1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number: 0-20540 ON ASSIGNMENT, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4023433 (State of Incorporation) (IRS Employer Identification No.) 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 April 30, 1998, the total number of outstanding shares of the Company's Common Stock ($0.01 par value) was 10,823,439.
2 ON ASSIGNMENT, INC. INDEX <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE NUMBER ----------- <S> <C> Item 1 - Consolidated Financial Statements Consolidated Balance Sheets at March 31, 1998 and December 31, 1997 (Unaudited) 3 Consolidated Statements of Income for the three months ended March 31, 1998 and March 31, 1997 (Unaudited) 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and March 31, 1997 (Unaudited) 5, 6 Notes to Consolidated Financial Statements (Unaudited) 7, 8, 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10, 11, 12 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security-Holders 13 Item 5 - Other Information 13 Item 6 - Exhibits and Reports on Form 8-K 13 Signatures 14 Index to Exhibits 15 </TABLE> 2
3 PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS ON ASSIGNMENT, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> March 31, December 31, 1998 1997 ------------ ------------ <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 23,282,000 $ 18,339,000 Marketable securities, current 5,070,000 5,370,000 Accounts receivable, net (Note 4) 16,018,000 15,215,000 Advances and deposits 115,000 67,000 Prepaid expenses 1,096,000 679,000 Income taxes receivable -- 111,000 Deferred income taxes 1,252,000 1,218,000 ------------ ------------ Total current assets 46,833,000 40,999,000 ------------ ------------ Office Furniture, Equipment and Leasehold Improvements, net (Note 5) 2,609,000 2,572,000 Workers' compensation deposits 725,000 596,000 Goodwill, net (Note 6) 522,000 534,000 Other assets 226,000 163,000 ------------ ------------ TOTAL ASSETS $ 50,915,000 $ 44,864,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accrued payroll $ 4,506,000 $ 3,043,000 Accounts payable 469,000 414,000 Accrued expenses 2,381,000 2,135,000 Income taxes payable 953,000 -- ------------ ------------ Total current liabilities 8,309,000 5,592,000 ------------ ------------ STOCKHOLDERS' EQUITY: Preferred stock (Note 8) 0 0 Common stock (Note 9) 108,000 107,000 Paid-in capital (Note 9) 13,112,000 12,099,000 Retained earnings 29,390,000 27,072,000 Cumulative foreign currency translation adjustment (Note 10) (4,000) (6,000) ------------ ------------ Total stockholders' equity 42,606,000 39,272,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 50,915,000 $ 44,864,000 ============ ============ </TABLE> 3
4 PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- 1998 1997 ----------- ----------- <S> <C> <C> REVENUES $28,567,000 $23,570,000 COST OF SERVICES 19,754,000 16,435,000 ----------- ----------- GROSS PROFIT 8,813,000 7,135,000 OPERATING EXPENSES 5,397,000 4,661,000 ----------- ----------- OPERATING INCOME 3,416,000 2,474,000 INTEREST INCOME 302,000 155,000 ----------- ----------- INCOME BEFORE INCOME TAXES 3,718,000 2,629,000 PROVISION FOR INCOME TAXES 1,400,000 999,000 ----------- ----------- NET INCOME $ 2,318,000 $ 1,630,000 =========== =========== BASIC EARNINGS PER SHARE (Notes 9 and 12) $ 0.22 $ 0.16 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (Notes 9 and 12) 10,767,000 10,372,000 =========== =========== DILUTED EARNINGS PER SHARE (Notes 9 and 12) $ 0.21 $ 0.15 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Notes 9 and 12) 11,202,000 10,860,000 =========== =========== </TABLE> 4
5 PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------- 1998 1997 ------------ ------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,318,000 $ 1,630,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 218,000 172,000 Increase in allowance for doubtful accounts 88,000 60,000 Decrease in income taxes receivable 111,000 0 (Increase) Decrease in deferred income taxes (34,000) 39,000 Loss on disposal of furniture and equipment 10,000 7,000 (Increase) Decrease in accounts receivable (889,000) 472,000 Increase in accounts payable and accrued expenses 1,764,000 147,000 Increase in income taxes payable 1,233,000 667,000 (Increase) Decrease in workers' compensation deposits (129,000) 27,000 (Increase) Decrease in prepaid expenses (417,000) 69,000 Increase in other assets (66,000) 0 ------------ ------------ Net cash provided by operating activities 4,207,000 3,290,000 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (1,000,000) (500,000) Proceeds from the maturity of marketable securities 1,300,000 2,000,000 Acquisition of office furniture, equipment and leasehold improvements (250,000) (298,000) Proceeds from sale of furniture and equipment 0 3,000 (Increase) Decrease in advances and deposits (48,000) 39,000 ------------ ------------ Net cash provided by investing activities 2,000 1,244,000 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of common stock options 644,000 511,000 Proceeds from issuance of common stock - Employee Stock Purchase Plan 90,000 85,000 ------------ ------------ Net cash provided by financing activities 734,000 596,000 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 4,943,000 5,130,000 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,339,000 11,102,000 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,282,000 $ 16,232,000 ============ ============ </TABLE> 5
6 PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------------------- 1998 1997 ----------------- ----------------- <S> <C> <C> Cash paid during the period for income taxes, net of refunds $ 91,000 $ 293,000 ================= ================= </TABLE> SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------------------- 1998 1997 ----------------- ----------------- <S> <C> <C> Tax benefit of disqualifying dispositions $ 280,000 $ 100,000 ================= ================= </TABLE> 6
7 PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS ON ASSIGNMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 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, 1997. 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 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 ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year or any other period. 2. 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., 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. 3. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. 4. Accounts receivable are stated net of an allowance for doubtful accounts of $814,000 and $734,000 at March 31, 1998 and December 31, 1997, respectively. 5. Office furniture, equipment and leasehold improvements are stated net of accumulated depreciation and amortization of $2,806,000 and $2,616,000 at March 31, 1998 and December 31, 1997, 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 $187,000 and $175,000 at March 31, 1998 and December 31, 1997, respectively. 7. Effective January 1, 1998, the Company implemented the On Assignment, Inc. Deferred Compensation Plan. The plan permits a select group of management or highly compensated employees or directors to annually elect to defer up to 100 percent of base salary, annual bonus or fees on a pre-tax basis, and earn tax-deferred interest on these amounts. Distributions from the plan are made at retirement, death or termination of employment, in a lump sum, or over five, ten or fifteen years. At March 31, 1998, the liability under the plan, which is reflected in accrued expenses, was approximately $173,000. A life insurance policy is maintained on the participants relating to the plan, whereby the Company is the sole owner and beneficiary of such insurance. 7
8 PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS ON ASSIGNMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (continued) In addition, a Master Trust Agreement has been established and, at least annually, the Company will transfer assets for its respective future liabilities created with respect to the annual deferral amounts and annual company contribution amounts, if any, for such participants for all periods prior to the transfer. 8. At March 31, 1998 and December 31, 1997, Preferred Stock at a par value of $0.01 per share consisted of 1,000,000 shares authorized and 0 shares issued and outstanding. 9. At March 31, 1998 and December 31, 1997, Common Stock at a par value of $0.01 per share consisted of 25,000,000 shares authorized and 10,795,435 and 10,727,235 shares issued and outstanding, respectively. On September 24, 1997, the Board of Directors authorized a two-for-one stock split, effected as a 100 percent common stock dividend, distributed on October 20, 1997 to shareholders of record on October 13, 1997. All references in the accompanying consolidated financial statements to number of shares and per share amounts of the Company's common stock have been retroactively restated to reflect the increased number of common shares outstanding. In addition, stockholders' equity has been restated to give retroactive recognition to the stock split by reclassifying from paid-in capital to common stock the par value of the additional shares arising from the split. 10. On May 12, 1997, the Company formed Assignment Ready Inc., a Canadian corporation and wholly-owned subsidiary of the Company, and commenced operations in Canada during the third quarter of 1997. Assets and liabilities of foreign operations, where the functional currency is the local currency, are translated into U.S. dollars at the rate of exchange in effect on the balance sheet date. Income and expenses are translated at the average rates of exchange prevailing during the period. The related translation adjustments are recorded as cumulative foreign currency translation adjustments, a separate component of stockholders' equity. 11. On February 12, 1998, the Company adopted the On Assignment, Inc. Change in Control Severance Plan to provide severance benefits for officers and other eligible employees who are terminated following an acquisition of the Company. Under the plan, if an eligible employee is involuntarily terminated within 18 months of a Change in Control, as defined in the Severance Plan, then the employee will be entitled to salary plus target bonus payable in a lump sum. The amounts payable would range from one month to 18 months of salary and target bonus depending on the employee's length of service and position with the Company. 8
9 PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS ON ASSIGNMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (continued) 12. 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 and non-qualified stock options) outstanding during the periods using the treasury stock method. Following is a reconciliation of the shares used to compute basic and diluted earnings per share: <TABLE> <CAPTION> Three Months Ended March 31, -------------------------- 1998 1997 ---------- ---------- <S> <C> <C> Weighted average number of shares outstanding used to compute basic earnings per share 10,767,000 10,372,000 Dilutive effect of stock options 435,000 488,000 ---------- ---------- Number of shares used to compute diluted earnings per share 11,202,000 10,860,000 ========== ========== </TABLE> 13. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 defines comprehensive income as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS No. 130 requires that an enterprise (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. Disclosure in the accompanying consolidated balance sheets and statements of income has not been made as the nonowner transactions of the Company consist only of foreign currency translation adjustments, which are insignificant to the consolidated financial statements as of March 31, 1998 and December 31, 1997. 9
10 PART I - FINANCIAL INFORMATION ITEM 2 - 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, risks inherent in expansion into new professions and new markets, the Company's ability to attract, train and retain qualified Account Managers and temporary employees in the laboratory, science, financial and environmental fields, and other risks discussed in "Risk Factors That May Affect Future Results" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997, 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. CHANGES IN RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997: REVENUES - Revenues increased by 21.2% from $23,570,000 for the three months ended March 31, 1997, to $28,567,000 for the three months ended March 31, 1998, 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 the 1998 period. 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. 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 the 1998 period, 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. 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 during the 1998 period. 10
11 PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHANGES IN RESULTS OF OPERATIONS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 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 20.2% from $16,435,000 for the three months ended March 31, 1997, to $19,754,000 for the three months ended March 31, 1998. Cost of services as a percentage of revenues decreased from 69.7% in the 1997 period to 69.1% in the 1998 period. This decrease was primarily attributable to an increase in conversion fee revenue of the Lab Support and Healthcare Financial Staffing divisions in the 1998 period. 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 15.8% from $4,661,000 for the three months ended March 31, 1997, to $5,397,000 for the three months ended March 31, 1998. Operating expenses as a percentage of revenues decreased from 19.8% in the 1997 period to 18.9% in the 1998 period. This result was primarily attributable to improved Account Manager productivity and leveraging a more efficient centralized support system over a larger revenue base. INTEREST INCOME - Interest income increased 94.8% from $155,000 for the three months ended March 31, 1997, to $302,000 for the three months ended March 31, 1998, primarily as a result of interest earned on higher interest-bearing cash, cash equivalent and marketable security account balances in the 1998 period. PROVISION FOR INCOME TAXES - Provision for income taxes increased 40.1% from $999,000 for the three months ended March 31, 1997 to $1,400,000 for the three months ended March 31, 1998. The Company's effective tax rate decreased from 38.0% in the 1997 period to 37.7% in the 1998 period. 11
12 PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES: The Company's primary sources of cash for the three months ended March 31, 1997 and 1998 were funds provided by operating activities. For the three months ended March 31, 1997, operating activities provided $3,290,000 of cash compared to $4,207,000 for the three months ended March 31, 1998. This increase was primarily attributable to an increase in accounts payable and accrued expenses, income taxes payable and higher net income. The increase was partially offset by an increase in accounts receivable and prepaid expenses. Cash provided by investing activities totaled $1,244,000 for the three months ended March 31, 1997, compared to $2,000 for the three months ended March 31, 1998. This was primarily attributable to lower net proceeds from the maturity of marketable securities in the 1998 period. Cash provided by financing activities was $596,000 for the three months ended March 31, 1997, compared to $734,000 for the three months ended March 31, 1998. The increase was attributable to greater proceeds from the issuance of common stock pursuant to the Company's Stock Option Plan and Employee Stock Purchase Plan during the 1998 period. 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 March 31, 1998). The agreement expires on July 1, 1999. No borrowings were outstanding under this credit line at March 31, 1998. The Company believes that its cash balances, together with funds from operations and its borrowing capacity, will be sufficient to meet its cash requirements through at least the next twelve months. 12
13 PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS None ITEM 5 - OTHER INFORMATION None ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.15 On Assignment, Inc. Change In Control Severance Plan and Summary Plan Description 10.16 On Assignment, Inc. Deferred Compensation Plan 10.17 Master Trust Agreement for On Assignment, Inc. Deferred Compensation Plan 11.1 Statement regarding computation of earnings per share (b) Reports on Form 8-K The Company filed a Form 8-K with the Securities and Exchange Commission on February 4, 1998. 13
14 PART II - OTHER INFORMATION 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. ON ASSIGNMENT, INC. Date: May 14, 1998 By: /s/ H. Tom Buelter ------------------- ----------------------- H. Tom Buelter Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: May 14, 1998 By: /s/ Ronald W. Rudolph ------------------- ----------------------- Ronald W. Rudolph Sr. Vice President, Finance & Operations Support, and Chief Financial Officer (Principal Financial and Accounting Officer) 14
15 PART II - OTHER INFORMATION INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit Number Description - ------- ----------- <S> <C> 10.15 On Assignment, Inc. Change in Control Severance Plan and Summary Plan Description 10.16 On Assignment, Inc. Deferred Compensation Plan 10.17 Master Trust Agreement for On Assignment, Inc. Deferred Compensation Plan 11.1 Statement regarding computation of earnings per share </TABLE> 15