<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 17, 1998
-----------------
ACSYS, INC.
-----------
(Exact name of registrant
as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Georgia 000-23711 58-2299173
- ---------------------- ----------- ------------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation
</TABLE>
75 Fourteenth Street, Suite 2200, Atlanta, Georgia 30309
-------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 817-9440
--------------
N/A
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS.
On November 17, 1998, Acsys, Inc. (the "Company") filed a Registration
Statement on Form S-1 (the "Registration Statement") with the Securities and
Exchange Commission which, upon becoming effective, will enable registered
resales of 423,056 shares of the Company's Common Stock (the "Common Stock") by
certain of the Company's shareholders, who obtained their shares of Common Stock
in connection with the Company's acquisition in May 1998 of Icon Search &
Consulting Co. ("ICON"). The Registration Statement includes the historical
financial statements of the Company which have been restated to account for the
acquisition of ICON as a pooling of interests transaction. Accordingly, in order
to provide all investors in the Common Stock with certain information contained
in the Registration Statement, but not yet otherwise filed by the Company in its
periodic reports under the Securities Exchange Act of 1934, the Company is
including certain portions of the Company's Registration Statement as Exhibit
99.1 hereto, the full text of which is incorporated by reference herein. The
filing of this report and the inclusion of portions of the Registration
Statement herein does not constitute an offer to sell or a solicitation of an
offer to buy any of the shares of Common Stock registered for resale under the
Registration Statement.
ITEM 7. EXHIBITS.
(c) EXHIBITS.
99.1 Certain Portions of the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on November 17,
1998.
Page 2
Exhibit Index Appears on Page 4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ACSYS, INC.
BY: /s/ Brady W. Mullinax, Jr.
--------------------------
Brady W. Mullinax, Jr.
Vice President - Finance,
Chief Financial Officer and
Secretary
Dated: 11/18/98
--------
Page 3
Exhibit Index Appears on Page 4
<PAGE>
EXHIBIT INDEX
Exhibit
Number Page
- -------------- ------
99.1 Certain Portions of the Company's Registration
Statement on Form S-1 filed with the Securities
and Exchange Commission on November 17, 1998.... 5
Page 4
<PAGE>
EXHIBIT 99.1
NOTE: The following defined terms are used in the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in
this exhibit:
"Pooling Acquisitions" means the acquisitions of Infinity Enterprises,
Inc.; David C. Cooper & Associates, Inc.; DCCA Professional Temporaries, Inc.;
EKT, Inc.; Cama of Tampa, Inc.; Ryland Forbes Consulting Group, Inc.; AcSys
Resources, Inc.; and Icon Search & Consulting Co. ("ICON"), which have been
accounted for under the pooling of interests method of accounting.
"Purchase Acquisitions" means the acquisitions of C.P.A. Staffing, Inc.;
C.P.A. Search, Inc.; and Career Placement Associates (together, "CPA Staffing")
in August 1997; TGS Resource Group, Inc. ("TGS") (doing business as "Don Richard
Associates of Richmond") in March 1998; KPD Systems, Inc. ("KPD") in July 1998;
and Staffing Edge, Inc. ("Staffing Edge") in August 1998, which have been
accounted for under the purchase method of accounting.
"Acquired Companies" means, collectively, the entities acquired in the
Pooling Acquisitions and the Purchase Acquisitions.
"We" or "our" refers to Acsys, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Results of Operations and Financial
Condition contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). These statements relate to future economic performance, plans and
objectives of management for future operations and projections of revenues and
other financial items that are based on the beliefs of our management, as well
as assumptions made by, and information currently available to, our management.
Actual results could differ materially from those currently anticipated as a
result of a number of factors, including those listed in (a) the "Risk Factors"
section of this Prospectus and (b) the disclosure contained in the "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Disclosure Regarding Forward Looking Statements" section of this Prospectus.
These factors include, but are not limited to, our brief combined operating
history and our ability to identify and acquire suitable acquisition candidates,
to integrate acquired companies into our operations, to implement internal
control and management financial and operational reporting systems, and to
manage risks associated with opening new offices and offering new services.
INTRODUCTION
Acsys is one of the leading specialty professional staffing and permanent
placement firms in the United States. We operate through 40 offices serving
major metropolitan markets across the United States, with a more significant
presence principally in the Eastern and Midwestern United States. We were
formed in March 1997 and since our formation have acquired 11 companies to
date.
Each of our acquisitions, other than the Purchase Acquisitions was accounted
for as a pooling of interests. Our historical financial statements have been
restated to reflect the results of operations and financial positions of the
Acquired Companies from their acquisition dates forward. Accordingly, the
results of operations of C.P.A. Staffing are included beginning August 12, 1997
(its date of acquisition). Additionally, the results of TGS, KPD and Staffing
Edge are included beginning March 31, 1998, July 1, 1998 and August 4, 1998
(their respective dates of acquisition). Additionally, the results of
operations of Cama of Tampa are included for periods beginning on January 1,
1996 (its date of formation). As a result, historical combined results may not
be comparable to or indicative of future performance. Our revenues and expenses
may be significantly affected by the number and timing of the acquisition of
additional businesses, the opening of additional offices or the introduction of
new services. The timing of such expansion activities may also affect period-
to-period comparisons.
Temporary staffing service revenues are recognized based on hours worked by
assigned personnel. Generally, we bill our clients a fixed sum per hour for the
hours our temporary employees work. Temporary personnel are generally Acsys
employees; accordingly, we are responsible for workers' compensation,
unemployment compensation insurance, Social Security and Medicare taxes and
general payroll expenses. These expenses are included within direct cost of
services. Because we pay our temporary employees only for the hours they
actually work, wages for our temporary personnel are a variable cost that
increase or decrease in proportion to service revenues. Our gross profit is
<PAGE>
determined by deducting these direct costs of services from our service
revenues. Some of the temporary employees may decide to accept an offer of
permanent employment from the client and thereby "convert" the temporary
position to a permanent position, and a fee is generally paid to Acsys. Such
fees are included in temporary staffing revenues.
Permanent placement service revenues are recognized when the employment offer
and acceptance have occurred and the candidate's employment start date has been
established. Acsys' fee is typically structured as a percentage of the placed
candidate's first-year annual compensation. Generally, if a candidate is
terminated or resigns during a specified guaranty period (typically 90-180
days), we either fill the position without additional charges or provide a
prorated refund.
The primary costs associated with permanent placement service revenues are
sales commissions to staffing consultants. Commissions vary proportionately
with permanent placement service revenues. Consistent with industry practices,
we classify all costs associated with permanent placement services as selling,
general and administrative expenses. Other selling, general and administrative
expenses include payroll for management and administrative employees, office
occupancy costs, sales and marketing expenses and other general and
administrative costs.
Prior to their acquisition by Acsys, the Acquired Companies were managed as
private companies with significant equity ownership by management. Our results
of operations reflect the S corporation tax structures of the Acquired
Companies (except for ICON which was a C corporation) which influenced, among
other things, the historical levels of their owners' compensation. The income
taxes related to ICON are included in the historical Consolidated Financial
Statements. The former owners of the Acquired Companies agreed to adjustments
in their compensation and benefits, effective as of the dates of the respective
acquisitions. The following results of operations do not include those
contractual compensation adjustments for periods prior to the dates of the
respective acquisitions.
RECENT DEVELOPMENTS
Growth Initiatives and Integration Activities. Beginning in the third quarter
of 1997, we undertook a number of different activities intended to support our
growth. These activities included the hiring of additional temporary and
permanent placement staffing consultants, the expansion of our IT and our Acsys
Business Consultants lines, the opening of new offices in Orlando, Florida and
Washington, D.C. and the augmentation of our corporate infrastructure to enable
us to operate as a public entity. In the first three quarters of 1998, we hired
many new temporary and permanent consultants and hired numerous corporate
office personnel in order to meet our revenue goals and to integrate the
Acquired Companies. We have worked and continue to work to integrate these
acquisitions into our Hub-Center approach.
Initial Public Offering. In February 1998, we completed our IPO of 2,842,500
shares of Common Stock at a price of $8.50 per share, realizing net cash
proceeds of approximately $20.2 million after deducting underwriting discounts
and offering expenses.
Distribution to S Corporation Shareholders. We terminated our S corporation
status and became a C corporation on February 5, 1998 in connection with our
initial public offering. During 1998, we made distributions to the persons who
were shareholders during the period we were an S corporation.
<PAGE>
The distributions approximated the amounts that such shareholders needed to
fund the payment of Federal and state income taxes payable on Acsys' taxable
income during that period. The amount of such distributions through September
30, 1998 were $545,000 and are reflected as a reduction in retained earnings.
Subsequent to September 30, 1998, upon completion of our final tax returns as a
S Corporation, we distributed an additional $293,000.
Deferred Tax Liability. In February, 1998, we recorded a deferred tax liability
of $3.0 million, primarily to recognize income tax expense on the cash to
accrual adjustment caused by our change from an S corporation to a C
corporation. We will pay the deferred tax liability over a four-year period.
Principally as a result of the deferred tax liability, we incurred a net loss
for the first quarter of 1998.
RESULTS OF OPERATIONS
The following table sets forth the consolidated statements of operations for
the indicated periods.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
----------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 1998
------- ------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Service revenues:
Temporary staffing...... $28,215 $44,556 $60,057 $42,550 $69,564
Permanent placement..... 8,269 12,186 18,071 13,742 19,807
------- ------- ------- ------- -------
Total service
revenues............. 36,484 56,742 78,128 56,292 89,371
Direct cost of services... 18,284 30,616 42,583 29,863 48,768
------- ------- ------- ------- -------
Gross profit.......... 18,200 26,126 35,545 26,429 40,603
Selling, general and
administrative expenses.. 13,893 20,769 29,979 21,063 32,969
Combination expenses...... -- -- 1,797 1,722 1,730
Amortization and
depreciation............. 682 693 715 459 1,059
Severance and franchise
termination costs........ 166 567 682 170 650
------- ------- ------- ------- -------
Operating income...... 3,459 4,097 2,372 3,015 4,195
Interest expense, net..... 865 811 788 588 466
------- ------- ------- ------- -------
Income before income
taxes.................... $ 2,594 $ 3,286 $ 1,584 $ 2,427 $ 3,729
======= ======= ======= ======= =======
</TABLE>
HISTORICAL RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
HISTORICAL RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Service Revenues. Total service revenues increased $33.1 million, or 58.8%, to
$89.4 million for the nine months ended September 30, 1998 from $56.3 million
for the corresponding period in 1997. Temporary staffing service revenues
increased $27.0 million, or 63.5%, to $69.6 million for the nine months ended
September 30, 1998 as compared to $42.6 million for 1997. The increase in
temporary staffing service revenues is primarily attributable to the growth of
IT contract staffing, the increase in billing rates and the impact of
acquisitions of C.P.A. Staffing, TGS, KPD and Staffing Edge. Permanent
placement service revenues increased $6.1 million, or 44.1%, to $19.8 million
for the nine months ended September 30, 1998 from $13.7 million for 1997.
Permanent placement service revenues increased primarily due to increases in
the number of permanent placements, the increase in placement fees and the
acquisitions completed in the nine months ended September 30, 1998 (the "1998
Acquisitions").
Gross Profit. Gross profit increased $14.2 million, or 53.6%, to $40.6 million
for the nine months ended September 30, 1998 from $26.4 million for 1997. Gross
profit as a percentage of service
<PAGE>
revenues for the nine months ended September 30, 1998 decreased to 45.4% of
revenues compared to 46.9% of revenues for 1997. The gross profit percentage
decline resulted from the decrease in 1998 of the higher margin permanent
placement revenues as a percentage of the total revenues and as a result of the
growth in 1998 of the information technology business which has higher bill
rates but lower margins than the rest of our business.
Selling General and Administrative Expenses. Selling, general and
administrative expenses increased $11.9 million, or 56.5%, to $33.0 million for
the nine months ended September 30, 1998 from $21.1 million for the nine months
ended September 30, 1997. As a percentage of revenues, selling, general and
administrative expenses were 36.9% for the nine months ended September 30, 1998
compared with 37.4% for the corresponding period in 1997. This decrease as a
percentage of revenues is primarily attributable to the fact that the nine
months ended September 30, 1997 had significant amounts of owners' compensation
costs. Also contributing to the lower percentage was increased efficiencies and
the spreading of overhead costs over a substantially larger revenue base.
Combination Expenses. Combination expenses for the nine months ended September
30, 1998 and 1997 were $1.7 million. These expenses included transaction costs
for our mergers which have been accounted for under the pooling of interests
method and include investment banking, legal, accounting and other fees.
Severance and Franchise Termination Costs. We recorded a charge of $650,000
during the nine months ended September 30, 1998 consisting principally of
severance obligations resulting from the decision to consolidate our corporate
offices in Atlanta. For the corresponding period in 1997, we recorded a charge
of $170,000 related to the termination of a franchise agreement.
Amortization and Depreciation. Amortization and depreciation for the nine
months ended September 30, 1998 increased $600,000 from the corresponding
period of 1997. Amortization and depreciation for the nine months ended
September 30, 1998 includes goodwill amortization expense as a result of the
C.P.A. Staffing acquisition in August 1997 and the 1998 Acquisitions.
Depreciation expense also increased as a result of capital expenditures in 1997
and 1998.
Interest Expense, net. For the nine months ended September 30, 1998, we
recorded net interest expense of $466,000, consisting principally of interest
on borrowings under our revolving credit facility with NationsBank, N.A., and
interest on noncompete and severance arrangements. For the nine months ended
September 30, 1997, we recorded net interest expense of $588,000 consisting
principally of interest expense on our credit facility and other long term
debt. In February 1998, we repaid the amount outstanding under this credit
facility with part of the proceeds of the IPO. We subsequently renewed
borrowings on our credit facility, primarily to fund our August 1998
acquisition of Staffing Edge. See "--Liquidity and Capital Resources."
Income Tax Expense. Prior to February 5, 1998, we were an S corporation and not
subject to income taxes. In connection with the IPO and the termination of our
S corporation status, we recorded a tax liability of approximately $3.0 million
in the nine months ended September 30, 1998 to recognize income tax expense
created by our change to a C corporation, which primarily relates to a change
from the cash to accrual method of accounting for income tax purposes. We will
pay the deferred tax liability over a four-year period. For 1997, the income
tax provision relates exclusively
<PAGE>
to ICON, which for federal income tax purposes was a C corporation subject to
corporate income taxes.
Net Income. On an historical basis, we recognized a net loss and a net loss per
share of $1.5 million and $0.10, respectively, for the nine months ended
September 30, 1998 compared to net income and net income per share of $1.8
million and $0.09, respectively, for the corresponding period of 1997. The
calculation of the net loss per share for the nine months ended September 30,
1997 reflects a reduction of $932,000 to net income available to common
shareholders for the accretion of the redeemable shares.
HISTORICAL RESULTS FOR 1997 COMPARED TO HISTORICAL RESULTS FOR 1996
Service Revenues. Total service revenues increased $21.4 million, or 37.7%, to
$78.1 million for the year ended December 31, 1997 from $56.7 million for the
year ended December 31, 1996. A total of $2.8 million of the increase is
attributable to revenues from C.P.A. Staffing from its acquisition date of
August 12, 1997. Temporary staffing service revenues increased $15.5 million,
or 34.8%, to $60.1 million for the year ended December 31, 1997 from $44.6 for
the year ended December 31, 1996. Temporary staffing service revenues increased
primarily as a result of growth in our IT business, increased billing rates,
and increased revenues from offices opened in 1996 and 1995. Permanent
placement service revenues increased $5.9 million or 48.3%, to $18.1 million
for the year ended December 31, 1997 from $12.2 million for the year ended
December 31, 1996. Permanent placement service revenues increased primarily due
to increases in permanent placements, in the number and productivity of
consultants and in billings to existing clients.
Gross Profit. Gross profit increased $9.4 million, or 36.1%, to $35.5 million
for the year ended December 31, 1997 from $26.1 million for the year ended
December 31, 1996. Gross profit as a percentage of service revenues decreased
to 45.5% for the year ended December 31, 1997 from 46.0% for the year ended
December 31, 1996. This decrease is primarily due to an increase in our IT
business in 1997 as compared to 1996 which is at a lower gross margin
percentage but at higher dollar amounts than the remainder of our business.
This decrease in gross margin percentage was not offset by the increase in the
percentage of service revenues derived from permanent placement services, which
increased to 23.1% of total service revenues for the year ended December 31,
1997 from 21.5% for the year ended December 31, 1996. Permanent placement
service revenues generate higher gross profits than temporary staffing service
revenues because sales commissions and other costs associated with permanent
placement services are included in selling, general and administrative
expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $9.2 million, or 44.3%, to $30.0 million for
the year ended December 31, 1997 from $20.8 million for the year ended December
31, 1996. Approximately $2.5 million of the increase was attributable to sales
commissions associated with the increase in service revenues. An additional
$2.2 million of the increase was the result of additional personnel costs. The
1997 results also reflect approximately $900,000 of C.P.A. Staffing-related
selling, general and administrative expenses from its date of acquisition. In
addition, we incurred expenses for the year ended December 31, 1997 in
connection with the introduction of Acsys Business Consulting staffing services
and IT temporary staffing services and with general integration-related
expenses. As a result of the above factors, selling, general and administrative
expenses as a percentage of revenues increased to 38.4% for the year ended
December 31, 1997 from 36.6% for the year ended December 31, 1996.
<PAGE>
Combination Expenses. For the year ended December 31, 1997, we recognized
expenses of $1.8 million, or 2.3% of service revenues, for legal, accounting
and other expenses related to the Pooling Acquisitions.
Amortization and Depreciation. The acquisition of C.P.A. Staffing and the
acquisition of certain assets of a predecessor by Infinity Enterprises, Inc.
originally generated most of the goodwill. Goodwill represents the excess cost
over the net tangible assets acquired and is being amortized over 40 years. We
periodically review the carrying value of intangible assets and impairments, if
any, when the expected future operating cash flows derived from such intangible
assets are less than their carrying value. Based upon our most recent analysis,
we believe that no material impairment of intangible assets existed at December
31, 1997. We fully amortized a non-compete agreement in 1996. The favorable
effect of the decrease in amortization due to the non-compete agreement was
offset by an increase in amortization of goodwill associated with the
acquisition of C.P.A. Staffing. In addition, depreciation increased due to an
increase in capital expenditures in 1997.
Severance and Franchise Termination Costs. During 1997, we recognized $512,000
of expense as a result of the restructured employment relationship with our
former President. Additionally during 1997, we recognized $170,000 related to
the termination of a franchise agreement by Cama of Tampa, Inc. During 1996, we
incurred $459,000 in severance payments to a former employee of AcSys
Resources, Inc. in connection with his employment termination. Also during
1996, we recorded $108,000 of franchise termination costs related to the
termination of the AcSys Resources, Inc. franchise agreement. We are not
currently a party to any franchise agreements. We could incur such costs in the
future in connection with future acquisitions.
Interest Expense, net. Interest expense, net is comparable for both periods
presented.
HISTORICAL RESULTS FOR 1996 COMPARED TO HISTORICAL RESULTS FOR 1995
Service Revenues. Service revenues increased $20.3 million, or 55.5%, to $56.7
million in 1996 from $36.5 million in 1995. Temporary staffing service revenues
increased $16.3 million, or 57.9%, to $44.6 million in 1996 from $28.2 million
in 1995. The increase in temporary staffing service revenues is primarily a
result of growth in our IT business and increases in billing rates and revenues
from offices opened in 1996 and 1995. Permanent placement service revenues
increased $3.9 million, or 47.4%, to $12.2 million in 1996 from $8.3 million in
1995. Permanent placement service revenue increased primarily due to an
increase in the number of permanent placements made in 1996, additional
permanent placement consultants and increased productivity. In addition, 1996
service revenues reflect $2.5 million in total service revenues from Cama of
Tampa, Inc. Due to a change in ownership of Cama of Tampa, Inc. as of January
1, 1996, our operating results for 1995 do not include the operating results of
that entity.
Gross Profit. Gross profit increased $7.9 million, or 43.5%, to $26.1 million
in 1996 from $18.2 million in 1995. Gross profit as a percentage of service
revenues decreased to 46.0% in 1996 from 49.9% in 1995, primarily because
permanent placement service revenues comprised a smaller portion of total
service revenues, decreasing to 21.5% of total service revenues in 1996 from
22.7% in 1995. Additionally, the gross profit percentage decline is due to an
increase in 1996 of our IT business which has a lower gross margin percentage
than our other temporary services businesses.
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.9 million, or 49.5%, to $20.8 million in
1996 from $13.9 million in 1995. Approximately $2.1 million of the increase was
attributable to sales commissions associated with the increase in permanent
placement revenues, and $1.4 million was the result of an increase in owners'
compensation of the entities acquired in the Pooling Acquisitions. In addition,
1996 selling, general and administrative expenses reflect the expenses of Cama
of Tampa, Inc. whereas 1995 selling, general and administrative expenses do
not. Selling, general and administrative expenses also increased as a result of
corporate expenses incurred in 1996 to support Acsys' growth. Selling, general
and administrative expenses as a percentage of service revenues decreased to
36.6% in 1996 from 38.1% in 1995, primarily due to startup expenses associated
with our IT business in 1995 which were not present in 1996.
Amortization and Depreciation. Amortization and depreciation increased $11,000,
or 1.6%, to $693,000 in 1996 from $682,000 in 1995.
Severance and Franchise Termination Costs. In 1996, we incurred $459,000 in
severance payments to a former employee of AcSys Resources, Inc. and $108,000
of costs related to the termination of the AcSys Resources, Inc. franchise
agreement. This compares to $166,000 of franchise termination costs in 1995.
Interest Expense, net. Interest expense, net decreased to $811,000 in 1996 from
$865,000 in 1995 principally due to lower average debt levels.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $3.5 million in the nine months
ended September 30, 1998. The use of cash is due to increases in accounts
receivable and in other working capital requirements. For the corresponding
period of 1997, cash provided by operations was $2.0 million, principally due
to increases in accrued expenses and other liabilities.
Net cash used in investing activities during the nine months ended September
30, 1998 was $36.6 million. Included in cash used for investing activities was
$34.3 million (net of cash acquired) paid in connection with the 1998
Acquisitions and $2.3 million used for capital expenditures for furniture,
fixtures and equipment. We will continue to make capital expenditures
throughout 1998 on information technology systems and equipment.
Net cash provided by financing activities was $40.9 million in the nine months
ended September 30, 1998. Upon completion of our IPO, we raised $20.2 million
net of expenses paid. We used approximately $11.1 million to immediately repay
our then current borrowings under our credit facility. We subsequently borrowed
approximately $31.5 million in connection with our acquisition of Staffing Edge
in August, 1998. Additionally, during the nine months ended September 30, 1998,
we used $545,000 for shareholder distributions related to certain pre-IPO S
corporation tax liabilities.
Principally as a result of the August 1998 acquisition of Staffing Edge, at
September 30, 1998 the outstanding balance under our $40.0 million revolving
credit facility was approximately $34.0 million. The amount available under our
credit facility will be reduced to $25.0 million on January 1, 1999.
Accordingly, at September 30, 1998, $9.0 million of the borrowings have been
classified as a current
<PAGE>
liability. We anticipate, as a result of our operating results and borrowing
capacity, that we will be able to refinance or replace the existing credit
facility with a larger borrowing facility. In the event that we are unable to
repay the amount necessary to reduce our obligations under the credit facility
to $25.0 million by January 1, 1999, in order to avoid default occurring under
the credit facility, we will attempt to negotiate with the lenders for a
modification of the credit facility. Additionally, we believe that funds
currently available on hand, funds to be provided by operations, funds
available under the existing credit facility and, after January 1, 1999, funds
available under the refinanced borrowing facility will be sufficient to meet
our anticipated needs for working capital for the next twelve months. There can
be no assurance that we will be able to replace, refinance or renegotiate our
credit facility. Our plan to replace, refinance or renegotiate our credit
facility, our estimate of the time that funds currently on hand, funds provided
by operations and funds available under the existing credit facility, and after
January 1, 1999, funds from the refinanced, replaced or renegotiated borrowing
facility will be sufficient to meet our working capital needs is a forward-
looking statement that is subject to risks and uncertainties. Actual results
and working capital needs could differ materially from those estimated due to a
number of factors, including the use of funds for acquisitions. In addition,
future acquisitions may require additional debt and equity financing.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." This statement requires that items that
are components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements. SFAS
No. 130 became effective for fiscal years beginning after December 15, 1997 and
is now currently being applied by Acsys. SFAS No. 130 requires comparative
financial statements provided for earlier periods to be reclassified to reflect
application of the provisions of this new standard. We have determined that for
the nine months ended September 30, 1997 and 1998 and for the years ended
December 31, 1995, 1996 and 1997, no items meeting the definition of
comprehensive income as specified on SFAS No. 130, except net income, existed
in the financial statements. As a result, no disclosure is necessary to comply
with the standard.
In June 1997, the FASB issued Statement No. 131, "Disclosure About Segments of
an Enterprise and Related Information" ("SFAS 131"). This statement establishes
additional standards for segment reporting in the financial statements and is
effective for fiscal years beginning after December 15, 1997. Our management
believes that SFAS 131 will not have a material effect on our financial
statements.
YEAR 2000 COMPUTER ISSUES
Introduction. The Year 2000 issue refers to the problems that result from the
many existing computer software programs and operating systems that use only
two digits rather than four to define the applicable year in a date field.
These programs were designed and developed without considering the impact of
the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000.
Acsys' State of Readiness. Our key financial, informational and operational
systems are being assessed and detailed plans are being developed to address
system modifications required by March 1999. These systems include information
technology systems ("IT"). We have assessed our major IT vendors and technology
providers and are in the process of testing our systems to determine Year
<PAGE>
2000 compliance. In addition, we are in the process of assessing our non-IT
systems that utilize embedded technology such as microcontrollers and reviewing
them for Year 2000 compliance.
To operate our business, we rely upon government agencies, utility companies,
providers of telecommunication services, suppliers, and other third party
service providers ("Primary Service Providers"), over which we can assert
little control. Our ability to conduct our core business depends upon the
ability of these Primary Service Providers to fix their Year 2000 issues and to
the extent they cannot or do not fix their Year 2000 issues, our financial
condition could be materially and adversely affected. In addition, our
customers may experience Year 2000 issues that could have a material adverse
effect on their business and their need for our services, which in turn could
have a material adverse effect on our business.
We have begun an assessment of all Primary Service Providers to determine risk
and assist in the development of contingency plans. This effort is to be
completed by March 1, 1999. In particular, we use various software packages in
conducting and accounting for our temporary staffing, permanent placement and
general accounting operations. These packages, among other things, track and
accumulate temporary staff time and client billings, process staff payroll, and
produce financial statements and other financial data. We use software packages
and hardware in certain locations that may not be Year 2000 compliant. In
addition, certain of our Hub-Centers use software packages that may not be Year
2000 compliant. As discussed in "Business--Corporate Support Services;
Information Systems," we are implementing integrated staffing and accounting
software packages. We have the option either to purchase new Year 2000
compliant software from outside vendors or implement existing in-house Year
2000 compliant software, or to combine both approaches.
We expect that our information systems integration efforts will enable us to be
fully Year 2000 compliant although we cannot guarantee that software
represented by vendors as Year 2000 compliant will in fact be compliant.
Further, we use a third-party payroll processing company, and although we
expect that this company will be Year 2000 compliant, no assurances can be
given in that regard. In pursuing our acquisition strategy we could acquire an
entity that is not Year 2000 compliant. Depending on the size of the entity
acquired, noncompliance could negatively affect our results of operations.
Costs to Address Acsys' Year 2000 Issues. We expense costs associated with Year
2000 system changes as the costs are incurred except for system change costs
that we would otherwise capitalize. To date we have incurred costs of
approximately $500,000 in connection with our Year 2000 compliance plan (our
"Year 2000 Plan"), and we expect to spend an additional $500,000 to complete
our Year 2000 Plan.The financial impact of these expenses has not been
material, and we do not expect future remediation costs to be material to our
consolidated financial position or results of operations. We cannot estimate
the future costs incurred as a result of Year 2000 issues suffered by our
Primary Service Providers and customers, and we cannot assure you that we will
successfully address the Year 2000 issues present in our own systems.
Risks Presented by Year 2000 Issues. We have recently begun the system
integration testing phase of our Year 2000 Plan. However, until system
integration testing is substantially in process we cannot fully assess the
risks of our Year 2000 issue. As a result of system integration testing, we may
<PAGE>
identify areas of our business that are at risk of Year 2000 disruption. The
absence of any such determination at this point represents only the status
currently in the implementation of our Year 2000 Plan, and should not be
construed to mean that there is no area of our business which is at risk of a
Year 2000 related disruption. As noted above, many of our critical Primary
Service Providers and customers may not appropriately address their Year 2000
issues, the result of which could have a material adverse effect on our
financial condition and results of operations.
Acsys' Contingency Plans. Our Year 2000 Plan calls for the development of
contingency plans for areas of the business that are susceptible to a
substantive risk of a disruption resulting from a Year 2000 related event.
Because we have only recently begun system integration testing, and accordingly
have not fully assessed our risk from potential Year 2000 failures, we have not
yet developed detailed contingency plans specific to Year 2000 events for any
specific area of business. We do, however, maintain contingency plans, outside
of the scope of the Year 2000 issue, designed to address various other business
interruptions. We are prepared for the possibility that system integration
testing may hereafter identify certain areas of business at risk. Consistent
with our Year 2000 Plan, we will develop specific Year 2000 contingency plans
for such areas of business as and if such determinations are made.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. These
statements appear in a number of places in this report and include all
statements that are not historical facts. Some of the forward-looking
statements relate to the intent, belief or expectations of Acsys and our
management regarding our strategies and plans for: operations, including our
Hub-Center management model; growth, including current and potential new
services; acquisitions; recruiting; and sales and marketing strategies. Other
forward-looking statements relate to trends affecting our financial condition
and results of operations; our anticipated capital needs and expenditures; and
litigation in which we are involved. Forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and
actual results may differ materially from those that are anticipated in the
forward-looking statements as a result of:
. our relatively brief combined operating history;
. our ability to identify and acquire suitable acquisition candidates;
. our ability to integrate acquired businesses into its operations;
. our ability to implement internal control and management financial and
operational reporting systems;
. risks associated with opening new offices and offering new services;
. the availability of qualified personnel to staff and supervise new offices;
. the possible effects of a downturn in the economy, which may result in a
decline in the demand for our services;
. the strength of demand for temporary staffing and permanent placement
services in our markets;
. the general level of economic activity and unemployment;
. existing and emerging competition;
<PAGE>
. competing demands for the attention of our management;
. the availability of capital to fund acquisitions;
. our ability to maintain sufficient profit margins despite pricing pressures;
. the changing regulatory environment; and
. our ability to address the Year 2000 issue.
In addition, the market price of the Common Stock may from time to time be
significantly volatile as a result of, among other things:
. our operating results;
. the operating results of other staffing companies;
. changes in the performance of the stock market in general; and
. the trading volume of the Common Stock.
You should review the more detailed description of these and other possible
risks contained in the "Risk Factors" section of this Prospectus.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Acsys, Inc.:
We have audited the accompanying consolidated balance sheets of Acsys, Inc. (a
Georgia corporation) and Subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, redeemable common stock and
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Acsys, Inc. and
Subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, PA,
May 22, 1998
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 1,102 $ 370 $ 1,175
Restricted cash............................... 117 -- --
Accounts receivable, net of allowances of
$313, $503 and $856.......................... 8,359 12,343 23,170
Prepaid expenses and other.................... 270 1,455 1,391
------- ------- -------
Total current assets........................ 9,848 14,168 25,736
PROPERTY AND EQUIPMENT, net..................... 941 1,928 4,380
GOODWILL AND OTHER INTANGIBLE ASSETS, net....... 7,126 15,783 54,567
DEFERRED INITIAL PUBLIC OFFERING COSTS.......... -- 1,200 --
DEFERRED INCOME TAXES........................... -- 103 --
OTHER ASSETS.................................... 252 170 230
------- ------- -------
Total assets................................ $18,167 $33,352 $84,913
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts............................... $ 265 $ 1,489 $ --
Lines of credit............................... 1,108 -- --
Current portion of long-term debt............. 722 47 9,003
Accounts payable.............................. 463 774 1,391
Accrued liabilities........................... 2,429 5,844 11,769
Deferred income taxes......................... 552 1,093 402
------- ------- -------
Total current liabilities................... 5,539 9,247 22,565
LONG-TERM DEBT.................................. 8,125 11,707 25,642
DEFERRED INCOME TAXES........................... -- -- 2,726
OTHER LONG-TERM LIABILITIES..................... 41 377 284
COMMITMENTS AND CONTINGENCIES (Note 5)
REDEEMABLE COMMON STOCK, no par value, 122,012,
122,012 and 0 shares issued and outstanding,
respectively................................... 288 1,220 --
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000
shares authorized, no shares issued or
outstanding.................................. -- -- --
Common stock, no par value, 45,000,000 shares
authorized, 9,972,294, 11,191,568 and
14,422,038 shares issued and outstanding,
respectively................................. 530 7,597 29,377
Retained earnings............................. 4,233 3,204 4,319
Treasury stock, at cost....................... (589) -- --
------- ------- -------
Total shareholders' equity.................. 4,174 10,801 33,696
------- ------- -------
Total liabilities and shareholders' equity.. $18,167 $33,352 $84,913
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS--EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
-------------------------------- -------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SERVICE REVENUES:
Temporary staffing..... $ 28,215 $ 44,556 $ 60,057 $ 42,550 $ 69,564
Permanent placement.... 8,269 12,186 18,071 13,742 19,807
---------- ---------- ---------- --------- ---------
Total service
revenues............ 36,484 56,742 78,128 56,292 89,371
DIRECT COST OF SERVICES,
consisting of
payroll, payroll taxes
and benefit costs for
temporary employees..... 18,284 30,616 42,583 29,863 48,768
---------- ---------- ---------- --------- ---------
Gross profit......... 18,200 26,126 35,545 26,429 40,603
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES................ 13,893 20,769 29,979 21,063 32,969
COMBINATION EXPENSES..... -- -- 1,797 1,722 1,730
AMORTIZATION AND
DEPRECIATION............ 682 693 715 459 1,059
SEVERANCE AND FRANCHISE
TERMINATION COSTS....... 166 567 682 170 650
---------- ---------- ---------- --------- ---------
Operating income..... 3,459 4,097 2,372 3,015 4,195
INTEREST EXPENSE, NET: 865 811 788 588 466
---------- ---------- ---------- --------- ---------
INCOME BEFORE INCOME
TAXES................... 2,594 3,286 1,584 2,427 3,729
Income taxes........... 133 419 438 580 5,185
---------- ---------- ---------- --------- ---------
NET INCOME (LOSS)........ $ 2,461 $ 2,867 $ 1,146 $ 1,847 $ (1,456)
========== ========== ========== ========= =========
NET INCOME (LOSS) PER
SHARE:
Basic and diluted net
income (loss) per
share................. $ 0.24 $ 0.27 $ 0.02 $ 0.09 $ (0.10)
========== ========== ========== ========= =========
Shares used in
computing basic net
income (loss) per
share................. 10,094 9,972 10,440 10,233 13,878
========== ========== ========== ========= =========
Shares used in
computing diluted net
income (loss) per
share................. 10,094 9,972 10,544 10,321 13,878
========== ========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
-----------------------------------------------
REDEEMABLE COMMON
STOCK COMMON STOCK
------------------ ------------------- RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT EARNINGS STOCK TOTAL
--------- ------- ---------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1995................... -- $ -- 10,094,306 $ 144 $ 913 $(131) $ 926
Distributions to
shareholders.......... -- -- -- -- (718) -- (718)
Net income............. -- -- -- -- 2,461 -- 2,461
--------- ------- ---------- ------- ------- ----- -------
BALANCE, DECEMBER 31,
1995................... -- -- 10,094,306 144 2,656 (131) 2,669
Assumption of debt
accounted for as a
distribution.......... -- -- -- -- (300) -- (300)
Push down of new
accounting basis in
purchase transaction.. -- -- -- 300 -- -- 300
Contributions from
shareholders.......... -- -- -- 150 -- -- 150
Distributions to
shareholders.......... -- -- -- -- (766) -- (766)
Purchase of Common
Stock in connection
with redemption
agreement (Note 10)... 122,012 64 (122,012) (64) -- (458) (522)
Accretion of redeemable
Common Stock to
redemption value...... -- 224 -- -- (224) -- (224)
Net income............. -- -- -- -- 2,867 -- 2,867
--------- ------- ---------- ------- ------- ----- -------
BALANCE, DECEMBER 31,
1996................... 122,012 288 9,972,294 530 4,233 (589) 4,174
Distributions to
shareholders.......... -- -- -- -- (1,243) -- (1,243)
Issuance of Common
Stock in connection
with acquisition...... -- -- 1,219,274 7,067 -- 589 7,656
Accretion of redeemable
Common Stock to
redemption value...... -- 932 -- -- (932) -- (932)
Net income............. -- -- -- -- 1,146 -- 1,146
--------- ------- ---------- ------- ------- ----- -------
BALANCE, DECEMBER 31,
1997................... 122,012 1,220 11,191,568 7,597 3,204 -- 10,801
Issuance of Common
Stock upon initial
public offering, net
of offering costs
(unaudited)........... -- -- 2,842,500 20,170 -- -- 20,170
Resetting of retained
earnings in connection
with the termination
of S Corporation
status (unaudited).... -- -- -- (2,737) 2,737 -- --
Termination of
redemption rights in
connection with the
initial public
offering (unaudited).. (122, 012) (1,220) 122,012 1,220 -- -- 1,220
Issuance of Common
Stock in connection
with acquisitions
(unaudited)........... -- -- 229,337 3,031 -- -- 3,031
Exercise of employee
stock options
(unaudited)........... -- -- 36,621 96 -- -- 96
Tax Benefit of Non-
qualified Stock option
exercises
(unaudited)........... -- -- -- -- 136 -- 136
Distributions to
shareholders
(unaudited)........... -- -- -- -- (302) -- (302)
Net loss (unaudited)... -- -- -- -- (1,456) -- (1,456)
--------- ------- ---------- ------- ------- ----- -------
BALANCE, SEPTEMBER 30,
1998 (unaudited)....... -- $ -- 14,422,038 $29,377 $ 4,319 $ -- $33,696
========= ======= ========== ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
---------------------- ---------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $2,461 $2,867 $1,146 $1,847 $(1,456)
Adjustments to reconcile net income
(loss) to net cash
provided by (used in) operating
activities--
Amortization and depreciation........ 682 693 715 459 1,059
Imputed interest..................... 73 71 74 58 47
Non-cash severance charge............ -- 458 -- -- --
Deferred tax expense................. 133 419 438 616 1,899
Other................................ (31) (45) 8 95 --
Changes in operating assets and
liabilities net of effect of
purchase acquisitions--
Accounts receivable, net............. (1,378) (3,085) (2,860) (3,286) (7,001)
Prepaid expenses and other........... 7 (190) (1,200) (377) 475
Other assets......................... -- -- 99 15 15
Accounts payable..................... 231 104 242 759 (67)
Accrued liabilities and other........ 635 547 1,490 1,783 1,718
Other long-term liabilities.......... -- -- 336 -- (140)
------ ------ ------ ------ -------
Net cash provided by (used in)
operating activities............... 2,813 1,839 488 1,969 (3,451)
------ ------ ------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for business
acquisitions........................ -- -- (1,996) (1,874) (34,260)
Capital expenditures................. (310) (562) (1,214) (446) (2,341)
------ ------ ------ ------ -------
Net cash used in investing
activities......................... (310) (562) (3,210) (2,320) (36,601)
------ ------ ------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from initial public
offering............................ -- -- -- -- 20,170
Changes in bank overdrafts........... (121) 217 1,224 (133) (1,489)
Net borrowings (repayments) on lines
of credit........................... 162 508 (1,108) (1,108) --
Net borrowings (repayments) on
revolving credit facility........... -- -- 12,207 12,207 22,910
Proceeds from long-term debt......... 80 326 -- -- --
Repayments of long-term debt......... (1,236) (1,811) (9,374) (9,243) (19)
Distributions to shareholders........ (717) (766) (843) (845) (545)
Deferred financing costs............. -- -- (232) -- (266)
Proceeds from exercise of employee
stock options....................... -- -- -- -- 96
Changes in restricted cash........... -- (89) 116 116 --
Net repayments of notes payable to
shareholders........................ -- (150) -- -- --
Shareholder contributions............ -- 150 -- -- --
------ ------ ------ ------ -------
Net cash provided by (used in)
financing activities............... (1,832) (1,615) 1,990 994 40,857
------ ------ ------ ------ -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................... 671 (338) (732) 643 805
CASH AND CASH EQUIVALENTS, beginning
of year.............................. 769 1,440 1,102 1,102 370
------ ------ ------ ------ -------
CASH AND CASH EQUIVALENTS, end of
year................................. $1,440 $1,102 $ 370 $1,745 $ 1,175
====== ====== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS:
Acsys, Inc. and Subsidiaries (the "Company") is a specialty professional
staffing firm that operates offices primarily located in major metropolitan
areas in the eastern and midwestern United States.
The Company was formed on March 10, 1997 and effected a business combination on
May 16, 1997 in which it acquired all of the issued and outstanding common
stock of Infinity Enterprises, Inc.; David C. Cooper & Associates, Inc.; DCCA
Professional Temporaries, Inc.; and EKT, Inc. in exchange for 4,240,283 shares
of the Company's Common Stock (the "May 16 Pooling"). Subsequent to the May 16
Pooling, the Company acquired all of the issued and outstanding common stock of
the following companies, in the same manner:
<TABLE>
<CAPTION>
NAME ACQUISITION DATE SHARES ISSUED
---- ---------------- -------------
<S> <C> <C>
Cama of Tampa, Inc. ......................... May 19, 1997 131,143
Rylan Forbes Consulting Group, Inc. ......... July 25, 1997 462,292
Acsys Resources, Inc. ....................... September 3, 1997 3,659,502
ICON Search and Consulting, Inc. ............ May 22, 1998 2,820,360
</TABLE>
The business combinations referred to above have been accounted for under the
pooling of interests method of accounting. Thus, the accompanying financial
statements have been restated to include the accounts and operating results of
the combined companies for all dates and periods prior to the combinations,
except for Cama of Tampa, Inc. ("Cama") which is reflected only from its
respective date of formation of January 1, 1996 (see Note 3).
Upon closing these acquisitions, the Company entered into employment agreements
with certain officers and employees (see Note 5). Those agreements provide for
reduced compensation from amounts previously charged to expense. The reduction
in compensation was approximately $2,341,000 for the year ended December 31,
1997 and $1,330,000 for the nine months ended September 30, 1998. The following
is an unaudited supplemental pro forma presentation of the year ended December
31, 1997 and the nine months ended September 30, 1998 statements of operations
to reflect this adjustment:
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------------- ------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
Income loss before
income taxes, as
reported............... $ 1,584 $ 3,729
Supplemental pro forma
adjustment to
compensation expense... 2,341 1,330
------------------ ------------------
Supplemental pro forma
income, before pro
forma income taxes..... 3,925 5,059
Supplemental pro forma
income taxes........... 2,329 2,479
------------------ ------------------
Supplemental pro forma
net income after
contractual reduction
in salaries............ $ 1,596 $ 2,580
================== ==================
Net income/(loss) per
diluted share as
reported............... $ 0.02 $ (0.10)
================== ==================
Supplemental pro forma
net income per diluted
share, as adjusted for
reduction in salaries.. $ 0.06 $ 0.18
================== ==================
Shares used in computing
supplemental pro forma
net income per diluted
share, as adjusted for
reduction in salaries.. 10,544 14,334
</TABLE>
This supplemental pro forma presentation is shown solely as a result of the
significant change in the Company's compensation arrangements following the
mergers, in order to assess the impact on the Company's results of operations.
This presentation assumes that the duties and responsibilities of the officers
and employees will not be diminished given the reduction in compensation and,
as such, that other costs will not be incurred that offset this pro forma
adjustment to compensation expense.
2. INITIAL PUBLIC OFFERING:
In February 1998, the Company completed its initial public offering ("IPO") of
2,842,500 shares of Common Stock at a price of $8.50 per share, generating net
cash proceeds of approximately $20.2 million after deducting underwriters'
discount and offering costs of approximately $2.3 million.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Risks and Uncertainties
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from expectations include, but are
not limited to, the Company's brief operating history, the competitive market
for temporary staffing services, dependence on availability of qualified
personnel, dependence on key personnel, dependence on key client and other
relationships successful integration of acquisitions, and risks associated with
opening new offices and offering new services.
Credit risk with respect to accounts receivable is dispersed due to the nature
of the business, the large number of customers, and the diversity of industries
serviced. At December 31, 1996 and 1997 and September 30, 1998, no one customer
represented greater than 10% of accounts receivable or greater than 10% of
revenues for the periods then ended.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pervasiveness 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All significant intercompany
transactions and accounts have been eliminated.
Cash and Cash Equivalents
The Company considers cash on deposit with financial institutions and all
highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents. The Company generally limits its investments in
cash equivalents to money market funds and certificates of deposit.
Restricted Cash
Restricted cash represents funds previously held by a financing institution as
collateral for a line of credit.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are depreciated using the straight-line method over the shorter of
the estimated useful life of the asset or the remaining term of the lease.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
SEPTEMBER 30,
USEFUL LIVES 1996 1997 1998
------------ ------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Office equipment................. 3-7 years $1,197 $1,806 $4,225
Office furniture and fixtures.... 3-7 years 420 960 1,952
Leasehold improvements........... 7 years 158 343 375
------ ------ ------
1,775 3,109 6,552
Less--Accumulated depreciation... (834) (1,181) (2,172)
------ ------ ------
$ 941 $1,928 $4,380
====== ====== ======
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996 and 1997 and
the nine months ended September 30, 1997 and 1998 was $124,000, $284,000
$386,000 $259,000 and $501,000, respectively.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
SEPTEMBER 30,
1996 1997 1998
------ ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill...................................... $7,643 $16,397 $55,252
Deferred financing costs...................... -- 232 468
Other......................................... 8 8 259
------ ------- -------
7,651 16,637 55,979
Less--Accumulated amortization................ (525) (854) (1,412)
------ ------- -------
$7,126 $15,783 $54,567
====== ======= =======
</TABLE>
Goodwill was recorded in connection with the acquisition on February 28, 1994
of certain assets of a predecessor by Infinity Enterprises, Inc., the
acquisition on January 1, 1996 of common stock from the previous shareholders
of Cama of Tampa, Inc., the acquisition on August 12, 1997 of C.P.A. Staffing
and the acquisitions on March 31, 1998, July 1, 1998 and August 4, 1998 of TGS
Resource Group, Inc., KPD Systems Inc. and Staffing Edge, Inc., respectively
(see Note 11). Goodwill is being amortized on a straight-line basis over 40
years.
Deferred financing costs are being amortized over the three-year term of the
credit facility (see Note 4).
Amortization expense for the intangible assets for the years ended December 31,
1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998 was
$558,000, $409,000, $329,000, $200,000 and $558,000, respectively.
Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles held and used by the Company be reviewed for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If changes in
circumstances indicate that the carrying amount of an asset that an entity
expects to hold and use may not be recoverable, future cash flows expected to
result from the use of the asset and its disposition will be estimated. If the
undiscounted value of the future cash flows is less than the carrying amount of
the asset, an impairment will be recognized. Management believes that there has
been no impairment of long-lived assets as of December 31, 1997.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accrued Liabilities
<TABLE>
<CAPTION>
DECEMBER 31
------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and commissions..................... $1,067 $2,722 $ 5,202
Acquisition transaction cost and other
acquired liabilities........................ -- -- 2,504
Combination costs............................ -- 1,612 103
Payroll taxes................................ 463 308 857
Shareholder distributions.................... -- 400 --
Accrued severance costs...................... -- 164 428
Income taxes payable......................... -- -- 1,314
Other........................................ 899 638 1,361
------ ------ -------
$2,429 $5,844 $11,769
====== ====== =======
</TABLE>
Revenue Recognition
The Company recognizes permanent placement revenues when the employment offer
and acceptance has occurred and the candidate's employment start date has been
established. Revenues from permanent placements are reported in the
consolidated statements of operations net of estimated adjustments due to
placed candidates that terminate employment within the Company's guarantee
period (generally 90-180 days). The net adjustment in each of the periods
presented is immaterial. The Company recognizes temporary staffing revenues
when the services are performed.
Gross Profit
Gross profit is determined by deducting the direct cost of services for
temporary staffing revenues (temporary and contract personnel payroll, payroll
taxes and benefit costs) from total service revenues. The primary costs
associated with permanent placement revenues are sales commissions, which
increase in proportion with service revenue from permanent placements.
Consistent with industry practice, these costs are included in selling, general
and administrative expenses.
Supplemental Cash Flow Information
For the years ended December 31, 1995, 1996 and 1997 and the nine months ended
September 30, 1997 and 1998, the Company paid interest of $919,000, $873,000,
$867,000, $370,000 and $602,000 respectively. The Company financed equipment
purchases under capital leases of $61,000 and $100,000 for the years ended
December 31, 1995 and 1996, respectively, and purchased Common Stock for debt
in the amount of $443,000 for the year ended December 31, 1996.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table displays the net noncash assets that were acquired in 1997
and the nine months ended September 30, 1998. The 1997 assets acquired are from
the Company's August 1997 acquisition of C.P.A. Staffing. The 1998 assets
acquired are from the Company's acquisitions of TGS, KPD and Staffing Edge on
March 31, 1998, July 1, 1998 and August 4, 1998, respectively. These
transactions are described in Note 11:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------ -------------------
(IN THOUSANDS)
<S> <C> <C>
Noncash assets (liabilities)
Accounts receivable................... $1,124 $ 3,826
Prepaid expenses and other............ 1 1,007
Property and equipment................ 167 568
Other assets.......................... -- 324
Goodwill.............................. 8,754 38,826
Accounts payable...................... (69) (684)
Accrued liabilities................... (325) (6,336)
Deferred tax liabilities.............. -- (240)
------ -------
Net noncash assets acquired........... 9,652 37,291
Common stock issued................... (7,656) (3,031)
------ -------
Net cash paid for acquisitions........ $1,996 $34,260
====== =======
</TABLE>
Income Taxes
The Company follows SFAS No. 109, "Accounting for Income Taxes." Under SFAS No.
109, the liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates that are expected to be in effect when the
differences reverse.
Prior to the IPO in February 1998 (see Note 2), the Company and its
subsidiaries were S corporations for federal and state income tax reporting
purposes except for ICON Search and Consulting, Inc. ("ICON") which is a C
Corporation. Accordingly, income tax expense and deferred taxes reflected in
the Company's financial statements prior to February 1998 were generated from
the operating activities of ICON.
In connection with the IPO, the Company and its subsidiaries terminated their S
corporation status and recorded income tax expense and a corresponding net
deferred tax liability of approximately $3,000,000, representing the tax effect
of differences in bases of assets and liabilities for financial reporting and
income tax purposes.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Income (Loss) Per Share
The Company has presented net income (loss) per share pursuant to SFAS No. 128,
"Earnings Per Share," and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98.
Basic net income (loss) per share is computed by dividing the net income (loss)
for each year by the weighted average number of common shares outstanding for
each year. Diluted net income (loss) per share is computed by dividing net
income (loss) for each year by the weighted average number of common shares and
Common Stock equivalents outstanding during each year. The average number of
common shares outstanding excludes the redeemable common shares, as the
accretion on the redeemable Common Stock of $224,000, $932,000 and $932,000 for
the years ended December 31, 1996 and 1997 and the nine months ended September
30, 1997, respectively, is deducted in arriving at the net income (loss)
available to Common shareholders. The average number of shares outstanding has
been retroactively restated to include the shares issued for the business
combinations accounted for as poolings of interests (see Note 1).
Fair Value of Financial Instruments
Management believes that the carrying amounts of certain financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate their fair values as of each balance sheet date
given the relatively short maturity of these instruments. The fair values of
long-term debt instruments have been estimated by discounting future cash flows
based on the current interest rate environment and remaining term to maturity.
The carrying amount of long-term debt approximates the fair value.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." This statement requires that items that
are components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements. SFAS
No. 130 became effective for fiscal years beginning after December 15, 1997 and
is now currently being applied by the Company. SFAS No. 130 requires
comparative financial statements provided for earlier periods to be
reclassified to reflect application of the provisions of this new standard. The
Company has determined that for the nine months ended September 30, 1997 and
1998 and for the years ended December 31, 1995, 1996 and 1997, no items meeting
the definition of comprehensive income as specified in SFAS No. 130, except net
income, existed in the financial statements. As a result, no disclosure is
necessary to comply with the standard.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective
for fiscal years beginning after December 15, 1997. Management believes that
SFAS No. 131 will not have a material effect on the Company's financial
statements.
Reclassifications
Certain amounts from prior years have been reclassified to conform with the
current year presentation.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. DEBT:
<TABLE>
<CAPTION>
DECEMBER 31
--------------- SEPTEMBER 30,
1996 1997 1998
------ ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revolving Credit Facility.................... $ -- $11,050 $33,959
Note payable to former shareholder of
Infinity Enterprises, Inc., repaid in May
1997........................................ 6,445 -- --
Non-compete agreements with former
shareholders of Infinity Enterprises, Inc.,
maturing February 2009, with monthly
payments of $8,333.......................... 1,217 1,116 1,042
Non-compete agreements with former owners of
EKT, Inc., repaid in May 1997............... 111 -- --
Term notes payable to former shareholders of
Cama of Tampa, Inc., repaid in May 1997..... 300 -- --
Term loans payable to a bank, repaid in
September 1997.............................. 256 -- --
Amount Due to former shareholders of Acsys
Resources, Inc., repaid in September 1997... 717 -- --
Loans due to shareholders of Acsys Resources,
Inc......................................... 93 -- --
Other........................................ 204 10 19
------ ------- -------
9,343 12,176 35,020
Less--Unamortized discount................... (496) (422) (375)
------ ------- -------
8,847 11,754 34,645
Less--Current portion........................ (722) (47) (9,003)
------ ------- -------
$8,125 $11,707 $25,642
====== ======= =======
</TABLE>
On May 16, 1997, the Company entered into an agreement with a bank which
provides for a $15,000,000 Revolving Credit Facility (the "Credit Facility") to
be repaid on May 31, 2000. At December 31, 1997, the Company had outstanding
borrowings under the Credit Facility of $11,050,000 and for the year ended
December 31, 1997 incurred $443,272 of interest expense under the Credit
Facility. The Company can elect on a monthly basis to pay interest at either:
(A) the greater of (i) the bank's prime rate or (ii) the federal funds rate
plus 0.5%, plus a margin which ranges up to 0.75%; or (B) at LIBOR plus a
margin, which ranges from 1.25% to 2.50%. Borrowings under the Credit Facility
are collateralized by all of the assets of the Company and a pledge of all of
the stock of its subsidiaries. Borrowings are also guaranteed by each of the
subsidiaries. The Credit Facility also contains various financial and non-
financial covenants and prohibits the payment of dividends without the lender's
consent. At December 31, 1997, the Company was in default under certain
covenants in the Credit Facility which were subsequently waived by the bank
through December 31, 1997. In February 1998, the Credit Facility was repaid
with proceeds from the IPO (see Note 2).
On June 29, 1998, the Company amended the Credit Facility, increasing the
amount available to be borrowed from $15.0 million to $25.0 million and
extending its maturity date from May 31, 2000 to June 30, 2002. In August 1998,
in connection with the acquisition of Staffing Edge (see Note 11), the Company
amended its Credit Facility increasing the available borrowings from $25.0
million to
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$40.0 million through January 1, 1999, after which availability under the
Credit Facility will be reduced to $25.0 million. As of September 30, 1998, the
Company had borrowed approximately $34.0 million under the credit facility, of
which $9.0 million, representing the amount which must be repaid or refinanced
by January 1, 1999, has been reclassified as current.
The Company has discounted the non-compete obligations and certain other notes
payable to reflect their fair market value based on average borrowing rates
available to the Company. The rate used to determine the discount was
approximately 9.25%. The discount is being amortized over the term of the notes
using the effective interest rate method. Amortization expense included in
interest expense in the accompanying statements of operations for the years
ended December 31, 1995, 1996 and 1997 and for the nine months ended September
30, 1997 and 1998 was approximately $73,000, $71,000, $74,000, $58,000 and
$47,000, respectively.
The obligations under the non-compete agreements with former shareholders are
secured by certain property and equipment and Common Stock of the Company, and
are personally guaranteed by certain shareholders of the Company.
Future maturities of long-term debt as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998.......................................................... $ 47
1999.......................................................... 41
2000.......................................................... 11,095
2001.......................................................... 49
2002.......................................................... 54
Thereafter.................................................... 468
-------
$11,754
=======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
In connection with the business combinations (see Notes 1 and 11), the Company
entered into employment agreements with certain shareholders who are also
officers or employees of the Company. Each employment agreement provides for a
guaranteed base salary over a three-year period and a discretionary bonus to be
determined by the Board of Directors. As of September 30, 1998, for the last
three months of 1998, and for the years ending December 31, 1999, 2000 and
2001, the Company is obligated to pay $926,000, $3,705,000, $2,474,000 and
$456,000 respectively, in salaries under these agreements. The agreements
contain non-compete covenants and can be terminated based on certain events, as
defined. In addition, the agreements provide for lump sum payments equal to
three times current salary upon certain triggering events such as a change in
control, among other events.
The Company leases office space under noncancelable operating leases. Certain
leases require additional payments for taxes and operating expenses and provide
for renewal options. Future minimum payments required under operating leases
that have an initial or remaining noncancellable lease term in excess of one
year at December 31, 1997 are as follows:
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998.......................................................... $1,653
1999.......................................................... 1,574
2000.......................................................... 1,469
2001.......................................................... 1,325
2002.......................................................... 976
Thereafter.................................................... 146
------
$7,143
======
</TABLE>
Rent expense for the years ended December 31, 1995, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998 was $733,000, $969,000, $863,000,
$772,000 and $1,895,000, respectively.
On November 13, 1997, a lawsuit was filed against the Company, Cama and the
former owner of Cama, Stephen S. Tutwiler by L. Robert Frank, Jr. and L. Robert
Frank & Associates, Inc. in the Circuit Court of the Thirteenth Judicial
Circuit, Hillsborough County, Florida. The lawsuit alleges that the plaintiff
and Mr. Tutwiler agreed to form a corporation to provide certain staffing
services; that such services were instead provided through a division of Cama;
and that the plaintiff was entitled to a portion of the stock of Cama and thus
to a portion of the shares of Common Stock issued to Mr. Tutwiler when it
acquired Cama. The plaintiff asserts numerous claims, including breach of
contract, fraud, civil conspiracy and alleged misstatements and omissions
regarding the Company's ownership of Cama in a prospectus filed by the Company.
The plaintiff seeks to recover $27,000 allegedly due to the plaintiff, his
alleged portion of Mr. Tutwiler's shares of Common Stock, and compensatory and
other damages. The plaintiff also seeks an accounting and employment by the
Company. The Company intends to vigorously defend the plaintiff's allegations.
An adverse result could have a material effect on the Company and result in a
charge to the statement of operations in the period in which the litigation is
resolved. There is no other pending litigation which the Company considers
material.
In February 1998, the Company entered into a tax indemnification agreement with
the then current shareholders which provides for indemnification by the Company
to the shareholders and by the then shareholders to the Company for tax
consequences of any adjustments made to taxable income (loss) prior to or after
the termination of the S Corporation election that may impact previously
reported amounts.
6. TERMINATION OF FRANCHISE AGREEMENTS AND SEVERANCE COSTS:
Prior to May 31, 1994, Acsys Resources operated as a franchisee under a
franchise agreement, which provided for various marketing and royalty payments
to the franchisor based on revenues. Effective May 31, 1994, Acsys Resources
and the franchisor terminated the agreement. The termination agreement provided
for payments to the franchisor of $360,000, which were made and recorded as an
expense in 1994. In addition, Acsys Resources was required to pay to the
franchisor 1% of revenues for the period June 1, 1994 through May 31, 1995, and
2% of revenues for the period June 1, 1995
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
through May 31, 1996, resulting in an expense of $201,000 in 1994, $166,000 in
1995, and $108,000 in 1996. In May 1997, Cama of Tampa, Inc. terminated its
franchise agreement and made a one-time payment to the franchisor of $170,000,
which was recorded as an expense for the year ended December 31, 1997.
The Company recorded a $512,000 charge in 1997 as a result of the termination
of employment of a former executive, representing the present value of future
severance payments due under his employment agreement. The severance obligation
will be paid in 36 monthly installments of $16,667 beginning December 1997, and
is recorded in other current and long-term liabilities in the accompanying
balance sheet.
The Company recorded a charge of $650,000 during the nine months ended
September 30, 1998 consisting of severance obligations resulting from the
Company's decision to consolidate its corporate offices in Atlanta, Georgia.
Costs under the franchise termination agreements and severance expense have
been separately recorded in the accompanying consolidated statements of
operations.
7. RETIREMENT SAVINGS PLAN:
Acsys Resources and ICON have defined contribution retirement plans for the
benefit of all eligible employees. The plans qualify under Section 401(k) of
the Internal Revenue Code and allow for eligible employees to contribute to the
plans up to 15% and 10%, respectively, of their pretax compensation, subject to
the maximum contributions allowed by the Internal Revenue Code. The plans
provide for discretionary matching contributions by Acsys Resources and ICON
based on a percentage of the participant's contributions to the plan and a
discretionary profit sharing contribution based on employee compensation. Acsys
Resources made $23,000, $30,000 and $35,000 during the years ended December 31,
1995, 1996 and 1997, respectively, in matching contributions and no
discretionary contributions were made to the plan. Acsys Resources did not make
matching contributions during the nine months ended September 30, 1997 and
1998. ICON has not made contributions to the plan since the plan's inception.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES:
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31
---------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current................................................... $(18) $ 27 $(96)
Deferred.................................................. 130 326 464
---- ---- ----
112 353 368
---- ---- ----
State:
Current................................................... $ (3) $ 5 (17)
Deferred.................................................. 24 61 87
---- ---- ----
21 66 70
---- ---- ----
$133 $419 $438
==== ==== ====
</TABLE>
The tax effect of significant temporary differences is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
GROSS DEFERRED TAX ASSETS:
Reserves not currently deductible for tax............... $ 12 $ 72
Operating loss carryforwards............................ -- 103
------ --------
12 175
GROSS DEFERRED TAX LIABILITY:
Difference between cash basis of
accounting (tax) and accrual basis of
accounting (book)...................................... (564) (1,165)
Amortization and depreciation........................... -- --
------ --------
Net deferred income tax liability..................... $ (552) $ (990)
====== ========
</TABLE>
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The federal statutory income tax rate is reconciled to the effective tax rate
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
----------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal statutory rate................... 34.0% 34.0% 34.0%
State income taxes, net of federal
benefit................................. 4.0 4.0 4.0
Income allocated to S-corporation
earnings................................ (33.0) (25.8) (12.3)
Expenses not deductible for tax
purposes................................ 0.1 0.5 1.9
---------- ---------- ----------
5.1% 12.7% 27.6%
========== ========== ==========
</TABLE>
9. RELATED PARTIES:
At December 31, 1996, Acsys Resources had loans due from its shareholders of
$62,000 at an interest rate of 5%. The loans are due on demand. These loans are
included in other assets in the accompanying consolidated balance sheets. In
addition, Acsys Resources owes three shareholders a total of $178,000 at
December 31, 1997 for compensation earned but not paid.
At December 31, 1997, the Company had outstanding advances to two of its
shareholders in the amount of $281,000, which are recorded within prepaid and
other current assets in the accompanying balance sheet.
10. CAPITAL TRANSACTIONS:
Stock Option Plan
In May 1997, the Company established the 1997 Stock Option Plan (the "Option
Plan"). The maximum number of shares of Common Stock that currently may be
subject to outstanding options, determined immediately after the grant of any
option, is 2,000,000 shares. The Option Plan provides that the number of shares
of Common Stock available for issuance thereunder shall be automatically
increased on the first trading day of each calendar year by the lesser of (i)
three percent of the number of shares outstanding on the preceding trading day
or (ii) 500,000 shares. Shares of Common Stock which are attributable to awards
which have expired, terminated or have been canceled or forfeited during any
calendar year are available for issuance or use in connection with future
awards during such calendar year.
In January 1997, Acsys Resources issued stock options under the Acsys Resources
1996 Equity Compensation Plan (the "Acsys Resources Plan") to its officers and
employees. In September 1997, the Acsys Resources Plan stock options were
exchanged for 111,687 stock options at an exercise price of $2.66 per share.
The exchange ratio was based on the exchange ratio used to effect the merger
between Acsys Resources and the Company on September 3, 1997. In connection
with this merger, these options became fully vested in accordance with the
change of control provision included in the Acsys Resources Plan. In May 1997,
the Company issued 97,698 non-qualified stock options and 37,500 qualified
stock options to an officer of the Company at an exercise price of $8.00 per
share.
As of December 31, 1997, there were 244,820 stock options outstanding and
exercisable under the Option Plan and the Acsys Resources Plan with a weighted
average exercise price of $5.61 per share. These options consist of 135,198 at
$8.00 per share and 109,622 at $2.66 per share.
From February to August 1998, the Company issued options to purchase 1,748,432
shares of Common Stock to certain employees and executive officers of the
Company at exercise prices that range from $8.50 to $18.50 per share.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In May 1997, ICON issued stock options to certain employees. In May 1998, the
ICON stock options were exchanged for 39,480 stock options at an exercise price
of $7.09 per share. In connection with the merger, these options became fully
vested.
The Company accounts for its option plan under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." In 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). SFAS 123 established a fair value
based method of accounting for stock-based compensation plans. SFAS 123
requires that an employer's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for the plan. Had the Company recognized compensation cost for
its stock option plans consistent with the provisions of SFAS 123, the
following pro forma net loss per Common share for the year ended December 31,
1997 would have resulted:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
---------------
(IN THOUSANDS--
EXCEPT PER
SHARE DATA)
<S> <C>
Net income:
As reported.............................................. $ 1,146
=======
As calculated in accordance with SFAS 123................ $ 871
=======
Net income/(loss) per Common Share:
As reported.............................................. $ 0.02
=======
As calculated in accordance with SFAS 123................ $ (0.01)
=======
Shares used in calculating net income per diluted common
share................................................... 10,440
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with a risk-free interest rate of 6.5%, no
expected dividend yield and an expected life of five years. A volatility of 0%
was assumed for the year ended December 31, 1997. As of December 31, 1997, the
weighted average fair value of the options outstanding was $1.61 per option.
Redemption and Severance Agreements
In September 1996, Acsys Resources, entered into a Stock Redemption Agreement
with one of its shareholders. Under this agreement, Acsys Resources repurchased
a portion of the shares owned by this shareholder for $458,500. This agreement
initially required Acsys Resources, Inc. to repurchase 122,012 shares of Common
Stock at a price based on an earnings formula defined in the Stock Redemption
Agreement. The Owner of these 122,012 shares of redeemable common stock entered
into a contractual waiver of all redemption rights effective upon the IPO.
Accordingly, subsequent to the IPO, these shares have been reclassified as
common stock.
In connection with the Stock Redemption Agreement, Acsys Resources and the
shareholder also entered into a severance agreement. Under this agreement, the
shareholder received $458,500, which was charged to expense in 1996.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company paid $200,000 and $717,000 in September 1996, and September 1997,
respectively in settlement of amount under these agreements.
11. ACQUISITIONS:
Acsys Resources acquired C.P.A. Staffing, Inc., C.P.A. Search, Inc. and Career
Placement Associates, Inc. (together, "C.P.A. Staffing") on August 12, 1997.
The acquisition was accounted for under the purchase method of accounting. The
total purchase price was approximately $9,700,000 and consisted of cash of
$1,900,000, 1,219,274 shares of Common Stock with an estimated fair value of
$7,700,000 and transaction costs of $144,000. The purchase price was allocated
to the assets acquired and liabilities assumed. The excess of approximately
$8,750,000 of the purchase price over the estimated fair value of the net
assets acquired was recorded as goodwill and is being amortized on a straight-
line basis over 40 years.
On March 31, 1998, the Company acquired all of the outstanding stock of TGS
Resource Group, Inc. ("TGS"), an accounting and finance staffing firm located
in Richmond, Virginia. The Company has accounted for this transaction under
the purchase method of accounting. The results of operations of TGS are
included from the date of acquisition only.
On May 22, 1998, the Company acquired all of the outstanding stock of ICON, an
Atlanta-based information technology staffing company, in a stock-for-stock
merger. As noted earlier, this transaction has qualified as a pooling of
interests for accounting purposes and as a tax-free reorganization. Under the
terms of the merger agreement, ICON shareholders received 2,820,360 shares of
Common Stock in exchange for all of the equity interests in ICON. In
connection with the merger, the Company recorded a charge for combination
expenses of $1,730,000 in the nine months ended September 30, 1998, including
investment banking, legal and accounting fees, and other transaction costs
associated with the merger.
On July 1, 1998, the Company acquired all of the outstanding stock of KPD
Systems, Inc. ("KPD"), an information technology staffing firm located on Long
Island, New York. The Company accounted for this transaction under the
purchase method of accounting. The results of operations for KPD are included
from the date of acquisition only.
On August 4, 1998, the Company acquired all of the outstanding stock of
Staffing Edge, Inc. ("Staffing Edge"), a specialty professional staffing firm
with offices throughout the Midwestern United States, for $22,510,000 in cash,
$838,000 in Common Stock, transaction costs of $1,918,000 and assumption of
debt of $7,040,000. The Company will account for this transaction under the
purchase method of accounting. The results of operations for Staffing Edge are
included from the date of acquisition only.
<PAGE>
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the unaudited pro forma results of operations of
the Company for the years ended December 31, 1996 and 1997 and the nine months
ended September 30, 1998, assuming that the acquisitions of C.P.A. Staffing,
TGS, KPD and Staffing Edge had occurred on January 1, 1996:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------ SEPTEMBER 30,
1996 1997 1998
------------------ -------------
(IN THOUSANDS--EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Service revenues......................... $ 80,835 $ 107,805 $107,776
Pro forma net income..................... 694 15 1,330
Pro forma diluted net income/(loss) per
share................................... $ 0.04 $ (0.08) $ 0.09
Shares used in computing pro forma
diluted net income per share amounts.... 11,421 11,420 14,473
</TABLE>
