UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) |
For the quarterly period ended September 30, 2003
OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) |
For the transition period from to
Commission file number: 0-20540
ON ASSIGNMENT, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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95-4023433 |
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(State of Incorporation) |
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(IRS Employer Identification No.) |
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26651 West Agoura Road, Calabasas, CA 91302 |
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(Address of principal executive offices) |
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(Zip Code) |
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(818) 878-7900 |
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(Registrant’s telephone number, including area code) |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o
At September 30, 2003, the total number of outstanding shares of the Company’s Common Stock ($0.01 par value) was 25,190,929.
ON ASSIGNMENT, INC.
Index
2
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
ON ASSIGNMENT, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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September 30, |
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December 31, |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
35,355,000 |
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$ |
31,990,000 |
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Marketable securities |
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— |
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2,000,000 |
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Accounts receivable, net |
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26,672,000 |
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30,296,000 |
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Advances and deposits |
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148,000 |
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353,000 |
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Prepaid expenses |
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2,149,000 |
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1,653,000 |
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Income taxes receivable |
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1,458,000 |
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— |
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Deferred income taxes |
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2,443,000 |
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2,732,000 |
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Other current assets |
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— |
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2,500,000 |
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Total current assets |
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68,225,000 |
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71,524,000 |
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Property and equipment, net |
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8,669,000 |
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7,377,000 |
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Workers’ compensation restricted deposits |
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— |
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88,000 |
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Goodwill, net |
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43,997,000 |
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123,835,000 |
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Identifiable intangible assets, net |
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10,136,000 |
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13,478,000 |
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Other assets |
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1,989,000 |
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1,845,000 |
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Total Assets |
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$ |
133,016,000 |
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$ |
218,147,000 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
1,690,000 |
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$ |
1,453,000 |
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Accrued payroll |
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4,778,000 |
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6,178,000 |
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Income taxes payable |
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— |
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483,000 |
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Deferred compensation |
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1,015,000 |
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1,351,000 |
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Accrued workers’ compensation |
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3,321,000 |
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3,048,000 |
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Other accrued expenses |
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3,237,000 |
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2,015,000 |
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Total current liabilities |
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14,041,000 |
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14,528,000 |
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Deferred income taxes |
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1,579,000 |
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2,572,000 |
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Total liabilities |
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15,620,000 |
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17,100,000 |
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Stockholders’ Equity: |
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Preferred stock |
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— |
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— |
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Common stock |
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279,000 |
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279,000 |
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Paid-in capital |
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117,499,000 |
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116,961,000 |
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Deferred compensation liability |
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— |
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265,000 |
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Retained earnings |
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21,604,000 |
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101,385,000 |
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Accumulated other comprehensive income |
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984,000 |
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575,000 |
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140,366,000 |
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219,465,000 |
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Less: Treasury shares, at cost |
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22,970,000 |
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18,418,000 |
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Total stockholders’ equity |
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117,396,000 |
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201,047,000 |
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Total Liabilities and Stockholders’ Equity |
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$ |
133,016,000 |
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$ |
218,147,000 |
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See accompanying Notes to Consolidated Financial Statements
3
ON ASSIGNMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended September 30, |
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2003 |
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2002 |
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Revenues |
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$ |
50,467,000 |
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$ |
74,583,000 |
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Cost of services |
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36,508,000 |
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52,732,000 |
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Gross profit |
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13,959,000 |
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21,851,000 |
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Selling, general and administrative expenses |
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13,647,000 |
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16,068,000 |
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Operating income |
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312,000 |
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5,783,000 |
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Interest income, net |
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82,000 |
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104,000 |
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Income before income taxes |
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394,000 |
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5,887,000 |
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Provision for income taxes |
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159,000 |
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2,236,000 |
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Net income |
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$ |
235,000 |
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$ |
3,651,000 |
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Basic net income per common share |
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$ |
0.01 |
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$ |
0.14 |
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Weighted average number of common shares outstanding |
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25,164,000 |
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26,555,000 |
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Diluted net income per common share |
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$ |
0.01 |
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$ |
0.14 |
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Weighted average number of common and common equivalent shares outstanding |
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25,186,000 |
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26,586,000 |
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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Three Months Ended September 30, |
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2003 |
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2002 |
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Net income |
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$ |
235,000 |
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$ |
3,651,000 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
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(128,000 |
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11,000 |
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Comprehensive income |
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$ |
107,000 |
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$ |
3,662,000 |
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See accompanying Notes to Consolidated Financial Statements
4
ON ASSIGNMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Nine Months Ended September 30, |
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2003 |
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2002 |
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Revenues |
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$ |
162,471,000 |
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$ |
184,294,000 |
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Cost of services |
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117,821,000 |
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128,741,000 |
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Gross profit |
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44,650,000 |
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55,553,000 |
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Selling, general and administrative expenses |
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44,769,000 |
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39,363,000 |
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Impairment of goodwill |
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79,897,000 |
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— |
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Operating income (loss) |
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(80,016,000 |
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16,190,000 |
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Interest income, net |
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290,000 |
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634,000 |
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Income (loss) before income taxes |
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(79,726,000 |
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16,824,000 |
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Provision for income taxes |
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55,000 |
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6,430,000 |
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Net income (loss) |
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$ |
(79,781,000 |
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$ |
10,394,000 |
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Basic net income (loss) per common share |
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$ |
(3.13 |
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$ |
0.41 |
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Weighted average number of common shares outstanding |
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25,500,000 |
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25,165,000 |
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Diluted net income (loss) per common share |
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$ |
(3.13 |
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$ |
0.41 |
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Weighted average number of common and common equivalent shares outstanding |
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25,500,000 |
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25,289,000 |
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
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Nine Months Ended September 30, |
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2003 |
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2002 |
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Net income (loss) |
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$ |
(79,781,000 |
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$ |
10,394,000 |
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Other comprehensive income: |
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Foreign currency translation adjustment |
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409,000 |
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356,000 |
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Comprehensive income (loss) |
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$ |
(79,372,000 |
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$ |
10,750,000 |
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See accompanying Notes to Consolidated Financial Statements
5
ON ASSIGNMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Nine Months Ended September 30, |
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2003 |
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2002 |
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Cash Flows From Operating Activities: |
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Net income (loss) |
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$ |
(79,781,000 |
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$ |
10,394,000 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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5,497,000 |
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3,468,000 |
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Impairment of goodwill |
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79,897,000 |
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— |
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Allowance for doubtful accounts |
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685,000 |
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334,000 |
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Deferred income taxes |
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(709,000 |
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62,000 |
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Loss on disposal of property and equipment |
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292,000 |
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6,000 |
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Income tax benefit of disqualifying dispositions |
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9,000 |
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722,000 |
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Gain on deferred compensation liability stock distribution |
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(24,000 |
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— |
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Changes in operating assets and liabilities: |
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Decrease (Increase) in accounts receivable |
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3,103,000 |
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(3,526,000 |
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(Increase) Decrease in income taxes receivable |
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(1,971,000 |
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864,000 |
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(Increase) Decrease in prepaid expenses |
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(492,000 |
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775,000 |
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Decrease in workers’ compensation deposits |
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88,000 |
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39,000 |
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Decrease in accounts payable and accrued expenses |
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(126,000 |
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(2,114,000 |
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(Increase) Decrease in other assets |
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(59,000 |
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305,000 |
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Net cash provided by operating activities |
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6,409,000 |
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11,329,000 |
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Cash Flows From Investing Activities: |
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Purchase of marketable securities |
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— |
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(2,000,000 |
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Proceeds from the maturity of marketable securities |
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2,000,000 |
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24,886,000 |
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Acquisition of property and equipment |
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(3,727,000 |
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(3,233,000 |
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Proceeds from the return of advances or deposits |
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80,000 |
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1,000 |
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Cash used in acquisition, net of cash received |
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— |
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(66,315,000 |
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Restricted cash – HPO earn-out provision |
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— |
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(2,500,000 |
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Proceeds from recovery of HPO escrow |
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2,500,000 |
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— |
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Net cash provided by (used for) investing activities |
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853,000 |
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(49,161,000 |
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Cash Flows From Financing Activities: |
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Proceeds from exercise of common stock options |
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8,000 |
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4,799,000 |
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Proceeds
from issuance of common stock - |
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280,000 |
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226,000 |
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Payments on notes payable |
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— |
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(5,039,000 |
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Payments on capital leases |
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— |
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(75,000 |
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Repurchase of common stock |
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(4,552,000 |
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(2,903,000 |
) |
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Net cash used for financing activities |
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(4,264,000 |
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(2,992,000 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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367,000 |
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282,000 |
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Net Increase (Decrease) In Cash and Cash Equivalents |
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3,365,000 |
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(40,542,000 |
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Cash and Cash Equivalents at Beginning of Period |
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31,990,000 |
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65,694,000 |
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Cash and Cash Equivalents at End of Period |
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$ |
35,355,000 |
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$ |
25,152,000 |
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See accompanying Notes to Consolidated Financial Statements
6
ON ASSIGNMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)
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Nine Months Ended September 30, |
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2003 |
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2002 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Acquisition: |
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Fair value of assets acquired, net of cash received |
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$ |
— |
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$ |
24,663,000 |
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Goodwill |
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— |
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118,215,000 |
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Long-term debt assumed |
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— |
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(5,729,000 |
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Stock issued |
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— |
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(70,834,000 |
) |
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Cash used in acquisition, net of cash received |
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$ |
— |
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$ |
66,315,000 |
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Cash paid during the period for: |
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Interest |
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$ |
— |
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$ |
41,000 |
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Income taxes, net of refunds |
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$ |
2,041,000 |
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$ |
4,700,000 |
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SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: |
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Deferred compensation liability stock disbursement |
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$ |
241,000 |
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$ |
29,000 |
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See accompanying Notes to Consolidated Financial Statements
7
ON ASSIGNMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
1. The accompanying consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). This Report on Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2002. Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations. The information reflects all normal and recurring adjustments which, in the opinion of the Company’s management, are necessary for a fair presentation of the financial position of the Company and its results of operations for the interim periods set forth herein. The results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year or any other period.
2. Recent Accounting Pronouncements:
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (FAS) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. This statement amends FAS No. 133 to clarify the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. FAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of FAS No. 149 did not have a material effect on the Company’s financial condition, results of operations or liquidity.
In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. The statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. FAS No. 150 must be applied immediately to instruments created or modified after May 31, 2003. The adoption of FAS No. 150 did not have a material effect on the Company’s financial condition, results of operations or liquidity.
FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” is effective for exit or disposal activities that are initiated after December 31, 2002. FAS No. 146 addresses financial accounting and reporting for the costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Costs to Exit and Disposal Activity (Including Certain Costs Incurred in a Restructuring)”. FAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred and establishes that fair value is the objective for initial measurements of the liability.
8
The Company incurred $814,000 and $1,577,000 of costs during the three months and nine months ended September 30, 2003, respectively, in connection with the reduction of personnel and office closures. These costs are included in selling, general and administrative expenses, as shown on the Company’s Consolidated Statements of Operations for the three and nine months ended September 30, 2003. The costs for the nine months ended September 30, 2003 consist of $478,000 in severance costs and $1,099,000 in office closure costs. Payments of $476,000 have been made as of September 30, 2003. The remaining liability of $1,101,000 is included in other accrued expenses on the Company’s consolidated balance sheet at September 30, 2003. The Company estimates that approximately $377,000 of the remaining liability will be paid before December 31, 2003.
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 $3,149,000 and $2,491,000 at September 30, 2003 and December 31, 2002, respectively.
5. Property and equipment are stated net of accumulated depreciation and amortization of $6,956,000 and $4,895,000 at September 30, 2003 and December 31, 2002, respectively.
The Company implemented an enterprise wide information technology system at the beginning of 2003 and is continuing to add significant enhancements to the software applications. Under the provisions of Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” the Company capitalizes costs associated with customized internal-use software systems that have reached the application stage and meet recoverability tests. Such capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related expenses for employees who are directly associated with the applications. In addition, the Company capitalizes costs incurred for enhancements or modifications to the software that result in additional functionality to the software’s performance. The Company has capitalized approximately $5,395,000 at September 30, 2003 with respect to this project.
6. Pursuant to FAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is tested for impairment at least annually and more frequently if an event occurs that indicates that the assets may be impaired. The test for impairment is performed at one level below the operating segment level, which is defined in FAS No. 142 as the reporting unit. As discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, the Company performed this test during the fourth quarter of 2002 and determined there was no impairment of goodwill as of December 31, 2002.
The Company’s management concluded at June 30, 2003, however, that significant events had occurred for purposes of its goodwill impairment analysis, requiring management to perform an analysis prior to the next regularly scheduled impairment testing date to determine whether the recorded goodwill balance was impaired. Lower demand for the Company’s temporary professionals due to a slow down in research and development spending, general economic conditions and increased competition for its services were
9
primary factors resulting in: (1) the Company’s lower market capitalization at June 30, 2003 compared to December 31, 2002; (2) the Company’s implementation of personnel reductions and office closures at the end of the first and second quarters of 2003; and (3) reduction of the Company’s current and projected operating results.
As part this analysis, FAS No. 142 required the Company’s management to estimate the fair value of its reporting units as compared with their estimated carrying value. If the fair value of the reporting unit was less than the estimated carrying value, then an impairment was deemed to have occurred. In estimating the fair value of its reporting units, the Company used the income approach, which utilizes forecasted discounted cash flows to estimate the fair value. The Company also considered total market capitalization as of June 30, 2003 and the average market capitalization for a period one month prior to and subsequent to that date in order to assess the volatility of the market capitalization.
Based on its impairment analysis, the Company concluded that goodwill, related to one of its reporting units in the Healthcare Staffing segment, was impaired. As required by FAS No. 142, in measuring the amount of goodwill impairment, the Company made a hypothetical allocation of the estimated fair value of the reporting unit to the tangible and intangible assets (other than goodwill) of the reporting unit. Based on this allocation, the Company concluded that $79,897,000 of recorded goodwill was impaired. The goodwill impairment was expensed as a non-cash charge to continuing operations during the second quarter of 2003.
Goodwill of $43,997,000 at September 30, 2003 and $123,835,000 at December 31, 2002, represents the excess of the purchase price over the fair value of the net assets acquired. The goodwill balance of $43,997,000 at September 30, 2003 is allocated $42,800,000 and $1,197,000 to the Healthcare Staffing and Lab Support segments, respectively. The Company will continue to evaluate the goodwill balance for impairment as required under FAS No.142.
As of September 30, 2003 and December 31, 2002, the Company had the following acquired intangible assets:
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September 30, 2003 |
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December 31, 2002 |
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Gross |
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Accumulated |
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Goodwill/ |
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Net |
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Estimated |
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Gross |
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Accumulated |
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Net |
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Estimated |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Customer relations |
|
$ |
11,100,000 |
|
$ |
3,845,000 |
|
$ |
— |
|
$ |
7,255,000 |
|
7 years |
|
$ |
11,100,000 |
|
$ |
1,943,000 |
|
$ |
9,157,000 |
|
7 years |
|
|
Contractor relations |
|
3,900,000 |
|
1,131,000 |
|
— |
|
2,769,000 |
|
5 years |
|
3,900,000 |
|
546,000 |
|
3,354,000 |
|
5 years |
|
|||||||
|
Covenants not to compete |
|
737,000 |
|
625,000 |
|
— |
|
112,000 |
|
2 years |
|
737,000 |
|
280,000 |
|
457,000 |
|
2 years |
|
|||||||
|
Employment agreements |
|
600,000 |
|
600,000 |
|
— |
|
— |
|
2 years |
|
600,000 |
|
210,000 |
|
390,000 |
|
2 years |
|
|||||||
|
Backlog |
|
400,000 |
|
400,000 |
|
— |
|
— |
|
1 year |
|
400,000 |
|
280,000 |
|
120,000 |
|
1 year |
|
|||||||
|
Total |
|
$ |
16,737,000 |
|
$ |
6,601,000 |
|
$ |
— |
|
$ |
10,136,000 |
|
|
|
$ |
16,737,000 |
|
$ |
3,259,000 |
|
$ |
13,478,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Goodwill |
|
$ |
124,531,000 |
|
$ |
637,000 |
|
$ |
79,897,000 |
|
$ |
43,997,000 |
|
|
|
$ |
124,472,000 |
|
$ |
637,000 |
|
$ |
123,835,000 |
|
|
|
|
Total |
|
$ |
141,268,000 |
|
$ |
7,238,000 |
|
$ |
79,897,000 |
|
$ |
54,133,000 |
|
|
|
$ |
141,209,000 |
|
$ |
3,896,000 |
|
$ |
137,313,000 |
|
|
|
10
The intangible asset related to employment agreements was fully amortized at June 30, 2003 due to the termination of those employment agreements.
Amortization expense for intangible assets subject to amortization was $866,000 and $1,151,000 for the three months ended September 30, 2003 and 2002 respectively, and $3,342,000 and $2,069,000 for the nine months ended September 30, 2003 and 2002, respectively. Estimated annual amortization for each of the years ended December 31, 2003 through December 31, 2007 is $4.1 million, $3.0 million, $2.5 million, $2.1 million and $1.2 million, respectively.
7. Revenue from temporary assignments, net of credits and discounts, is recognized when earned, based on hours worked by the Company’s temporary professionals on a weekly basis. Permanent placement fees are recognized when earned, upon conversion of a temporary professional to a client’s regular employee. Reimbursements, including those related to travel and out-of-pocket expenses, are included in revenues, and equivalent amounts of reimbursable expenses are included in cost of services.
8. At September 30, 2003 and December 31, 2002, common stock, par value $0.01 per share, consisted of 75,000,000 shares authorized and 25,190,929 and 26,378,461 shares issued and outstanding net of 2,662,500 and 1,524,000 treasury shares (Note 9), respectively.
On June 4, 2003 the Board of Directors adopted a Stockholders Rights Plan. In connection with the adoption of the rights plan, the Board of Directors declared a dividend of one right for each outstanding share of common stock, payable to stockholders of record on June 16, 2003. Each right, when exercisable, entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock at a price of $40.00, subject to adjustment. Initially, the rights will be attached to all certificates representing shares of the Company’s outstanding common stock. The rights will separate from the common stock and a distribution of rights certificates will occur upon the earlier to occur of: (i) 10 days following a public announcement that a person or group has acquired, or obtained the right to acquire, beneficial ownership of 15 percent or more of the outstanding shares of common stock of the Company, or (ii) 10 business days following the commencement of, or the first public announcement of the intention to commence, a tender offer or exchange offer the consummation of which would result in beneficial ownership by a person of 15 percent or more of the outstanding shares of common stock of the Company. The rights will expire on June 4, 2013, unless earlier redeemed or exchanged by the Company pursuant to the terms of the rights plan.
The rights have certain anti-takeover effects and will cause substantial dilution to a person or group that attempts to acquire the Company in a manner or on terms not approved by our Board of Directors.
On June 17, 2003 the Company’s stockholders approved an Amendment and Restatement of the On Assignment, Inc. Restated 1987 Stock Option Plan. The total shares of common stock reserved for issuance under the Restated 1987 Stock Option Plan was increased from 10,000,000 shares to 11,000,000 shares.
11
9. On June 15, 2001, the Board of Directors authorized the Company to repurchase up to 10 percent of its outstanding shares of common stock in addition to 660,000 shares previously repurchased for a total of 2,941,000 shares of common stock. At September 30, 2003 and December 31, 2002, the Company had repurchased 2,662,500 and 1,524,000 shares of its common stock at a total cost of $22,970,000 and $18,418,000, respectively. At September 30, 2003, the Company had remaining authorization to repurchase 278,500 shares.
10. The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its stock-based compensation plans. The Company has adopted the disclosure only provisions of FAS No. 123, “Accounting for Stock-Based Compensation,” and, therefore, no stock-based employee compensation cost is reflected in net income. The following table illustrates the effect on the net income and earnings per share if the Company had applied the fair value recognition provisions of FAS No. 123 to stock-based employee compensation.
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
Net income (loss)—as reported |
|
$ |
235,000 |
|
$ |
3,651,000 |
|
$ |
(79,781,000 |
) |
$ |
10,394,000 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
816,000 |
|
1,049,000 |
|
2,272,000 |
|
2,995,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income (loss)—pro forma |
|
(518,000 |
) |
2,602,000 |
|
(82,053,000 |
) |
7,399,000 |
|
||||
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
||||
|
Basic—as reported |
|
0.001 |
|
0.14 |
|
(3.13 |
) |
0.41 |
|
||||
|
Basic—pro forma |
|
(0.02 |
) |
0.10 |
|
(3.22 |
) |
0.29 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted—as reported |
|
0.001 |
|
0.14 |
|
(3.13 |
) |
0.41 |
|
||||
|
Diluted—pro forma |
|
(0.02 |
) |
0.10 |
|
(3.22 |
) |
0.29 |
|
||||
12
11. The following is a reconciliation of the shares used to compute basic and diluted earnings per share:
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
|
Weighted average number of shares outstanding used to compute basic earnings per share |
|
25,164,000 |
|
26,555,000 |
|
25,500,000 |
|
25,165,000 |
|
|
Dilutive effect of stock options |
|
22,000 |
|
31,000 |
|
— |
|
124,000 |
|
|
Number of shares used to compute diluted earnings per share |
|
25,186,000 |
|
26,586,000 |
|
25,500,000 |
|
25,289,000 |
|
Anti-dilutive options excluded from the computation of diluted earnings per share totaled 2,662,000 shares and 2,087,000 shares for the three months ended September 30, 2003 and 2002, respectively and 2,385,000 shares and 1,556,000 shares for the nine months ended September 30, 2003 and 2002, respectively.
12. Indicated below is the information required to comply with FAS 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 segment provides temporary and permanent placement services of laboratory and scientific professionals including the biotechnology, pharmaceutical, food and beverage and chemical industries. The Healthcare Staffing segment includes the combined results of the Healthcare Financial Staffing, Clinical Lab Staff, Diagnostic Imaging Staff, and the Nurse Travel and Allied Travel divisions. The Healthcare Staffing segment provides temporary and permanent placement services of medical billing and collection professionals, laboratory and medical professionals and traveling nurses, laboratory, radiology and respiratory professionals to the healthcare industry.
The Company’s management evaluates the performance of each segment primarily based on revenues, gross profit and operating income (before interest and income taxes). The information in the following table is derived directly from the segments’ internal financial reporting used for corporate management purposes. Certain corporate expenses are not allocated to and/or among the operating segments.
13
The following table represents revenues, gross profit and operating income by operating segment:
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
||||
|
Lab Support |
|
$ |
22,766,000 |
|
$ |
28,017,000 |
|
$ |
71,413,000 |
|
$ |
85,892,000 |
|
|
Healthcare Staffing |
|
27,701,000 |
|
46,566,000 |
|
91,058,000 |
|
98,402,000 |
|
||||
|
Total Revenues |
|
$ |
50,467,000 |
|
$ |
74,583,000 |
|
$ |
162,471,000 |
|
$ |
184,294,000 |
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
||||
|
Lab Support |
|
$ |
7,126,000 |
|
$ |
9,055,000 |
|
$ |
23,063,000 |
|
$ |
27,748,000 |
|
|
Healthcare Staffing |
|
6,833,000 |
|
12,796,000 |
|
21,587,000 |
|
27,805,000 |
|
||||
|
Total Gross Profit |
|
$ |
13,959,000 |
|
$ |
21,851,000 |
|
$ |
44,650,000 |
|
$ |
55,553,000 |
|
|
Operating Income (Loss): |
|
|
|
|
|
|
|
|
|
||||
|
Lab Support |
|
$ |
893,000 |
|
$ |
1,668,000 |
|
$ |
3,223,000 |
|
$ |
7,030,000 |
|
|
Healthcare Staffing |
|
(581,000 |
) |
4,115,000 |
|
(83,239,000 |
) |
9,160,000 |
|
||||
|
Total Operating Income (Loss) |
|
$ |
312,000 |
|
$ |
5,783,000 |
|
$ |
(80,016,000 |
) |
$ |
16,190,000 |
|
The Company does not report total assets by segment. The following table represents identifiable assets by operating segment:
|
|
|
September 30, |
|
December 31, |
|
||
|
Accounts Receivable, gross: |
|
|
|
|
|
||
|
Lab Support |
|
$ |
15,004,000 |
|
$ |
13,409,000 |
|
|
Healthcare Staffing |
|
14,817,000 |
|
19,378,000 |
|
||
|
Total Accounts Receivable, gross |
|
$ |
29,821,000 |
|
$ |
32,787,000 |
|
14
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, as amended, 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 following: (1) the Company’s ability to attract, train and retain qualified staffing consultants and temporary professionals in the laboratory and scientific, medical billing and collections, clinical laboratory and medical staffing fields, (2) the effectiveness of the Company's cost containment measures (3) the substantial amount of goodwill remaining on the Company’s consolidated balance sheet at September 30, 2003 after a goodwill impairment charge was taken in June 2003 and the potential negative impact on the Company’s net income resulting from an additional write-down of such goodwill, (4) the Company’s ability to integrate acquired operations, including Health Personnel Options Corporation, and (5) the other risks discussed in “Risk Factors” in Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, 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.
Overview
On Assignment, Inc. is a leading provider of skilled temporary professionals to clients in the healthcare and science industries. We provide clients in these markets with short-term or long-term assignments of temporary professionals and temporary to permanent placement of these professionals. Our business consists of two operating segments: Healthcare Staffing and Lab Support. Through our Healthcare Staffing segment, we are able to offer our clients temporary professionals, both locally-based and traveling, from more than ten healthcare and medical financial occupations. These temporary professional specialties include nurses, specialty nurses, surgical technicians, imaging technicians, x-ray technicians, medical technicians, cytotechnologists, phlebotomists, coding, billing, claims processing and collections staff. Through our Lab Support segment, we service the domestic and international markets for science professionals and provide temporary and permanent placement of scientific personnel to industrial laboratories including the biotechnology, pharmaceutical, food and beverage, chemical and environmental industries.
Healthcare Staffing segment revenues represented approximately 55 percent of our total revenues for the three months ended September 30, 2003, down from 62 percent in the 2002 period. For the nine months ended September 30, 2003 the Healthcare Staffing segment represented approximately 56 percent of our total revenues, up from 53 percent in the 2002 period. The increase in Healthcare Staffing segment revenues for the nine months ended September 30, 2003, as a percent of our total revenues, was principally due to our acquisition of Health Personnel Options Corporation (HPO) in April 2002 and the inclusion of its results of oeprations for the entire 2003 period. Through this acquisition, we have been able to increase our participation in the travel nurse industry.
15
In recent quarters, our Lab Support and Healthcare Staffing segments have encountered continuing price competition from established temporary staffing companies. Our Lab Support business continues to be negatively impacted by the reduction in general economic activity. In our Healthcare Staffing segment, the Nurse Travel business has experienced reduced demand as a result of lower than expected patient census and the current stabilization of the full- and part-time nurse workforce. Intensification of and the continuation of price competition in the markets in which we operate could reduce revenues and gross profits in the future and negatively affect our market share as well.
We continue to explore cost rationalization strategies that we believe will yield more productive and cost effective operations. We have reviewed and continue to assess our operations, including the performance of our branch offices in certain markets. As a result of such reviews, we have closed offices and reduced field and corporate staff dedicated to supporting the Healthcare Staffing and Lab Support segments. Severance costs and office closure costs related to these staff reductions and office closures were $1,577,000 during the nine months ended September 30, 2003 and are included in selling, general and administrative expenses.
Seasonality
Our results of operations have historically been subject to seasonal fluctuations. During the fourth quarter and through February, revenues, operating income and net income in both our Healthcare Staffing and Lab Support segments, have been negatively impacted by the holidays due to fewer business days in comparison to the third quarter and the fall off of the number of temporary professionals willing to work during this period. Additionally, demand for our temporary professionals in our Lab Support segment 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.
16
The following table summarizes, for the periods indicated, selected statements of operations data expressed as a percentage of revenues:
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|
Cost of services |
|
72.3 |
|
70.7 |
|
72.5 |
|
69.9 |
|
|
Gross profit |
|
27.7 |
|
29.3 |
|
27.5 |
|
30.1 |
|
|
Selling, general and administrative expenses |
|
27.0 |
|
21.5 |
|
27.5 |
|
21.4 |
|
|
Impairment of goodwill |
|
— |
|
— |
|
49.2 |
|
— |
|
|
Operating income (loss) |
|
0.7 |
|
7.8 |
|
(49.2 |
) |
8.7 |
|
|
Interest income, net |
|
0.1 |
|
0.1 |
|
0.2 |
|
0.4 |
|
|
Income (loss) before income taxes |
|
0.8 |
|
7.9 |
|
(49.0 |
) |
9.1 |
|
|
Provision for income taxes |
|
0.3 |
|
3.0 |
|
0.1 |
|
3.5 |
|
|
Net income (loss) |
|
0.5 |
% |
4.9 |
% |
(49.1 |
)% |
5.6 |
% |
CHANGES IN RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Revenues - Revenues decreased $24,116,000 or 32.3 percent from $74,583,000 for the three months ended September 30, 2002 to $50,467,000 for the three months ended September 30, 2003.
Lab Support segment’s revenues decreased by $5,251,000 or 18.7 percent from $28,017,000 for the three months ended September 30, 2002 to $22,766,000 for the three months ended September 30, 2003. The decrease in revenue was primarily attributable to a 19.9 percent decrease in the average number of temporary professionals on assignment and a 35.4 percent decrease in permanent placement fee revenue from $505,000 for the three months ended September 30, 2002 to $326,000 for the three months ended September 30, 2003. Revenues for the three months ended September 30, 2003, in comparison to the same period last year, were adversely impacted by a weaker demand for our temporary professionals, particularly in the biotechnology sector, due to a slow down in research and development spending and general economic conditions.
Healthcare Staffing segment’s revenues decreased $18,865,000 or 40.5 percent from $46,566,000 for the three months ended September 30, 2002 to $27,701,000 for the three months ended September 30, 2003. The overall decrease in revenue was primarily attributable to a 42.3 percent decrease in the average number of temporary professionals on assignment and a 37.2 percent decrease in permanent placement fee revenue from $137,000 for the three months ended September 30, 2002 to $86,000 for the three months ended September 30, 2003. Revenues for the three months ended September 30, 2003, in comparison to the same period last year, were adversely impacted by a weaker demand for our temporary professionals due to general economic conditions and increased competition.
17
Cost of Services - Cost of services consists of temporary professionals compensation, payroll taxes, benefits, housing expense, travel expense and other employment-related expenses. Cost of services decreased $16,224,000 or 30.8 percent from $52,732,000 for the three months ended September 30, 2002 to $36,508,000 for the three months ended September 30, 2003. The cost of services as a percentage of revenues increased by 1.6 percent from 70.7 percent in the 2002 period to 72.3 percent in the 2003 period. The Lab Support segment’s cost of services as a percentage of segment revenues increased by 1.0 percent from 67.7 percent in the 2002 period to 68.7 percent in the 2003 period. This increase was primarily attributable to a 2.2 percent increase in temporary professionals’ compensation and payroll taxes partially offset by a 1.0 percent decrease in workers’ compensation expense and a 0.2 percent decrease in employer paid benefits. The Healthcare Staffing segment’s cost of services as a percentage of segment revenues increased by 2.8 percent from 72.5 percent in the 2002 period to 75.3 percent in the 2003 period. This increase was attributable to the following, which represents an increase or decrease as a percentage of segment revenue: a 3.7 percent increase in temporary professionals’ compensation, a 1.1 percent increase in employer paid taxes and benefits and a 0.4 percent increase in workers’ compensation expense, partially offset by a 2.4 percent decrease in travel related expenses.
Selling, General and Administrative Expenses – Selling, general and administrative expenses include the costs associated with our network of Staffing Consultants and branch offices, including Staffing Consultants’ compensation, rent, other office expenses and advertising for temporary professionals. Selling, general and administrative expenses also include our corporate and support office expenses, such as the salaries of corporate operations and support personnel, recruiting and training expenses, corporate advertising and promotion, rent and other general and administrative expenses. Selling, general and administrative expenses decreased $2,420,000 or 15.1 percent from $16,068,000 for the three months ended September 30, 2002 to $13,647,000 for the three months ended September 30, 2003. A charge of $814,000 for office closures is included in selling, general and administrative expenses for the three months ended September 30, 2003. Selling, general and administrative expense as a percentage of revenues increased from 21.5 percent in the 2002 period to 27.0 percent in the 2003 period primarily due to higher fixed operating expenses, relative to revenue.
Interest Income - Interest income, net decreased 21.2 percent from $104,000 for the three months ended September 30, 2002, to $82,000 for the three months ended September 30, 2003. This decrease was due to lower interest rate yields during the 2003 period on lower interest bearing cash equivalent account balances, primarily due to a decrease in revenues.
Provision for Income Taxes - Our effective tax rate was 40.4 percent for the three months ended September 30, 2003 as compared to an effective tax rate of 38.0 for the corresponding period in 2002. The difference in our tax rate for the third quarter of 2003, as compared with the corresponding period of 2002, was the result of higher state effective tax rates due to minimum franchise tax requirements.
18
Revenues - Revenues decreased $21,823,000 or 11.8 percent from $184,294,000 for the nine months ended September 30, 2002 to $162,471,000 for the nine months ended September 30, 2003. Revenue resulting from the operations of HPO was $63,912,000 and $71,135,000 for the nine months ended September 30, 2002 and September 30, 2003, respectively. Excluding the effect of the HPO acquisition, revenue decreased 24.1 percent or $29,046,000.
Lab Support segment’s revenues decreased by $14,479,000 or 16.9 percent from $85,892,000 for the nine months ended September 30, 2002 to $71,413,000 for the nine months ended September 30, 2003. The decrease in revenue was primarily attributable to a 19.5 percent decrease in the average number of temporary professionals on assignment for the nine months ended September 30, 2003. Revenues for the nine months ended September 30, 2003 were adversely impacted by continuing weaker demand for our temporary professionals, particularly in the biotechnology sector, due to a slow down in research and development spending and general economic conditions.
Healthcare Staffing segment’s revenues decreased $7,344,000 or 7.5 percent from $98,402,000 for the nine months ended September 30, 2002 to $91,058,000 for the nine months ended September 30, 2003. Revenue resulting from the acquisition of HPO was $63,912,000 and $71,135,000 for the nine months ended September 30, 2002 and September 30, 2003, respectively. Excluding the effect of the HPO acquisition, revenue decreased 42.2 percent from $34,490,000 for the nine months ended September 30, 2002 to $19,923,000 for the nine months ended September 30, 2003. This decrease in revenue was primarily attributable to a 38.7 percent decrease in the average number of temporary professionals on assignment for the nine months ended September 30, 2003. Revenues for the nine months ended September 30, 2003 were adversely impacted by continuing weaker demand for our temporary professionals due to general economic conditions and increased competition.
Cost of Services - Cost of services consists of temporary professionals compensation, payroll taxes, benefits, housing expense, travel expense and other employment-related expenses. Cost of services decreased $10,920,000 or 8.5 percent from $128,741,000 for the nine months ended September 30, 2002 to $117,821,000 for the nine months ended September 30, 2003. The increase in cost of services attributable to the HPO acquisition was $8,800,000. Excluding the effect of the HPO acquisition, cost of services decreased 42.6 percent or $9,927,000 from $23,294,000 for the 2002 period to $13,367,000 for the 2003 period. The cost of services as a percentage of revenues increased by 2.7 percent from 69.9 percent in the 2002 period to 72.5 percent in the 2003 period. The Lab Support segment’s cost of services as a percentage of segment revenues remained unchanged at 67.7 percent in both the 2002 and 2003 period. The Healthcare Staffing segment’s cost of services as a percentage of segment revenues increased by 4.5 percent from 71.7 percent in the 2002 period to 76.3 percent in the 2003 period. This increase was primarily attributable to the following, which represents an increase or decrease as a percentage of segment revenues: a 3.2 increase in temporary professionals’ compensation and payroll taxes, a 0.6 percent increase in workers’ compensation expense, a 0.4 percent increase in employer paid benefits and a 0.3 percent increase in travel related expenses.
19
Selling, General and Administrative Expenses – Selling, general and administrative expenses include the costs associated with our network of Staffing Consultants and branch offices, including Staffing Consultants’ compensation, rent, other office expenses and advertising for temporary professionals. Selling, general and administrative expenses also include our corporate and support office expenses, such as the salaries of corporate operations and support personnel, recruiting and training expenses, corporate advertising and promotion, rent and other general and administrative expenses. Selling, general and administrative expenses increased $5,406,000 or 13.7 percent from $39,363,000 for the nine months ended September 30, 2002 to $44,769,000 for the nine months ended September 30, 2003. Selling, general and administrative expenses attributable to HPO were $10,321,000 and $14,357,000 for the nine months ended September 30, 2002 and September 30, 2003, respectively. Excluding the effect of HPO’s results, selling, general and administrative expense increased 4.7 percent or $1,370,000. A charge of $1,577,000 for severance costs and office closures is included in selling, general and administrative expenses for the nine months ended September 30, 2003. Selling, general and administrative expense as a percentage of revenues increased from 21.4 percent in the 2002 period to 27.5 percent in the 2003 period primarily due to higher fixed operating expenses, relative to revenue.
Impairment of Goodwill – FAS No. 142, “Goodwill and Other Intangible Assets,” requires us to test goodwill for impairment at least annually and more frequently if an event occurs which indicates that the assets may be impaired. The test for impairment is performed at one level below the operating segment level, which is defined in FAS No. 142 as the reporting unit. As discussed in our Annual Report on Form 10-K for the year ended December 31, 2002, we performed this test during the fourth quarter of 2002 and had determined there was no impairment of goodwill as of December 31, 2002.
We concluded at June 30, 2003, however, that significant events had occurred for purposes of our goodwill impairment analysis, requiring us to perform an analysis prior to the next regularly scheduled impairment testing date to determine whether the recorded goodwill balance was impaired. Lower demand for our temporary professionals due to a slow down in research and development spending, general economic conditions including a tight labor market and increased competition for our services was a primary factor resulting in: (1) our lower market capitalization at June 30, 2003 compared to December 31, 2002; (2) our implementation of personnel reductions and office closures at the end of the first and second quarters of 2003; and (3) reduction of our current and projected operating results.
As part this analysis, FAS No. 142 required us to estimate the fair value of our reporting units as compared with their estimated carrying value. If the fair value of the reporting unit was less than the estimated carrying value, then an impairment is deemed to have occurred. In estimating the fair value of our reporting units, we used the income approach, which utilizes forecasted discounted cash flows to estimate the fair value. We also considered total market capitalization as of June 30, 2003 and the average market capitalization for a period one month prior to and subsequent to that date in order to assess the volatility of the market capitalization.
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Based on our impairment analysis, we concluded that goodwill, related to one of our reporting units in the Healthcare Staffing segment, was impaired. As required by FAS No. 142, in measuring the amount of goodwill impairment, we made a hypothetical allocation of the estimated fair value of the reporting unit to the tangible and intangible assets (other than goodwill) of the reporting unit. Based on this allocation, we concluded that $79,897,000 of recorded goodwill was impaired. The goodwill impairment has been expensed as a non-cash charge to continuing operations during the second quarter of 2003. We will continue to evaluate the goodwill balance for impairment as required under FAS No. 142.
Interest Income - Interest income, net decreased 54.3 percent from $634,000 for the nine months ended September 30, 2002 to $290,000 for the nine months ended September 30, 2003. This decrease was primarily the result of lower interest income earned during the 2003 period on interest bearing cash, cash equivalents and marketable securities account balances, which were reduced compared to the 2002 period, primarily due to cash used in the April 2002 HPO acquisition.
Provision for Income Taxes - Our effective tax rate was 0.1 percent for the nine months ended September 30, 2003, as compared to an effective tax rate of 38.2 percent for the corresponding period in 2002. The difference in our tax rate for the first nine months of 2003, as compared with the corresponding period of 2002 was primarily due to the non-deductibility of goodwill impairment recognized in the 2003 period.
LIQUIDITY AND CAPITAL RESOURCES
The change in our liquidity during the nine months ended September 30, 2003 is the net effect of funds provided by operations and funds provided by investing activities, offset by funds used for financing activities. For the nine months ended September 30, 2003, funds used in financing activities were $4,264,000. Funds provided by operating activities were $6,409,000 for the nine months ended September 30, 2003. Funds provided by investing activities were $853,000, including $2,500,000 from the recovery of cash held in escrow with respect to an earn-out provision of the HPO acquisition and $2,000,000 from the maturity of marketable securities, reduced by $3,727,000 used for the acquisition of property and equipment, consisting primarily of the PeopleSoft enterprise wide information technology system.
On June 15, 2001, the Board of Directors authorized the repurchase, from time to time, of up to 2,941,000 shares of On Assignment’s common stock. During the nine months ended September 30, 2003, we repurchased 1,138,500 shares of common stock on the open market at a total cost of $4,552,000 bringing the total shares repurchased under the authorization to 2,662,500 at a total cost of $22,970,000. At September 30, 2003, we had remaining authorization to repurchase 278,500 shares of our common stock.
Our working capital at September 30, 2003 was $54,184,000, including $35,355,000 in cash and cash equivalents. Our working capital requirements consist primarily of the financing of accounts receivables.
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Although we do not have a borrowing facility in place, we believe we have the ability to enter into a borrowing facility if and when we deem such a facility appropriate. While there can be no assurances in this regard, we expect that internally-generated cash together with our borrowing ability will be sufficient to support our working capital needs and other obligations on both a short and long-term basis.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. This statement amends FAS No. 133 to clarify the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. FAS No. 149 is effective for contracts entered into or modified after September 30, 2003. The adoption of FAS No. 149 did not have a material effect on our financial condition, results of operations or liquidity.
In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. The statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. FAS No. 150 must be applied immediately to instruments created or modified after May 31, 2003. The adoption of FAS No. 150 did not have a material effect on our financial condition, results of operations or liquidity
CRITICAL ACCOUNTING POLICIES:
Our accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2002. We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.
Allowance For Doubtful Accounts. We estimate an allowance for doubtful accounts related to trade receivables based on our analysis of specific accounts and historical collection experiences applied to the remaining general accounts. For specific accounts, we use our judgment, based on available facts and circumstances, to record a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. For the remaining general accounts, a general reserve is established based on a range of percentages applied to aging categories. These percentages are based on historical collection experience. Actual results may differ from our estimates of the recoverability of amounts due, which may materially affect our future financial results.
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Accrued Workers’ Compensation. We are partially self-insured for workers’ compensation expense. The workers’ compensation program covers all of our temporary professionals and regular employees. In connection with this program, we pay a base premium plus actual losses incurred up to certain levels and are insured for losses greater than certain levels per occurrence and in the aggregate. The self-insurance claim liability is determined based on claims filed and claims incurred but not reported. In order to ensure that the accrued workers’ compensation balance is adequate to cover all costs incurred under our workers’ compensation program, at the end of each fiscal quarter, an actuarial report is prepared by an independent third party who calculates our self-insurance claim liability based on historical experience and trends of industry data. If historical experiences and industry trends change, the self-insurance claim liability calculated by the third-party actuary could change by a material amount.
Contingencies. We account for contingencies in accordance with FAS No. 5, “Accounting for Contingencies”. FAS No. 5 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal and workers’ compensation matters requires us to use our judgment. While we believe that our accruals for these matters are adequate, if the actual loss from a loss contingency is significantly different than the estimated loss, results of operations may be over or understated.
Goodwill. See our discussion regarding impairment of goodwill under “Changes in Results of Operations for the Nine Months Ended September 30, 2003 and 2002”.
With respect to our goodwill impairment testing, the fair market value of our reporting units was estimated by us using the income approach, which utilizes forecasted discounted cash flows to estimate the fair value. Judgments and assumptions about future values are complex and often subjective. They can be affected by a variety of factors, including but not limited to, significant negative industry or economic trends, significant changes in the manner or use of the acquired assets or the strategy of our overall business and significant underperformance relative to expected historical or projected future operating results. Although we believe the judgments and assumptions used in our impairment tests are reasonable and appropriate, there is nonetheless a high degree of uncertainty and judgment involved.
The fair market value was compared to the carrying value for each reporting unit. Based on this comparison, we determined that the goodwill related to one of the reporting units in the Healthcare Staffing segment was impaired. We have recognized an impairment charge of $79,897,000 during the second quarter of 2003. At September 30, 2003, we have a remaining goodwill balance of $43,997,000, which we will continue to evaluate for impairment as required under FAS No. 142.
Identifiable Intangible Assets and Long-Lived Assets. In conjunction with our test of goodwill impairment as discussed above, we also concluded there were sufficient indicators to require us to perform an analysis to assess whether any of our identifiable intangible assets and long-lived assets were impaired at June 30, 2003. FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
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Assets,” is the authoritative standard on the accounting for the impairment of identifiable intangible assets and long-lived assets subject to amortization and depreciation. FAS No. 144 requires us to recognize an impairment loss only if the carrying amount of the intangible assets or long-lived assets are not recoverable and exceeds their fair value. The assets are deemed not recoverable when their carrying amount exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. Assumptions used to arrive at the undiscounted cash flows in the impairment test of intangible assets and long-lived assets were the same assumptions used in our goodwill impairment tests. Results of our testing at June 30, 2003 indicated that the carrying value of the intangible assets and long-lived assets were recoverable and, therefore, there was no impairment. We will continue to evaluate the carrying amount of the identifiable intangible assets and long-lived assets for impairment as required under FAS No. 144.
COMMERCIAL COMMITMENTS:
In addition to the Commercial Commitments previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2002, we have subsequently entered into the following significant commitments:
We are completing our initial implementation of a PeopleSoft enterprise wide information technology system. As of September 30, 2003, we have incurred approximately $5,395,000 in capital expenditures related to this project. There were no costs incurred prior to 2002. We expect to incur approximately $1,000,000 over the next three months to complete the initial implementation phase. In addition, we are planning to implement further enhancements to our PeopleSoft applications during 2004, however, we currently have not entered into any commitments with regard to these enhancements.
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Item 3 – Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks arising from transactions in the normal course of business, principally risks associated with interest rate and foreign currency fluctuations. We are exposed to interest rate risk from our held-to-maturity investments. The interest rate risk is immaterial due to the short maturity of the majority of these investments. We are exposed to foreign currency risk from the translation of foreign operations into U.S. dollars. Based on the relative size and nature of our foreign operations, we do not believe that a ten percent change in foreign currencies would have a material impact on our financial statements.
Item 4 – Controls and Procedures
Management, including our Chief Executive Officer and President and Executive Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and President and Executive Vice President, Finance and Chief Financial Officer concluded that our disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports that we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
There have been no changes in our internal controls over financial reporting identified in connection with the evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934 that occurred during our last fiscal quarter that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting.
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Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment agreement between the Company and Peter Dameris, dated as of October 27, 2003
31.1 Certification of Joseph Peterson, M.D., Chief Executive Officer and President pursuant to rule 13a-14(a).
31.2 Certification of Ronald W. Rudolph, Executive Vice President, Finance and Chief Financial Officer pursuant to rule 13a-14(a).
32.1 Certification of Joseph Peterson, M.D., Chief Executive Officer and President pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Ronald W. Rudolph, Executive Vice President, Finance and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
(1) Current report on Form 8-K was filed with the commission on August 6, 2003 to furnish Item 12 disclosure thereon. This report furnished a press release announcing our financial results for the second quarter of 2003.
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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.
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November 14, 2003 |
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/s/ Joseph Peterson, M.D. |
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Joseph Peterson, M.D. |
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Chief Executive Officer
and President |
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Date: |
November 14, 2003 |
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/s/ Ronald W. Rudolph |
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Ronald W. Rudolph |
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Executive Vice
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