UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2001
OR
For the transition period from _________ to _________
Commission file number: 0-20540
ON ASSIGNMENT, INC.
26651 West Agoura Road, Calabasas, CA 91302(Address of principal executive offices)(Zip Code)
(818) 878-7900(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
At October 31, 2001, the total number of outstanding shares of the Company’s Common Stock ($0.01 par value) was 22,384,235.
TABLE OF CONTENTS
ON ASSIGNMENT, INC.INDEX
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PART I — FINANCIAL INFORMATION
Item 1 — Consolidated Financial Statements
ON ASSIGNMENT, INC.CONSOLIDATED BALANCE SHEETS
See accompanying Notes to Consolidated Financial Statements
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ON ASSIGNMENT, INC.CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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ON ASSIGNMENT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS
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ON ASSIGNMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
1. The accompanying consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). This Report on Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2000. Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. The information reflects all normal and recurring adjustments which, in the opinion of the Company’s Management, are necessary for a fair presentation of the financial position of the Company and its results of operations for the interim periods set forth herein. The results for the three months or nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year or any other period.
2. Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company has adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.
3. The consolidated financial statements include the accounts of the Company and its wholly owned domestic and foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated.
4. Accounts receivable are stated net of an allowance for doubtful accounts of $1,537,000 and $1,460,000 at September 30, 2001 and December 31, 2000, respectively.
5. Office furniture, equipment and leasehold improvements are stated net of accumulated depreciation and amortization of $4,357,000 and $3,389,000 at September 30, 2001 and December 31, 2000, respectively.
6. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. It is being amortized on a straight-line basis over 15 years. Goodwill is stated net of accumulated amortization of $600,000 and $486,000 at September 30, 2001 and December 31, 2000, respectively. Amortization expense for goodwill was $113,000 and $97,000 for the nine month period ending September 30, 2001 and 2000, respectively.
In July 2001, the Financial Accounting Standards Board issued Statement No. 141 (SFAS No. 141), “Business Combinations,” and Statement No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.” SFAS No. 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. These standards will be adopted in fiscal 2002. The Company is currently evaluating the impact that these standards will have on its financial statements.
7. Revenue from temporary assignments, net of credits and discounts, is recognized when earned, based on hours worked by the Company’s temporary employees on a weekly basis. Permanent placement fees are recognized when earned, upon conversion of a temporary employee to a client’s regular employee.
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ON ASSIGNMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. At September 30, 2001 and December 31, 2000, Common Stock, at a par value of $0.01 per share, consisted of 75,000,000 shares authorized and 22,378,866 and 22,476,618 shares issued and outstanding net of 1,133,500 and 660,000 treasury shares (Note 9), respectively.
9. On June 15, 2001, the Board of Directors authorized the Company to repurchase up to 10% or 2,281,000 shares of its outstanding shares of common stock. On April 1, 1999, the Board of Directors had previously authorized the Company to repurchase up to $15 million of its common stock. At September 30, 2001 and December 31, 2000, the Company had repurchased 1,133,500 shares and 660,000 shares of its common stock at a total cost of $15,310,000 and $7,812,000, respectively. The Company has remaining authorizations to repurchase 1,807,500 shares.
10. The following is a reconciliation of the shares used to compute basic and diluted earnings per share:
Anti-dilutive options excluded from the computation of diluted earnings per share totaled 670,940 shares and 93,196 shares for the three months ended September 30, 2001 and 2000, respectively and 605,456 shares and 74,613 shares for the nine months ended September 30, 2001 and 2000, respectively.
11. Indicated below is the information required to comply with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.
The Company has two reportable operating segments: Lab Support and Healthcare Staffing. The Lab Support operating segment includes the combined results of Lab Support and EnviroStaff, as they have similar economic characteristics and they meet the aggregation criteria of SFAS No. 131. The Lab Support segment provides temporary and permanent placement services of laboratory and scientific professionals to the biotechnology, pharmaceutical, food and beverage, chemical and environmental industries. The Healthcare Staffing segment includes the combined results of Healthcare Financial Staffing, Clinical Lab Staff and Diagnostic Imaging Staff. The Healthcare Staffing segment provides temporary and permanent placement services of medical billing and collection professionals, and medical staffing personnel to the healthcare industry.
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The Company’s management evaluates performance of each segment primarily based on revenues and operating income (before acquisition costs, interest and income taxes). The Company’s management does not evaluate, manage or measure performance of segments using asset information, accordingly, asset information by segment is not disclosed. The information in the following table is derived directly from the segments’ internal financial reporting used for corporate management purposes. Certain corporate expenses have not been allocated from the Lab Support segment to the Healthcare Staffing segment.
12. On July 20, 1998, the Company acquired substantially all of the assets of LabStaffers, Inc., a provider of temporary science and medical laboratory professionals through its branches in Greensboro and Charlotte, N.C. The LabStaffers, Inc. offices and operations acquired have been added to the Company’s Lab Support division. This acquisition has been accounted for using the purchase method of accounting. Pro Forma information is not presented as the impact on revenues, net income and earnings per share are not significant. Consideration for the purchase consisted of $808,000 in cash paid on the purchase date. In addition, in July 1999 and July 2000 the Company paid an additional $360,000 in cash in accordance with the agreement, bringing the total consideration for the purchase to $1,528,000 at September 30, 2000. This contingent consideration has been added to goodwill in the accompanying Consolidated Balance Sheets. The payment made in July 2000 was the last contingent payment due under the purchase agreement.
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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements. 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 Company’s ability to attract, train and retain qualified Account Managers and temporary employees in the laboratory and scientific, environmental health and safety, medical billing and collections and clinical laboratory and medical staffing fields, management of growth, particularly in international markets, risks inherent in expansion into new international markets and new professions, the integration of acquired operations, and other risks discussed in “Risk Factors That May Affect Future Results” in Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000, 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. All forward-looking statements in this document are based on information available to the Company as of the date hereof and the Company assumes no obligation to update any such forward-looking statements.
CHANGES IN RESULTS OF OPERATIONSFOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000:
Revenues — Revenues decreased by 8.2% from $51,109,000 for the three months ended September 30, 2000, to $46,943,000 for the three months ended September 30, 2001, as a result of the decreased revenues of the Lab Support and Healthcare Staffing segments.
Lab Support segment’s revenues decreased by 8.0% from $36,584,000 for the three months ended September 30, 2000, to $33,664,000 for the three months ended June 30, 2001. The decrease in revenue was primarily attributable to a 11.0% decrease in the average number of temporary employees on assignment and a 29.7% decrease in conversion fee revenue from $1,331,000 for the three months ended September 30, 2000 to $936,000 for the three months ended September 30, 2001. This decrease was partially offset by a 4.6% increase in average billing rates in the 2001 period.
Healthcare Staffing segment’s revenues decreased by 8.6% from $14,525,000 for the three months ended September 30, 2000, to $13,279,000 for the three months ended September 30, 2001. The decrease in revenue was primarily attributable to a 12.7% decrease in the number of temporary employees on assignment and a 11.8% decrease in conversion fee revenue from $161,000 for the three months ended September 30, 2000 to $142,000 for the three months ended September 30, 2001. This decrease was partially offset by a 5.9% increase in average bill rates in the 2001 period.
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Cost of Services — Cost of services consists solely of compensation for temporary employees and payroll taxes, benefits and employment related expenses paid by the Company in connection with such compensation. Cost of services decreased 7.4% from $34,328,000 for the three months ended September 30, 2000, to $31,803,000 for the three months ended September 30, 2001. The Lab Support segment’s cost of services as a percentage of segment revenues increased by 0.6% from 67.0% in the 2000 period to 67.6% in the 2001 period. This increase was primarily attributable to a 0.5% increase in workers’ compensation expense and a 0.2% increase in employer paid benefits and training expenses, partially offset by a 0.1% decrease in temporary employee compensation and payroll taxes. The Healthcare Staffing segment’s cost of services as a percentage of segment revenues increased by 0.4% from 67.6% in the 2000 period to 68.0% in the 2001 period. This increase was primarily attributable to a 0.6% increase in workers’ compensation expense and a 0.1% increase in employer paid benefits and training expenses, partially offset by a 0.3% decrease in temporary employee compensation and payroll taxes. The increase in workers’ compensation for both segments was primarily due to higher insurance premiums in the 2001 period.
Selling, General and Administrative Expenses — Selling, general and administrative expenses include the costs associated with the Company’s network of Account Managers and branch offices, including Account Manager compensation, rent, other office expenses and advertising for temporary employees, and corporate office expenses, such as the salaries of corporate operations and support personnel, Account Manager recruiting and training expenses, corporate advertising and promotion, rent and other general and administrative expenses. Selling, general and administrative expenses increased 0.3% from $9,347,000 for the three months ended September 30, 2000, to $9,371,000 for the three months ended September 30, 2001. Selling, general and administrative expense as a percentage of revenues increased from 18.3% in the 2000 period to 20.0% in the 2001 period. This result was primarily attributable to the hiring of new Account Managers for the opening of new offices and the expansion of existing offices, offset by a decrease in expenses associated with the centralized support system achieved through planned cost reductions.
Interest Income — Interest income decreased 4.6% from $679,000 for the three months ended September 30, 2000, to $648,000 for the three months ended September 30, 2001. This decrease was primarily the result of lower interest rate yields earned during the 2001 period offset by higher interest bearing cash equivalent and marketable security account balances.
Provision for Income Taxes — Provision for income taxes decreased 21.9% from $3,018,000 for the three months ended September 30, 2000, to $2,358,000 for the three months ended September 30, 2001. The Company’s effective tax rate decreased from 37.2% in the 2000 period to 36.8% in the 2001 period. The decrease in the effective tax rate was primarily due to an increase in non-taxable interest income as a percentage of income before income taxes and to a lesser extent a lower effective tax rate experienced on foreign taxable income.
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Revenues — Revenues increased by 3.2% from $143,272,000 for the nine months ended September 30, 2000, to $147,798,000 for the nine months ended September 30, 2001, as a result of the increased revenues of the Lab Support and Healthcare Staffing segments.
Lab Support segment’s revenues increased by 3.2% from $103,166,000 for the nine months ended September 30, 2000, to $106,504,000 for the nine months ended September 30, 2001. The increase in revenue was primarily attributable to a 5.2% increase in average hourly billing rates. The increase was partially offset by a 1.2% decrease in the number of temporary employees on assignment, one fewer working day in the 2001 period and a 9.2% decrease in conversion fee revenue from $3,234,000 for the nine months ended September 30, 2000 to $2,935,000 for the nine months ended September 30, 2001.
Healthcare Staffing segment’s revenues increased by 3.0% from $40,106,000 for the nine months ended September 30, 2000, to $41,294,000 for the nine months ended September 30, 2001. The increase in revenue was primarily attributable to a 5.2% increase in average hourly billing rates. The increase was partially offset by a 0.9% decrease in the number of temporary employees on assignment, one fewer working day in the 2001 period and a 1.8% decrease in conversion fee revenue from $391,000 for the nine months ended September 30, 2000 to $384,000 for the nine months ended September 30, 2001.
Cost of Services — Cost of services consists solely of compensation for temporary employees and payroll taxes, benefits and employment related expenses paid by the Company in connection with such compensation. Cost of services increased 3.6% from $96,390,000 for the nine months ended September 30, 2000, to $99,867,000 for the nine months ended September 30, 2001. The Lab Support segment’s cost of services as a percentage of segment revenues increased by 0.2% from 67.1% in the 2000 period to 67.3% in the 2001 period. This increase was primarily attributable to a 0.4% increase in employer paid benefits and training expenses and a 0.4% increase in workers’ compensation expense, partially offset by a 0.6% decrease in temporary employee compensation and payroll taxes. The Healthcare Staffing segment’s cost of services as a percentage of segment revenues increased by 0.4% from 67.8% in the 2000 period to 68.2% in the 2001 period. This increase was primarily attributable to a 0.4% increase in workers’ compensation expense and a 0.3% increase in employer paid benefits and training expenses, partially offset by a 0.3% decrease in temporary employee compensation and payroll taxes. The increase in employer paid benefits for both segments was due to planned enhancements of existing programs designed to retain temporary employees so they will be available for additional assignments. The increase in workers’ compensation for both segments was primarily due to higher insurance premiums in the 2001 period.
Selling, General and Administrative Expenses — Selling, general and administrative expenses include the costs associated with the Company’s network of Account Managers and branch offices, including Account Manager compensation, rent, other office expenses and advertising for temporary employees, and corporate office expenses, such as the salaries of corporate operations and support personnel, management compensation, Account Manager recruiting and training expenses, corporate advertising and promotion, rent and other general and administrative expenses. Selling, general and administrative expenses increased 8.8% from $26,573,000 for the
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nine months ended September 30, 2000, to $28,902,000 for the nine months ended September 30, 2001. Selling, general and administrative expenses as a percentage of revenues increased from 18.5% in the 2000 period to 19.6% in the 2001 period. This result was primarily attributable to the hiring of new Account Managers for the opening of new offices and the expansion of existing offices.
Interest Income — Interest income increased 26.6% from $1,696,000 for the nine months ended September 30, 2000, to $2,147,000 for the nine months ended September 30, 2001. This increase was primarily the result of interest earned on higher interest-bearing cash, cash equivalent and marketable security account balances in the 2001 period offset by lower interest rate yields during the nine months ended September 30, 2001.
Provision for Income Taxes — Provision for income taxes decreased 4.8% from $8,180,000 for the nine months ended September 30, 2000, to $7,788,000 for the nine months ended September 30, 2001. The Company’s effective tax rate decreased from 37.2% in the 2000 period to 36.8% in the 2001 period. The decrease in the effective tax rate was primarily due to an increase in non-taxable interest income as a percentage of income before income taxes and to a lesser extent a lower effective tax rate experienced on foreign taxable income.
LIQUIDITY AND CAPITAL RESOURCES:
The change in the Company’s liquidity during the nine months ended September 30, 2001 is the net effect of funds generated by operations and equity incentive plans and the funds used for repurchases of common stock and, to a lesser extent, capital expenditures. As of September 30, 2001, the Board of Directors has authorized the repurchase, from time to time, of up to 2,941,000 shares of the Company’s common stock. During the nine months ended September 30, 2001, the Company repurchased 473,500 shares of common stock on the open market bringing the total shares repurchased under the authorization to 1,133,500. For the nine months ended September 30, 2001, the Company generated $20,668,000 from operations, used $6,274,000 in investing activities and used $3,223,000 in financing activities.
The Company’s working capital at September 30, 2001, included $62,427,000 in cash and cash equivalents. The Company’s working capital requirements consist primarily of the financing of accounts receivable. While there can be no assurances in this regard, the Company expects that internally generated cash together with its borrowing ability will be sufficient to support the working capital needs of the Company and other obligations on both a short and long-term basis. As of September 30, 2001, the Company had no material capital commitments.
RECENT ACCOUNTING PRONOUNCEMENTS:
Item 3 — Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to certain market risks arising from transactions in the normal course of business, principally risks associated with interest rate and foreign currency fluctuations. The Company is exposed to interest rate risk from its held to maturity investments. The interest rate risk is immaterial due to the short maturity of those investments. The Company is exposed to foreign currency risk from the translation of foreign operations into U.S. dollars. Based on the relative size and nature of its foreign operations, the Company does not believe that a ten percent change in foreign currencies would have a material impact on its financial statements.
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PART II — OTHER INFORMATION
Item 4 — Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
Item 6 — Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
(1) Current report on Form 8-K was filed with the commission on August 21, 2001. This report set forth that on August 7, 2001, the Board of Directors elected Dr. Joe Peterson as Chief Executive Officer and as a member of the Board effective September 1, 2001 and that Kathy West, President retired as an officer effective September 1, 2001 with Dr. Peterson succeeding Ms. West as President.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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