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 result in 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. The loss of significant clients could materially adversely affect the Company's business, operating results and financial condition. 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. 5 6 Workers' Compensation Expense. The Company maintains a partially self-insured workers' compensation policy. 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 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. 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 had no material effect on the conduct of its business, 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, have increased in recent years thereby increasing the cost of services. Previous 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. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies, including those used to pay temporary employees and bill clients for temporary employees, may need to be upgraded to comply with such "Year 2000" requirements. The Company is in the process of assessing Year 2000 issues as they relate to its systems, business and operations. At this time, the Company cannot make a determination of the impact, if any, of Year 2000 issues as they may relate to significant relationships with clients or temporary employees. However, if any of the Company's clients or temporary employees experience Year 2000 problems with respect to their relationship with the Company, such clients or employees could assert claims for damages against the Company. Any such litigation could result in costs and diversion of the Company's resources, even if ultimately decided in favor of the Company. The occurrence of any of the foregoing could have a material adverse effect on the Company's business, operating results or financial condition. ITEM 2. PROPERTIES The Company has leased approximately 19,300 square feet of office space through February 2004, for its corporate headquarters in Calabasas, California. In addition, the Company leases office space in 58 branch office locations in the metropolitan areas listed under the caption "Branch Office Network" in Item 1 hereof. A branch office typically occupies approximately 1,200 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 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 6 7 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company on December 31, 1997 were:
Name Age Position ---- --- -------- H. Tom Buelter............. 56 Chairman of the Board and Chief Executive Officer Kathy J. West.............. 46 President and Chief Operating Officer Ronald W. Rudolph.......... 54 Senior Vice President, Finance and Operations Support, and Chief Financial Officer Carrie S. Nebens........... 40 Vice President and General Manager, Lab Support division Jeffrey A. Evans........... 29 Vice President and General Manager, Healthcare Financial Staffing division
- -------------------------------------------- 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 Senior Vice President, Finance and Operations Support, and Chief Financial Officer since October 1996. 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 Senior Vice President and General Manager, Lab Support division since September 1997. 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. JEFFREY A. EVANS has served as Vice President and General Manager, Healthcare Financial Staffing division since March 1997. From September 1996 through March 1997, Mr. Evans served as Director, Operations Central. From March 1996 through September 1996, Mr. Evans served as Director, Account Manager Casting. From September 1995 through March 1996, Mr. Evans served as Director, Business Development, Mergers and Acquisitions. From May 1995 through September 1995, Mr. Evans served as Director, Operations and Planning. From September 1992 through April 1994, Mr. Evans attended Duke University's Fuqua School of Business where he received a Masters of Business Administration. 7 8 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, 1996, to December 31, 1997. At February 27, 1998, the Company had approximately 115 holders of record of its Common Stock (although the Company has been informed there are in excess of approximately 3,050 beneficial owners) and 10,790,407 shares outstanding.
Price Range of Common Stock ------------------------------------------- High Low -------------------- -------------------- Fiscal Year Ended December 31, 1996 First Quarter 19-3/4 13-11/16 Second Quarter 22 15-3/4 Third Quarter 20-3/4 14-3/8 Fourth Quarter 17-5/8 13-7/8 Fiscal Year Ended December 31, 1997 First Quarter 18-7/8 12-1/2 Second Quarter 20-5/16 12 Third Quarter 23-1/8 17-3/8 Fourth Quarter 29-5/8 20-3/8
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. 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. 8 9 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.
Years Ended December 31, --------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ----------- ----------- ----------- ----------- ------------ (in thousands, except per share data) INCOME STATEMENT DATA Revenues $ 38,752 $ 53,617 $ 72,617 $ 88,188 $ 107,849 Cost of services 27,100 37,343 50,812 61,231 74,748 ----------- ----------- ----------- ----------- ------------ Gross profit 11,652 16,274 21,805 26,957 33,101 Operating expenses 7,737 10,661 14,950 17,699 20,714 ----------- ----------- ----------- ----------- ------------ Operating income 3,915 5,613 6,855 9,258 12,387 Acquisition costs -- -- -- 401 -- ----------- ----------- ----------- ----------- ------------ Income before interest and income taxes 3,915 5,613 6,855 8,857 12,387 Interest income, net 112 164 410 549 833 ----------- ----------- ----------- ----------- ------------ Income before income taxes 4,027 5,777 7,265 9,406 13,220 Provision for income taxes 1,550 2,296 2,924 3,800 4,954 ----------- ----------- ----------- ----------- ------------ Net income $ 2,477 $ 3,481 $ 4,341 $ 5,606 $ 8,266 =========== =========== =========== =========== ============ Basic earnings per share $ 0.27 $ 0.36 $ 0.44 $ 0.55 $ 0.78 =========== =========== =========== =========== ============ Weighted average number of common shares outstanding 9,322 9,690 9,974 10,207 10,561 =========== =========== =========== =========== ============ Diluted earnings per share $ 0.24 $ 0.34 $ 0.41 $ 0.51 $ 0.75 =========== =========== =========== =========== ============ Weighted average number of common and common equivalent shares outstanding 10,140 10,248 10,530 10,898 11,031 =========== =========== =========== =========== ============ BALANCE SHEET DATA Cash, cash equivalents and current portion of marketable securities $ 4,692 $ 5,403 $ 6,892 $ 14,102 $ 23,709 Working capital 8,801 11,255 14,772 23,848 35,407 Total assets 11,485 17,584 23,922 31,874 44,864 Long-term liabilities -- -- -- -- -- Stockholders' equity 10,245 14,829 20,148 27,635 39,272
9 10 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, the integration of acquired operations, management of growth 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, and the risks discussed in the "Risk Factors" section included in the Company's Registration Statement on Form S-1 as declared effective by the Securities and Exchange Commission on September 21, 1992 (Reg. No. 33-50646). 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, 1996 AND 1997 REVENUES. Revenues increased by 22.3% from $88,188,000 in the year ended December 31, 1996, to $107,849,000 in the year ended December 31, 1997, as a result of the increased revenues of the Lab Support and the Healthcare Financial Staffing divisions, partially offset by a decrease in the revenues of the EnviroStaff division. The growth of the Lab Support division's revenues were primarily attributable to an increase in the number of temporary employees on assignment and to a lesser extent to an increase in average hourly billing rates during 1997. The increase in the number of temporary employees on assignment in the Lab Support division was primarily attributable to the strong performance in most of the markets in which the Lab Support division has older, better established branches and to a lesser extent the contribution of new offices opened in the past year. Lab Support's revenue growth was tempered by an unusually high number of conversions of temporary employees to permanent status in the fourth quarter of 1997, primarily as a result of the tight domestic labor market. The growth of the Healthcare Financial Staffing division's revenues were primarily attributable to an increase in the number of temporary employees on assignment and to a lesser extent to an increase in average hourly billing rates during 1997, which were principally attributable to a concentration on new business with a higher price structure. The increase in the number of temporary employees on assignment in the Healthcare Financial Staffing division was primarily attributable to the strong performance in most of the markets in which the Healthcare Financial Staffing division has older, better established branches and to a lesser extent the contribution of new offices opened in the past year. Healthcare Financial Staffing's revenue growth was tempered by an unusually high number of conversions of temporary employees to permanent status in the fourth quarter of 1997, primarily as a result of the tight domestic labor market. The decrease in the EnviroStaff division's revenues were primarily attributable to the continuing transition of the division's business away from remediation and the resulting planned decline in remediation assignments, partially offset by increases in revenue from the division's higher margin core business and an increase in average hourly billing rates. In addition, severe winter weather in several key markets contributed to the decrease in revenues in 1997. COST OF SERVICES. Cost of services consists solely of compensation for temporary employees and payroll taxes and benefits paid by the Company in connection with such compensation. Cost of services increased 22.1% from $61,231,000 in 1996 to $74,748,000 in 1997. Cost of services as a percentage of revenues decreased from 69.4% in 1996 to 69.3% in 1997. This decrease was primarily attributable to an increase in conversion fee revenue of the Lab Support and Healthcare Financial Staffing divisions in 1997. In addition, an increase in average gross margins of the EnviroStaff division was offset by an increase in employer paid benefits and workers' compensation expense reserves. 10 11 OPERATING EXPENSES. Operating 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. Operating expenses increased 17.0% from $17,699,000 in 1996 to $20,714,000 in 1997. Operating expenses as a percentage of revenues decreased from 20.1% in 1996 to 19.2% in 1997. This result was primarily attributable to the increased productivity of the Account Managers. ACQUISITION COSTS. Acquisition costs consisted principally of legal, accounting, financial advisory services and other expenses related to the initial combination of EnviroStaff, Inc. and the Company in 1996. The combined companies incurred approximately $401,000 in acquisition costs during the first quarter of 1996. INTEREST INCOME, NET. Interest income, net increased 51.7% from $549,000 in 1996 to $833,000 in 1997, primarily as a result of interest earned on higher interest-bearing cash, cash equivalent and marketable security account balances in 1997, and the effect of interest expense charged on EnviroStaff, Inc.'s line of credit borrowings in 1996. PROVISION FOR INCOME TAXES. Provision for income taxes increased 30.4% from $3,800,000 in 1996 to $4,954,000 in 1997. The Company's effective tax rate decreased from 40.4% in 1996 to 37.5% in 1997. This decrease was primarily attributable to the consolidation of divisional field operations into Assignment Ready, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, which resulted in a lower overall effective state tax rate. 11 12 YEARS ENDED DECEMBER 31, 1995 AND 1996 REVENUES. Revenues increased by 21.4% from $72,617,000 in the year ended December 31, 1995, to $88,188,000 in the year ended December 31, 1996, primarily as a result of the increase in the revenues of the Lab Support division and to a lesser extent from the increase in revenues generated by EnviroStaff and the Healthcare Financial Staffing division. The growth of the Lab Support division's revenues were primarily attributable to the number of temporary employees on assignment. The increase in the number of temporary employees on assignment in the Lab Support division was primarily the result of the strong performance in most of the markets in which the Lab Support division has older, better established branches and to a lesser extent the contribution of new Lab Support offices opened in the past year. However, Lab Support's revenue growth was tempered by a higher number of conversions of temporary employees to permanent status in 1996 as compared to 1995, and the impact of severe winter weather in several key markets during the first quarter of 1996. Average hourly billing rates of the Lab Support division did not vary significantly between the two periods. The growth of the Healthcare Financial Staffing division's revenues were primarily attributable to higher average hourly billing rates, which were principally attributable to a concentration on new business with a higher price structure, and to a lesser extent from the contribution of new offices opened in 1996. The growth of EnviroStaff's revenues were primarily attributable to the contribution of new EnviroStaff offices opened in 1996, as well as the growth of most existing offices. Average hourly billing rates of EnviroStaff did not vary significantly between the two periods. COST OF SERVICES. Cost of services increased 20.5% from $50,812,000 in 1995 to $61,231,000 in 1996. Cost of services as a percentage of revenues decreased from 70.0% in 1995 to 69.4% in 1996. This decrease was primarily attributable to an increase in conversion fee revenue of the Lab Support division in the 1996 period. In addition, an increase in average gross margins of the Healthcare Financial Staffing division in the 1996 period and an increase in average gross margins of EnviroStaff as a result of a decrease in average pay rates in the 1996 period, was partially offset by an increase in employer payroll taxes and employer paid benefits. OPERATING EXPENSES. Operating expenses increased 18.4% from $14,950,000 in 1995 to $17,699,000 in 1996. Operating expenses as a percentage of revenues decreased from 20.6% in 1995 to 20.1% in 1996. This result was primarily attributable to the increased productivity of the Account Managers. ACQUISITION COSTS. The Company incurred approximately $401,000 in acquisition costs during the first quarter of 1996, related to the initial combination of EnviroStaff, Inc. and the Company. INTEREST INCOME, NET. Interest income, net increased 33.9% from $410,000 in 1995 to $549,000 in 1996, primarily as a result of interest earned on higher interest-bearing cash, cash equivalent and marketable security account balances in 1996, partially offset by interest expense charged on EnviroStaff's line of credit borrowings in 1996. PROVISION FOR INCOME TAXES. Provision for income taxes increased 30.0% from $2,924,000 in 1995 to $3,800,000 in 1996. The Company's effective tax rate remained consistent at approximately 40% in 1995 and 1996. 12 13 LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash in 1996 and 1997 were funds provided by operating activities. In 1996, operating activities provided $5,678,000 of cash compared to $8,281,000 in 1997. This increase was primarily attributable to higher net income and a larger increase in income taxes payable, accounts payable and accrued expenses in 1997 compared to 1996, partially offset by a larger increase in accounts receivable in 1997 compared to 1996, which was principally due to the increase in revenues. Cash provided by investing activities totaled $1,404,000 in 1996 compared to cash used for investing activities of $3,537,000 in 1997. This was primarily attributable to cash used to purchase marketable securities exceeding cash proceeds from the maturity of marketable securities in 1997. Cash provided by financing activities was $693,000 in 1996 compared to $2,497,000 in 1997. The increase was primarily attributable to greater proceeds from the issuance of common stock pursuant to the Company's Stock Option Plan and Employee Stock Purchase Plan during 1997, and repayments of EnviroStaff's line of credit borrowings exceeding the related borrowings during 1996. Effective November 25, 1997, the Company renewed its unsecured bank line of credit. The maximum borrowings allowable under this agreement are $7,000,000 and bear interest at the bank's reference rate (8.50% at December 31, 1997). The agreement expires on July 1, 1999. No borrowings were outstanding under this credit line at December 31, 1997. In addition, the Company's EnviroStaff subsidiary had a $1,000,000 line of credit with a bank at the time of its acquisition by the Company. Borrowings accrued interest at prime plus 1.25%. Advances were secured by all of the assets of EnviroStaff and the agreement included requirements for minimum operating ratios and tangible net worth and restricted the payment of dividends. On April 19, 1996, the Company paid the outstanding balance in full and the line of credit agreement was terminated. The Company believes that its cash balances, together with the funds from operations and its borrowing capacity, will be sufficient to meet its cash requirements through at least the next twelve months. 13 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS To the Board of Directors of On Assignment, Inc. We have audited the accompanying consolidated balance sheets of On Assignment, Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed at Item 14. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of On Assignment, Inc. and subsidiaries as of December 31, 1996 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. 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 23, 1998 14 15
ON ASSIGNMENT, INC. CONSOLIDATED BALANCE SHEETS December 31 -------------------------------------- 1996 1997 ------------- ------------ ASSETS Current Assets: Cash and cash equivalents (Note 1) $ 11,102,000 $ 18,339,000 Marketable securities (Note 1) 3,000,000 5,370,000 Accounts receivable, net of allowance for doubtful accounts of $553,000 (1996) and $734,000 (1997) 12,264,000 15,215,000 Advances and deposits 72,000 67,000 Prepaid expenses 681,000 679,000 Income taxes receivable -- 111,000 Deferred income taxes (Notes 1 and 8) 968,000 1,218,000 ------------- -------------- Total current assets 28,087,000 40,999,000 ------------- -------------- Office Furniture, Equipment and Leasehold Improvements, net (Notes 1 and 2) 2,294,000 2,572,000 Workers' compensation restricted deposits (Note 6) 743,000 596,000 Goodwill, net (Note 4) 581,000 534,000 Other assets 169,000 163,000 ------------- -------------- Total Assets $ 31,874,000 $ 44,864,000 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accrued payroll $ 2,397,000 $ 3,043,000 Accounts payable 488,000 414,000 Accrued expenses 1,348,000 2,135,000 Income taxes payable (Notes 1 and 8) 6,000 -- ------------- -------------- Total current liabilities 4,239,000 5,592,000 ------------- -------------- Commitments and Contingencies (Notes 5 and 6) -- -- Stockholders' Equity (Notes 3 and 9): Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding in 1996 and 1997 -- -- Common Stock, $0.01 par value, 25,000,000 shares authorized, 10,311,120 issued and outstanding in 1996 and 10,727,235 issued and outstanding in 1997 103,000 107,000 Paid-in capital 8,726,000 12,099,000 Retained earnings 18,806,000 27,072,000 Cumulative foreign currency translation adjustment 0 (6,000) ------------- -------------- Total stockholders' equity 27,635,000 39,272,000 ------------- -------------- Total Liabilities and Stockholders' Equity $ 31,874,000 $ 44,864,000 ============= ============== See accompanying Notes to Consolidated Financial Statements
15 16 ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ------------------------------------------- 1995 1996 1997 ------------ ------------ ------------ Revenues (Note 1) $ 72,617,000 $ 88,188,000 $107,849,000 Cost of services 50,812,000 61,231,000 74,748,000 ------------ ------------ ------------ Gross profit 21,805,000 26,957,000 33,101,000 Operating expenses 14,950,000 17,699,000 20,714,000 ------------ ------------ ------------ Operating income 6,855,000 9,258,000 12,387,000 Acquisition costs -- 401,000 -- ------------ ------------ ------------ Income before interest and income taxes 6,855,000 8,857,000 12,387,000 Interest income, net (Notes 1 and 7) 410,000 549,000 833,000 ------------ ------------ ------------ Income before income taxes 7,265,000 9,406,000 13,220,000 Provision for income taxes (Notes 2,924,000 3,800,000 4,954,000 1 and 8) ------------ ------------ ------------ Net income $ 4,341,000 $ 5,606,000 $ 8,266,000 ============ ============ ============ Basic earnings per share (Note 1) $ 0.44 $ 0.55 $ 0.78 ============ ============ ============ Weighted average number of Common Shares Outstanding 9,974,000 10,207,000 10,561,000 ============ ============ ============ Diluted earnings per share (Note 1) $ 0.41 $ 0.51 $ 0.75 ============ ============ ============ Weighted average number of Common and Common Equivalent Shares Outstanding 10,530,000 10,898,000 11,031,000 ============ ============ ============
See accompanying Notes to Consolidated Financial Statements 16 17 ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Shares Amount Shares Amount ------------ ------------ ------------ ------------ Balance, January 1, 1995 0 $ 0 9,822,482 $ 96,000 Exercise of warrants -- -- 13,832 -- Exercise of common stock -- -- 192,746 4,000 options Common stock issued -- Employee Stock Purchase -- -- 19,862 -- Plan Disqualifying dispositions -- -- -- -- Officer loans receivable -- -- -- -- Net income -- -- -- -- ------------ ------------ ------------ ------------ Balance, December 31, 1995 0 0 10,048,922 100,000 Exercise of common stock -- -- 249,392 3,000 options Common stock issued -- Employee Stock Purchase -- -- 12,806 -- Plan Disqualifying dispositions -- -- -- -- Net income -- -- -- -- ------------ ------------ ------------ ------------ Balance, December 31, 1996 0 0 10,311,120 103,000 Exercise of common stock -- -- 402,563 4,000 options Common stock issued -- Employee Stock Purchase -- -- 13,552 -- Plan Disqualifying dispositions -- -- -- -- Translation adjustments -- -- -- -- Net income -- -- -- -- ------------ ------------ ------------ ------------ Balance, December 31, 1997 0 $ 0 10,727,235 $ 107,000 ============ ============ ============ ============ Cumulative Foreign Currency Paid-In Retained Translation Capital Earnings Adjustment Total ------------ ------------ ------------ ------------ Balance, January 1, 1995 $ 5,873,000 $ 8,859,000 $ 0 $ 14,828,000 Exercise of warrants -- -- -- -- Exercise of common stock 532,000 -- -- 536,000 options Common stock issued -- Employee Stock Purchase 121,000 -- -- 121,000 Plan Disqualifying dispositions 213,000 -- -- 213,000 Officer loans receivable 109,000 -- -- 109,000 Net income -- 4,341,000 -- 4,341,000 ------------ ------------ ------------ ------------ Balance, December 31, 1995 6,848,000 13,200,000 0 20,148,000 Exercise of common stock 1,016,000 -- -- 1,019,000 options Common stock issued -- Employee Stock Purchase 149,000 -- -- 149,000 Plan Disqualifying dispositions 713,000 -- -- 713,000 Net income -- 5,606,000 -- 5,606,000 ------------ ------------ ------------ ------------ Balance, December 31, 1996 8,726,000 18,806,000 0 27,635,000 Exercise of common stock 2,321,000 -- -- 2,325,000 options Common stock issued -- Employee Stock Purchase 172,000 -- -- 172,000 Plan Disqualifying dispositions 880,000 -- -- 880,000 Translation adjustments -- -- (6,000) (6,000) Net income -- 8,266,000 -- 8,266,000 ------------ ------------ ------------ ------------ Balance, December 31, 1997 $ 12,099,000 $ 27,072,000 $ (6,000) $ 39,272,000 ============ ============ ============ ============
See accompanying Notes to Consolidated Financial Statements 17 18
ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, ---------------------------------------------------- 1995 1996 1997 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,341,000 $ 5,606,000 $ 8,266,000 Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions: Depreciation and amortization 586,000 701,000 815,000 Increase in allowance for doubtful accounts 345,000 504,000 451,000 Increase in deferred income taxes (203,000) (368,000) (250,000) Loss on disposal of furniture and equipment -- 1,000 141,000 Increase in accounts receivable (2,909,000) (2,624,000) (3,403,000) Increase in income taxes receivable -- -- (111,000) Increase in accounts payable and accrued expenses 300,000 1,238,000 1,360,000 Increase in income taxes payable 456,000 415,000 873,000 (Increase) Decrease in workers' compensation restricted deposits (9,000) 117,000 147,000 (Increase) Decrease in prepaid expenses (291,000) 118,000 2,000 Increase in other assets (45,000) (30,000) (10,000) ------------ ------------ ------------ Net cash provided by operating activities 2,571,000 5,678,000 8,281,000 ============ ============ ============ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (4,300,000) (1,000,000) (7,250,000) Proceeds from the maturity of marketable securities 2,580,000 3,565,000 4,880,000 Acquisition of furniture, equipment and leasehold improvements (802,000) (1,204,000) (1,180,000) Proceeds from sale of furniture and equipment -- 4,000 8,000 Decrease in advances and deposits 13,000 39,000 5,000 ------------ ------------ ------------ Net cash provided by (used for) investing activities (2,509,000) 1,404,000 (3,537,000) ============ ============ ============ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of common stock options and warrants 536,000 1,019,000 2,325,000 Proceeds from issuance of common stock - Employee Stock Purchase Plan 121,000 149,000 172,000 Proceeds from collection of officer loans receivable 300,000 -- -- Borrowings on line of credit 1,587,000 450,000 -- Repayments of line of credit borrowings (1,112,000) (925,000) -- ------------ ------------ ------------ Net cash provided by financing activities 1,432,000 693,000 2,497,000 ------------ ------------ ------------ Effect of exchange rate changes on cash and cash equivalents -- -- (4,000) (Note 1) ------------ ------------ ------------ Net Increase in Cash and Cash Equivalents 1,494,000 7,775,000 7,237,000 Cash and Cash Equivalents at Beginning of Period 1,833,000 3,327,000 11,102,000 ------------ ------------ ------------ Cash and Cash Equivalents at End of Period $ 3,327,000 $ 11,102,000 $ 18,339,000 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: Tax benefit of disqualifying dispositions (Note 8) $ 213,000 $ 713,000 $ 880,000 ============ ============ ============ Officer loans receivable (Note 3) $ 109,000 $ -- $ -- ============ ============ ============ See accompanying Notes to Consolidated Financial Statements 18
19 ON ASSIGNMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. On Assignment, Inc. (the "Company"), through its Lab Support division, provides temporary and permanent placement of scientific personnel with laboratories and other institutions. The Company's EnviroStaff division provides temporary and permanent placement of environmental professionals to the environmental services industry. The Company's Healthcare Financial Staffing division 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 11). 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. 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, which have been classified as held to maturity, are recorded at amortized cost which approximated market at December 31, 1996 and 1997. Cash paid for income taxes (net of refunds) for the years ended December 31, 1995, 1996, and 1997 was $2,671,000, $3,739,000 and $4,443,000, respectively. Cash paid for interest for the years ended December 31, 1995, 1996, and 1997 was $25,000, $15,000 and $0, 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. Pursuant to Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets to be Disposed of," the Company reviews long-lived assets and certain identifiable intangibles for impairment at least quarterly. An impairment loss is recognized when the sum of the undiscounted future cash flows is less than the carrying amount of the asset. Adopting SFAS No. 121 during the year ended December 31, 1996 did not have a material effect on the Company's financial statements. Goodwill. Goodwill is being amortized on a straight-line basis over fifteen years. The Company periodically reviews goodwill to assess recoverability; impairments would be recognized in operating results if a permanent diminution in value were to occur. Income Taxes. Deferred taxes result from temporary differences between the tax 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 is recognized when earned, based on hours worked by the Company's temporary employees. Permanent placement fees are recognized when earned, upon conversion of a temporary employee to a client's regular employee. 19 20 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 translation adjustments, a separate component of stockholders' equity. Earnings per Share. In December 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "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, non-qualified stock options, and warrants) 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, -------------------------------------- 1995 1996 1997 ---------- ---------- ---------- Weighted average number of shares outstanding used to compute basic earnings per share 9,974,000 10,207,000 10,561,000 Dilutive effect of stock options and warrants 556,000 691,000 470,000 ---------- ---------- ---------- Number of shares used to compute diluted earnings per share 10,530,000 10,898,000 11,031,000 ========== ========== ==========
Recently Issued Accounting Pronouncements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting for Comprehensive Income" and No. 131, "Disclosure about Segments of an Enterprise and Related Information." These statements are effective for financial statements issued for periods beginning after December 15, 1997. The Company has not yet determined the impact of adopting these statements. 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 disbursed customers, thus spreading the trade credit risk. The Company performs ongoing credit evaluations to identify risks and maintains an allowance to address these risks. 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, 1996 and 1997, consisted of the following:
1996 1997 ----------- ----------- Furniture and fixtures $ 930,000 $ 1,018,000 Computers and related equipment 1,897,000 2,252,000 Machinery and equipment 668,000 859,000 Leasehold improvements 551,000 609,000 Construction in progress 280,000 450,000 ----------- ----------- 4,326,000 5,188,000 Less accumulated depreciation and amortization (2,032,000) (2,616,000) ----------- ----------- Total $ 2,294,000 $ 2,572,000 =========== ===========
20 21 Depreciation and amortization expense for the years ended December 31, 1995, 1996 and 1997 was $511,000, $634,000 and $753,000, respectively. 3. OFFICER LOANS RECEIVABLE. In May 1995, two officers of the company paid in full $200,000 in promissory notes plus accrued interest of $16,000. In July 1995, a former officer of the company paid in full the remaining $100,000 promissory note plus accrued interest of $11,000. A portion of the loans, amounting to $109,000, were originally treated as a reduction in stockholders' equity for financial reporting purposes. Therefore, the payoff of the notes resulted in a corresponding increase in stockholders' equity in the accompanying Consolidated Balance Sheets and Consolidated Statements of Stockholders' Equity. 4. GOODWILL. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired (see Note 11). Goodwill is stated net of accumulated amortization of $128,000 at December 31, 1996 and $175,000 at December 31, 1997. 5. 401(k) RETIREMENT SAVINGS 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 of the Board of Directors. The Company made no matching or discretionary contributions to the plan during the years ended December 31, 1995, 1996 and 1997. 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 ---------- 1998 $1,105,000 1999 875,000 2000 600,000 2001 455,000 2002 389,000 Thereafter 421,000 ---------- Total Minimum Lease Payments $3,845,000 ==========
Rent expense for the years ended December 31, 1995, 1996 and 1997 was $1,105,000, $1,153,000 and $1,433,000, 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. 21 22 Effective September 1, 1993, the Company became partially self-insured for workers' compensation expense. In connection with this program, cash deposits are required to be held by the reinsurer for the payment of losses and as collateral amounting to $743,000 and $596,000 at December 31, 1996 and 1997, 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, 1996 and 1997. In addition, the Company has provided a stand-by letter of credit amounting to approximately $334,000 at December 31, 1996 and 1997, in connection with this program. The self-insurance claim liability is determined based on claims filed and an estimate of claims incurred but not yet reported. 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 has provided a standby letter of credit amounting to approximately $120,000 at December 31, 1996 and 1997. This letter of credit expires on July 1, 1998. Effective October 1, 1996, EnviroStaff was added to the Company's workers' compensation program. 7. BORROWING ARRANGEMENTS. Effective November 25, 1997, the Company renewed its unsecured bank line of credit. The maximum borrowings allowable under this agreement are $7,000,000 and bear interest at the bank's reference rate (8.50% at December 31, 1997). The agreement expires on July 1, 1999. No borrowings were outstanding under this credit line at December 31, 1996 and 1997. In addition, the Company's EnviroStaff subsidiary had a $1,000,000 line of credit with a bank. Borrowings accrued interest at prime plus 1.25%. Advances were secured by all of the assets of EnviroStaff and the agreement included requirements for minimum operating ratios and tangible net worth and restricted the payment of dividends. On April 19, 1996, the Company paid the outstanding balance in full and the line of credit agreement was terminated. 8. INCOME TAXES. The provision for income taxes consists of the following:
1995 1996 1997 --------------------- --------------------- --------------------- Federal: Current $ 2,406,000 $ 3,277,000 $ 4,166,000 Deferred (175,000) (296,000) (271,000) --------------------- --------------------- --------------------- 2,231,000 2,981,000 3,895,000 --------------------- --------------------- --------------------- State: Current 721,000 891,000 1,038,000 Deferred (28,000) (72,000) 21,000 --------------------- --------------------- --------------------- 693,000 819,000 1,059,000 --------------------- --------------------- --------------------- Total $ 2,924,000 $ 3,800,000 $ 4,954,000 ===================== ===================== =====================
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, 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. 22 23 The components of deferred tax assets (liabilities) are as follows:
December 31, 1996 December 31, 1997 --------------------------- --------------------------- Federal State Federal State ----------- ----------- ----------- ----------- Deferred tax assets: Allowance for doubtful accounts $ 187,000 $ 48,000 $ 249,000 $ 33,000 Depreciation and amortization expense 107,000 32,000 158,000 24,000 Vacation accrual 30,000 8,000 58,000 8,000 State taxes 301,000 -- 221,000 -- Net operating loss carryforward 52,000 5,000 45,000 2,000 Workers' compensation loss reserve 197,000 50,000 406,000 55,000 ----------- ----------- ----------- ----------- Total deferred tax assets 874,000 143,000 1,137,000 122,000 Deferred tax liabilities: Other (49,000) -- (41,000) -- ----------- ----------- ----------- ----------- Net deferred tax asset $ 825,000 $ 143,000 $ 1,096,000 $ 122,000 =========== =========== =========== ===========
The net operating loss carryforwards included in the deferred tax asset at December 31, 1996 and 1997, were acquired through the acquisition of 1st Choice Personnel, Inc. (see Note 11). 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 1995, 1996 and 1997 to income before income taxes and the actual income taxes follows:
Years Ended ------------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Income tax expenses at the statutory rate $ 2,543,000 $ 3,292,000 $ 4,627,000 State income taxes, net of federal income tax benefit 422,000 534,000 401,000 Other (41,000) (26,000) (74,000) ----------- ----------- ----------- Total $ 2,924,000 $ 3,800,000 $ 4,954,000 =========== =========== ===========
At December 31, 1996 and 1997, net income taxes payable and additional paid-in capital include tax benefits amounting to $713,000 and $880,000, respectively, resulting from disqualifying dispositions by officers and employees of common stock of the Company acquired through the exercise of stock options. 23 24 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. The following summarizes stock option activity for the years ended December 31, 1995, 1996 and 1997:
Weighted Non- Average Incentive qualified Exercise Stock Stock Price Options Options Per Share --------------- ------------- -------------- Outstanding at January 1, 1995 1,088,924 115,552 $ 4.13 Granted 412,180 177,740 $ 12.21 Exercised (187,664) (5,082) $ 2.77 Canceled (121,166) (11,584) $ 7.16 -------------- ------------- Outstanding at December 31, 1995 1,192,274 276,626 $ 7.31 Granted 434,324 106,640 $ 16.58 Exercised (193,054) (56,338) $ 4.20 Canceled (306,774) (5,218) $ 14.07 -------------- ------------- Outstanding at December 31, 1996 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 ============== =============
The following summarizes pricing and term information for options outstanding as of December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ --------------------- NUMBER WEIGHTED OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED AT REMAINING AVERAGE AT AVERAGE RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE - ------------------ ----------- ------------ -------- ------------ -------- $ 0.35 to $ 7.25 .......... 244,190 5.5 years $ 4.32 232,837 $ 4.22 7.75 to 15.50 .......... 239,830 8.3 12.26 70,149 10.73 15.75 to 17.375 ......... 245,436 8.2 16.30 102,526 16.27 17.5625 to 22.50 ......... 184,500 9.2 19.92 61,083 19.18 22.75 to 24.75 ........... 268,000 10.0 22.77 -- 0.00 ---------- -------- $ 0.35 to $24.75 ......... 1,181,956 8.2 $15.04 466,595 $ 9.81
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 1995, 1996 and 1997, shares issued under the plan were 19,862, 12,806 and 13,552, 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. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Accordingly, no compensation cost has been recognized for its stock option and purchase plans. The estimated fair value of options granted during 1995, 1996 and 1997 pursuant to SFAS No. 123 was approximately $3,533,000, $4,268,000 and $5,530,000, respectively, and the estimated fair value of stock purchased under the Company's Employee Stock Purchase Plan was approximately $41,000, $51,000 and $60,000, 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 $4,163,000, $4,850,000 and $7,368,000 and pro forma earnings per share would have been $0.40, $0.45 and $0.68 for 1995, 1996 and 1997, 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. 24 25 The fair value of options granted under the Company's Stock Option Plan during 1995, 1996 and 1997 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 1995, 1996 or 1997, (ii) expected volatility of approximately 47% in 1995 and 1996, and 48% in 1997 (iii) risk-free interest rate of approximately 6.1% in 1995, 6.3% in 1996, and 6.2% in 1997, and (iv) expected lives of the options of approximately 5 years in 1995, 1996 and 1997. Pro forma compensation cost of shares purchased under the Employee Stock Purchase Plan is measured based on the discount from market value. 10. UNAUDITED QUARTERLY RESULTS. The following table presents unaudited quarterly financial information for each of the eight quarters ended December 31, 1997. 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, 1996 1996 1996 1996 1997 1997 1997 1997 ------- ------- ------- ------- ------- ------- ------- ------- Revenues $18,902 $21,438 $23,303 $24,545 $23,570 $26,410 $28,854 $29,015 Cost of services 13,129 14,919 16,244 16,939 16,435 18,447 20,176 19,690 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit 5,773 6,519 7,059 7,606 7,135 7,963 8,678 9,325 Operating expenses 4,070 4,332 4,554 4,743 4,661 5,090 5,449 5,514 ------- ------- ------- ------- ------- ------- ------- ------- Operating income 1,703 2,187 2,505 2,863 2,474 2,873 3,229 3,811 Acquisition costs 401 -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Income before interest and income taxes 1,302 2,187 2,505 2,863 2,474 2,873 3,229 3,811 Interest income 113 127 130 179 155 203 227 248 ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes 1,415 2,314 2,635 3,042 2,629 3,076 3,456 4,059 Provision for income taxes 557 944 1,062 1,237 999 1,153 1,293 1,509 ------- ------- ------- ------- ------- ------- ------- ------- Net income $ 858 $ 1,370 $ 1,573 $ 1,805 $ 1,630 $ 1,923 $ 2,163 $ 2,550 ======= ======= ======= ======= ======= ======= ======= ======= Basic earnings per share $ 0.08 $ 0.13 $ 0.15 $ 0.18 $ 0.16 $ 0.18 $ 0.20 $ 0.24 ======= ======= ======= ======= ======= ======= ======= ======= Weighted average number of 10,114 10,158 10,254 10,301 10,372 10,548 10,626 10,696 common shares outstanding ======= ======= ======= ======= ======= ======= ======= ======= Diluted earnings per share $ 0.08 $ 0.13 $ 0.14 $ 0.17 $ 0.15 $ 0.18 $ 0.20 $ 0.23 ======= ======= ======= ======= ======= ======= ======= ======= Weighted average number of common and common 10,856 10,920 10,898 10,858 10,860 10,956 11,092 11,163 equivalent shares outstanding ======= ======= ======= ======= ======= ======= ======= =======
25 26 11. ACQUISITIONS. On January 31, 1994, the Company acquired all of the outstanding shares of the capital stock of 1st Choice Personnel, Inc. ("1st Choice"), a California corporation, which specialized in providing employees on temporary assignments to the mortgage banking and financial services industries. 1st Choice formed the core of the Company's second operating division: Finance Support, which has been renamed to Healthcare Financial Staffing. This acquisition has been accounted for using the purchase method of accounting. Consideration for the stock purchase consisted solely of $513,000 in cash. Effective May 17, 1995, the Company dissolved 1st Choice Personnel, Inc. as a separate subsidiary and continued its operations as a division of the company. On November 29, 1994, the Company formed Finance Support, Inc. ("FSI"), a Delaware corporation and wholly-owned subsidiary of the company. On December 5, 1994, FSI acquired substantially all of the assets of Sklar Resource Group, Inc. ("SRG"), a firm that provided professional personnel for temporary credit and collection assignments. The SRG offices and operations acquired were added to the Company's Finance Support division, which was subsequently renamed the Healthcare Financial Staffing division. This acquisition has been accounted for using the purchase method of accounting. Consideration for the purchase consisted of $738,000 in cash. Effective January 1, 1997, FSI was merged with and into ARI in accordance with the corporate reorganization (see Note 1). On March 27, 1996, the Company issued 171,579 shares of its common stock for all of the outstanding common stock of EnviroStaff, Inc. ("ESI"), a Minnesota corporation, which specialized in providing employees on temporary assignments to the environmental services industry. The acquisition has been accounted for as a pooling-of-interests and, accordingly, the Company's consolidated financial statements have been restated for all periods prior to the acquisition to include the results of operations, financial positions, and cash flows of ESI. Revenues, net income and primary and fully diluted earnings per share for the individual entities are as follows:
On Assignment EnviroStaff Combined ------------------- ------------------- ------------------- Three Months Ended March 31, 1996 Revenues $ 16,379,000 $ 2,523,000 $ 18,902,000 Net income (loss) $ 1,086,000 $ (228,000) $ 858,000 Earnings (loss) per share $ 0.20 $ (0.04) $ 0.16 Year Ended December 31, 1995 Revenues $ 62,042,000 $ 10,575,000 $ 72,617,000 Net income $ 4,330,000 $ 11,000 $ 4,341,000 Earnings per share $ 0.82 $ 0.00 $ 0.82 Year Ended December 31, 1994 Revenues $ 48,402,000 $ 5,215,000 $ 53,617,000 Net income $ 3,348,000 $ 133,000 $ 3,481,000 Earnings per share $ 0.65 $ 0.03 $ 0.68
Acquisition costs of approximately $401,000 related to the acquisition of ESI were charged to expense during the three-month period ended March 31, 1996. The after-tax impact of these expenses on primary and fully diluted earnings per share was $0.04 for the three-month period ended March 31, 1996. Acquisition costs include legal, accounting, financial advisory services, and other costs of the acquisition. Effective January 1, 1997, ARI became a wholly owned subsidiary of ESI in accordance with the corporate reorganization (see Note 1). 26 27 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 18, 1998 (the "1998 Proxy Statement") and is incorporated herein by reference. The 1998 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 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 1998 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 1998 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 1998 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 1998 Proxy Statement to be filed within 120 days after the end of the Company's fiscal year and is incorporated herein by reference. 27 28 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 14 Consolidated Balance Sheets at December 31, 1996 and 1997 15 Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997 16 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997 17 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 18 Notes to Consolidated Financial Statements 19 2. Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts 33
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, 1997. 28 29 (c) EXHIBITS
NUMBER DESCRIPTION ------ ----------- 2.1 (1) Agreement and Plan of Reorganization dated as of March 27, 1996 by and among the Company, ESI Acquisition Corporation, EnviroStaff, Inc. (ESI) and the stockholders of ESI listed therein. 3.1 (2) Amended and Restated Certificate of Incorporation of the Company. 3.2 (3) Amended and Restated Bylaws of the Company. 4.1 (4) Warrant Purchase Agreement dated March 28, 1991, by and between the Company and Silicon Valley Bank; and Warrant to Purchase 15,000 Shares of Common Stock of the Company dated March 28, 1991. 4.2 (4) Specimen Common Stock Certificate. 10.1 (4) Form of Indemnification Agreement. 10.2 (5) Restated 1987 Stock Option Plan, as amended. 10.3 (6) 1992 Employee Stock Purchase Plan. 10.9 (7) Office lease dated December 7, 1993, by and between the Company and Malibu Canyon Office Partners, LP 10.10 (8) Form of Loan Agreement between the Company and executive officers of the Company, including form of Demand Note as Exhibit A thereto. 10.12 (8) Consulting Agreement dated January 25, 1995 between the Company and Karen Brenner. 10.13 (8) Settlement Agreement and General Release by and between the Company and Tadeusz Czyzewski dated March 24, 1995. 10.14 (8) Offer letter agreement by and between the Company and Ronald W. Rudolph dated March 27, 1995. 11.1 Statement regarding computation of earnings per share. 21.1 Subsidiaries of the Registrant. 24.1 Consent of Deloitte & Touche LLP. 25.1 Power of Attorney (see page 32).
- --------- (1) 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 April 10, 1996. (2) 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. (3) 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. 29 30 (4) 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. (5) 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. (6) 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. (7) 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. (8) 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 31, 1995. 30 31 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 report to be signed on its behalf by the undersigned, thereunto duly authorized, in Calabasas, California on this 27th day of March, 1998. ON ASSIGNMENT, INC. By: /s/ H. Tom Buelter ------------------------- H. Tom Buelter Chairman of the Board and Chief Executive Officer 31 32 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints H. Tom Buelter and Ronald W. Rudolph and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date ------------------------------------ ----------------------------------------------- ----------------------------- /s/ H. Tom Buelter Chairman of the Board and March 27, 1998 - ------------------------------ Chief Executive Officer H. Tom Buelter (Principal Executive Officer) /s/ Ronald W. Rudolph Senior Vice President, Finance and Operations March 27, 1998 - ------------------------------ Support, and Chief Financial Officer (Principal Ronald W. Rudolph Financial and Accounting Officer) /s/ Karen Brenner Director March 27, 1998 - ------------------------------ Karen Brenner /s/ Jonathan S. Holman Director March 27, 1998 - ------------------------------ Jonathan S. Holman /s/ Jeremy M. Jones Director March 27, 1998 - ------------------------------ Jeremy M. Jones /s/ William E. Brock Director March 27, 1998 - ------------------------------ William E. Brock
32 33 ON ASSIGNMENT, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
---------------------------------------------------------------------------------------- Balance at Charged to beginning of costs and Charged to Balance at Description period expenses other accounts Deductions end of period - ----------------------------------- ------------ ------------ -------------- -------------- -------------- Year ended December 31, 1995 Allowance for doubtful accounts $160,000 345,000 -- (70,000) $435,000 Year ended December 31, 1996 Allowance for doubtful accounts $435,000 504,000 -- (386,000) $553,000 Year ended December 31, 1997 Allowance for doubtful accounts $553,000 451,000 -- (270,000) $734,000
33 34
INDEX TO EXHIBITS SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE -------------- -------------------------------------------------------------------------------------------- --------------- 2.1 (1) Agreement and Plan of Reorganization dated as of March 27, 1996 by and among the Company, ESI -- Acquisition Corporation, EnviroStaff, Inc. (ESI) and the stockholders of ESI listed therein. 3.1 (2) Amended and Restated Certificate of Incorporation of the Company. -- 3.2 (3) Amended and Restated Bylaws of the Company. -- 4.1 (4) Warrant Purchase Agreement dated March 28, 1991, by and between the Company and Silicon Valley -- Bank; and Warrant to Purchase 15,000 Shares of Common Stock of the Company dated March 28, 1991. 4.2 (4) Specimen Common Stock Certificate. -- 10.1 (4) Form of Indemnification Agreement. -- 10.2 (5) Restated 1987 Stock Option Plan, as amended. -- 10.3 (6) 1992 Employee Stock Purchase Plan. -- 10.9 (7) Office lease dated December 7, 1993, by and between the Company and Malibu Canyon Office -- Partners, LP 10.10 (8) Form of Loan Agreement between the Company and executive officers of the Company, including form -- of Demand Note as Exhibit A thereto. 10.12 (8) Consulting Agreement dated January 25, 1995, between the Company and Karen Brenner. -- 10.13 (8) Settlement Agreement and General Release by and between the Company and Tadeusz Czyzewski dated -- March 24, 1995. 10.14 (8) Offer letter agreement by and between the Company and Ronald W. Rudolph dated March 27, 1995. -- 11.1 Statement regarding computation of earnings per share. 36 21.1 Subsidiaries of the Registrant 37 24.1 Consent of Deloitte & Touche LLP. 38 25.1 Power of Attorney (see page 32). --
(1) 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 April 10, 1996. (2) 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. (3) 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. 34 35 (4) 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. (5) 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. (6) 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. (7) 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. (8) 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 31, 1995. 35 EX-11.1 2 EXHIBIT 11.1 1 Exhibit 11.1 ON ASSIGNMENT, INC. STATEMENT OF COMPUTATION OF DILUTED EARNINGS PER SHARE
Years Ended December 31, --------------------------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Net income used to compute basic and diluted earnings per share $ 4,341,000 $ 5,606,000 $ 8,266,000 =========== =========== =========== Basic earnings per share $ 0.44 $ 0.55 $ 0.78 =========== =========== =========== Weighted average number of shares outstanding used to compute basic earnings per share 9,974,000 10,207,000 10,561,000 Dilutive effect of stock options and warrants 556,000 691,000 470,000 ----------- ----------- ----------- Number of shares used to compute diluted earnings per share 10,530,000 10,898,000 11,031,000 =========== =========== =========== Diluted earnings per share $ 0.41 $ 0.51 $ 0.75 =========== =========== ===========
36 EX-21.1 3 EXHIBIT 21.1 1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Assignment Ready, Inc., a Delaware corporation, is a wholly owned subsidiary of EnviroStaff, Inc., a Minnesota corporation, which in turn is a wholly owned subsidiary of the Registrant. Assignment Ready, Inc. does business under the names "Lab Support," "Healthcare Financial Staffing," and "EnviroStaff." Other subsidiaries of the Registrant are omitted from this exhibit pursuant to Regulation S-K 601(b)(21)(ii). 37 EX-24.1 4 EXHIBIT 24.1 1 Exhibit 24.1 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statements No. 33-57078 and No. 333-38849 of On Assignment, Inc. and subsidiaries on Form S-8 of our report dated January 23, 1998, with respect to the consolidated financial statements and financial statements schedule of On Assignment, Inc. appearing in this Annual Report on Form 10-K of On Assignment, Inc. for the year ended December 31, 1997. /s/ Deloitte & Touche LLP Deloitte & Touche LLP March 27, 1998 Los Angeles, California 38 EX-27.1 5 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS; CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 18,935,000 5,370,000 15,949,000 734,000 0 40,999,000 5,188,000 2,616,000 44,864,000 5,592,000 0 0 0 107,000 39,165,000 44,864,000 0 107,849,000 0 74,748,000 0 451,000 0 13,220,000 4,954,000 8,266,000 0 0 0 8,266,000 0.78 0.75
EX-27.2 6 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS (UNAUDITED) AND CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 16,967,000 5,900,000 16,034,000 788,000 0 39,325,000 5,297,000 2,533,000 43,330,000 7,400,000 0 0 0 107,000 35,823,000 43,330,000 0 78,834,000 0 55,058,000 0 285,000 0 9,161,000 3,445,000 5,716,000 0 0 0 5,716,000 0.20 0.20
EX-27.3 7 EXHIBIT 27.3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS (UNAUDITED) AND CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997. 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 19,024,000 2,050,000 13,359,000 728,000 0 34,763,000 4,831,000 2,330,000 38,602,000 5,906,000 0 0 0 53,000 32,643,000 38,602,000 0 49,980,000 0 34,882,000 0 210,000 0 5,705,000 2,152,000 3,553,000 0 0 0 3,553,000 0.18 0.18
EX-27.4 8 EXHIBIT 27.4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS (UNAUDITED) AND CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997. 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 16,948,000 1,500,000 12,324,000 592,000 0 31,038,000 4,605,000 2,179,000 34,914,000 4,953,000 0 0 0 52,000 29,909,000 34,914,000 0 23,570,000 0 16,435,000 0 60,000 0 2,629,000 999,000 1,630,000 0 0 0 1,630,000 0.16 0.15
EX-27.5 9 EXHIBIT 27.5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS; CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 11,845,000 3,000,000 12,817,000 553,000 0 28,087,000 4,326,000 2,032,000 31,874,000 4,239,000 0 0 0 52,000 27,583,000 31,874,000 0 88,188,000 0 61,231,000 0 504,000 15,000 9,406,000 3,800,000 5,606,000 0 0 0 5,606,000 0.55 0.51
EX-27.6 10 EXHIBIT 27.6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS (UNAUDITED) AND CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996. 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 8,700,000 4,990,000 12,367,000 498,000 0 26,451,000 4,115,000 1,846,000 30,220,000 5,033,000 0 0 0 51,000 25,136,000 30,220,000 0 63,643,000 0 44,292,000 0 219,000 12,000 6,364,000 2,563,000 3,801,000 0 0 0 3,801,000 0.15 0.14
EX-27.7 11 EXHIBIT 27.7
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS (UNAUDITED) AND CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996. 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 7,269,000 4,940,000 10,662,000 440,000 0 23,034,000 3,697,000 1,687,000 26,556,000 3,494,000 0 0 0 51,000 22,831,000 26,556,000 0 40,340,000 0 28,340,000 0 141,000 11,000 3,729,000 1,501,000 2,228,000 0 0 0 2,228,000 0.13 0.13
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