SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to _______
Commission file number 000-22309
ASI SOLUTIONS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 13-3903237
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
780 THIRD AVENUE, NEW YORK, NEW YORK 10017
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 319-8400
------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Common Stock, par value $0.01 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on June 16, 1998 was $33,121,832. The
calculation of holdings by non-affiliates is based upon the assumption, for
these purposes only, that directors, executive officers and persons holding 10%
or more of the registrant's Common Stock, par value $0.01 per share, are
affiliates.
The number of shares of the registrant's Common Stock, par value $0.01 per
share, outstanding on June 16, 1998 was 6,522,408.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the Registrant's
Annual Meeting of Stockholders to be held on August 5, 1998 are incorporated by
reference into Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
ASI Solutions Incorporated (the "Company") is a leading national provider of
a comprehensive range of human resources outsourcing services for large
organizations seeking to hire, train and develop a higher quality, more
effective workforce. The Company's services are organized into five core areas:
assessment and selection, training and development, customer contact monitoring,
employment process administration and compensation research and consulting
services. The Company, which has been providing human resources services for
over 18 years, believes that it is well positioned to be a single-source
solution for organizations which outsource all or a portion of these human
resources functions.
The Company's assessment and selection services entail designing and
implementing assessment processes for the selection of new hires and the
evaluation of existing employees for advancement to positions of increased
responsibility. The Company's training and development services include live
simulations, competency surveys for job skill evaluation and situational
exercises through which managers are introduced to techniques to improve their
performance. The Company's customer contact monitoring capability typically is
used by clients which utilize inbound and outbound call centers for their
customer contact service functions. The Company's employment process
administration services address clients' recurring staffing needs resulting from
regular employee turnover, as well as large-scale, rapid hiring needs for
clients who do not have the in-house capacity to fulfill their needs. The
Company's compensation research and consulting operations, which the Company
acquired through its acquisition of McLagan Partners Incorporated ("McLagan") in
November 1997, involve the provision of a series of compensation surveys
primarily to companies in the financial services and securities industries.
The Company was founded in 1978 as a New York corporation by Bernard F.
Reynolds, Eli Salig and Seymour Adler and was reorganized (the "Reorganization")
in March 1996 as a Delaware holding company for its three subsidiaries,
Assessment Solutions Incorporated ("Assessment Solutions"), Proudfoot Reports
Incorporated ("Proudfoot") and C3 Solutions Incorporated ("C3"). On April 16,
1997, the Company completed the initial public offering of 1,800,000 shares of
the Company's common stock, par value $0.01 per share (the "Common Stock"). On
August 14, 1997, T3 Solutions Incorporated ("T3") was incorporated, and on
November 14, 1997, the Company acquired McLagan Partners Incorporated and its
related entities.
SERVICES
Assessment and Selection. The Company designs and implements assessment
processes for the selection of new hires and the evaluation of existing
employees for positions of increased responsibility. These assessment services
have generally been provided for positions for which large numbers of staff are
required and where effectiveness in the job directly impacts the business'
revenue. The Company may design either a single assessment instrument, which is
delivered as part of an existing selection process, or the entire selection
process itself, as required by the particular client. Assessment was the first
service provided by the Company and has served as the foundation for several of
its other services.
On a typical engagement, the Company first custom designs the assessment
tools necessary for an effective selection process. This generally involves
field research and job analysis to determine the critical components of the
position and the key competencies required to execute it successfully.
Virtually all of the Company's assessment projects include the use of live
simulations, either in person or over the telephone, in order to ensure that
candidates possess the skill requirements for the position sought. The Company
has found that the use of job-specific, behavior-based techniques to determine a
candidate's ability to actually perform the required tasks provides clients with
a more accurate selection process and a more qualified workforce. The Company's
staff of professional industrial psychologists designs each assessment
instrument to meet the standards for test validity established by the Society
for Industrial and Organizational Psychology, the Uniform
Guidelines on Employee Selection Procedures issued by the federal government in
1978, as well as other professional standards. The Company has applied its
validation procedures to selection mechanisms to a wide variety of desired
skills, including multilingual fluency, which the Company believes is becoming
an increasingly important requirement for customer sales and service positions.
The Company also provides executive assessment services which involve the
evaluation of executive applicants for general and functional management level
positions. The Company uses evaluation methods similar to those used for
operational level employees, although executive assessments generally involve
more comprehensive procedures, including in-depth interviews and extensive
testing. The Company has expanded its executive assessment resources through
staff additions and the leasing of additional space.
Training and Development. The Company's training and development services
are an outgrowth of the Company's expertise in conducting live simulations for
job skill evaluations. A typical training and development program begins with
the administration of competency evaluation surveys to a manager's colleagues
which are analyzed by the Company's staff. Simulations are then developed in
order to allow further testing by the Company's assessment professionals of the
manager's relevant job skills. Based on the skills necessary for the particular
functions performed by the manager, the Company develops a training program
through which the manager is introduced to techniques for improving his or her
performance. Once the training program is completed, the manager is often put
through another set of simulation exercises to determine how well the suggested
improvements have been understood and adopted by the manager. The Company then
provides each participant with a written development plan for further
improvement.
The Company's training and development services can also be used to assist
in determining the potential for assigning existing employees to newly-created
positions. In one instance, a team of the Company's industrial psychologists
worked with the client to define the new job requirements and design a
telephone-based simulation to assess the employees' aptitude for the new
function. The Company's staff tested more than 2,500 customer service
representatives over a three-month period. The Company's simulation services
are now used to screen over 3,000 prospective new hires for this client annually
for both the sales and service positions.
The Company believes a major opportunity for growth in its training and
development services is in the area of remote management. Through its client
engagements, the Company has developed an understanding of the challenges
inherent in managing large numbers of employees who are geographically
dispersed. As organizations downsize and flatten their organizational
structures, executives are being asked to manage greater numbers of individuals.
In addition, due to the expanding geographical scope of many businesses and the
growing use of telecommuting, managers are being forced to learn to communicate
with, supervise and motivate their employees telephonically and by electronic
mail, rather than through face-to-face meetings. The Company believes it has
developed the knowledge and expertise necessary to train managers to deal
effectively with these challenges.
Customer Contact Monitoring. The Company provides monitoring services for
clients who engage in large-scale use of call centers for their customer contact
functions. These call centers may consist of clients' employees or external
vendors contracted by the client. The establishment of call centers as the
primary means by which large companies provide customer and sales related
services has led to an increased demand for the Company's services from existing
and potential clients. As heightened domestic and global competition has led to
the availability of an increased number of alternative or substitute products
and services in many industries, the role of customer service has assumed a
greater level of importance in terms of customer acquisition and retention. As
a consequence, companies are becoming increasingly vigorous in their efforts to
insure that customer service representatives employed by them or by vendors
operating on their behalf are complying with their service quality standards.
The Company's proprietary monitoring system can provide analyses and results
of customer contact representatives' performance on an individual, team and call
center basis, with comparisons against established service quality standards and
group norms.
2
Employment Process Administration. The Company offers complete employment
process administration services to clients who have large-scale hiring needs and
who do not have the in-house capacity to fulfill their needs. Employment
processes provided by the Company typically include: advertising for and
recruiting applicants; establishing automated telephonic voice response systems
to screen prospective applicants; arranging for the physical facilities and
equipment necessary for the pre-screening process; performing background checks
on applicants; and conducting testing and simulations utilizing the Company's
assessment expertise to select applicants for recommendation to the client. The
Company can also provide any of these services individually on an as needed
basis. In particular, the Company provides clients who have their own internal
employment processes with ongoing background check services.
To meet a client's needs, the Company is frequently asked to secure
facilities and equipment, establish an interactive voice response system to
screen prospective applicants, develop proprietary database and report
generation software and staff a facility with test administrators and
coordinators. The Company has in the past scheduled and tested up to 500
applicants per day, provided client access to the database for ongoing status
reports and provided complete support up to the point of hire.
Compensation Research and Consulting. The Company provides a series of
surveys to the financial services and securities industries. These include
compensation surveys for bank and brokerage and investment management clients as
well as market share surveys for retail operations and performance monitoring
services for institutional operations within the financial services industry.
The Company's consultants and analysts work closely with clients throughout the
year to ensure the accuracy and consistency of survey data. Clients may
purchase surveys only if they participate in the surveys. In addition to
domestic surveys, the Company serves both the European and Asian markets through
its foreign offices. The Company also provides various compensation consulting
services to its client base.
CLIENTS
The Company's clients are in a wide range of industries, including
telecommunications, financial services, information technology, consumer
products and healthcare, and are principally Fortune 500 companies for which
customer service, sales and call center functions are critical components of
their businesses. Current customers include American Express Company, Bell
Atlantic, BellSouth Corporation, Citibank, N.A., Morgan Stanley Dean Witter
Discover & Co., Georgia-Pacific Corporation, Hewlett-Packard Company, Merrill
Lynch Incorporated, Oxford Health Plans, Inc., Pepsi-Cola Bottling Co., Goldman,
Sachs & Co. and United Parcel Service of America, Inc. The Company provides its
services primarily through its two operations centers in Melville, New York, but
also through its regional offices and at clients' locations. Compensation
research and consulting services are provided through offices in Stamford
Connecticut, Chicago, London, Tokyo and Hong Kong. The only customer accounting
for more than 10% of the Company's revenues in fiscal 1998 and fiscal 1997 was
Bell Atlantic, representing 30% in both fiscal years. In fiscal 1996, Ameritech
accounted for 14% of the Company's revenue.
COMPETITION
The Company believes that the human resources industry is highly fragmented
and that no one participant or small number of participants is dominant in the
industry. The principal competition encountered by the Company across the full
range of services provided by the Company are human resources consulting firms,
smaller companies who are specialized providers of certain services provided by
the Company and consulting firms that are affiliated with large multinational
accounting firms. In addition, the human resources staffs of many large
organizations which are existing or potential clients of the Company may already
provide one or more of the basic services provided by the Company. Key
competitive factors include depth of industry knowledge, breadth of skills and
services offered, level of experience, flexibility, responsiveness to customer
requests, availability of resources to perform a wide variety of projects in a
timely manner and price.
3
In the area of assessment services, the Company encounters competition from
large firms such as Aon Consulting, Development Dimensions International and
Personnel Decisions International. In the area of training and development, the
Company competes with Aon Consulting, Development Dimensions International, The
Center for Creative Leadership and TeleSpectrum Worldwide. In the area of
employment process administration, the Company competes with the human resources
outsourcing departments within organizations such as Ernst & Young LLP, Fiserve,
Inc., Manpower Temporary Services and Norrell Corporation. In the area of
customer contact monitoring, the Company is presently unaware of any direct
competitors. While there are many firms who offer compensation consulting
services such as Towers Perrin and Hewitt Associates, the Company's compensation
survey service for the financial services industry has no direct competition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company primarily relies on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company generally enters into
confidentiality agreements with its employees and clients that limit access to
and distribution of its proprietary information. The Company also believes that
factors such as the technical and creative skills of its personnel, the
Company's corporate knowledge and expertise in behavioral assessment and name
recognition are essential to establishing and maintaining a leadership position
in its industry. The Company seeks to protect its database, documentation and
other written materials under trade secret and copyright laws.
EMPLOYEES
As of March 31, 1998, the Company employed 471 employees, of whom 337 were
full-time and 134 were part-time. Historically, the Company has generally been
able to satisfy its hiring needs. No assurance can be given, however, that this
will continue to be the case, particularly if the Company experiences
substantial future growth. The inability of the Company to hire sufficient,
qualified personnel to service its future growth would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has no collective bargaining agreements or any similar union
agreements and the Company has never experienced any work stoppages. The
Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in leased offices occupying
approximately 11,300 square feet at 780 Third Avenue, New York, New York 10017.
The lease for this space will expire in 2010. The Company also leases office
space at the following locations: Campbell, California; St. Louis, Missouri; and
two offices in Melville, New York. The terms of these leases expire between
1999 and 2005. Through its acquisition of McLagan in November, 1997, the
Company acquired leases in Stamford, Connecticut and Chicago, Illinois for
11,000 and 6,100 square feet, respectively. These leases expire in 2001 and
2000, respectively. The Company also acquired leased office space in London,
Tokyo and Hong Kong through its acquisition of McLagan.
The Company anticipates that as its business grows, it will establish more
regional offices and continue to enlarge existing offices.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings that
are incidental to the conduct of its business. The Company is not involved in
any pending or threatened legal proceedings which the Company believes could
reasonably be expected to have a material adverse effect on the Company's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol ASIS. The high and low sales prices of the Common Stock each calendar
quarter, as reported by the Nasdaq National Market, were as follows:
Fiscal 1999: High Low
------- -----
First quarter (through June 16, 1998).. 11 9/16 7 3/4
Fiscal 1998:
First quarter (from April 15, 1997).... 11 3/8 6
Second quarter......................... 14 3/4 7 3/4
Third quarter.......................... 12 3/8 8 1/4
Fourth quarter......................... 10 5/8 8 1/2
As of June 16, 1998, there were 52 holders of record of the Company's Common
Stock. There were 6,522,408 shares of Common Stock outstanding on June 16,
1998.
The market price of the Company's Common Stock has fluctuated significantly
since the initial public offering in April 1997. The market price of the Common
Stock could be subject to significant fluctuation in the future based on factors
such as major announcements by the Company or its competitors, quarterly
fluctuations in the Company's financial results or the financial results of
other companies in its industry, changes in analysts' estimates of the Company's
financial performance and general conditions in the human resource outsourcing
market and the financial markets. In addition, the stock market in general has
experienced extreme price and volume fluctuations, which have particularly
affected the market prices for many companies and which have often been
unrelated to the operating performance of the specific companies. There can be
no assurance that the market price of the Common Stock will not decline
substantially or otherwise continue to experience significant fluctuations in
the future.
DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain earnings, if any, for the development of its
business. Additionally, the Company's credit facility prohibits the declaration
and payment of cash dividends.
5
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
consolidated statements of income for the five fiscal years ended March 31,
1994, 1995, 1996, 1997 and 1998 and consolidated balance sheets as of March 31,
1995, 1996, 1997 and 1998 are derived from audited financial statements of the
Company. The consolidated balance sheet data as of March 31, 1994 are derived
from unaudited financial statements of the Company. The unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in this report.
YEAR ENDED MARCH 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
STATEMENT OF OPERATIONS DATA (1):
Revenue.................................................... $6,028 $8,023 $10,558 $18,819 $34,866
Cost of services........................................... 3,207 4,179 5,207 8,706 17,664
------ ------ ------- ------- -------
Gross Profit............................................... 2,821 3,844 5,351 10,113 17,202
Operating expenses:
General and administrative................................ 1,688 1,948 2,225 3,224 7,871
Sales and marketing....................................... 618 744 1,100 1,890 3,273
Research and development.................................. 283 375 614 1,272 1,747
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Income from operations..................................... 232 777 1,412 3,727 4,311
Other income............................................... -- 276 -- -- --
Interest (expense) income, net............................. (24) (14) 2 2 (593)
------ ------ ------- ------- -------
Income before provision for income taxes
and cumulative effect of change in accounting principle.. 208 1,039 1,414 3,729 3,718
Provision for income taxes................................. (61) (468) (682) (1,917) (1,599)
------ ------ ------- ------- -------
Income before cumulative effect of change in accounting
principle................................................. 147 571 732 1,812 2,119
Cumulative effect of change in accounting principle (2).... 19 -- -- -- --
------ ------ ------- ------- -------
Net income................................................. $ 166 $ 571 $ 732 $ 1,812 $ 2,119
====== ====== ======= ======= =======
Basic earnings per share................................... $0.04 $0.12 $0.16 $0.39 $0.33
Diluted earnings per share................................. $0.04 $0.12 $0.16 $0.39 $0.33
Weighted average common shares outstanding (3):
Basic..................................................... 4,625 4,625 4,625 4,625 6,346
Dilutive effect of stock options and warrants............. 42 42 42 42 175
------ ------ ------- ------- -------
Diluted shares............................................ 4,667 4,667 4,667 4,667 6,521
====== ====== ======= ======= =======
OPERATING DATA:
Number of employees........................................ 116 123 145 282 471
AS OF MARCH 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------- ------- -------
BALANCE SHEET DATA (1):
Cash and cash equivalents.................................. $ 22 $ 228 $ 70 $ 60 $ 964
Working capital............................................ (172) 389 530 152 3,160
Total assets............................................... 1,823 2,470 4,243 8,595 44,561
Long-term debt, less current portion....................... 160 -- -- 307 17,002
Total stockholders' equity................................. 280 850 2,396 3,243 15,696
_____________
(1) The financial statements for all periods prior to March 31, 1996 have been
presented on a consolidated basis at the historical cost basis of the
entities involved in the Reorganization in a manner similar to a pooling of
interests. As of March 31, 1996, the date of the Reorganization, the
interests of the shareholders of such entities other than one controlling
shareholder have been accounted for as a purchase of minority interest. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" under Item 7 of Part II hereof and Note 1 to the Notes
to Consolidated Financial Statements under Item 8 of Part II hereof.
(2) Upon adoption of SFAS No. 109, the Company recorded a cumulative effect of
change in accounting principle of $19,091 in fiscal 1994.
(3) See Note 2 to the Notes to Consolidated Financial Statements under Item 8 of
Part II hereof for a description of weighted average number of common shares
outstanding.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Selected Financial Data and the related notes thereto included in Item 6 and the
Company's Consolidated Financial Statements and related notes thereto included
in Item 8. This report also contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Any such statements are subject to risks and uncertainties that
could cause the actual results to differ materially from those projected in such
statements, including negative developments relating to unforeseen order
cancellations or the effect of a customer delaying an order, negative
developments relating to the Company's significant customers, a reduction in
demand for the Company's services, the impact of intense competition, changes in
the industry, and changes in the general economy. The Company undertakes no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
OVERVIEW
ASI Solutions Incorporated is a leading national provider of a comprehensive
range of human resources outsourcing services for large organizations seeking to
hire, train and develop a higher quality, more effective workforce. The
Company's services are organized into five core areas; assessment and selection,
training and development, customer contact monitoring, employment process
administration and compensation research and consulting services. The Company
believes these services position the Company as a single-source solution for
many organizations which outsource all or a portion of their human resources
functions. The Company markets its services principally to Fortune 500
companies for which customer service, sales and call center functions are
critical components of their businesses. Industries served by the Company
include telecommunications, financial services, information technology, consumer
products and healthcare.
The Company was founded in 1978 to provide assessment services principally
to companies in the securities industry and later to several of the regional
telephone companies. In 1986, the Company acquired a background investigation
firm which provided pre-employment screening services. Prior to fiscal 1994,
the Company's revenue was primarily generated from assessment and selection
services and limited employment process administration services, such as
background checks.
In fiscal 1994, the Company introduced and began generating revenue from a
broader array of employment process administration services and training and
development services, which have favorably impacted the Company's results of
operations since that time. In October 1996, the Company introduced its
customer contact monitoring services. In November 1997, the Company acquired
McLagan, a provider of a comprehensive array of compensation research and
consulting services primarily to the financial services and securities
industries. From fiscal 1992 to fiscal 1998, the Company's revenue has
increased at a compounded annual growth rate of approximately 42%, from $4.3
million in fiscal 1992 to $34.9 million in fiscal 1998.
The Company charges for its services through contractual arrangements which
vary depending on the type of service and the nature of the Company's
relationship with the client and recognizes revenue upon completion of such
services. For assessment and selection, the Company generally charges a fixed
fee for the initial design of the assessment instruments and selection process,
and then delivers the service for a per applicant fee. For training and
development contracts, the Company generally charges a fixed fee per person. For
customer contact monitoring, the Company generally charges a fee per-call
monitored, determined by the duration of the call, aggregate number of calls,
and other relevant variables. For employment process administration contracts,
the Company charges a per-unit fee, which varies depending upon whether the
client only needs one type of service, such as employee background checks, or an
entire recruitment and hiring process. Individual services generally are also
provided on a per-unit fee basis, while more complete services typically include
a base fee component and a per-unit fee. Compensation survey services are
provided at a fixed price per survey or per service provided.
7
The Company's clients generally use its services on an as-needed basis,
requiring the Company to be able to respond quickly to changes in the volume of
services it must provide at a given time. The Company has taken a variety of
steps in order to address the operational challenges this situation presents and
increase its ability to control its cost of services. For example, the Company
engages many professionals, including a number of its psychologists, on a part-
time basis, which enables it to have access to a large number of staff on
relatively short notice without incurring significant fixed labor expenses. The
Company also cross-trains its employees on multiple aspects of the delivery of
its services, giving the Company as much flexibility as possible when staffing a
particular client engagement. In addition, the Company often provides its
services at client facilities or other off-site locations, limiting the
Company's need to expand its own facilities in response to rapid increases in
clients' demands for services.
Cost of services includes payroll and other expenses directly attributable
to the services delivered by the Company, as well as facilities costs, including
telephone expenses, costs for third party data utilized in background reports
(e.g., credit bureau reports) and any necessary travel directly related to
providing such services.
The Company generally has experienced lower cost of services on its
employment process administration and assessment and selection categories.
Employment process administration services have tended to have lower associated
labor costs due to efficiencies achieved through the use of various automation
technologies which have reduced the Company's staffing level requirements. Such
technologies include interactive voice response used to automate components of
the Company's recruitment process, and remote access to several of the Company's
services through its worldwide web site. In addition, the provision of
employment process administration services does not require as many
professionals with advanced degrees as are required in the Company's other
services, resulting in lower payroll rates. With respect to assessment and
selection, while these services typically are provided by experienced staff who
have masters or doctoral degrees, the relatively high payroll expense associated
with such personnel is offset by higher pricing for the services they provide.
Automated systems have also helped to increase the efficiencies of the
assessment and selection processes.
General and administrative expense includes payroll and related expenses
attributable to senior management, finance, information systems, human resources
and office administration personnel, facilities costs and general office
expenses pertaining to these functions, as well as outside professional fees.
Sales and marketing expense consists of salaries, commissions on a small
number of the Company's services, travel-related costs associated with the
solicitation of new business, the cost of designing, producing and distributing
marketing materials, and facilities and office-related expense pertaining to
these activities.
Research and development expense includes payroll and related expenses,
facilities costs and necessary travel expenses pertaining to the professional
staff which develop new programs used in the conduct of assessment and selection
testing, training and development activities, customer contact monitoring and
employment process administration. Such research and development typically is
only conducted in connection with services being performed under existing client
contracts, and is expensed as incurred.
The Company's operations are subject to Federal and various state, local and
foreign taxes, resulting in an effective tax rate typically of approximately
43%.
Because of the significant size and financial resources of the Company's
existing clients, write-offs for bad debts have historically not been material.
As of March 31, 1998, the following five customers represented 59% of the
Company's total accounts receivable: Bell Atlantic, BellSouth Corporation,
American Express Company, Hewlett-Packard Company, and Morgan Stanley Dean
Witter Discover & Co.
In March 1996, the Company completed the Reorganization pursuant to which
its two predecessor companies, Assessment Solutions and Proudfoot, which were
separately owned but commonly controlled, became subsidiaries of the Company and
substantially all of the stockholders of the predecessors became
8
stockholders of the Company. The Reorganization has been accounted for as a
reorganization of entities under common control to the extent of the ownership
of one stockholder who held an approximately 60% interest in the entities both
prior and subsequent to the Reorganization. The remaining approximately 40% of
the ownership interests have been treated as if acquired and have been accounted
for as a purchase, resulting in an increase in goodwill of approximately
$1,063,000. This goodwill is being amortized over ten years.
Fiscal 1998 Compared with Fiscal 1997
Revenue. Revenue increased $16.1 million or 85.3% from $18.8 million for
fiscal 1997 to $34.9 million for fiscal 1998. This increase was attributable to
revenue increases in assessment and selection, customer contact monitoring and
employment process administration and to the addition of $5.9 million in revenue
from compensation research and consulting services through the acquisition of
McLagan in November 1997, partially offset by a decrease in training and
development revenue. Assessment and selection revenue increased $3.7 million or
56.8% from $6.4 million for fiscal 1997 to $10.1 million for fiscal 1998. 58%
of the increase came from existing clients while 42% came from new assessment
and selection clients. Training and development revenue decreased $479,000 or
16.1% from $3.0 million in fiscal 1997 to $2.5 million in fiscal 1998 due to a
very large engagement totaling $1.3 million performed in fiscal 1997, partially
offset by the increases in business with other existing clients, the addition of
several new clients and the addition of revenue from the Company's acquisition
of Effective Learning Systems in August 1997. Customer contact monitoring
revenue increased $943,000 or 93% from $1.0 million in fiscal 1997 to $2.0
million in fiscal 1998. 75% of the increase came from existing clients while
25% of the increase came from the addition of several new clients. Employment
process and administration revenue increased $6.0 million or 71.2% from $8.4
million in fiscal 1997 to $14.4 million in fiscal 1998.
Cost of services. Cost of services increased $9.0 million or 102.9% from
$8.7 million in fiscal 1997 to $17.7 million in fiscal 1998. McLagan accounted
for $2 million of the increase, of which approximately $500,000 was for
incentive payments to employees. Personnel additions made to meet the higher
business volume accounted for over 70% of the increase. The remainder of the
increase was primarily due to outside services utilized to assist in service
delivery. As a percentage of revenue, cost of services increased from 46.3% in
fiscal 1997 to 50.7% in fiscal 1998. Higher personnel costs, largely due to the
nature of services provided, accounted for the majority of the increase. The
opening of a new 23,000 square foot operations center in July 1997 also
contributed to the increase.
General and administrative. General and administrative expense increased
$4.7 million from $3.2 million in fiscal 1997 to $7.9 million in fiscal 1998.
McLagan accounted for $2 million of the increase. Personnel additions accounted
for approximately one half of the increase. The remainder of the increase was
due to incentive payments to McLagan employees of approximately $450,000, higher
professional fees, rent, travel and amortization of goodwill associated with the
acquisitions of McLagan and Effective Learning Systems. As a percentage of
revenues, general and administrative expense increased from 17.1% in fiscal 1997
to 22.6% in fiscal 1998. Higher professional fees and goodwill amortization
accounted for the majority of the increase.
Sales and marketing. Sales and marketing expense increased by $1.4 million
or 73.2% from $1.9 million in fiscal 1997 to $3.3 million in fiscal 1998.
Personnel additions for both sales management and sales representatives
accounted for the majority of the increase. Higher advertising and marketing
expenses as well as public relations expenses also contributed to the increase.
As a percentage of revenues, sales and marketing expenses decreased from 10.0%
to 9.4% due to lower sales and marketing expenses as a percentage of sales for
McLagan, which was acquired in November 1997.
Research and development. Research and development expense increased by
$474,000 or 37.3% from $1.3 million in fiscal 1997 to $1.8 million in fiscal
1998. Personnel additions accounted for virtually all of the increase. As a
percentage of revenue, research and development expense decreased from 6.8% in
fiscal 1997 to 5% in fiscal 1998 largely due to the fact that McLagan had no
research and development expense.
9
Interest (expense) income, net. Net interest expense increased by
approximately $600,000 in fiscal 1998 due to interest incurred on $20 million
borrowed to fund the acquisition of McLagan and interest on short term bank
borrowings, used primarily to finance fixed asset additions.
Provision for income taxes. The difference between the effective federal
income tax provision calculated using statutory rates and the actual provision
recorded is principally due to the effect of state and local taxes. Provision
for income taxes for fiscal 1997 also included $236,000 relating to the
resolution of an Internal Revenue Service examination.
The percentages listed are based on actual amounts rather than the rounded
amounts shown above.
Fiscal 1997 Compared With Fiscal 1996
Revenue. Revenue increased $8.2 million or 77.4% from $10.6 million for
fiscal 1996 to $18.8 million for fiscal 1997. This increase was attributable to
revenue increases from all four business areas. Assessment and selection
revenue increased $1.8 million or 39.1% from $4.6 million for fiscal 1996 to
$6.4 million for fiscal 1997. Revenue gains from assessment and selection
services were attributable to a general increase in demand for the Company's
services from existing clients. Training and development revenue increased $1.8
million or 150% from $1.2 million for fiscal 1996 to $3.0 million for fiscal
1997. Revenue gains from training and development services were principally due
to expansion of programs at two of the Company's existing clients. Customer
contact monitoring revenue increased $730,000 or 252% from $284,000 for fiscal
1996 to $1.0 million for fiscal 1997. Revenue gains from customer contact
monitoring services were attributable to the implementation of a new service
offering. Employment process administration revenue increased $3.9 million or
86.7% from $4.5 million for fiscal 1996 to $8.4 million for fiscal 1997.
Revenue gains from employment process administration services were principally
due to expansion of programs at two of the Company's existing clients.
Cost of services. Cost of services increased $3.5 million or 67.3% from
$5.2 million for fiscal 1996 to $8.7 million for fiscal 1997. The increase was
primarily attributable to personnel additions as well as to increases in
facilities costs due to office expansion, travel expense associated with
training and development services and the cost of third party data used in the
Company's background reports offset, in part, by a decrease in personnel expense
necessary to generate such reports. As a percentage of revenue, cost of
services decreased from 49.3% for fiscal 1996 to 46.3% for fiscal 1997,
principally due to the fact that a significant portion of the Company's
outsourcing services and training and development services were performed off-
site at temporary locations and clients' offices which resulted in facilities
costs increasing at a slower rate than the rate of increase in revenue. This
decrease was offset in part by increases in revenue during the period from lower
margin services, particularly customer contact monitoring and employment
background reports.
General and administrative. General and administrative expense increased
$1.0 million or 45.5% from $2.2 million in fiscal 1996 to $3.2 million in fiscal
1997. This increase was primarily attributable to an increase in salary expense
relating to personnel additions, higher facilities costs due to office expansion
and amortization of goodwill associated with the Reorganization. As a
percentage of revenue, general and administrative expense decreased from 21.1%
in fiscal 1996 to 17.1% in fiscal 1997 due to the Company's ability to service a
portion of the additional business generated during the period with existing
personnel. In addition, the Company reduced its utilization of temporary
workers and reduced its costs for medical premiums by moving to a managed care
health plan.
Sales and marketing. Sales and marketing expense increased $789,000 or
71.7% from $1.1 million in fiscal 1996 to $1.9 million in fiscal 1997. This
increase was principally due to increases in expenditures for marketing
materials and the ongoing cost of maintaining the Company's internet website.
As a percentage of revenue, sales and marketing expense decreased from 10.4% in
fiscal 1996 to 10.0% in fiscal 1997 due to the fact that revenue increased at a
faster rate than increases in salary expense.
10
Research and development. Research and development expense increased
$658,000 or 107.2% from $614,000 in fiscal 1996 to $1.3 million in fiscal 1997.
This increase was primarily attributable to the hiring of additional research
and development personnel and the resulting expenditures for payroll increases
which accompanied such hiring and to increases in travel-related expenses
attributable to new business development. Research and development expense
increased as a percentage of revenue from 5.8% in fiscal 1996 to 6.8% in fiscal
1997 due to the expansion of the professional staff, principally senior level
industrial psychologists to support new business development efforts and
existing programs.
Interest (expense) income, net. Net interest (expense) income represents
interest paid on bank borrowings offset by interest income accrued on notes
receivable due from shareholders.
Provision for income taxes. The difference between the effective federal
income tax provision calculated using statutory rates and the actual provision
recorded is principally due to the effect of state and local taxes. Provision
for income taxes for fiscal 1997 also included $236,000 relating to the
resolution of an Internal Revenue Service examination.
The percentages listed are based on actual amounts rather than the rounded
amounts shown above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from capital requirements, capital
expenditures and principal and interest payments on debt. Historically, the
Company's source of liquidity has been cash flow generated internally from
operations, supplemented by short-term borrowings under bank lines of credit and
long-term equipment financing. The Company also raised approximately $9 million
after expenses in its initial public offering in April 1997.
Cash flow used in operating activities in fiscal 1998 was $2,648,000, on net
income of $2,119,000, due to higher receivables resulting from the growth in
sales, a reduction in accounts payable and accrued expenses and income taxes
payable.
Cash flow used in investing activities of $20,604,000 in fiscal 1998 was
primarily for the acquisition of McLagan and Effective Learning Systems and for
the purchase of furniture, computer and telecommunications equipment for the
Company's new operations center in Melville, New York.
Cash flow generated from financing activities was $24,151,000 in fiscal 1998
and was attributable to the proceeds from the Company's initial public offering,
a long-term borrowing to fund the McLagan acquisition, and an increase in short-
term borrowings. The Company used approximately $3.0 million of the initial
public offering net proceeds to repay debt, $3.0 million to purchase equipment,
$637,000 related to the acquisition of Effective Learning Systems and $2.5
million related to the acquisition of McLagan.
In November 1997, the Company entered into a new bank credit agreement (the
"Credit Facility") which provides a $15 million term loan and a $5 million
revolving credit facility. This agreement expires November 13, 2002. At March
31, 1998, borrowings under the term loan were $14,625,000 and borrowings under
the revolving credit facility were $3,150,000. The Company also had borrowings
at March 31, 1998 under an equipment lease facility of $845,160. The Credit
Facility contains various financial and other covenants and conditions,
including, but not limited to, limitations on capital expenditures and paying
dividends, making acquisitions and incurring additional indebtedness.
Management believes its working capital, line of credit and cash flows from
operations will be sufficient to meet expected future working capital
requirements.
11
INFLATION
Inflation has had a minimal effect on the results of the Company.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where necessary, restated, to conform to the SFAS 128
requirements.
In 1998, the Company adopted Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" which requires that descriptive information about securities
be shown in the financial statements. The adoption of this statement did not
have any impact on the Company's disclosures in the financial statements for the
year ended March 31, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 becomes effective in fiscal 1999. Management
believes that the adoption of this statement will provide additional disclosure
in the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"), which changes the way public
companies report information about segments. SFAS 131, which is based on the
management approach to segment reporting, includes requirements to report
selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds and reports revenues. SFAS 131 becomes effective in fiscal 1999.
Management believes that the adoption of this statement will provide additional
disclosure in the Company's financial statements.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its information systems to identify
those areas which could be affected by the "Year 2000" issue. The Company
presently believes the Year 2000 issue will not have a material impact on its
systems, financial position or results of operations and cash flows because both
hardware and software currently in use are Year 2000 compliant, or can be
readily modified to be compliant.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants.................................................... 14
Consolidated Balance Sheets as of March 31, 1998 and 1997............................ 15
Consolidated Statements of Income for the years ended March 31, 1998, 1997 and 1996.. 16
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1998,
1997 and 1996....................................................................... 17
Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1997
and 1996............................................................................ 18-19
Notes to Consolidated Financial Statements........................................... 20-32
13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of ASI Solutions Incorporated:
We have audited the consolidated financial statements of ASI Solutions
Incorporated listed in the index on page 13 of this annual report on Form 10-K.
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 audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ASI Solutions Incorporated as of March 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1998, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
May 20, 1998
14
ASI SOLUTIONS INCORPORATED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
1998 1997
---------------------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 964,106 $ 60,190
Restricted cash 1,891,821
Accounts receivable, net 10,706,699 4,184,886
Prepaid expenses and other current assets 678,531 343,455
Deferred income taxes 106,158 5,910
Notes receivable from stockholders 389,191
---------- ----------
Total current assets 14,347,315 4,983,632
Property and equipment, net 5,318,524 2,219,801
Intangible assets, net 24,132,292 1,121,815
Deferred financing costs 460,075
Other assets 302,706 269,990
----------- ----------
Total assets $44,560,912 $8,595,238
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current portion, notes payable to bank $ 4,951,602 $1,910,506
Current portion, subordinated notes payable 1,666,666
Other acquisition debt 267,667
Accounts payable and accrued expenses 4,129,877 1,874,139
Accrued income taxes 171,864 1,046,584
----------- ----------
Total current liabilities 11,187,676 4,831,229
Deferred income taxes 423,140 78,303
Notes payable to bank, less current portion 13,668,558 306,626
Subordinated notes payable, less current portion 3,333,334
Other liabilities 252,663 136,194
----------- ----------
Total liabilities 28,865,371 5,352,352
Commitments (Note 8)
Stockholders' Equity:
Preferred stock, $.01 par value, authorized
2,000,000 shares; no shares issued
Common stock, $.01 par value, authorized
18,000,000 shares; issued and outstanding
6,466,701 in 1998 and 4,625,158 in 1997 65,123 46,252
Additional paid-in-capital 10,841,728 1,109,218
Cumulative translation adjustment 9,382
Retained earnings 5,172,039 3,052,450
Treasury stock, 45,534 shares, at cost (392,731)
Deferred offering costs (965,034)
----------- ----------
Total stockholders' equity 15,695,541 3,242,886
----------- ----------
Total liabilities & stockholders' equity $44,560,912 $8,595,238
=========== ==========
The accompanying notes are an integral part of these financial statements.
15
ASI SOLUTIONS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED MARCH 31, 1998
1998 1997 1996
---------- ---------- ------------
Revenue $ 34,865,557 $18,818,839 $10,558,113
Cost of services 17,663,690 8,705,528 5,206,854
----------- ------------ ----------
Gross profit 17,201,867 10,113,311 5,351,259
Operating expenses:
General and administrative 7,871,423 3,224,083 2,225,551
Sales and marketing 3,272,518 1,889,910 1,100,205
Research and development 1,746,507 1,272,043 613,906
----------- ------------ ----------
Income from operations 4,311,419 3,727,275 1,411,597
Interest expense (income), net 592,841 (1,343) (2,227)
----------- ------------ ----------
Income before provision for income taxes 3,718,578 3,728,618 1,413,824
Provision for income taxes 1,598,989 1,916,926 681,455
----------- ------------ ----------
Net income $2,119,589 $1,811,692 $ 732,369
========== =========== ===========
Basic earnings per share $ 0.33 $ 0.39 $ 0.16
========== =========== ===========
Diluted earnings per share $ 0.33 $ 0.39 $ 0.16
========== =========== ===========
Weighted average common
shares outstanding:
Basic shares 6,346,053 4,625,158 4,625,158
Diluted effect of stock options and warrants 175,345 42,246 42,246
----------- ------------ ----------
Diluted shares 6,521,398 4,667,404 4,667,404
========== ========= ===========
The accompanying notes are an integral part of these financial statements.
16
ASI SOLUTIONS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED MARCH 31, 1998
ASSESSMENT PROUDFOOT
ASI SOLUTIONS SOLUTIONS REPORTS
INCORPORATED INCORPORATED INCORPORATED ADDITIONAL
COMMON STOCK COMMON STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- --------- ---------- --------- ---------- --------- ------------
April 1, 1995 100 $ 16,750 1,900,000 $ 19,000 $ 306,324
Net Income
Settlement of
stockholder note (250,000)
Recapitalization
of Company 4,625,158 $ 46,252 (100) (16,750) (1,900,000) (19,000) 1,052,894
--------- --------- --------- ---------- ----------- ---------- ----------
March 31, 1996 4,625,158 46,252 -- -- -- -- 1,109,218
Net Income
Deferred offering
costs
--------- --------- --------- ---------- ----------- ---------- ----------
March 31, 1997 4,625,158 46,252 -- -- -- -- 1,109,218
Issuance of Common
Stock in initial public
offering and payment
of offering costs 1,800,000 18,000 9,016,283
Transfer of
Common Stock
back to the Company (45,534)
Issuance of Common
Stock for Employee Stock
Purchase Plan 17,077 171 86,927
Issuance of Common
Stock for acquisition
of McLagan Partners
Incorporated 50,000 500 449,500
Issuance of Common Stock
related to bank financing 20,000 200 179,800
Translation Adjustment
Net income
--------- --------- --------- ---------- ----------- ---------- -----------
March 31, 1998 6,466,701 $ 65,123 -- $ -- -- $ -- $10,841,728
========= ========= ========= ========== =========== ========== ===========
CUMULATIVE DEFERRED
TRANSLATION RETAINED OFFERING TREASURY
ADJUSTMENT EARNINGS COSTS STOCK TOTAL
--------- ---------- --------- --------- ----------
April 1, 1995 $ 508,389 $ 850,463
Net Income 732,369 732,369
Settlement of
stockholder note (250,000)
Recapitalization
of Company 1,063,396
--------- ---------- --------- --------- ----------
March 31, 1996 - 1,240,758 - - 2,396,228
Net Income 1,811,692 1,811,692
Deferred offering
costs $ (965,034) (965,034)
--------- ---------- --------- --------- ----------
March 31, 1997 - 3,052,450 (965,034) - 3,242,886
Issuance of Common
Stock in initial public
offering and payment
of offering costs 965,034 9,999,317
Transfer of
Common Stock
back to the Company $(392,731) (392,731)
Issuance of Common
Stock for Employee Stock
Purchase Plan 87,098
Issuance of Common
Stock for acquisition
of McLagan Partners
Incorporated 450,000
Issuance of Common Stock
related to bank financing 180,000
Translation Adjustment $ 9,382 9,382
Net income 2,119,589 2,119,589
--------- ---------- ---------- --------- ----------
March 31, 1998 $ 9,382 $5,172,039 $ - $(392,731)$15,695,541
========= ========== ========== ========= ==========
The accompanying notes are an integral part of these financial statements.
17
ASI SOLUTIONS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED MARCH 31, 1998
1998 1997 1996
------------ ----------- ---------
Cash flow from operating activities:
Net income: $ 2,119,589 $ 1,811,692 $ 732,369
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,378,232 434,614 174,576
Provision for doubtful accounts 108,153 (9,200) (4,956)
Other 112,929 (14,298) 63,553
Deferred income taxes 244,589 113,060 (7,943)
Changes in assets and liabilities,
net of the effect of business acquisitions:
Accounts receivable (6,622,371) (2,146,639) (746,550)
Prepaid expenses and other current assets (334,960) (301,254) 3,349
Other assets (31,890) (173,222) (154)
Notes receivable from stockholders (25,461) (264,442)
Accounts payable and accrued expenses 1,253,616 1,034,758 156,333
Income taxes (876,260) 262,097 183,912
------------ ----------- ---------
Net cash (used in) provided by operating activities (2,648,373) 986,147 290,047
------------ ----------- ---------
Cash flow from investing activities:
Acquisition of property and equipment (3,556,780) (2,052,638) (279,795)
Acquisitions of businesses (16,943,188)
Other (103,649)
------------ ----------- ---------
Net cash used in investing activities (20,603,617) (2,052,638) (279,795)
------------ ----------- ---------
Cash flow from financing activities:
Repayment of notes payable to stockholder (210,789)
Proceeds from borrowings 21,102,238 2,117,132 100,000
Repayment of debt (4,834,080) (58,333)
Payment of financing costs (312,048)
Payment of offering costs (965,034)
Purchase of minority stockholder interest (95,000)
Restricted cash (1,891,821)
Proceeds from issuance of common stock, net 10,086,415
------------ ----------- ---------
Net cash provided by (used in) financing activities 24,150,704 1,057,098 (169,122)
------------ ----------- ---------
Effect of exchange rate changes on cash and
cash equivalents 5,202
Net increase (decrease) in cash and cash equivalents 903,916 (9,393) (158,870)
Cash and cash equivalents at beginning of period 60,190 69,583 228,453
------------ ----------- ---------
Cash and cash equivalents at end of period $ 964,106 $ 60,190 $ 69,583
============ =========== =========
Supplemental cash flow information:
Cash paid for:
Interest $ 658,049 $ 40,027 $ 5,875
Income taxes $ 2,240,600 $ 1,531,705 $ 463,287
The accompanying notes are an integral part of these financial statements.
18
ASI SOLUTIONS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1998
Supplemental disclosures of noncash investing and
financing activities:
1998
-----
Transfer of common stock back to the Company
in full satisfaction of shareholder debt $ 392,731
Common stock issued in connection with acquisitions 450,000
Common stock issued in connection with debt
financing 180,000
Issuance of subordinated debt in connection with
acquisitions 5,000,000
Issuance of notes in connection with acquisitions 401,500
Details of acquisitions (Note 3):
Fair value of assets acquired (including goodwill) $23,794,688
Liabilities assumed (1,000,000)
Notes issued (5,401,500)
Stock issued (450,000)
-----------
Cash utilized for acquisitions $16,943,188
============
The accompanying notes are an integral part of these financial statements.
19
ASI SOLUTIONS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
--------------------------------------
On March 26, 1996, ASI Solutions Incorporated (the "Company") was incorporated
in the State of Delaware. Effective March 31, 1996, the Company issued 4,625,158
shares of Common Stock in exchange for substantially all of the issued and
outstanding shares of common stock of Proudfoot Reports Incorporated ("PRI") and
95% of the common stock of Assessment Solutions Incorporated ("Assessment
Solutions"). During fiscal 1997, the remaining 5% of the outstanding common
stock of Assessment Solutions was redeemed. The initial stockholders of the
Company were also the principal stockholders of PRI and Assessment Solutions,
the two previously separate but commonly controlled companies. After the
reorganization, Assessment Solutions and PRI are wholly owned subsidiaries of
the Company. C3 Solutions Incorporated ("C3") was formed on September 16, 1996
as a wholly owned subsidiary of the Company. On August 29, 1997, the Company's
newly created subsidiary, T3 Solutions Incorporated ("T3"), acquired the assets
of Effective Learning Systems. On November 13, 1997, the Company's newly
created subsidiary McLagan Partners, Inc. ("McLagan Partners") acquired
substantially all of the assets and business operations of McLagan Partners
Incorporated and subsidiaries. The Company, Assessment Solutions, PRI, C3, T3
and McLagan Partners are hereinafter referred to collectively as the "Company."
Effective April 16, 1997, the Company sold 1.8 million shares of common stock to
the public at a price of $6 per share in an initial public offering and pursuant
to an overallotment option, the underwriter purchased 270,000 shares of common
stock at a price of $6 per share (the "Offering"). Proceeds from the Offering,
net of underwriters' discount and offering costs, were approximately $9,034,000.
Effective on the Offering date, the Company's Certificate of Incorporation (the
"Certificate") was restated to increase the number of authorized shares of
Common Stock to 18 million shares. In addition, effective on the Offering date,
the Board of Directors of the Company was authorized to issue up to 2 million
shares of Preferred Stock in one or more classes or series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, and the number of shares constituting any series or the designation
of such series. However, pursuant to the Certificate, the holders of Preferred
Stock would not have cumulative voting rights with respect to the election of
directors. Any such Preferred Stock issued by the Company may rank prior to the
Common Stock as to dividend rights, liquidation preference or both, may have
full or limited voting rights and may be convertible into shares of Common
Stock.
The exchange described above has been accounted for as a reorganization since
all entities involved were under common control. The consolidated financial
statements reflect the interests attributable to the one controlling shareholder
of both combined entities at their historical basis of accounting. The
remaining interests have been accounted for as a purchase of minority interests
and the excess of the purchase price over the related historical cost of
$1,063,000 has been allocated to intangible assets. All intercompany accounts
and transactions have been eliminated in consolidation.
THE COMPANY
ASI Solutions Incorporated is a leading national provider of a comprehensive
range of human resources outsourcing services for large organizations seeking to
hire, train and develop a higher quality, more effective workforce. The
Company's services are organized into five core areas; assessment and selection,
training and development, customer contact monitoring, employment process
administration and compensation research and consulting services. The Company
believes these services position the Company as a single-source solution for
many organizations which outsource all or a portion of their human resources
functions. The Company markets its services principally to Fortune 500
companies for which customer service, sales and call center
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
functions are critical components of their businesses. Industries served by the
Company include telecommunications, financial services, information technology,
consumer products and healthcare.
2. SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity date of three months or less from the date of purchase to be a cash
equivalent.
RESTRICTED CASH
At March 31, 1998, $1,891,821 was held in a certificate of deposit for use as
the first scheduled payment of principal and interest, due April 30, 1998, in
accordance with the terms of the subordinated note entered into in the McLagan
Partners Incorporated acquisition.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist of accounts receivable and cash deposits. Cash deposits
generally do not exceed insurable limits. Accounts receivable are concentrated
among a limited number of major companies. To reduce credit risk, the Company
performs credit evaluations of its customers but does not generally require
collateral. For the years ended March 31, 1998 and 1997 one customer
represented 30% of revenue. For the year ended March 31, 1996, a different
customer represented 14% of revenue. For years ended March 31, 1998, 1997 and
1996 revenues from the Company's top five customers represented approximately
55%, 54%, and 52% of total revenues, respectively. Accounts receivable from
five customers represented approximately 59% of total accounts receivable at
March 31, 1998 and 1997, respectively.
Allowances for doubtful accounts were approximately $122,000, $14,000 and
$24,000 as of March 31, 1998, 1997 and 1996, respectively. There were no
accounts receivable write-offs for fiscal years ended March 31, 1998, 1997 or
1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Furniture and equipment are stated at cost and depreciated over the assets'
estimated useful lives of five years using the straight-line method. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life of the improvement. Capitalized software reflects costs related to
internally developed or purchased software that are capitalized and amortized on
a straight-line basis over a period of five years.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Maintenance and repairs are charged to expense as incurred; renewals and
improvements that extend the life of assets are capitalized. Upon retirement or
disposal, the asset cost and the related accumulated depreciation and
amortization are eliminated from the respective accounts and the resulting gain
or loss, if any, is included in the results of operations.
INTANGIBLE ASSETS
Intangible assets principally include customer lists, covenants not to compete
and the excess of purchase price over the fair value of identifiable net assets
acquired (goodwill). The intangible assets are amortized on a straight-line
basis over their estimated useful lives ranging from 5 to 40 years.
Amortization expense relating to intangible assets was $400,929, $84,005 and
$13,481 for the years ended March 31, 1998, 1997 and 1996, respectively.
Accumulated amortization relating to intangible assets was $625,324 and $224,395
as of March 31, 1998 and 1997, respectively.
The Company assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through forecasted future operations. Impairment is evaluated by comparing
future cash flows (undiscounted and without interest charges) expected to result
from the use or sale of the asset and its eventual disposition, to the carrying
amount of the asset.
LONG-LIVED ASSETS
If events or changes in circumstances indicate that the carrying amount of a
long-lived asset, including intangible assets, may not be recoverable, the
Company estimates the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future cash
flows (undiscounted) is less than the carrying amount of the long-lived asset,
an impairment loss is recognized. To date, no impairment losses have been
recognized.
DEFERRED FINANCING COSTS
Deferred financing costs represent fees incurred in connection with the
Company's Credit Agreement with several banks, and are being amortized, using
the straight-line method, over 65 months, the length of the related term loan.
Amortization expense was $34,222 at March 31, 1998.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries, where the local currency is
the functional currency, are translated into U.S. dollars using exchange rates
in effect at period end for assets and liabilities and average exchange rates
during each reporting period for results of operations and cash flows.
Adjustments resulting from translation of financial statements are reflected as
a separate component of shareholders' equity.
REVENUE
The Company recognizes revenue as earned upon the performance of agreed-upon
services.
RENT EXPENSE
The Company recognizes rent expense for operating leases on a straight-line
basis over the term of the related lease.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
consists of the tax payable for the period and the change during the period in
deferred tax assets and liabilities. (See Note 8.)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents and fixed rate debt obligations are reflected in the
accompanying consolidated balance sheets at amounts considered by management to
reasonably approximate fair value. Management is not aware of any factors that
would significantly affect the value of these amounts.
RECLASSIFICATIONS
Certain items in the prior year consolidated financial statements have been
reclassified to conform to the 1998 presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where necessary, restated, to conform to the SFAS 128
requirements.
In 1998, the Company adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" which requires that descriptive information about securities be shown
in the financial statements. The adoption of this statement did not have any
impact on the Company's disclosures in the financial statements for the year
ended March 31, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 becomes effective in fiscal 1999. Management
believes that the adoption of this statement will provide additional disclosure
in the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"), which changes the way public
companies report information about segments. SFAS 131, which is based on the
management approach to segment reporting, includes requirements to report
selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds and reports revenues. SFAS 131 becomes effective in fiscal 1999.
Management believes that the adoption of this statement will provide additional
disclosure in the Company's financial statements.
23
3. ACQUISITIONS:
------------
On November 13, 1997, the Company acquired substantially all of the assets
(primarily fixed assets of $483,978) and businesses of McLagan Partners
Incorporated and its related entities (collectively, "McLagan"). The
consideration paid by the Company for the assets of McLagan included (i) $15.5
million paid in cash; (ii) $5 million in subordinated notes bearing interest at
8 percent per annum and payable in three equal principal installments on each of
April 30, 1998, April 30, 1999 and April 30, 2000; and (iii) 50,000 shares of
the common stock, par value $.01 per share, of the Company. The Company
incurred $828,188 of costs associated with the acquisition. The Company also
discharged approximately $1 million of McLagan's outstanding liabilities and
agreed to make deferred payments in an aggregate amount of $1 million, on April
30, 2000, to certain employees of McLagan, provided that such employees continue
to be employed by the McLagan subsidiaries as of such date.
The acquisition has been accounted for using the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets purchased
based upon the fair values at the date of the acquisition. As a result,
$22,294,210 of the purchase price has been allocated to goodwill, customer lists
and other intangibles which are being amortized on a straight line basis over
periods from 5 to 40 years. The Company has an incentive compensation program
with former officers of McLagan which provides for payments to such officers
when certain milestone earnings are attained. At the request of the officers,
$841,278 in connection with this incentive compensation program was paid to
employees in fiscal 1998.
The operating results of the acquisition have been included in the consolidated
statement of income from the date of the acquisition. The following pro forma
information has been prepared assuming that this acquisition had taken place as
of April 1, 1996. The pro forma information includes adjustments for
amortization of intangibles arising from the transaction, the interest expense
related to the debt incurred to finance the transaction, additional bonuses, and
an adjustment of the tax provisions for fiscal 1997 and 1998 representing the
statutory federal rate assuming that McLagan had always been a C Corporation.
The pro forma financial information is not necessarily indicative of the results
of operations as they would have been had the transaction been effected on the
assumed dates, nor does it reflect the results of operations for future periods.
YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
Revenue $43,961,821 $32,566,662
Net Income $ 3,232,546 $ 1,754,903
Earnings per share (diluted) $ 0.49 $ 0.27
On August 29, 1997, the Company acquired the assets of Effective Learning
Systems, a New Jersey based training organization, for approximately $1,000,000.
While the effect of this acquisition on the reported financial statements of the
Company was not significant, the Company did enter into three promissory notes,
requiring monthly payments through March 31, 1999 and bearing interest at a
monthly rate of 0.75%.
As of March 31, 1998, the remaining borrowings under the promissory notes were
$267,667.
4. RELATED PARTY TRANSACTIONS:
--------------------------
During fiscal 1996, the Company loaned $233,519, $112,617 and $17,597 to Messrs.
Reynolds, Salig and Adler, respectively. The loans were evidenced by 5-year
notes bearing interest at the rate of 7% repaid per annum and requiring equal
annual principal payments over the term of the notes. On May 21, 1997, Messrs.
Reynolds, Salig and Adler transferred 45,534 shares of the Company's Common
Stock owned by them to the Company in full satisfaction of these notes.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On March 31, 1996, a stockholder of Assessment Solutions exchanged 521,000
shares of common stock in PRI to Assessment Solutions in full settlement of a
note receivable from the stockholder in the amount of $250,000. In the
consolidated financial statements, the investment in PRI has been accounted for
as a reduction of additional paid-in capital.
A director of the Company is also a partner of the law firm that is the
Company's general counsel. Expenses incurred by the Company for legal services
provided by this law firm were approximately $691,000, $400,000 and $38,000 for
the years ended March 31, 1998, 1997 and 1996, respectively. In addition,
options to purchase 5,000 shares of common stock were issued to this director
with an exercise price of $6.50 on January 15, 1997.
5. PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment are comprised of the following:
1998 1997
---------- ----------
Furniture and equipment $6,551,022 $3,030,065
Capitalized software 652,848 173,017
Leasehold improvements 304,593 265,641
---------- ----------
7,508,463 3,468,723
Less, accumulated depreciation and amortization 2,189,939 1,248,922
---------- ----------
$5,318,524 $2,219,801
========== ==========
Depreciation and amortization expense relating to furniture and equipment and
leasehold improvements was approximately $858,000, $320,000 and $161,000 for the
fiscal years ended March 31, 1998, 1997 and 1996, respectively. Amortization
expense relating to capitalized software was approximately $83,000 and $17,000
for the fiscal years ended March 31, 1998 and 1997, respectively. There were no
capitalized software costs in the fiscal year ended March 31, 1996.
6. DEBT:
----
Notes Payable to Bank
- ---------------------
On November 13, 1997, the Company entered into a Credit Agreement with several
banks. The Credit Agreement consists of a $15 million term loan, the proceeds
of which were used in the financing of the acquisition of McLagan, and a $5
million revolving credit facility. This Credit Agreement replaced an existing
line of credit with another bank, the outstanding balance of which, $1,844,000
at March 31, 1997, was fully paid during the fiscal year ended March 31, 1998.
The term loan bears interest at the prime rate plus 0.25 percent or the
eurodollar rate plus 3.25 percent. The payment schedule under the term loan
calls for quarterly installment payments beginning on March 31, 1998. Borrowings
under the revolving credit facility bear interest at the prime rate or an
optional eurodollar based rate. As of March 31, 1998, borrowings under the term
loan were $14,625,000 and borrowings under the revolving credit facility were
$3,150,000.
The Credit Agreement expires on November 13, 2002, at which time any outstanding
principal and interest is payable. The Credit Agreement contains various
financial and other covenants and conditions, including but not limited to
limitations on capital expenditures and paying dividends, making acquisitions
and incurring additional indebtedness.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company also has two equipment notes payable to a bank in the amount of
$845,160 at March 31, 1998. Such notes are payable monthly and bear interest at
8.97% and 9.65%.
Subordinated Notes Payable:
- --------------------------
In connection with the acquisition of McLagan (See Note 3), the Company issued
$5 million of subordinated notes bearing interest at 8% per annum and payable in
three equal principal installments on each of April 30, 1998, 1999 and 2000.
Such notes are subordinated to the Company's Credit Facility and equipment
borrowings.
Other Acquisition Debt:
- ----------------------
In connection with the acquisition of Effective Learning Systems (See Note 3),
the Company issued three notes for $401,500 bearing interest at 0.75% per month.
The balance of the notes at March 31, 1998 of $267,667 is due monthly through
March 31, 1999.
Amounts due on the Company's debt financings discussed above are as follows:
1999 $ 6,885,935
2000 4,110,325
2001 5,129,030
2002 4,315,694
2003 3,446,843
-----------
$23,887,827
===========
7. LEASE COMMITMENTS:
-----------------
The Company leases facilities under various operating leases which expire on
various dates through 2010. The leases include escalations for operating
expenses and real estate taxes. Rent expense charged to operations was
$1,584,637, $879,000 and $584,000 for the years ended March 31, 1998, 1997 and
1996, respectively.
As of March 31, 1998, future minimum annual rental payments under noncancellable
operating leases are as follows:
FISCAL YEAR
1999 $1,665,623
2000 1,650,179
2001 1,595,166
2002 1,370,955
2003 1,423,831
Thereafter 5,215,487
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
8. INCOME TAXES:
------------
The provision for income taxes consists of:
1998 1997 1996
---------- ---------- ---------
Current:
Federal $ 798,961 $1,295,771 $430,818
State and local 332,986 508,095 258,580
Foreign 222,453
Deferred 244,589 113,060 (7,943)
---------- ---------- --------
$1,598,989 $1,916,926 $681,455
========== ========== ========
The tax provision for the year ended March 31, 1997 also included a $236,000
charge pertaining to an examination by the Internal Revenue Service.
The difference between the statutory Federal income tax rate and the effective
income tax rate is reconciled as follows:
1998 1997 1996
---------- ---------- --------
Statutory Federal income tax rate provision $1,264,317 $1,267,730 $480,700
State and local taxes, net of Federal benefit 194,853 335,342 170,663
Non-deductible expenses 64,703 52,000
Prior Year income taxes 236,000
Other 75,116 25,854 30,092
---------- ---------- --------
$1,598,989 $1,916,926 $681,455
========== ========== ========
The components of deferred tax assets and liabilities as of March 31, 1998 and
1997, are as follows:
1998 1997
---------- ----------
Current:
Bad debt reserve $ 52,158 $ 5,910
Accrued bonus 54,000
--------- ---------
Net current asset $ 106,158 $ 5,910
--------- ---------
Non-current:
Straight-lining rent payments $ 106,853 56,559
Fixed and intangible assets (529,993) (134,862)
--------- ---------
Net non-current liability (423,140) (78,303)
Net deferred tax liability $(316,982) $ (72,393)
========= =========
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
9. RETIREMENT PLANS:
----------------
The Company has a 401(k) profit sharing plan, covering substantially all
employees. Employees can contribute to a maximum of 15% of their earnings up to
IRS limitations. Contributions can be made by the Company on a discretionary
basis and vest over a five-year period. Contributions made by the Company to
the plan for the year ended March 31, 1998 were approximately $75,000.
Contributions made by the Company to the plan for the years ended March 31, 1997
and 1996 were not significant.
McLagan Partners, Inc. employees are covered under a separate plan. Employees
are eligible after one year of service. Employees are not required to make
contributions to the plan. The Company makes a discretionary contribution based
on the total compensation of participants. Contributions made by the Company to
the plan for the year ended March 31, 1998 were approximately $34,000.
10. STOCK PLANS:
-----------
STOCK OPTION AND GRANT PLAN
The Company's Stock Option and Grant Plan (the "Option Plan") was adopted by the
Company's Board of Directors as of March 31, 1996 and approved by its
stockholders on January 16, 1997. Officers, directors, employees, consultants
and key persons of the Company are eligible to participate in the Option Plan.
The Option Plan provides that options for an aggregate of 800,000 shares of
Common Stock are available for award (at a price of no less than the fair market
value of the underlying stock at grant date) which generally vest ratably over
three years and expire ten years from the date of grant.
STOCK PURCHASE PLAN
In January 1997, the Company created an Employee Stock Purchase Plan (the "Stock
Purchase Plan"), which provides for eligible employees to purchase shares of
Common Stock, through regular period salary reductions of up to 10% of their
pre-tax gross compensation. A maximum of 250,000 shares of Common Stock may be
issued under the Stock Purchase Plan. Under applicable tax rules, an employee
may purchase no more than $25,000 of the fair market value worth of Common Stock
in any calendar year and certain other tax limitations may apply. The Stock
Purchase Plan is intended to qualify as an employee stock purchase plan as
defined in Section 423 of the Internal Revenue Code.
DIRECTORS' STOCK OPTION PLAN
In January 1997, the Company adopted a stock option and grant plan for non-
employee directors pursuant to which options to acquire a maximum aggregate of
50,000 shares of Common Stock may be granted to non-employee directors. The
options issued vest ratably over three years, expire ten years from grant date
and cannot have exercise prices less than the fair market value of the Common
Stock on date of grant.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SUMMARY OF OPTIONS
A summary of stock option transactions for the years ended March 31, 1998, 1997
and 1996 is as follows:
March 31, 1998 March 31, 1997 March 31, 1996
------------------------------- ------------------------ ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------- -------------- -------------- -------- -------- -----
Outstanding beginning of year 393,533 $ 5.75 51,692 $ 0.79
Granted 406,000 8.71 341,841 6.50 51,692 $0.79
Forfeited/expired (9,000) 6.50
-------- -------- -------
Options outstanding, end of year 790,533 $ 7.26 393,533 $ 5.75 51,692 $0.79
======== ======== ========
Options exercisable, end of year 245,866 $ 5.30 176,533 $ 4.83
======== ========
Options available for grant, end of year 59,467 456,467
======= ========
Weighted average fair value of options
granted during the year $2.92 $ 2.64
======== =======
The Company has applied the disclosure-only provision for SFAS 123. Had
compensation cost been determined based on the fair value at the grant date
consistent with the provisions of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below for the years ended March 31, 1998, 1997 and 1996.
1998 1997 1996
---------- ---------- --------
Net income attributable to common
shareholders as reported $2,119,589 $1,811,692 $732,369
========== ========== ========
Unaudited pro forma net income $1,921,552 $1,632,165 $719,917
========== ========== ========
Basic and diluted earnings per share,
as reported $ 0.33 $ 0.39 $ 0.16
========== ========== ========
Unaudited pro forma basic earnings per share $ 0.30 $ 0.35 $ 0.16
========== ========== ========
Unaudited pro forma diluted earnings per share $ 0.29 $ 0.35 $ 0.15
========== ========== ========
The weighted average fair value of each option has been estimated on the date of
grant using the Black-Scholes options pricing model with the following weighted
average assumptions used for grants in 1998, 1997 and 1996, respectively; no
dividend yield; expected volatility of 40%; risk-free interest rate (ranging
from 5.74%-6.37%); and expected lives ranging from approximately three to five
years.
29
The following table summarizes information about stock options outstanding at
March 31, 1998:
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
$0.35 to 1.22 51,692 8 $0.79 51,692 $0.79
6.50 to 7.75 429,841 8.93 6.78 194,174 6.50
9.00 to 9.25 309,000 9.63 9.01
------- ---- ----- ------- ----
$0.35 to 9.25 790,533 9.14 $7.26 245,866 $5.30
For the years ended March 31, 1998, 1997 and 1996, no options were exercised or
expired.
11. EQUITY:
------
UNDESIGNATED PREFERRED STOCK
The Board of Directors of the Company is authorized, without further action of
the stockholders of the Company, to issue up to 2,000,000 shares of Preferred
Stock in one or more classes or series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, and the
number of shares constituting any series or the designation of such series.
However, pursuant to the Certificate, the holders of Preferred Stock would not
have cumulative voting rights with respect to the election of directors. Any
such Preferred Stock issued by the Company may rank prior to the Common Stock as
to dividend rights, liquidation preference or both, may have full or limited
voting rights and may be convertible into shares of Common Stock.
The purpose of authorizing the Board of Directors to issue Preferred Stock is,
in part, to eliminate delays associated with a stockholder vote on specific
issuances. The issuance of Preferred Stock could adversely affect the voting
power of the holders of Common Stock and could have the effect of delaying,
deferring, or preventing a change in control of the Company.
STOCK DIVIDEND
The Company's Board of Directors declared an approximately 1.06-for-1 stock
split in the form of a stock dividend effective January 15, 1997. All
references in the consolidated financial statements to shares of Common Stock
were retroactively adjusted to reflect this stock split.
12. EMPLOYMENT AGREEMENTS:
---------------------
In January 1997, the Company entered into employment agreements with three key
executives that expire on the third anniversary of the date upon which the
Company notifies the executive of the Company's intention to terminate (except
in the case of termination due to cause) their employment. The agreements
provide for aggregate salaries of $752,000 per annum plus fringe benefits and an
annual bonus to be determined by the Board of Directors. Each employment
agreement includes a covenant not to compete with the Company for a period of
three years after employment ceases.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In November 1997, the Company entered into employment agreements with four key
executives of McLagan Partners, Inc. that expire on March 31, 2000. The
agreements provide for aggregate base salaries of $600,000 and aggregate annual
incentive payments if certain performance targets are met. All incentive
payments amount to (a) for the period January 1, 1998 through March 31, 1999,
100% of McLagan's income between $4.5 and $6.75 million and 40% of the income in
excess of $6.75 million, and (b) for fiscal year 2000, 100% of McLagan's income
between $3.6 and $5.4 million and 40% of income in excess of $5.4 million. The
agreements include covenants not to compete with the Company for periods between
two and three years beyond the term of their employment with the Company.
13. QUARTERLY RESULTS OF OPERATIONS:
-------------------------------
The following tables set forth unaudited financial data for each of the eight
consecutive fiscal quarters ended March 31, 1998. The 1997 and first two
quarters of fiscal 1998 earnings per share amounts have been restated to comply
with SFAS 128.
31
Quarter Ended
June 30 Sept. 30 Dec. 31 Mar. 31
------- ------------- ------- -------
1998:
Revenue $6,700 $5,905 $9,385 $12,875
Cost of Services 3,444 3,319 4,528 6,372
------ ------ ------ -------
Gross Profit 3,256 2,586 4,857 6,503
Operating expenses:
General and administrative 1,318 1,319 2,271 2,964
Sales and marketing 785 661 805 1,021
Research and development 475 361 392 519
------ ------ ------ -------
Income from operations 678 245 1,389 1,999
Interest (expense) income, net 62 51 (236) (470)
------ ------ ------ -------
Income before provision for income taxes 740 296 1,153 1,529
Provision for income taxes 322 127 495 654
------ ------ ------ -------
Net income $ 418 $ 169 $ 658 $ 875
====== ====== ====== =======
Share Information:
Basic earnings per share $ 0.07 $ 0.03 $ 0.10 $ 0.14
====== ====== ====== =======
Diluted earnings per share $ 0.07 $ 0.03 $ 0.10 $ 0.13
====== ====== ====== =======
1997:
Revenue $3,911 $4,142 $4,806 $ 5,960
Cost of Services 1,742 1,842 2,321 2,801
------ ------ ------ -------
Gross Profit 2,169 2,300 2,485 3,159
Operating expenses:
General and administrative 760 719 728 1,017
Sales and marketing 372 368 514 636
Research and development 231 227 385 429
------ ------ ------ -------
Income from operations 806 986 858 1,077
Interest (expense) income, net (27) (7) 21 15
------ ------ ------ -------
Income before provision for income taxes 779 979 879 1,092
Provision for income taxes 367 674 404 472
------ ------ ------ -------
Net income $ 412 $ 305 $ 475 $ 620
====== ====== ====== =======
Share Information:
Basic earnings per share $ 0.09 $ 0.07 $ 0.10 $ 0.13
====== ====== ====== =======
Diluted earnings per share $ 0.09 $ 0.07 $ 0.10 $ 0.13
====== ====== ====== =======
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K is incorporated by
reference to the information contained in the Company's definitive Proxy
Statement for the Company's 1998 Annual Meeting of Stockholders (the "Proxy
Statement"), to be filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) Financial Statements and Supplementary Data
-------------------------------------------
See Index to Consolidated Financial Statements under Item 8 in Part II
hereof.
(2) Exhibits
--------
See (c) below.
33
(b) Reports on Form 8-K.
-------------------
On November 24, 1997, the Company filed a Current Report on Form 8-K (the
"McLagan 8-K") to report its acquisition of substantially all of the assets
of McLagan Partners Incorporated and its affiliated entities. On January 27,
1998, the Company filed an amendment to the McLagan 8-K for the purpose of
filing the historical and pro forma financial information required by Form
8-K.
(c) Exhibits
--------
Exhibit
Number Description
------ -----------
2.1 Asset Purchase Agreement entered into as of November 13, 1997 by and
among McLagan Partners, Inc., McLagan Partners Incorporated and the
holders of all of the outstanding capital stock of McLagan Partners
Incorporated (incorporated by reference to the relevant exhibit to
the Company's Current Report on Form 8-K dated November 13, 1997
(filed November 24, 1997))
2.2 Asset Purchase Agreement entered into as of November 13, 1997 by and
among McLagan Partners International, Inc., McLagan Partners
International Incorporated and the holders of all of the outstanding
capital stock of McLagan Partners International Incorporated
(incorporated by reference to the relevant exhibit to the Company's
Current Report on Form 8-K dated November 13, 1997 (filed November
24, 1997))
2.3 Asset Purchase Agreement entered into as of November 13, 1997 by and
among McLagan Partners Asia, Inc., McLagan Partners Asia
Incorporated and the holders of all of the outstanding capital stock
of McLagan Partners Asia Incorporated (incorporated by reference to
the relevant exhibit to the Company's Current Report on Form 8-K
dated November 13, 1997 (filed November 24, 1997))
3.1 First Restated Certificate of Incorporation of the Company
(incorporated by reference to the relevant exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1997
(filed June 27, 1997))
3.2 By-laws of the Company (incorporated by reference to the relevant
exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1997 (filed June 27, 1997))
4.1 Specimen of Common Stock Certificate (incorporated by reference to
the relevant exhibit to the Company's Registration Statement on Form
S-1 (File No. 333-20401) filed on January 24, 1997, as amended)
10.1 Warrant Agreement by and between the Company and H.C. Wainwright &
Co., Inc. (incorporated by reference to the relevant exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1997 (filed June 27, 1997))
10.2 Registration Rights Agreement between the Company, Bernard F.
Reynolds, Eli Salig and Seymour Adler, Ph.D. (incorporated by
reference to the relevant exhibit to the Company's Registration
Statement on Form S-1 (File No. 333-20401) filed on January 24,
1997, as amended)
34
10.3 Stock Option and Grant Plan of the Company (incorporated by
reference to the relevant exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997 (filed June 27,
1997))
10.4 Director's Stock Option Plan of the Company (incorporated by
reference to the relevant exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997 (filed June 27,
1997))
10.5 Employee Stock Purchase Plan of the Company (incorporated by
reference to the relevant exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997 (filed June 27,
1997))
10.6 Employment Agreement between the Company and Bernard F. Reynolds
(incorporated by reference to the relevant exhibit to the Company's
Registration Statement on Form S-1 (File No. 333-20401) filed on
January 24, 1997, as amended)
10.7 Employment Agreement between the Company and Eli Salig (incorporated
by reference to the relevant exhibit to the Company's Registration
Statement on Form S-1 (File No. 333-20401) filed on January 24,
1997, as amended)
10.8 Employment Agreement between the Company and Seymour Adler, Ph.D.
(incorporated by reference to the relevant exhibit to the Company's
Registration Statement on Form S-1 (File No. 333-20401) filed on
January 24, 1997, as amended)
10.9 Sublease dated July 2, 1996 between Assessment Solutions and Nikon
Inc. regarding the space at 1300 Walt Whitman Road, Melville, New
York (incorporated by reference to the relevant exhibit to the
Company's Registration Statement on Form S-1 (File No. 333-20401)
filed on January 24, 1997, as amended)
10.10 Lease dated January 27, 1984 between Assessment Solutions and 780
Third Avenue Associates regarding the space at 780 Third Avenue, New
York, New York, and the Third Amendment to the lease dated August 7,
1996 by and among Assessment Solutions, Proudfoot and 780 Third
Avenue Associates (incorporated by reference to the relevant exhibit
to the Company's Registration Statement on Form S-1 (File No. 333-
20401) filed on January 24, 1997, as amended)
10.11 Sublease dated October 6, 1994 between Proudfoot and Nikon, Inc.
regarding the space at 1300 Walt Whitman Road, Melville, New York,
and the Amendment to the sublease, dated July 2, 1996 (incorporated
by reference to the relevant exhibit to the Company's Registration
Statement on Form S-1 (File No. 333-20401) filed on January 24,
1997, as amended)
10.12 Lease dated January 25, 1996 between Assessment Solutions and
Pruneyard Associates regarding the space at 1999 South Bascom
Avenue, Campbell, California (incorporated by reference to the
relevant exhibit to the Company's Registration Statement on Form S-1
(File No. 333-20401) filed on January 24, 1997, as amended)
10.13 Commitment letter dated March 3, 1997 between the Company and Fleet
Bank, N.A. (incorporated by reference to the relevant exhibit to the
Company's Registration Statement on Form S-1 (File No. 333-20401)
filed on January 24, 1997, as amended)
35
+10.14 Agreement by and between Assessment Solutions and TeleSector
Resources Group, Inc. (incorporated by reference to the relevant
exhibit to the Company's Registration Statement on Form S-1 (File
No. 333-20401) filed on January 24, 1997, as amended)
10.15 Lease Agreement by and between 320 Expressway Associates and
the Company, dated March 27, 1997 (incorporated by reference to
the relevant exhibit to the Company's Quarterly Report on Form 10-
Q for the quarter ended June 30, 1997 (filed August 14, 1997))
+10.16 Amendment No. 06 dated October 6, 1997 to the Agreement by and
between Assessment Solutions and TeleSector Resources Group, Inc.,
d/b/a Bell Atlantic Network Services (incorporated by reference to
the relevant exhibit to the Company's Quarterly Report on Form 10-
Q for the quarter ended December 31, 1997 (filed January 30,
1998))
+10.17 Amendment No. 07 dated January 12, 1998 to the Agreement by and
between Assessment Solutions and TeleSector Resources Group, Inc.,
d/b/a Bell Atlantic Network Services (incorporated by reference to
the relevant exhibit to the Company's Quarterly Report on Form 10-
Q for the quarter ended December 31, 1997 (filed January 30,
1998))
10.18 Form of Employment Agreement between McLagan Partners, Inc. and
its senior officers (incorporated by reference to the relevant
exhibit to the Company's Current Report on Form 8-K dated November
13, 1997 (filed November 24, 1997))
10.19 McLagan Partners, Inc. Incentive Compensation Plan (incorporated
by reference to the relevant exhibit to the Company's Current
Report on Form 8-K dated November 13, 1997 (filed November 24,
1997))
10.20 Credit Agreement dated as of November 13, 1997 among the Company,
McLagan Partners, Inc., The Chase Manhattan Bank, as
Administrative Agent for the Lenders thereunder, and the other
Lenders identified therein (incorporated by reference to the
relevant exhibit to the Company's Current Report on Form 8-K dated
November 13, 1997 (filed November 24, 1997))
*21.1 List of Subsidiaries of the Company
*23.1 Consent of Coopers & Lybrand L.L.P.
*27.1 Financial Data Schedule
- ------------------------
+ Confidential treatment has been granted as to a portion of this document
by order of the SEC.
* Filed herewith
Note: In November of 1996, Assessment Systems, Inc. changed its name to
Assessment Solutions. Consequently, all references herein to Assessment
Solutions are intended to also refer to Assessment Systems, Inc.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASI SOLUTIONS INCORPORATED
By: /s/ Michael J. Mele
-------------------
Michael J. Mele
Senior Vice President and Chief Financial
Officer
Dated: June 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Bernard F. Reynolds Chairman of the Board and Chief June 24, 1998
- ------------------------ Executive Officer (Principal Executive
Bernard F. Reynolds Officer)
/s/ Eli Salig President and Chief Operating Officer June 24, 1998
- ---------------------- (Principal Executive Officer) and Director
Eli Salig
/s/ Seymour Adler Executive Vice President and Director June 24, 1998
- ----------------------
Seymour Adler
/s/ Michael J. Mele Senior Vice President and Chief Financial June 24, 1998
- ---------------------- Officer (Principal Financial and Accounting
Michael J. Mele Officer)
/s/ David Tory Director June 24, 1998
- ---------------
David Tory
/s/ Michael J. Boylan Director June 24, 1998
- ----------------------
Michael J. Boylan
/s/ Ilan Kaufthal Director June 24, 1998
- ------------------
Ilan Kaufthal
/s/ Carl Seldin Koerner Secretary and Director June 24, 1998
- -----------------------
Carl Seldin Koerner
/s/ F. Samuel Smith Director June 24, 1998
- ------------------------
F. Samuel Smith
37