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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_________________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1999
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 000-22309
ASI SOLUTIONS INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 13-3903237
<S> <C>
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
</TABLE>
780 Third Avenue, New York, New York 10017
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 319-8400
------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Common Stock, par value $0.01 per share
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____
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on June 21, 1999 was $52,310,504. The
calculation of holdings by non-affiliates is based upon the assumption, for
these purposes only, that directors, executive officers and persons holding 10%
or more of the registrant's Common Stock, par value $0.01 per share, are
affiliates.
The number of shares of the registrant's Common Stock, par value $0.01 per
share, outstanding on June 21, 1999 was 6,538,813.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the Registrant's
Annual Meeting of Stockholders to be held on August 18, 1999 are incorporated by
reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
Overview
ASI Solutions Incorporated (the "Company") is a leading national provider
of human resources outsourcing services for large organizations seeking to hire,
train and develop a higher quality, more effective workforce. The Company's
services are organized into three core areas: performance improvement services,
employment process outsourcing and compensation services and market share
studies. The Company, which has been providing human resources services for over
19 years, believes that it is well positioned to be a single-source solution for
organizations which outsource all or a portion of these human resources
functions.
The Company was founded in 1978 as a New York corporation by Bernard F.
Reynolds, Eli Salig and Seymour Adler and was reorganized (the "Reorganization")
in March 1996 as a Delaware holding company for its three subsidiaries,
Assessment Solutions Incorporated ("Assessment Solutions"), Proudfoot Reports
Incorporated ("Proudfoot") and C3 Solutions Incorporated ("C3"). On April 16,
1997, the Company completed the initial public offering of 1,800,000 shares of
the Company's common stock, par value $0.01 per share (the "Common Stock"). On
August 14, 1997, T3 Solutions Incorporated ("T3") was incorporated, and on
November 14, 1997, the Company acquired McLagan Partners Incorporated and its
related entities.
Services
Performance Improvement Services. The Company provides a comprehensive
range of workforce performance improvement services. The Company believes that
the role of customer service has assumed a greater level of importance in terms
of customer acquisition and retention as heightened competition has led to the
availability of an increased number of alternative or substitute products and
services in virtually all industries. As a consequence, companies are becoming
increasingly vigorous in their efforts to ensure that their customer service
meets the highest quality standards. The Company meets this need by providing
solutions that help clients to assess and select more qualified employees, train
and develop existing employees and to measure performance on a continuing basis
to ensure that service quality remains high. The Company custom designs programs
for clients. This generally involves field research and job analysis to
determine the critical components of a position and the key competencies
required to execute it successfully. Many of the Company's projects include the
use of live simulations, either in person or over the telephone, since the
Company has found that the use of job-specific, behavior-based techniques to
determine a candidate's ability to actually perform the required tasks provides
clients with a more qualified workforce. Assessment and selection services range
from high volume telephone simulation of job candidates, both internal and
external, to comprehensive executive assessment programs. Training and
development programs also utilize the Company's expertise in conducting live
simulations for job skill evaluation. The Company also provides performance
measurement, or monitoring, services for clients who engage in large-scale use
of call centers for their customer contact function.
Employment Process Outsourcing. The Company offers complete employment
process outsourcing services to clients who have large-scale hiring needs and
who do not have the in-house capacity to fulfill their needs. Employment
processes provided by the Company typically include: advertising for and
recruiting applicants; establishing automated telephonic voice response systems
to screen prospective applicants; arranging for the physical facilities and
equipment necessary for the pre-screening process; performing background checks
on applicants; and conducting testing and simulations utilizing the Company's
assessment expertise to select applicants for recommendation to the client. The
Company can also provide any of these services individually on an as needed
basis. In particular, the Company provides
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clients who have their own internal employment processes with ongoing background
check services. To meet a client's needs, the Company is frequently asked to
secure facilities and equipment, establish an interactive voice response system
to screen prospective applicants, develop proprietary database and report
generation software and staff a facility with test administrators and
coordinators. The Company has in the past scheduled and tested up to 500
applicants per day, provided client access to the database for ongoing status
reports and provided complete support up to the point of hire.
Compensation Services and Market Share Studies. The Company provides a
series of surveys to the financial services and securities industries. These
include compensation surveys for bank and brokerage and investment management
clients as well as market share surveys for retail operations and performance
monitoring services for institutional operations within the financial services
industry. The Company's consultants and analysts work closely with clients
throughout the year to ensure the accuracy and consistency of survey data. Only
participating clients may purchase surveys. In addition to domestic surveys, the
Company serves both the European and Asian markets through its foreign offices.
The Company also provides various compensation consulting services to its client
base.
Clients
The Company's clients are in a wide range of industries, including
telecommunications, financial services, information technology, consumer
products and healthcare, and are principally Fortune 500 companies for which
customer service, sales and call center functions are critical components of
their businesses. Current customers include American Express Company, Bell
Atlantic, BellSouth Corporation, Citibank, N.A., Morgan Stanley Dean Witter
Discover & Co., Hewlett-Packard Company, Merrill Lynch Incorporated, Goldman,
Sachs & Co., United Parcel Service of America, Inc, the Internal Revenue
Service, AT&T Wireless Services and Cablevision. The Company provides its
services primarily through its two operations centers in Melville, New York, but
also through its regional offices and at clients' locations. Compensation
services are provided through offices in Stamford Connecticut, Chicago, London,
Tokyo and Hong Kong. The only customer accounting for more than 10% of the
Company's revenues in fiscal 1999, 1998 and fiscal 1997 was Bell Atlantic,
representing 28% in 1999 and 30% in both 1998 and 1997.
Competition
The Company believes that the human resources industry is highly fragmented
and that no one participant or small number of participants is dominant in the
industry. The principal competition encountered by the Company across the full
range of services provided by the Company are human resources consulting firms,
smaller companies who are specialized providers of certain services provided by
the Company and consulting firms that are affiliated with large multinational
accounting firms. In addition, the human resources staffs of many large
organizations which are existing or potential clients of the Company may already
provide one or more of the basic services provided by the Company. Key
competitive factors include depth of industry knowledge, breadth of skills and
services offered, level of experience, flexibility, responsiveness to customer
requests, availability of resources to perform a wide variety of projects in a
timely manner and price.
In the area of performance improvement services, the Company encounters
competition from firms such as Aon Consulting, Development Dimensions
International, Personnel Decisions International, The Center for Creative
Leadership and Achieve Global. In the area of employment process outsourcing,
the Company competes with the human resources outsourcing departments within
organizations such as Aon Consulting, Ernst & Young LLP, Fiserve, Inc., Manpower
Temporary Services and Norrell Corporation. While there are many firms who offer
compensation consulting services such as Towers Perrin and Hewitt Associates,
the Company's compensation survey service for the financial services industry
has no direct competition.
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Intellectual Property and Other Proprietary Rights
The Company primarily relies on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company generally enters into
confidentiality agreements with its employees and clients that limit access to
and distribution of its proprietary information. The Company also believes that
factors such as the technical and creative skills of its personnel, the
Company's corporate knowledge and expertise in behavioral assessment and name
recognition are essential to establishing and maintaining a leadership position
in its industry. The Company seeks to protect its database, documentation and
other written materials under trade secret and copyright laws.
Employees
As of March 31, 1999, the Company employed 534 employees, of whom 391 were
full-time and 143 were part-time. Historically, the Company has generally been
able to satisfy its hiring needs. No assurance can be given, however, that this
will continue to be the case, particularly if the Company experiences
substantial future growth. The inability of the Company to hire sufficient,
qualified personnel to service its future growth would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has no collective bargaining agreements or any similar union
agreements and the Company has never experienced any work stoppages. The Company
considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in leased offices occupying
approximately 11,300 square feet at 780 Third Avenue, New York, New York 10017.
The lease for this space will expire in 2010. The Company also leases office
space at the following locations: Campbell, California; St. Louis, Missouri;
Washington, D.C.; Boston, Massachusetts; and two offices in Melville, New York.
The terms of these leases expire between 1999 and 2005. Through its acquisition
of McLagan in November, 1997, the Company acquired leases in Stamford,
Connecticut and Chicago, Illinois for 11,000 and 6,100 square feet,
respectively. These leases expire in 2001 and 2000, respectively. The Company
also acquired leased office space in London, Tokyo and Hong Kong through its
acquisition of McLagan.
The Company anticipates that as its business grows, it will establish more
regional offices and continue to enlarge existing offices.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings
that are incidental to the conduct of its business. The Company is not involved
in any pending or threatened legal proceedings which the Company believes could
reasonably be expected to have a material adverse effect on the Company's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol ASIS. The high and low sales prices of the Common Stock each calendar
quarter, as reported by the Nasdaq National Market, were as follows:
<TABLE>
<CAPTION>
Fiscal 2000:............................. High Low
---- ---
<S> <C> <C>
First quarter (through June 21, 1999).. 10 7
Fiscal 1999:
First quarter ......................... 11 9/16 7 3/4
Second quarter......................... 8 3/4 5 3/4
Third quarter.......................... 9 5 1/2
Fourth quarter......................... 11 7 3/8
</TABLE>
As of June 21, 1999, there were 53 holders of record of the Company's
Common Stock. There were 6,538,813 shares of Common Stock outstanding on June
21, 1999.
The market price of the Company's Common Stock has fluctuated significantly
since the initial public offering in April 1997. The market price of the Common
Stock could be subject to significant fluctuation in the future based on factors
such as major announcements by the Company or its competitors, quarterly
fluctuations in the Company's financial results or the financial results of
other companies in its industry, changes in analysts' estimates of the Company's
financial performance and general conditions in the human resource outsourcing
market and the financial markets. In addition, the stock market in general has
experienced extreme price and volume fluctuations, which have particularly
affected the market prices for many companies and which have often been
unrelated to the operating performance of the specific companies. There can be
no assurance that the market price of the Common Stock will not decline
substantially or otherwise continue to experience significant fluctuations in
the future.
Dividends
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain earnings, if any, for the development of its
business. Additionally, the Company's credit facility prohibits the declaration
and payment of cash dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
consolidated statements of income for the five fiscal years ended March 31,
1995, 1996, 1997, 1998 and 1999 and consolidated balance sheets as of March 31,
1995, 1996, 1997, 1998 and 1999 are derived from audited financial statements of
the Company. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this report.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data (1):
Revenue........................................... $8,023 $10,558 $18,819 $34,866 $59,653
Cost of services.................................. 4,179 5,207 8,706 17,664 29,755
------ ------- ------- ------- -------
Gross Profit...................................... 3,844 5,351 10,113 17,202 29,898
Operating expenses:
General and administrative....................... 1,948 2,225 3,224 7,871 14,263
Sales and marketing.............................. 744 1,100 1,890 3,273 5,408
Research and development......................... 375 614 1,272 1,747 1,938
------ ------- ------- ------- -------
Income from operations............................ 777 1,412 3,727 4,311 8,289
Other income...................................... 276 -- -- -- --
Interest (expense) income, net.................... (14) 2 2 (593) (1,710)
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Income before provision for income taxes.......... 1,039 1414 3,729 3,718 6,579
Provision for income taxes........................ (468) (682) (1,917) (1,599) (2,768)
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Net income........................................ $ 571 $ 732 $ 1,812 $ 2,119 $ 3,811
====== ======= ======= ======= =======
Basic earnings per share.......................... $ 0.12 $ 0.16 $ 0.39 $ 0.33 $ 0.59
Diluted earnings per share........................ $ 0.12 $ 0.16 $ 0.39 $ 0.33 $ 0.58
Weighted average common shares outstanding (2):
Basic............................................ 4,625 4,625 4,625 6,346 6,487
Dilutive effect of stock options and warrants.... 42 42 42 175 128
------ ------- ------- ------- -------
Diluted shares................................... 4,667 4,667 4,667 6,521 6,615
====== ======= ======= ======= =======
Operating Data:
Number of employees............................... 123 145 282 471 534
As of March 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Balance Sheet Data (1):
Cash and cash equivalents......................... $ 228 $ 70 $ 60 $ 964 $ 7,595
Working capital................................... 389 530 152 3,160 4,196
Total assets...................................... 2,470 4,243 8,595 44,561 50,540
Long-term debt, less current portion.............. -- -- 307 17,002 12,892
Total stockholders' equity........................ 850 2,396 3,243 15,696 19,686
</TABLE>
_____________
(1) The financial statements for all periods prior to March 31, 1996 have been
presented on a consolidated basis at the historical cost basis of the
entities involved in the Reorganization in a manner similar to a pooling of
interests. As of March 31, 1996, the date of the Reorganization, the
interests of the shareholders of such entities other than one controlling
shareholder have been accounted for as a purchase of minority interest. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" under Item 7 of Part II hereof and Note 1 to the Notes
to Consolidated Financial Statements under Item 8 of Part II hereof.
(2) See Note 2 to the Notes to Consolidated Financial Statements under Item 8 of
Part II hereof for a description of weighted average number of common shares
outstanding.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Selected Financial Data and the related notes thereto included in Item 6 and the
Company's Consolidated Financial Statements and related notes thereto included
in Item 8. This report also contains, in addition to historical information,
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. Any such statements are subject to risks and uncertainties that
could cause the actual results to differ materially from those projected in such
statements, including negative developments relating to unforeseen order
cancellations or the effect of a customer delaying an order, negative
developments relating to the Company's significant customers, a reduction in
demand for the Company's services, the impact of intense competition, changes in
the industry, and changes in the general economy. The Company undertakes no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
Overview
ASI Solutions Incorporated (the "Company") is a leading national provider of
human resources outsourcing services for large organizations seeking to hire,
train and develop a higher quality, more effective workforce. The Company's
services are organized into three core areas: performance improvement services,
employment process outsourcing and compensation services and market share
studies. The Company, which has been providing human resources services for
over 19 years, believes that it is well positioned to be a single-source
solution for organizations which outsource all or a portion of these human
resources functions.
The Company was founded in 1978 as a New York corporation by Bernard F.
Reynolds, Eli Salig and Seymour Adler and was reorganized (the "Reorganization")
in March 1996 as a Delaware holding company for its three subsidiaries,
Assessment Solutions Incorporated ("Assessment Solutions"), Proudfoot Reports
Incorporated ("Proudfoot") and C3 Solutions Incorporated ("C3"). On April 16,
1997, the Company completed the initial public offering of 1,800,000 shares of
the Company's common stock, par value $0.01 per share (the "Common Stock"). On
August 14, 1997, T3 Solutions Incorporated ("T3") was incorporated, and on
November 14, 1997, the Company acquired McLagan Partners Incorporated and its
related entities.
In fiscal 1994, the Company introduced and began generating revenue from a
broader array of employment process outsourcing services and performance
improvement services, which have favorably impacted the Company's results of
operations since that time. In October 1996, the Company introduced its
performance measuring services. In November 1997, the Company acquired McLagan,
a provider of a comprehensive array of compensation services and market share
studies primarily to the financial services and securities industries. From
fiscal 1995 to fiscal 1999, the Company's revenue has increased at a compounded
annual growth rate of approximately 65%, from $8.0 million in fiscal 1995 to
$59.7 million in fiscal 1999.
The Company charges for its services through contractual arrangements which
vary depending on the type of service and the nature of the Company's
relationship with the client and recognizes revenue upon completion of such
services. Within performance improvement services, the Company generally
charges a fixed fee for the initial design of a program, and then delivers
assessment and training services for a per person fee. For performance
measurement, the Company generally charges a fixed monthly fee, determined by
the duration of calls monitored, aggregate number of calls, and other relevant
variables. For employment process outsourcing contracts, the Company charges a
per-unit fee, which varies depending upon whether the client only needs one type
of service, such as employee background checks, or an entire recruitment and
hiring process. For larger engagements a minimum monthly fee may be charged.
Individual services generally are also provided on a per-unit fee basis, while
more complete services
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typically include a base fee component and a per-unit fee. Compensation services
and market share studies are provided at a fixed price per survey or per service
provided.
The Company's clients generally use its services on an as-needed basis,
requiring the Company to be able to respond quickly to changes in the volume of
services it must provide at a given time. The Company has taken a variety of
steps in order to address the operational challenges this situation presents and
increase its ability to control its cost of services. For example, the Company
engages many professionals, including a number of its psychologists, on a part-
time basis, which enables it to have access to a large number of staff on
relatively short notice without incurring significant fixed labor expenses. The
Company also cross-trains its employees on multiple aspects of the delivery of
its services, giving the Company as much flexibility as possible when staffing a
particular client engagement. In addition, the Company often provides its
services at client facilities or other off-site locations, limiting the
Company's need to expand its own facilities in response to rapid increases in
clients' demands for services.
Cost of services includes payroll and other expenses directly attributable
to the services delivered by the Company, as well as facilities costs, including
telephone expenses, costs for third party data utilized in background reports
(e.g., credit bureau reports) and any necessary travel directly related to
providing such services.
General and administrative expense includes payroll and related expenses
attributable to senior management, finance, information systems, human resources
and office administration personnel, facilities costs and general office
expenses pertaining to these functions, as well as outside professional fees.
Sales and marketing expense consists of salaries, commissions, travel-
related costs associated with the solicitation of new business, the cost of
designing, producing and distributing advertising and marketing materials, and
facilities and office-related expense pertaining to these activities.
Research and development expense includes payroll and related expenses,
facilities costs and necessary travel expenses pertaining to the professional
staff which develop new programs used in the conduct of performance improvement
services and employment process outsourcing. Such research and development
typically is only conducted in connection with services being performed under
existing client contracts, and is expensed as incurred.
The Company's operations are subject to Federal and various state, local and
foreign taxes, resulting in an effective tax rate typically of approximately
42%.
Because of the significant size and financial resources of the Company's
existing clients, write-offs for bad debts have historically not been material.
As of March 31, 1999, the following five customers represented 42% of the
Company's total accounts receivable: Bell Atlantic, BellSouth Corporation,
Southwestern Bell Corporation, Hewlett-Packard Company, and Science Applications
International Corporation.
In March 1996, the Company completed the Reorganization pursuant to which
its two predecessor companies, Assessment Solutions and Proudfoot, which were
separately owned but commonly controlled, became subsidiaries of the Company and
substantially all of the stockholders of the predecessors became stockholders of
the Company. The Reorganization has been accounted for as a reorganization of
entities under common control to the extent of the ownership of one stockholder
who held an approximately 60% interest in the entities both prior and subsequent
to the Reorganization. The remaining approximately 40% of the ownership
interests have been treated as if acquired and have been accounted for as a
purchase, resulting in an increase in goodwill of approximately $1,063,000.
This goodwill is being amortized over ten years.
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Fiscal 1999 Compared with Fiscal 1998
Revenue. Revenue increased $24.8 million, or 71.1%, from $34.9 million in
fiscal 1998 to $59.7 million in fiscal 1999. The acquisition of McLagan
Partners, the Company's compensation services and market share studies unit, in
November 1997, accounted for $14.8 million, or 60% of the increase. Other
service areas grew by $10.0 million, or 34.4%, in fiscal 1999. Performance
improvement services' revenue increased by $2.5 million, or 17.1%, from $14.6
million in fiscal 1998 to $17.1 million in fiscal 1999. Increases in training
and development and performance measurement resulted from an increase in the
client base. Employment process outsourcing revenue increased by $7.4 million,
or 51.3%, from $14.4 million in fiscal 1998 to $21.8 million in fiscal 1999.
Services provided to a large outsourcing client accounted for a majority of the
increase. Compensation services and market share study revenue increased by
$14.8 million from $5.9 million in fiscal 1998 to $20.8 million in fiscal 1999.
Cost of services. Cost of services increased $12.1 million, or 68.4%, from
$17.7 million in fiscal 1998 to $29.8 million in fiscal 1999. Expenses
associated with McLagan Partners, acquired in November 1997 accounted for $6.7
million, or 55.4% of the increase. Incentive payments, largely due to the
McLagan acquisition agreement, were $3.7 million in 1999 compared to $.6 million
in 1998. Cost of services for other business areas increased by 34.3% which is
consistent with the increase in revenue. Increased personnel and related
expenses, and outside services, such as telecommunications and service delivery,
needed to meet the higher business volume, accounted for the majority of the
increase. As a percentage of revenue, cost of services was 49.9% in fiscal
1999, compared to 50.7% in fiscal 1998.
General and administrative. General and administrative expense increased by
$6.4 million, or 81%, from $7.9 million in fiscal 1998 to $14.3 million in
fiscal 1999. Expenses associated with McLagan Partners, acquired in November
1997, accounted for $5.9 million, or 91.6% of the increase. Incentive payments,
largely due to the McLagan acquisition agreement, amounted to $3.3 million.
General and administrative expense for other service areas increased by only
9.1% as higher business volume provided better absorption of fixed expenses. As
a percentage of revenue, general and administrative expense was 23.9% in fiscal
1999 compared to 22.6% in fiscal 1998.
Sales and marketing. Sales and marketing expense increased by $2.1 million,
or 65.2%, from $3.3 million in fiscal 1998 to $5.4 million in fiscal 1999.
Expenses associated with McLagan Partners, acquired in November 1997, accounted
for $.6 million, or 28.6%, of the increase. Other service areas sales and
marketing expense increased by $1.5 million, or 49.2%. Approximately half of
this increase was due to increased sales personnel dedicated to new business
developments. As a percentage of revenue, sales and marketing expense was 9.1%
in fiscal 1999 compared to 9.4% in fiscal 1998.
Research and development. Research and development expense increased by $.1
million, or 6%, from $1.8 million in fiscal 1998 to $1.9 million in fiscal 1999.
Increased personnel accounted for the majority of the increase. As a percentage
of revenue, research and development expense was 3.2% in fiscal 1999 compared to
5% in fiscal 1998. The decrease is largely due to the fact that the
compensation services area has no research and development.
Interest (expense) income, net. Net interest expense increased by $1.1
million from $.6 million in fiscal 1998 to $1.7 million in fiscal 1999 due to
interest incurred on the debt to acquire McLagan Partners in November 1997 and
interest in short term bank borrowings, used principally to provide working
capital and to finance fixed asset additions.
Provision for income taxes. The difference between the effective federal
income tax provision calculated using statutory rates and the actual provision
recorded is principally due to the effect of state and local taxes. As a
percentage of pre-tax income, the provision for income taxes was 42.1% in fiscal
1999 compared to 43% in fiscal 1998.
The percentages listed are based on actual amounts rather than the rounded
amounts shown above.
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Fiscal 1998 Compared with Fiscal 1997
Revenue. Revenue increased $16.1 million or 85.3% from $18.8 million for
fiscal 1997 to $34.9 million for fiscal 1998. The acquisition of Mclagan
Partners, the Company's compensation and market studies unit, in November 1997,
accounted for $5.9 million, or 36.6%, of the increase. Other service areas'
revenue increased by $10.1 million or 53.7%. Performance improvement services'
revenue increased by $4.2 million, or 40.3%, from $10.4 million in fiscal 1997
to $14.6 million in fiscal 1998. Within this category, growth of 56.8% in
assessment services and 93% in performance measurement services more than offset
a reduction of 16.1% in training. Both assessment and performance measurement
had increases in volume with existing accounts as well as the addition of
several new clients. Training's decrease was due to a very large engagement
totaling $1.3 million performed in fiscal 1997, partially offset by increases in
business with other existing clients, the addition of several new clients and
the addition of revenue from the Company's acquisition of Effective Learning
Systems in August 1997. Employment Process Outsourcing revenue increased by $6
million or 71.2% from $8.4 million in fiscal 1997 to $14.4 million in fiscal
1998.
Cost of services. Cost of services increased $9.0 million or 102.9% from
$8.7 million in fiscal 1997 to $17.7 million in fiscal 1998. McLagan accounted
for $2 million of the increase, of which approximately $500,000 was for
incentive payments to employees. Personnel additions made to meet the higher
business volume accounted for over 70% of the increase. The remainder of the
increase was primarily due to outside services utilized to assist in service
delivery. As a percentage of revenue, cost of services increased from 46.3% in
fiscal 1997 to 50.7% in fiscal 1998. Higher personnel costs, largely due to the
nature of services provided, accounted for the majority of the increase. The
opening of a new 23,000 square foot operations center in July 1997 also
contributed to the increase.
General and administrative. General and administrative expense increased
$4.7 million from $3.2 million in fiscal 1997 to $7.9 million in fiscal 1998.
McLagan accounted for $2 million of the increase. Personnel additions accounted
for approximately one half of the increase. The remainder of the increase was
due to incentive payments to McLagan employees of approximately $450,000, higher
professional fees, rent, travel and amortization of goodwill associated with the
acquisitions of McLagan and Effective Learning Systems. As a percentage of
revenues, general and administrative expense increased from 17.1% in fiscal 1997
to 22.6% in fiscal 1998. Higher professional fees and goodwill amortization
accounted for the majority of the increase.
Sales and marketing. Sales and marketing expense increased by $1.4 million
or 73.2% from $1.9 million in fiscal 1997 to $3.3 million in fiscal 1998.
Personnel additions for both sales management and sales representatives
accounted for the majority of the increase. Higher advertising and marketing
expenses as well as public relations expenses also contributed to the increase.
As a percentage of revenues, sales and marketing expenses decreased from 10.0%
to 9.4% due to lower sales and marketing expenses as a percentage of sales for
McLagan, which was acquired in November 1997.
Research and development. Research and development expense increased by
$474,000 or 37.3% from $1.3 million in fiscal 1997 to $1.8 million in fiscal
1998. Personnel additions accounted for virtually all of the increase. As a
percentage of revenue, research and development expense decreased from 6.8% in
fiscal 1997 to 5% in fiscal 1998 largely due to the fact that McLagan had no
research and development expense.
Interest (expense) income, net. Net interest expense increased by
approximately $600,000 in fiscal 1998 due to interest incurred on $20 million
borrowed to fund the acquisition of McLagan and interest on short term bank
borrowings, used primarily to finance fixed asset additions.
Provision for income taxes. The difference between the effective federal
income tax provision calculated using statutory rates and the actual provision
recorded is principally due to the effect of state and
10
<PAGE>
local taxes. Provision for income taxes for fiscal 1997 also included $236,000
relating to the resolution of an Internal Revenue Service examination.
The percentages listed are based on actual amounts rather than the rounded
amounts shown above.
Liquidity and Capital Resources
The Company's liquidity needs arise from capital requirements, capital
expenditures and principal and interest payments on debt. Historically, the
Company's source of liquidity has been cash flow generated internally from
operations, supplemented by short-term borrowings under bank lines of credit and
long-term equipment financing.
Cash flow provided by operating activities in fiscal 1999 was $8,139,000, on
net income of $3,810,000, due to income generated from operations and increases
in accounts payable and accrued expenses. Cash flow used in investing
activities of $1,452,000 in fiscal 1999 was primarily for fixed asset additions.
Cash flow used in financing activities was $56,000 in fiscal 1999 and was
attributable to the repayment of outstanding debt.
In November 1997, the Company entered into a new bank credit agreement (the
"Credit Facility") which provides a $15 million term loan and a $5 million
revolving credit facility. The revolving credit facility was subsequently
increased to $10.0 million in December 1998. This agreement expires November 13,
2002. At March 31, 1999, borrowings under the term loan were $13,000,000 and
borrowings under the revolving credit facility were $4,700,000. The Company
also had borrowings at March 31, 1999 under an equipment lease facility of
$668,558. The Credit Facility contains various financial and other covenants
and conditions, including, but not limited to, limitations on capital
expenditures and paying dividends, making acquisitions and incurring additional
indebtedness. The Company received a waiver for non-compliance of certain loan
covenants as of March 31, 1999.
Management believes its working capital, line of credit and cash flows from
operations will be sufficient to meet expected future working capital
requirements.
Inflation
Inflation has had a minimal effect on the results of the Company.
Impact of Recently Issued Accounting Pronouncements
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which requires
that changes in comprehensive income be shown in a financial statement that is
displayed with the same prominence as other financial statements. Such
information is included in the Statement of Stockholders' Equity.
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), which changes the way public companies report
information about segments. SFAS 131, which is based on the management approach
to segment reporting, includes requirements to report selected segment
information quarterly and entity-wide disclosures about products and services,
major customers, and the material countries in which the entity holds and
reports revenues.
11
<PAGE>
Year 2000 Compliance
The Company has conducted a review of its information systems to identify
those areas which could be affected by the "Year 2000" issue. Key financial,
informational and operational systems have been inventoried and assessed, and
detailed plans were developed and implemented for the required systems
modifications or replacements. Due to significant expansion experienced by the
Company during the last three years, the Company has created new software or
modified existing software to continue providing superior customer service.
Through that process, the majority of systems used by the Company have become
Year 2000 compliant. Also, as part of the expansion, the Company has upgraded
the information systems' infrastructure, via the procurement of new hardware and
software that are certified by their manufacturers as year 2000 compliant.
Remaining hardware and software that are not compliant is minimal and will be
phased out by July 31, 1999.
The Company estimates that there are no significant costs associated with
the finalization of its Year 2000 compliance plans and believes that any costs
incurred will be internal, non-incremental costs. In addition third party
customers and suppliers are in the process of providing written assurances for
the Company that they expect to be Year 2000 compliant over the next 12 months.
The Company has received assurance from the vast majority of these third parties
that they will be compliant. Management believes that third party non-
compliance will not materially impact the Company's operations.
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk, i.e. the risk of loss arising from
adverse changes in interest rates and foreign currency exchange rates.
Interest Rate Exposure
The Company has entered into an interest rate swap at a fixed rate of 9 %
per annum on borrowings under its credit facility of up to $5,000,000. A one
percent change in interest rates on variable rate debt would increase interest
expense by approximately $134,000 based upon the variable rate debt outstanding
at March 31, 1999.
Foreign Exchange Exposure
Portions of the Company's operations are conducted in Hong Kong, Japan and
the United Kingdom. Exchange rate fluctuations between the US dollar/Hong Kong
dollar, US dollar/Japanese Yen and the US dollar/pound sterling result in
fluctuations in the amounts relating to the Hong Kong, Japan and United Kingdom
operations reported in the Company's consolidated financial statements.
The Company has not entered into hedging transactions with respect to its
foreign currency exposure, but may do so in the future.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.................................................... 14
Consolidated Balance Sheets as of March 31, 1999 and 1998............................ 15
Consolidated Statements of Income for the years ended March 31, 1999, 1998 and 1997.. 16
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1999,
1998 and 1997....................................................................... 17
Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998
and 1997............................................................................ 18-19
Notes to Consolidated Financial Statements........................................... 20-33
</TABLE>
13
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of ASI Solutions Incorporated:
In our opinion, the consolidated financial statements listed in the Index
appearing under Item 8 on page 13 present fairly, in all material respects, the
consolidated financial position of ASI Solutions Incorporated as of March 31,
1999 and 1998, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended March 31, 1999, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
May 20, 1999
14
<PAGE>
ASI Solutions Incorporated
Consolidated Balance Sheets
March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
ASSETS:
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 7,595,366 $ 964,106
Restricted cash 1,891,821
Accounts receivable, net 12,874,967 10,706,699
Prepaid expenses and other current assets 576,424 678,531
Deferred income taxes 299,478 106,158
---------------- ---------------
Total current assets 21,346,235 14,347,315
Property and equipment, net 5,218,408 5,318,524
Intangible assets, net 23,258,472 24,132,292
Deferred financing costs 391,386 460,075
Other assets 325,518 302,706
---------------- ---------------
Total assets $50,540,019 $44,560,912
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current portion, notes payable to bank $ 7,143,658 $ 4,951,602
Current portion, subordinated notes payable 1,666,666 1,666,666
Other debt 66,501 267,667
Accounts payable and accrued expenses 7,946,658 4,129,877
Accrued income taxes 326,964 171,864
---------------- ---------------
Total current liabilities 17,150,447 11,187,676
Deferred income taxes 543,593 423,140
Notes payable to bank, less current portion 11,224,900 13,668,558
Subordinated notes payable, less current portion 1,666,667 3,333,334
Other liabilities 268,373 252,663
---------------- ---------------
Total liabilities 30,853,980 28,865,371
Commitments
Stockholders' Equity:
Preferred stock, $.01 par value, authorized 2,000,000
shares; no shares issued
Common stock, $.01 par value, authorized 18,000,000
shares; issued and outstanding 6,497,631 in 1999 and
6,466,701 in 1998 65,432 65,123
Additional paid in capital 11,038,250 10,841,728
Accumulated other comprehensive income (7,839) 9,382
Retained earnings 8,982,927 5,172,039
Less: Treasury stock, 45,534 shares at cost (392,731) (392,731)
---------------- ---------------
Total stockholders' equity 19,686,039 15,695,541
---------------- ---------------
Total liabilities & stockholders' equity $50,540,019 $44,560,912
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
ASI Solutions Incorporated
Consolidated Statements of Income
For each of the three years in the period ended March 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 59,653,278 $ 34,865,557 $ 18,818,839
Cost of services 29,755,156 17,663,690 8,705,528
------------ ------------ ------------
Gross profit 29,898,122 17,201,867 10,113,311
Operating expenses:
General and administrative 14,263,341 7,871,423 3,224,083
Sales and marketing 5,407,659 3,272,518 1,889,910
Research and development 1,938,061 1,746,507 1,272,043
------------ ------------ ------------
Income from operations 8,289,061 4,311,419 3,727,275
Interest expense (income), net 1,709,734 592,841 (1,343)
------------ ------------ ------------
Income before provision for income taxes 6,579,327 3,718,578 3,728,618
Provision for income taxes 2,768,439 1,598,989 1,916,926
------------ ------------ ------------
Net income $ 3,810,888 $ 2,119,589 $ 1,811,692
============ ============ ============
Basic earnings per share $ 0.59 $ 0.33 $ 0.39
============ ============ ============
Diluted earnings per share $ 0.58 $ 0.33 $ 0.39
============ ============ ============
Weighted average common shares outstanding:
Basic shares 6,487,253 6,346,053 4,625,158
Diluted effect of stock options and
warrants 128,018 175,345 42,246
------------ ------------ ------------
Diluted shares 6,615,271 6,521,398 4,667,404
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
ASI Solutions Incorporated
Consolidated Statements of Stockholders' Equity
For each of the three years in the period ended March 31, 1999
<TABLE>
<CAPTION>
ASI Solutions Accumulated
Incorporated Additional Other Deferred
Common Stock Paid-In Comprehensive Retained Offering Treasury
Shares Amount Capital Income Earnings Costs Stock Total
------ ------ ------- ------ -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
April 1, 1996 4,625,158 $46,252 $1,109,218 $1,240,758 $ 2,396,228
Net Income 1,811,692 1,811,692
Deferred offering costs $(965,034) (965,034)
--------- ------- ---------- ---------- --------- -----------
March 31, 1997 4,625,158 46,252 1,109,218 3,052,450 (965,034) 3,242,886
Issuance of common
stock in initial public
offering and payment of
offering costs 1,800,000 18,000 9,016,283 965,034 9,999,317
Transfer of common stock
back to the company (45,534) $(392,731) (392,731)
Issuance of common stock
for Employee Stock
Purchase Plan 17,077 171 86,927 87,098
Issuance of common stock
for acquisition
of McLagan Partners, Inc. 50,000 500 449,500 450,000
Issuance of common stock
related to bank
financing 20,00 200 179,800 180,000
Translation adjustment $ 9,382 9,382
Net income 2,119,589 2,119,589
--------- ------- ---------- -------- ---------- --------- --------- -----------
March 31, 1998 6,466,701 65,123 10,841,728 9,382 5,172,039 - (392,731) 15,695,541
Issuance of common
stock for Employee
Stock Purchase Plan 30,930 309 196,522 196,831
Translation adjustment (17,221) (17,221)
Net income 3,810,888 3,810,888
--------- ------- ----------- -------- ---------- --------- --------- -----------
March 31, 1999 6,497,631 $65,432 $11,038,250 $ (7,839) $8,982,927 - $(392,731) $19,686,039
========= ======= =========== ======== ========== ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
ASI Solutions Incorporated
Consolidated Statements of Cash Flows
For each of the three years in the period ended March 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flow from operating activities:
Net income: $ 3,810,888 $ 2,119,589 $1,811,692
Adjustments to reconcile net income to
net cash:
Depreciation and amortization 2,418,164 1,378,232 434,614
Provision for doubtful accounts 75,503 108,153 (9,200)
Other 90,703 112,929 (14,298)
Deferred income taxes (72,867) 244,589 113,060
Changes in assets and liabilities,
net of the effect of business acquisitions:
Accounts receivable (2,231,542) (6,622,371) (2,146,639)
Prepaid expenses and other current assets 22,084 (334,960) (301,254)
Other assets (2,597) (31,890) (173,222)
Notes receivable from stockholders (25,461)
Accounts payable and accrued expenses 3,397,558 1,253,616 1,034,758
Income taxes 630,713 (876,260) 262,097
----------- ----------- ----------
Net cash provided by (used in) operating activities 8,138,607 (2,648,373) 986,147
----------- ----------- ----------
Cash flow from investing activities:
Acquisition of property and equipment (1,411,205) (3,556,780) (2,052,638)
Acquisition of businesses (16,943,188)
Other (40,333) (103,649)
----------- ----------- ----------
Net cash (used in) investing activities (1,451,538) (20,603,617) (2,052,638)
----------- ----------- ----------
Cash flow from financing activities:
Proceeds from borrowings 21,102,238 2,117,132
Repayment of debt (2,119,435) (4,834,080)
Payment of financing costs (25,000) (312,048)
Payment of offering costs (965,034)
Purchase of minority stockholder interest (95,000)
Restricted cash 1,891,821 (1,891,821)
Proceeds from issuance of common stock, net 196,831 10,086,415
----------- ----------- ----------
Net cash (used in) provided by financing activities (55,783) 24,150,704 1,057,098
----------- ----------- ----------
Effect of exchange rate changes on cash and
cash equivalents (26) 5,202
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 6,631,260 903,916 (9,393)
Cash and cash equivalents at beginning of period 964,106 60,190 69,583
----------- ----------- ----------
Cash and cash equivalents at end of period $ 7,595,366 $ 964,106 $ 60,190
=========== =========== ==========
Supplemental cash flow information:
Cash paid for:
Interest $ 1,588,680 $ 658,049 $ 40,027
Income taxes $ 2,328,978 $ 2,240,600 $1,531,705
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
ASI Solutions Incorporated
Consolidated Statements of Cash Flows (continued)
For each of the three years in the period ended March 31, 1999
Supplemental disclosures of non-cash investing and
financing activities:
1998
----
Transfer of common stock back to the Company
in full satisfaction of shareholder debt $ 392,731
Common stock issued in connection with acquisitions 450,000
Common stock issued in connection with debt
financing 180,000
Issuance of subordinated debt in connection with
acquisitions 5,000,000
Issuance of notes in connection with acquisitions 401,500
Details of acquisitions (Note 3):
Fair value of assets acquired (including goodwill) $23,794,688
Liabilities assumed (1,000,000)
Notes issued (5,401,500)
Stock issued (450,000)
-----------
Cash utilized for acquisitions $16,943,188
===========
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
ASI Solutions Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation:
--------------------------------------
On March 26, 1996, ASI Solutions Incorporated (the "Company") was incorporated
in the State of Delaware. Effective March 31, 1996, the Company issued 4,625,158
shares of Common Stock in exchange for substantially all of the issued and
outstanding shares of common stock of Proudfoot Reports Incorporated ("PRI") and
95% of the common stock of Assessment Solutions Incorporated ("Assessment
Solutions"). During fiscal 1997, the remaining 5% of the outstanding common
stock of Assessment Solutions was redeemed. The initial stockholders of the
Company were also the principal stockholders of PRI and Assessment Solutions,
the two previously separate but commonly controlled companies. After the
reorganization, Assessment Solutions and PRI are wholly owned subsidiaries of
the Company. C/3/ Solutions Incorporated ("C/3/") was formed on September 16,
1996 as a wholly owned subsidiary of the Company. On August 29, 1997, the
Company's newly created subsidiary, T/3/ Solutions Incorporated ("T/3/"),
acquired the assets of Effective Learning Systems. On November 13, 1997, the
Company's newly created subsidiary McLagan Partners Inc. ("McLagan Partners")
acquired substantially all of the assets and business operations of McLagan
Partners Incorporated and subsidiaries. The Company, Assessment Solutions, PRI,
C/3/, T/3/ and McLagan Partners are hereinafter referred to collectively as the
"Company."
The exchange described above has been accounted for as a reorganization since
all entities involved were under common control. The consolidated financial
statements reflect the interests attributable to the one controlling shareholder
of both combined entities at their historical basis of accounting. The remaining
interests have been accounted for as a purchase of minority interests and the
excess of the purchase price over the related historical cost of $1,063,000 has
been allocated to intangible assets. All intercompany accounts and transactions
have been eliminated in consolidation.
Effective April 16, 1997, the Company sold 1.8 million shares of common stock to
the public at a price of $6 per share in an initial public offering and pursuant
to an over-allotment option, the underwriter purchased 270,000 shares of common
stock at a price of $6 per share (the "Offering"). Proceeds from the Offering,
net of underwriters' discount and offering costs, were approximately $9,034,000.
Effective on the Offering date, the Company's Certificate of Incorporation (the
"Certificate") was restated to increase the number of authorized shares of
Common Stock to 18 million shares.
The Company
ASI Solutions Incorporated (the "Company") is a leading national provider of
human resources outsourcing services for large organizations seeking to hire,
train and develop a higher quality, more effective workforce. The Company's
services are organized into three core areas: performance improvement services,
employment process outsourcing and compensation services and market share
studies. The Company believes these services position the Company as a single-
source solution for many organizations that outsource all or a portion of their
human resources functions. The Company markets its services principally to
Fortune 500 companies for which customer service, sales and call center
functions are critical components of their businesses. Industries served by the
Company include telecommunications, financial services, information technology,
consumer products and healthcare.
20
<PAGE>
Notes to Consolidated Financial Statements - continued
2. Significant Accounting Policies:
-------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of all wholly owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity date of three months or less from the date of purchase to be a cash
equivalent.
Restricted Cash
At March 31, 1998, $1,891,821 was held in a certificate of deposit for use as
the first scheduled payment of principal and interest, due April 30, 1998, in
accordance with the terms of the subordinated note entered into in the McLagan
Partners Incorporated acquisition. The certificate of deposit matured and the
scheduled note payment was made during Fiscal 1999.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist of accounts receivable and cash deposits. Cash deposits
generally do not exceed insurable limits. Accounts receivable are concentrated
among a limited number of major companies. To reduce credit risk, the Company
performs credit evaluations of its customers but does not generally require
collateral. For the year ended March 31, 1999, one customer represented 28% of
revenue. For the years ended March 31, 1998 and 1997 one customer represented
30% of revenue. For the years ended March 31, 1999, 1998 and 1997 revenues from
the Company's top five customers represented approximately 46%, 55%, and 54% of
total revenues, respectively. Accounts receivable from five customers
represented approximately 42 % and 59% of total accounts receivable at March 31,
1999 and 1998, respectively.
Allowances for doubtful accounts were approximately $186,000, $122,000 and
$14,000 as of March 31, 1999, 1998 and 1997, respectively. Accounts receivable
write-offs amounted to $20,934 for fiscal year ended March 31, 1999. There were
no accounts receivable write-offs for fiscal years ended March 31, 1998 or 1997.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
21
<PAGE>
Notes to Consolidated Financial Statements-continued
Property and Equipment
Furniture and equipment are stated at cost and depreciated over the assets'
estimated useful lives of five years using the straight-line method. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life of the improvement. Capitalized software reflects costs related to
internally developed or purchased software that are capitalized and amortized on
a straight-line basis over a period of five years.
Maintenance and repairs are charged to expense as incurred; renewals and
improvements that extend the life of assets are capitalized. Upon retirement or
disposal, the asset cost and the related accumulated depreciation and
amortization are eliminated from the respective accounts and the resulting gain
or loss, if any, is included in the results of operations.
Intangible Assets
Intangible assets principally include customer lists, covenants not to compete
and the excess of purchase price over the fair value of identifiable net assets
acquired (goodwill). The intangible assets are amortized on a straight-line
basis over their estimated useful lives ranging from 5 to 40 years. Amortization
expense relating to intangible assets was $913,325, $400,929 and $84,005 for the
years ended March 31, 1999, 1998 and 1997, respectively. Accumulated
amortization relating to intangible assets was $1,393,990 and $625,324 as of
March 31, 1999 and 1998, respectively.
The Company assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through forecasted future operations. Impairment is evaluated by comparing
future cash flows (undiscounted and without interest charges) expected to result
from the use or sale of the asset and its eventual disposition, to the carrying
amount of the asset.
Long-lived Assets
If events or changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted) is less than the
carrying amount of the long-lived asset, an impairment loss is recognized. To
date, no impairment losses have been recognized.
Deferred Financing Costs
Deferred financing costs represent fees incurred in connection with the
Company's Credit Agreement with several banks, and are being amortized, using
the straight-line method, over 65 months, the length of the related term loan.
Amortization expense was $93,689 and $34,222 for the years ended March 31, 1999
and 1998, respectively.
Foreign Currency Translation
The financial statements of foreign subsidiaries, where the local currency is
the functional currency, are translated into U.S. dollars using exchange rates
in effect at period end for assets and liabilities and average exchange rates
during each reporting period for results of operations and cash flows.
Adjustments resulting from translation of financial statements are reflected as
a separate component of shareholders' equity.
22
<PAGE>
Notes to Consolidated Financial Statements - continued
Revenue
The Company recognizes revenue as earned upon the performance of agreed-upon
services.
Rent Expense
The Company recognizes rent expense for operating leases on a straight-line
basis over the term of the related lease.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
consists of the tax payable for the period and the change during the period in
deferred tax assets and liabilities. (See Note 9.)
Fair Value of Financial Instruments
Cash and cash equivalents and fixed rate debt obligations are reflected in the
accompanying consolidated balance sheets at amounts considered by management to
reasonably approximate fair value. Management is not aware of any factors that
would significantly affect the value of these amounts.
Earnings Per Share
In 1998, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where necessary, restated, to conform to the SFAS 128
requirements.
Impact of Recently Issued Accounting Pronouncements
In fiscal 1999 the Company adopted, Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which requires that
changes in comprehensive income be shown in a financial statement that is
displayed with the same prominence as other financial statements. Such
information is included in the Statement of Stockholders' Equity.
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"), which changes the way public companies report information about
segments. SFAS 131, which is based on the management approach to segment
reporting, includes requirements to report selected segment information
quarterly and entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds and reports
revenues. (See Note 14.)
23
<PAGE>
Notes to Consolidated Financial Statements - continued
3. Acquisitions:
------------
On November 13, 1997, the Company acquired substantially all of the assets
(primarily fixed assets of $483,978) and businesses of McLagan Partners
Incorporated and its related entities (collectively, "McLagan"). The
consideration paid by the Company for the assets of McLagan included (i) $15.5
million paid in cash; (ii) $5 million in subordinated notes bearing interest at
8 percent per annum and payable in three equal principal installments on each of
April 30, 1998. April 30, 1999 and April 30, 2000; and (iii) 50,000 shares of
the common stock, par value $.01 per share, of the Company. The company incurred
$828,188 of costs associated with the acquisition. The Company also discharged
approximately $1 million of McLagan's outstanding liabilities and agreed to
make deferred payments in an aggregate amount of $1 million, on April 30, 2000,
to certain employees of McLagan, provided that such employees continue to be
employed by the McLagan subsidiaries as of such date.
The acquisition has been accounted for using the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets purchased
based upon the fair values at the date of the acquisition. As a result,
$22,294,210 of the purchase price has been allocated to goodwill, customer lists
and other intangibles which are being amortized on a straight line basis over
periods from 5 to 40 years. The Company has an incentive compensation program
with former officers of McLagan which provides for payments to such officers
when certain milestone earnings are attained. (See Note 13.)
On August 29, 1997, the Company acquired the assets of Effective Learning
Systems, a New Jersey based training organization, for approximately $1,000,000.
While the effect of this acquisition on the financial statements of the Company
was not significant, the Company did enter into promissory notes, which were
fully paid as of March 31, 1999.
4. Property and Equipment:
----------------------
Property and equipment are comprised of the following:
1999 1998
Furniture and equipment $ 7,901,792 $ 6,551,022
Capitalized software 652,848 652,848
Leasehold improvements 357,422 304,593
----------- -----------
8,912,062 7,508,463
Less, accumulated depreciation and amortization 3,693,654 2,189,939
----------- -----------
$ 5,218,408 $ 5,318,524
=========== ===========
Depreciation and amortization expense relating to furniture and equipment
and leasehold improvements was approximately $1,374,000, $858,000 and $320,000
for the years ended March 31, 1999, 1998 and 1997, respectively. Amortization
expense relating to capitalized software was approximately $131,000, $83,000 and
$17,000 for the fiscal years ended March 31, 1999, 1998, and 1997, respectively.
24
<PAGE>
Notes to Consolidated Financial Statements - continued
5. Debt:
----
Notes Payable to Bank
- ---------------------
On November 13, 1997, the Company entered into a Credit Agreement with several
banks. The Credit Agreement consists of a $15 million term loan, the proceeds of
which were used in the financing of the acquisition of McLagan, and a $10
million revolving credit facility. Substantially all of the Company's assets are
held as collateral for this debt.
The term loan bears interest at the prime rate (7.75% at March 31, 1999) plus
0.25 percent or the eurodollar rate (1.0808 at March 31, 1999) plus 3.25
percent. The payment schedule under the term loan calls for quarterly
installment payments beginning on March 31, 1998. Borrowings under the revolving
credit facility bear interest at the prime rate or an optional eurodollar based
rate. As of March 31, 1999 and 1998, borrowings under the term loan were
$13,000,000 and $14,625,000, respectively and borrowings under the revolving
credit facility were $4,700,000 and $3,150,000, respectively.
The Credit Agreement expires on November 13, 2002 at which time any outstanding
principal and interest is payable. The Credit Agreement contains various
financial and other covenants and conditions, including but not limited to
limitations on capital expenditures and dividend payments, making acquisitions
and incurring additional indebtedness. The Company received a waiver for
non-compliance of certain loan covenants as of March 31, 1999.
The Company also has two equipment notes payable to a bank in the amount of
$668,558 and $845,160 at March 31, 1999 and 1998, respectively. Such notes are
payable monthly and bear interest at 8.97% and 9.65%.
Subordinated Notes Payable:
- --------------------------
In connection with the acquisition of McLagan (See Note 3), the Company issued
$5 million of subordinated notes bearing interest at 8% per annum and payable in
three equal principal installments on each of April 30, 1998, 1999 and 2000.
Such notes are subordinated to the Company's Credit Facility and equipment
borrowings. The amount outstanding under such notes as of March 31, 1999 was
$3,333,333.
Amounts due on the Company's debt financings discussed above are as follows:
2000 $ 8,876,825
2001 5,129,030
2002 4,315,694
2003 3,446,843
--------------
$ 21,768,392
==============
25
<PAGE>
Notes to Consolidated Financial Statements - continued
6. Accounts Payable and Accrued Expenses:
-------------------------------------
Accounts payable and accrued expenses are comprised of the following:
1999 1998
---- ----
Accounts payable $ 1,205,870 $ 1,957,020
Bonuses 4,938,826 741,136
Payroll, payroll taxes and benefits 679,595 209,232
Interest 259,769 164,244
Professional fees 184,123 114,813
Other 678,475 943,432
----------- -----------
$ 7,946,658 $ 4,129,877
=========== ===========
7. Lease Commitments:
-----------------
The Company leases facilities under various operating leases that expire on
various dates through 2010. The leases include escalations for operating
expenses and real estate taxes. Rent expense charged to operations was
$2,139,000, $1,585,000 and $879,000 for the years ended March 31, 1999, 1998 and
1997, respectively.
As of March 31 1999, future minimum annual rental payments under non-cancelable
operating leases are as follows:
Fiscal Year
-----------
2000 $ 1,650,179
2001 1,595,166
2002 1,370,955
2003 1,423,831
2004 1,322,288
Thereafter 3,893,199
8. Related Party Transactions:
--------------------------
During fiscal 1996, the Company loaned $233,519, $112,617 and $17,597 to Messrs.
Reynolds, Salig and Adler, respectively. The loans were evidenced by 5-year
notes bearing interest at the rate of 7% repaid per annum and requiring equal
annual principal payments over the term of the notes. On May
26
<PAGE>
Notes to Consolidated Financial Statements - continued
21, 1997, Messrs. Reynolds, Salig and Adler transferred 45,534 shares of the
Company's common Stock owned by them to the Company in full satisfaction of
these notes.
A director of the Company is also a partner of the law firm that is the
Company's general counsel. Expenses incurred by the Company for legal services
provided by this law firm were approximately $241,000, $691,000 and $400,000 for
the years ended March 31, 1999, 1998 and 1997, respectively. In addition
options to purchase 5,000 shares of common stock were issued to this director at
a price of $6.50 on January 15, 1997 and options to purchase 5,000 shares of
common stock were issued to this director at a price of $6.50 on November 4,
1998.
9. Income Taxes:
------------
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $1,436,018 $ 798,961 $1,295,771
State and local 769,094 332,986 508,095
Foreign 636,194 222,453
Deferred (72,867) 244,589 113,060
---------- ---------- ----------
$2,768,439 $1,598,989 $1,916,926
========== ========== ==========
</TABLE>
The tax provision for the year ended March 31, 1997 also included a $236,000
charge pertaining to an examination by the Internal Revenue Service.
The difference between the statutory Federal income tax rate and the effective
income tax rate is reconciled as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate provision $2,236,971 $1,264,317 $1,267,730
State and local taxes, net of Federal benefit 507,593 194,853 335,342
Non-deductible expenses 72,306 64,703 52,000
Prior Year income taxes 236,000
Other (48,431) 75,116 25,854
---------- ---------- ----------
$2,768,439 $1,598,989 $1,916,926
========== ========== ==========
</TABLE>
27
<PAGE>
Notes to Consolidated Financial Statements - continued
The components of deferred tax assets and liabilities as of March 31, 1999 and
1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current:
Bad debt reserve $ 75,918 $ 52,158
Accrued bonus 223,560 54,000
---------- ----------
Net current asset $ 299,478 $ 106,158
---------- ----------
Non-current:
Foreign Tax Credit $ 82,634
Straight-lining rent payments 109,222 $ 106,853
Fixed and intangible assets (735,449) (529,993)
---------- ----------
Net non-current liability (543,593) (423,140)
---------- ----------
Net deferred tax liability $(244,115) $(316,982)
========== ==========
</TABLE>
10. Retirement Plans:
----------------
The Company has a 401(k) profit sharing plan, covering substantially all
employees. Employees can contribute to a maximum of 15% of their earnings up to
IRS limitations. Contributions can be made by the Company on a discretionary
basis and vest over a five-year period. Contributions made by the Company to
the plan for the years ended March 31, 1999 and 1998 were approximately $317,000
and $75,000, respectively. Contributions made by the Company to the plan for
the year ended March 31, 1997 were not significant.
McLagan Partners, Inc. employees are covered under a separate plan. Employees
are eligible after one year of service. Employees are not required to make
contributions to the plan. The Company makes a discretionary contribution based
on the total compensation of participants. There were no contributions made by
the Company to the plan for the year ended March 31, 1999. Contributions made by
the Company to the plan for the year ended March 31, 1998 were approximately
$34,000.
11. Stock Plans:
-----------
Stock Option and Grant Plan
The Company's Stock Option and Grant Plan (the "Option Plan") was adopted by the
Company's Board of Directors as of March 31, 1996 and approved by its
stockholders on January 16, 1997. Officers, directors, employees, consultants
and key persons of the Company are eligible to participate in the Option Plan.
The Option Plan currently provides that options for an aggregate of 1,200,000
shares of Common Stock are available for award (at a price of no less than the
fair market value of the underlying stock at grant date) which generally vest
ratably over three years and expire ten years from the date of grant.
Stock Purchase Plan
In January 1997, the Company created an Employee Stock Purchase Plan (the "Stock
Purchase Plan"), which provides for eligible employees to purchase shares of
Common Stock, through regular period salary reductions of up to 10% of their
pre-tax gross compensation. A maximum of 250,000 shares of Common Stock may be
issued under the Stock Purchase Plan. Under applicable tax rules, an employee
may purchase no more than $25,000 of the fair market value worth of Common Stock
in any calendar year and certain
28
<PAGE>
Notes to Consolidated Financial Statements - continued
other tax limitations may apply. The Stock Purchase Plan is intended to qualify
as an employee stock purchase plan as defined in Section 423 of the Internal
Revenue Code.
Directors' Stock Option Plan
In January 1997, the Company adopted a stock option and grant plan for non-
employee directors pursuant to which options to acquire a maximum aggregate of
50,000 shares of Common Stock may be granted to non-employee directors. The
options issued vest ratably over three years, expire ten years from grant date
and cannot have exercise prices less than the fair market value of the Common
Stock on date of grant.
Summary of Options
A summary of stock option transactions for the years ended March 31, 1999, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998 March 31, 1997
--------------------------- ---------------------- ----------------------
Weighted Weighted
Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- --------- ----------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year 790,533 $ 7.26 393,533 $5.75 51,692 $0.79
Granted 314,000 8.05 406,000 8.71 341,841 6.50
Forfeited/expired (31,430) (9,000) 6.50
----------- --------- ----------- -------- --------- ----------
Options outstanding, end of year 1,073,103 $ 7.49 790,533 $7.26 393,533 $5.75
=========== ========= =========== ======== ========= ==========
Options exercisable, end of year 436,177 $ 6.49 245,866 $5.30 176,533 $4.83
=========== ========= =========== ======== ========= ==========
Options available for grant, end of year 176,897 59,467 456,467
=========== =========== =========
Weighted average fair value of options
granted during the year $ 3.88 $ 2.92 $ 2.64
=========== =========== =========
</TABLE>
The Company has applied the disclosure-only provision for SFAS 123. Had
compensation cost been determined based on the fair value at the grant date
consistent with the provisions of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below for the years ended March 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income attributable to common
stockholders as reported $3,810,888 $2,119,589 $1,811,692
========== ========== ==========
Unaudited pro forma net income $3,536,324 $1,921,552 $1,632,165
========== ========== ==========
Basic earnings per share,
as reported $ 0.59 $ 0.33 $ 0.39
========== ========== ==========
Diluted earnings per share,
as reported $ 0.58 $ 0.33 $ 0.39
========== ========== ==========
</TABLE>
29
<PAGE>
Notes to Consolidated Financial Statements - continued
<TABLE>
<S> <C> <C> <C>
Unaudited pro forma basic earnings per share $ 0.55 $ 0.30 $ 0.35
========== ========== ==========
Unaudited pro forma diluted earnings per share $ 0.53 $ 0.29 $ 0.35
========== ========== ==========
</TABLE>
The weighted average fair value of each option has been estimated on the date of
grant using the Black-Scholes options pricing model with the following weighted
average assumptions used for grants in 1999; no dividend yield; expected
volatility of 55%; risk-free interest rate (ranging from 4.74%-5.61%); and
expected lives ranging from approximately two to five years.The weighted average
fair value of each option has been estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions used for grants in 1998 and 1997, respectively; no dividend yield;
expected volatility of 40%; risk-free interest rate (ranging from 5.74%-6.37%);
and expected lives ranging from approximately three to five years.
The following table summarizes information about stock options outstanding at
March 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Exercisable Price
- ---------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.35 to 1.22 51,692 7 $0.79 51,692 $0.79
6.50 to 7.75 566,841 8.39 6.71 283,818 6.64
9.00 to 9.625 454,570 8.80 9.21 100,667 9.01
--------- ---- ----- -------- -----
$0.35 to 9.25 1,073,103 8.50 $7.49 436,177 $6.49
--------- ---- ----- -------- -----
</TABLE>
For the years ended March 31, 1999, 1998 and 1997, no options were exercised or
expired.
12. Equity:
------
Undesignated Preferred Stock
The Board of Directors of the Company is authorized, without further action of
the stockholders of the Company, to issue up to 2,000,000 shares of Preferred
Stock in one or more classes or series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, and the
number of shares constituting any series or the designation of such series.
However, pursuant to the Certificate, the holders of Preferred Stock would not
have cumulative voting rights with respect to the election of directors. Any
such Preferred Stock issued by the Company may rank prior to the Common Stock as
to dividend rights, liquidation preference or both, may have full or limited
voting rights and may be convertible into shares of Common Stock.
The purpose of authorizing the Board of Directors to issue Preferred Stock is,
in part, to eliminate delays associated with a stockholder vote on specific
issuances. The issuance of Preferred Stock could adversely affect the voting
power of the holders of Common Stock and could have the effect of delaying,
deferring, or preventing a change in control of the Company.
30
<PAGE>
Notes to Consolidated Financial Statements - continued
Stock Dividend
The Company's Board of Directors declared an approximately 1.06-for-1 stock
split in the form of a stock dividend effective January 15, 1997. All
references in the consolidated financial statements to shares of Common Stock
were retroactively adjusted to reflect this stock split.
13. Employment Agreements:
---------------------
In January 1997, the Company entered into employment agreements with three key
executives that expire on the third anniversary of the date upon which the
Company notifies the executive of the Company's intention to terminate (except
in the case of termination due to cause) their employment. The agreements
provide for aggregate salaries of $870,000 per annum plus fringe benefits and an
annual bonus to be determined by the Board of Directors. Each employment
agreement includes a covenant not to compete with the Company for a period of
three years after employment ceases.
In November 1997, the Company entered into employment agreements with four key
executives of McLagan Partners, Inc. that expire on March 31, 2000. The
agreements provide for aggregate base salaries of $600,000 and aggregate annual
incentive payments if certain performance targets are met. All incentive
payments amount to (a) for the period January 1, 1998 through March 31, 1999,
100% of McLagan's income between $4.5 and $6.75 million and 60% of the income in
excess of $6.75 million, and (b) for fiscal year 2000, 100% of McLagan's income
between $3.6 and $5.4 million and 60% of income in excess of $5.4 million. The
agreements include covenants not to compete with the Company for periods between
two and three years beyond the term of their employment with the Company. In
connection with this incentive plan, $4,254,000 for fiscal 1999 was paid to the
officers in May 1999, and at the request of the officers, $841,278 was paid to
employees in fiscal 1998.
14. Industry Segment Information:
----------------------------
ASI Solutions' reportable segments are performance improvement services,
employment process outsourcing and compensation services and market share
studies.
Revenues and profits in the performance improvement services segment are
generated by designing custom solutions for a client where ASI assesses job
candidates, trains existing employees and measures employee performance through
monitoring customer contact. Fees charged are generally based on the number of
people and calls processed plus a fee for the development of a customized
solution.
Revenues and profits in the employee process outsourcing segment are generated
by providing the following services: advertising for and recruiting of
applicants; establishing automated telephonic voice response systems to screen
prospective applicants; arranging for the physical facilities and equipment
necessary for the pre-screening process and performing background checks on
applicants. For larger engagements, the Company generally charges a fixed
minimum monthly fee which may increase based on the total number of people
processed. For other assignments, such as background checks, revenue is based
on a fixed fee for each candidate processed.
Revenues and profits in the compensation services and market share studies
segment are generated by providing survey services to the financial and
securities industries. These include compensation as well as market share
survey services for retail operations within the financial services industry.
Only participating clients may purchase surveys. The Company also provides
compensation services where revenue is generated based on a fee per assignment
basis.
31
<PAGE>
Notes to Consolidated Financial Statements - continued
The accounting polices of the segments are the same as those described in the
"Summary of Significant Accounting Policies". ASI Solutions evaluates the
performance of its segments and allocates resources to them based on their
operating contribution, which represents segment revenues less direct costs of
operation, excluding the allocation of corporate expenses. Identifiable assets
of the operating segments principally consist of net accounts receivable
associated with the segment activities. Accounts receivable from performance
improvement services and employment process outsourcing are managed on a
combined basis. All other identifiable assets not attributable to industry
segments are included in corporate assets. The Company does not track
expenditures for long lived assets on a segment basis.
The table below presents information on the revenues and operating contribution
for each segment for the two years ended March 31, 1999, and items which
reconcile segment operating contribution to the Company's reported pre-tax
income.
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998
(in thousands)
<S> <C> <C>
Revenue:
Performance Improvement Services $17,104 $14,538
Employment Process Outsourcing 21,763 14,381
Compensation Services and Market Share Studies 20,786 5,946
------- -------
$59,653 $34,865
------- -------
Operating contribution:
Performance Improvement Services $ 6,878 $ 6,755
Employment Process Outsourcing 8,500 5,304
Compensation Services and Market Share Studies 4,370 2,091
------- -------
$19,748 $14,150
------- -------
Consolidated expenses (income):
Interest, net $ 1,710 $ 593
Depreciation and Amortization 2,418 1,378
Selling, General and Administrative and
Research and Development 9,041 8,460
------- -------
13,169 10,431
------- -------
Income before income taxes $ 6,579 $ 3,719
------- -------
Identifiable Assets:
Performance Improvement and Employment Process
Outsourcing $13,136 $12,644
Compensation Services and Market Share Studies 5,283 3,684
Corporate 8,471 3,641
------- -------
$26,890 $19,969
------- -------
</TABLE>
32
<PAGE>
Notes to Consolidated Financial Statements - continued
The Company began providing compensation and market share studies in November
1997 with the acquisition of McLagan, through its United States and
international offices. All other revenues are generated in the United States.
International revenues in fiscal 1999 and 1998 were $6,775,828 and $1,893,879,
respectively.
In 1997 the Company was organized through the management of its two
subsidiaries, ASI and PRI. The revenues and net income for ASI in fiscal 1997
were $13,862,332 and $1,669,063, respectively. The revenues and net income for
PRI in fiscal 1997 were $4,956,507 and $142,629, respectively.
15. Quarterly Results of Operations (Unaudited):
-------------------------------------------
The following tables set forth unaudited financial data for each of the eight
consecutive fiscal quarters ended March 31, 1999.
<TABLE>
<CAPTION>
Quarter Ended
June 30 Sept. 30 Dec. 31 Mar. 31
------- -------- ------- -------
<S> <C> <C> <C> <C>
1999:
Revenue $12,013 $14,844 $18,058 $14,739
Gross Profit 6,149 7,630 8,985 7,134
Income before provision for income taxes 1,504 1,570 1,949 1,556
Net income 854 914 1,121 922
Diluted earnings per share $ 0.13 $ 0.14 $ 0.17 $ 0.14
1998:
Revenue $ 6,700 $ 5,905 $ 9,385 $12,875
Gross Profit 3,256 2,586 4,857 6,503
Income before provision for income taxes 740 296 1,153 1,529
Net income 418 169 658 875
Diluted earnings per share $ 0.07 $ 0.03 $ 0.10 $ 0.13
</TABLE>
33
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K is incorporated by
reference to the information contained in the Company's definitive Proxy
Statement for the Company's 1999 Annual Meeting of Stockholders (the "Proxy
Statement"), to be filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the Proxy Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) Financial Statements and Supplementary Data
-------------------------------------------
See Index to Consolidated Financial Statements under Item 8 in Part II
hereof.
(2) Exhibits
--------
See (c) below.
34
<PAGE>
(b) Reports on Form 8-K.
-------------------
None
(c) Exhibits
Exhibit
Number Description
------ -----------
2.1 Asset Purchase Agreement entered into as of November 13, 1997 by
and among McLagan Partners, Inc., McLagan Partners Incorporated
and the holders of all of the outstanding capital stock of
McLagan Partners Incorporated (incorporated by reference to the
relevant exhibit to the Company's Current Report on Form 8-K
dated November 13, 1997 (filed November 24, 1997))
2.2 Asset Purchase Agreement entered into as of November 13, 1997 by
and among McLagan Partners International, Inc., McLagan Partners
International Incorporated and the holders of all of the
outstanding capital stock of McLagan Partners International
Incorporated (incorporated by reference to the relevant exhibit
to the Company's Current Report on Form 8-K dated November 13,
1997 (filed November 24, 1997))
2.3 Asset Purchase Agreement entered into as of November 13, 1997 by
and among McLagan Partners Asia, Inc., McLagan Partners Asia
Incorporated and the holders of all of the outstanding capital
stock of McLagan Partners Asia Incorporated (incorporated by
reference to the relevant exhibit to the Company's Current Report
on Form 8-K dated November 13, 1997 (filed November 24, 1997))
3.1 First Restated Certificate of Incorporation of the Company
(incorporated by reference to the relevant exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997 (filed June 27, 1997))
3.2 By-laws of the Company (incorporated by reference to the relevant
exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997 (filed June 27, 1997))
4.1 Specimen of Common Stock Certificate (incorporated by reference
to the relevant exhibit to the Company's Registration Statement
on Form S-1 (File No. 333-20401) filed on January 24, 1997, as
amended)
10.1 Warrant Agreement by and between the Company and H.C. Wainwright
& Co., Inc. (incorporated by reference to the relevant exhibit to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997 (filed June 27, 1997))
10.2 Registration Rights Agreement between the Company, Bernard F.
Reynolds, Eli Salig and Seymour Adler, Ph.D. (incorporated by
reference to the relevant exhibit to the Company's Registration
Statement on Form S-1 (File No. 333-20401) filed on January 24,
1997, as amended)
35
<PAGE>
10.3 Stock Option and Grant Plan of the Company (incorporated by
reference to the relevant exhibit to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997 (filed June
27, 1997))
10.4 Director's Stock Option Plan of the Company (incorporated by
reference to the relevant exhibit to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997 (filed June
27, 1997))
10.5 Employee Stock Purchase Plan of the Company (incorporated by
reference to the relevant exhibit to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997 (filed June
27, 1997))
10.6 Employment Agreement between the Company and Bernard F. Reynolds
(incorporated by reference to the relevant exhibit to the
Company's Registration Statement on Form S-1 (File No. 333-20401)
filed on January 24, 1997, as amended)
10.7 Employment Agreement between the Company and Eli Salig
(incorporated by reference to the relevant exhibit to the
Company's Registration Statement on Form S-1 (File No. 333-20401)
filed on January 24, 1997, as amended)
10.8 Employment Agreement between the Company and Seymour Adler, Ph.D.
(incorporated by reference to the relevant exhibit to the
Company's Registration Statement on Form S-1 (File No. 333-20401)
filed on January 24, 1997, as amended)
10.9 Sublease dated July 2, 1996 between Assessment Solutions and
Nikon Inc. regarding the space at 1300 Walt Whitman Road,
Melville, New York (incorporated by reference to the relevant
exhibit to the Company's Registration Statement on Form S-1 (File
No. 333-20401) filed on January 24, 1997, as amended)
10.10 Lease dated January 27, 1984 between Assessment Solutions and 780
Third Avenue Associates regarding the space at 780 Third Avenue,
New York, New York, and the Third Amendment to the lease dated
August 7, 1996 by and among Assessment Solutions, Proudfoot and
780 Third Avenue Associates (incorporated by reference to the
relevant exhibit to the Company's Registration Statement on Form
S-1 (File No. 333-20401) filed on January 24, 1997, as amended)
10.11 Sublease dated October 6, 1994 between Proudfoot and Nikon, Inc.
regarding the space at 1300 Walt Whitman Road, Melville, New
York, and the Amendment to the sublease, dated July 2, 1996
(incorporated by reference to the relevant exhibit to the
Company's Registration Statement on Form S-1 (File No. 333-20401)
filed on January 24, 1997, as amended)
10.12 Lease dated January 25, 1996 between Assessment Solutions and
Pruneyard Associates regarding the space at 1999 South Bascom
Avenue, Campbell, California (incorporated by reference to the
relevant exhibit to the Company's Registration Statement on Form
S-1 (File No. 333-20401) filed on January 24, 1997, as amended)
10.13 Commitment letter dated March 3, 1997 between the Company and
Fleet Bank, N.A. (incorporated by reference to the relevant
exhibit to the Company's Registration Statement on Form S-1 (File
No. 333-20401) filed on January 24, 1997, as amended)
36
<PAGE>
+10.14 Agreement by and between Assessment Solutions and TeleSector
Resources Group, Inc. (incorporated by reference to the relevant
exhibit to the Company's Registration Statement on Form S-1 (File
No. 333-20401) filed on January 24, 1997, as amended)
10.15 Lease Agreement by and between 320 Expressway Associates and the
Company, dated March 27, 1997 (incorporated by reference to the
relevant exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 (filed August 14, 1997))
+10.16 Amendment No. 06 dated October 6, 1997 to the Agreement by and
between Assessment Solutions and TeleSector Resources Group,
Inc., d/b/a Bell Atlantic Network Services (incorporated by
reference to the relevant exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997
(filed January 30, 1998))
+10.17 Amendment No. 07 dated January 12, 1998 to the Agreement by and
between Assessment Solutions and TeleSector Resources Group,
Inc., d/b/a Bell Atlantic Network Services (incorporated by
reference to the relevant exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997
(filed January 30, 1998))
10.18 Form of Employment Agreement between McLagan Partners, Inc. and
its senior officers (incorporated by reference to the relevant
exhibit to the Company's Current Report on Form 8-K dated
November 13, 1997 (filed November 24, 1997))
10.19 McLagan Partners, Inc. Incentive Compensation Plan (incorporated
by reference to the relevant exhibit to the Company's Current
Report on Form 8-K dated November 13, 1997 (filed November 24,
1997))
10.20 Credit Agreement dated as of November 13, 1997 among the Company,
McLagan Partners, Inc., The Chase Manhattan Bank, as
Administrative Agent for the Lenders thereunder, and the other
Lenders identified therein (incorporated by reference to the
relevant exhibit to the Company's Current Report on Form 8-K
dated November 13, 1997 (filed November 24, 1997))
21.1 List of Subsidiaries of the Company
*23.1 Consent of PricewaterhouseCoopers LLP
*27.1 Financial Data Schedule
_______________
+ Confidential treatment has been granted as to a portion of this document
by order of the SEC.
* Filed herewith
Note: In November of 1996, Assessment Systems, Inc. changed its name to
Assessment Solutions. Consequently, all references herein to Assessment
Solutions are intended to also refer to Assessment Systems, Inc.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ASI SOLUTIONS INCORPORATED
By: /s/ Michael J. Mele
---------------------------
Michael J. Mele
Senior Vice President and
Chief Financial Officer
Dated: June 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bernard F. Reynolds Chairman of the Board and Chief June 24, 1999
- ----------------------- -------------
Bernard F. Reynolds Executive Officer (Principal Executive
Officer)
/s/ Eli Salig President and Chief Operating Officer June 24, 1999
- ----------------------- -------------
Eli Salig (Principal Executive Officer) and Director
/s/ Seymour Adler Executive Vice President and Director June 24, 1999
- ----------------------- -------------
Seymour Adler
/s/ Michael J. Mele Senior Vice President and Chief Financial June 24, 1999
- ----------------------- -------------
Michael J. Mele Officer (Principal Financial and Accounting
Officer)
/s/ David Tory Director June 24, 1999
- ----------------------- -------------
David Tory
/s/ Michael J. Boylan Director June 24, 1999
- ----------------------- -------------
Michael J. Boylan
/s/ Ilan Kaufthal Director June 24, 1999
- ----------------------- -------------
Ilan Kaufthal
/s/ Carl Seldin Koerner Secretary and Director June 24, 1999
- ----------------------- -------------
Carl Seldin Koerner
/s/ F. Samuel Smith Director June 24, 1999
- ----------------------- -------------
F. Samuel Smith
</TABLE>
38
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement of ASI Solutions Incorporated on Forms S-8 (Nos. 333-36513, 333-36511
and 333-36509) of our report dated May 20, 1999 on our audits of the
consolidated financial statements of ASI Solutions, Incorporated as of March 31,
1999 and 1998 and for the years ended March 31, 1999, 1998 and 1997, which
report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
May 20, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 7,595,366 2,855,927
<SECURITIES> 0 0
<RECEIVABLES> 13,060,684 10,828,699
<ALLOWANCES> 185,717 122,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 21,346,235 14,347,315
<PP&E> 8,912,062 7,508,463
<DEPRECIATION> 3,693,654 2,189,939
<TOTAL-ASSETS> 50,540,019 44,560,912
<CURRENT-LIABILITIES> 17,150,447 11,187,676
<BONDS> 0 0
0 0
0 0
<COMMON> 65,432 65,123
<OTHER-SE> 19,620,607 15,630,418
<TOTAL-LIABILITY-AND-EQUITY> 50,540,019 44,560,912
<SALES> 59,653,278 34,865,557
<TOTAL-REVENUES> 59,653,278 34,865,557
<CGS> 29,755,156 17,663,690
<TOTAL-COSTS> 51,364,217 30,554,138
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 75,503 108,153
<INTEREST-EXPENSE> 1,794,678 592,841
<INCOME-PRETAX> 6,579,327 3,718,578
<INCOME-TAX> 2,768,439 1,598,989
<INCOME-CONTINUING> 3,810,888 2,119,589
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,810,888 2,119,589
<EPS-BASIC> 0.59 0.33
<EPS-DILUTED> 0.58 0.33
</TABLE>
