SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
--
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-22-309
ASI SOLUTIONS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 13-3903237
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification Number)
780 THIRD AVENUE, NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including (212) 319-8400
area code:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
-----
The number of shares of the registrant's Common Stock, par value $0.01 per
share, outstanding on January 27, 1998 was 6,446,701.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASI SOLUTIONS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND MARCH 31, 1997
DECEMBER 31, MARCH 31,
1997 1997
(UNAUDITED)
------------------ ---------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 2,883,155 $ 60,190
Accounts receivable, net 6,806,782 4,184,886
Prepaid expenses and other current assets 268,657 343,455
Deferred income taxes 5,910 5,910
Notes receivable from stockholders 389,191
------------------ ---------------
Total current assets 9,964,504 4,983,632
Property and equipment, net 5,218,286 2,219,801
Intangible assets, net 24,180,349 1,121,815
Deferred financing costs 478,633
Other assets 271,773 269,990
------------------ ---------------
Total assets $40,113,545 $8,595,238
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Notes payable to bank $ 2,372,579 $1,844,000
Current portion, long-term debt 267,667 66,506
Current portion, notes payable 1,666,666
Accounts payable and accrued expenses 3,103,703 1,874,139
Accrued income taxes 1,046,584
------------------ ---------------
Total current liabilities 7,410,615 4,831,229
Deferred income taxes 78,303 78,303
Notes payable to bank, less current portion 14,214,246
Long-term debt, less current portion 66,917 306,626
Notes payable, less current portion 3,333,334
Other liabilities 205,053 136,194
------------------ ---------------
Total liabilities 25,308,468 5,352,352
Stockholders' Equity:
Common stock 65,123 46,252
Additional paid in capital 10,846,665 1,109,218
Currency translation adjustment (11,550)
Retained earnings 4,297,570 3,052,450
------------------ ---------------
15,197,808 4,207,920
Less: Treasury stock at cost (45,534 shares) (392,731)
Deferred offering costs (965,034)
------------------ ---------------
Total stockholders' equity 14,805,077 3,242,886
------------------ ---------------
Total liabilities & stockholders' equity $40,113,545 $8,595,238
================== ===============
The accompanying notes are an integral part of these financial statements.
1
ASI SOLUTIONS INCORPORATED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE 3 MONTHS AND 9 MONTHS ENDED DECEMBER 31, 1997 AND 1996
3 MONTHS ENDED 9 MONTHS ENDED
DECEMBER DECEMBER DECEMBER DECEMBER
31, 1997 31, 1996 31, 1997 31, 1996
----------- ----------- ------------ ------------
Revenue $9,385,226 $4,805,828 $21,990,577 $12,858,779
Cost of services 4,528,056 2,321,492 11,291,997 5,905,213
----------- ----------- ------------ ------------
Gross profit 4,857,170 2,484,336 10,698,580 6,953,566
Operating expenses:
General and administrative 2,270,606 726,384 4,907,233 2,206,820
Sales and marketing 805,081 514,254 2,251,051 1,253,957
Research and development 392,799 385,256 1,228,043 842,876
----------- ----------- ------------ ------------
Income from operations 1,388,684 858,442 2,312,253 2,649,913
Interest (expense) income, net (235,698) 20,652 (122,457) (13,265)
----------- ----------- ------------ ------------
Income before provision for income taxes 1,152,986 879,094 2,189,796 2,636,648
Provision for income taxes 494,784 404,272 944,676 1,444,836
----------- ----------- ------------ ------------
Net income $ 658,202 $ 474,822 $ 1,245,120 $ 1,191,812
=========== =========== ============ ============
Basic earnings per share $ 0.10 $ 0.10 $ 0.20 $ 0.26
=========== =========== ============ ============
Diluted earnings per share $ 0.10 $ 0.10 $ 0.19 $ 0.26
=========== =========== ============ ============
Weighted average common shares outstanding:
Basic shares 6,437,534 4,625,158 6,308,257 4,625,158
Plus diluted effect of stock
options and warrants 193,863 42,246 169,094 42,246
----------- ----------- ------------ ------------
Diluted shares 6,631,397 4,667,404 6,477,351 4,667,404
=========== =========== ============ ============
The accompanying notes are an integral part of these financial statements.
2
ASI SOLUTIONS INCORPORATED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 9 MONTHS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
------------ -----------
Cash flow from operating activities:
Net income: $ 1,245,120 $ 1,191,812
Adjustments to reconcile net income to
net cash:
Depreciation and amortization 785,167 282,167
Provision for doubtful accounts 38,000
Accrual of straight-line rent 68,859 (7,627)
Other (15,090)
Deferred income taxes (13,728)
Changes in assets and liabilities:
Accounts receivable (2,659,896) (1,308,346)
Prepaid expenses and other current assets 74,798 (15,025)
Other assets (4,923) (132,089)
Notes receivable from stockholders (19,096)
Accounts payable and accrued
Expenses 1,229,564 363,448
Income taxes (1,046,584) 247,625
------------ -----------
Net cash (used in) provided by operating activities (284,985) 589,141
------------ -----------
Cash flow from investing activities:
Fixed asset additions (3,598,057) (1,456,410)
Purchase of minority stockholder interest (95,000)
Acquisition of business - McLagan Partners (22,213,183)
Acquisition of business - ELS (1,016,500)
------------ -----------
Net cash (used in) investing activities (26,827,740) (1,551,410)
------------ -----------
Cash flow from financing activities:
Proceeds from borrowings, net 16,456,533 1,038,785
Repayment of long-term debt (2,242,195)
Issuance of note payable 5,000,000
Proceeds from issuance of common stock, net 10,721,352
------------ -----------
Net cash provided by financing activities 29,935,690 1,038,785
------------ -----------
Net increase in cash 2,822,965 76,516
Cash at beginning of period 60,190 69,583
------------ -----------
Cash at end of period $ 2,883,155 $ 146,099
============ ===========
Supplemental disclosures of non
cash investing and financing activities:
Transfer of common stock back to the
Company in full satisfaction of
Shareholder debt of $389,191 in 1997.
The accompanying notes are an integral part of these financial statements.
3
ASI SOLUTIONS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION:
--------------------------------------
On March 26, 1996, ASI Solutions Incorporated (the "Company") was incorporated
in the State of Delaware. Effective March 31, 1996, the Company issued
4,625,158 shares of Common Stock in exchange for substantially all of the issued
and outstanding shares of common stock of Proudfoot Reports Incorporated ("PRI")
and 95% of the common stock of Assessment Solutions Incorporated ("Assessment
Solutions"). During fiscal 1997, the remaining 5% of the outstanding common
stock of Assessment Solutions was redeemed. The initial stockholders of the
Company were also the principal stockholders of PRI and Assessment Solutions,
the two previously separate but commonly controlled companies. After the
reorganization, Assessment Solutions and PRI are wholly owned subsidiaries of
the Company. C/3/ Solutions Incorporated ("C/3/") was formed on September 16,
1996 as a wholly owned subsidiary of the Company. On August 29, 1997, the
Company's newly created subsidiary, T/3/ Solutions Incorporated ("T/3/"),
acquired the assets of Effective Learning Systems and on November 13, 1997, the
Company's newly created subsidiary McLagan Partners Incorporated ("McLagan
Partners") acquired substantially all of the assets of McLagan Partners
Incorporated and subsidiaries of McLagan Partners, McLagan Partners
International Incorporated ("McLagan International") and McLagan Partners Asia
Incorporated ("McLagan Asia") acquired substantially all of the assets of
McLagan Partners International Incorporated and McLagan Partners Asia
Incorporated respectively. The Company, Assessment Solutions, PRI, C/3/, T/3/,
McLagan Partners, McLagan International and McLagan Asia 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 over-allotment option, the underwriter purchased 270,000 shares of common
stock at a price of $6 per share (the "Offering"). Proceeds from the Offering,
net of underwriters' discount and offering costs, were approximately $9,039,000.
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 were 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 accompanying unaudited interim financial statements of ASI Solutions
Incorporated have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and note
disclosures normally included in annual financial statements have been condensed
or omitted pursuant to those rules and regulations. In the opinion of
1
management, all adjustments, consisting of normal, recurring adjustments
considered necessary for a fair presentation, have been included. Although
management believes that the disclosures made are adequate to ensure that the
information presented is not misleading, it is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997. The results of the nine months ended December 31, 1997
and 1996 are not necessarily indicative of the results of operations for the
entire year.
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. Adjustments resulting
from translation of financial statements are reflected as a separate component
of shareholders' equity.
2. OPERATIONS:
----------
THE COMPANY
Assessment Solutions is a management consulting firm with primary emphasis on
research and the application of simulation technology to the assessment of
sales, service and management personnel. PRI provides pre-employment and post-
employment background checks. C/3/ provides monitoring services for clients who
engage in large-scale use of call centers for their customer contact functions.
McLagan provides compensation surveys and services to the financial industry.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share ("SFAS No. 128"). Statement
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements.
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 No. 130 becomes effective in fiscal 1999.
Management has not yet evaluated the effects of this change on the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued 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 has
not yet evaluated the effect of this change on the Company's financial
statements.
2
USE OF OFFERING PROCEEDS
The Company has used approximately $3 million of the offering proceeds to repay
debt, $2.2 million to purchase equipment, $637,000 related to the acquisition of
Effective Learning Systems, $2.5 million related to the acquisition of McLagan
Partners Incorporated and has invested the remainder in liquid short term
investments.
3. STOCKHOLDERS' EQUITY:
---------------------
A SUMMARY OF THE CHANGES IN STOCKHOLDERS' EQUITY FOR THE 9 MONTHS ENDED DECEMBER
31, 1997 IS AS FOLLOWS:
ADDITIONAL CURRENCY DEFERRED
COMMON PAID-IN TRANSLATION RETAINED OFFERING TREASURY
SHARES STOCK CAPITAL ADJUSTMENT EARNINGS COSTS STOCK TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 4,625,158 $46,252 $ 1,109,218 $3,052,450 $(965,034) $ 3,242,886
Issuance of Common
Stock in initial public
offering and payment of
offering costs 1,800,000 18,000 9,021,220 965,034 10,004,254
Transfer of Common Stock
back to the company (45,534) $(392,731) (392,731)
Issuance of Common Stock
for Employee Stock
Purchase Plan 17,077 171 86,927 87,098
Issuance of Common Stock
for acquisition of McLagan 50,000 500 449,500 450,000
Partners, Inc.
Issuance of Common Stock
related to bank financing 20,000 200 179,800 180,000
Currency Translation
Adjustment $(11,550) (11,550)
Net Income 1,245,120 1,245,120
------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 6,466,701 $65,123 $10,846,665 $(11,550) $4,297,570 $(392,731) $14,805,077
======================================================================================================
4. ACQUISITION OF MCLAGAN PARTNERS INCORPORATED:
--------------------------------------------
On November 13, 1997, the Company acquired substantially all of the assets
(primarily fixed assets of $501,478) 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 ASI, and the Company incurred
$764,661 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 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. Simultaneously with the
execution of the purchase agreements, the Company also granted stock options to
purchase an
3
aggregate of 300,000 shares of common stock under its 1996 Stock Option and
Grant Plan to certain employees of the McLagan subsidiaries.
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,
$22,213,183 of the purchase price has been allocated to goodwill, customer lists
and other intangibles which are being amortized on a straight line basis over a
period 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.
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 at
the beginning of the respective periods. 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, and an
adjustment of the tax provisions for fiscal 1996 and 1997 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 operation as they would have been had the transaction been effected on the
assumed dates.
9 MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
Revenue $27,044,210 $32,566,662
Net Income $ 779,586 $ 1,754,903
Earnings per share $ .12 $ .27
5. CREDIT AGREEMENT:
----------------
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.
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. The
annual payments for fiscal years ended March 31, 1999, 2000, 2001, 2002, 2003,
are as follows: $1,625,000, $2,250,000, $3,250,000, $4,125,000 and $3,375,000.
Borrowing under the revolving credit facility bears interest at the prime rate
or an optional eurodollar based rate.
The Credit Agreement expires on November 13, 2002 at which time any outstanding
principal and interest is payable. The Credit Agreement has various restrictive
covenants and is collateralized by all of the assets of the Company.
4
As of December 31, 1997, borrowings under the term loan were $15,000,000 and
borrowings under the revolving credit facility were $700,000. Interest expense
for the 9 month period ended December 31, 1997 was $313,215.
6. PROVISION FOR INCOME TAXES:
--------------------------
The provision for income taxes declined to 42.9% from 46% due primarily to
higher costs in the same period for fiscal 1997 resulting from an Internal
Revenue Service examination and lower New York City taxes in 1998 resulting from
the transfer of a significant portion of operations out of New York City.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
QUARTERLY COMPARISON OF RESULTS OF OPERATIONS
The Company's third quarter revenue increased 95.3% to $9.4 million from $4.8
million in the third quarter of fiscal 1997. Net income was $658,000, or 7% of
revenue, up 38.6% from $475,000, or 9.9% of revenue, in the third quarter of
fiscal 1997. The increase in net income is primarily due to contribution from
McLagan, the new compensation and consulting business acquired in November 1997.
Revenue increased in all business areas. Assessment and Selection revenue was
$2.5 million, an increase of $0.8 million, or 46.1%, principally due to
increased revenue with existing clients.
Employment Process Administration revenue was $3.1 million, an increase of $0.9
million, or 38.9%, due principally to higher volume with a large client and the
expansion of services provided to that client.
Customer Contact Monitoring revenue was $0.5 million, an increase of 15% from
the third quarter of last year. This is a new business area and the increase
was due to services provided to three new clients.
Training and Development revenue was $0.5 million, an increase of 16%. Revenue
from new programs in connection with the August 1997 acquisition of Effective
Learning Systems accounts for the increase.
Compensation Survey and Consulting, a new business area resulting from the
McLagan acquisition, revenue was $2.8 million, accounting for approximately 60%
of the revenue increase of $4.6 million over last year's third quarter.
Cost of services increased $2.2 million, or 95.1%, to $4.5 million. The new
Compensation Survey and Consulting area accounted for $0.9 million of the
increase. The remainder of the increase was due to
5
both personnel additions and higher facility and equipment expenses. As a
percentage of revenue, cost of services was 48.2% compared to 48.3% in last
year's quarter.
General and administrative expense increased $1.5 million, or 212.6%, to $2.3
million. Compensation Survey and Consulting accounted for $0.9 million of the
increase. Outside services associated with operating as a publicly owned entity,
higher fixed expenses associated with the new corporate offices and amortization
of goodwill associated with the acquisition of McLagan contributed to the
increase. As a percentage of revenue, general and administrative expense
increased from 15.1% to 24.2%.
Sales and marketing expense increased by $0.3 million, or 56.6%, to $0.8 million
principally due to the addition of senior staff to manage business units and
sales areas, and to higher spending incurred to promote business volume. As a
percentage of revenue, sales and marketing expense decreased from 10.7% to 8.6%.
Research and development expense was $0.4 million, approximately the same as
last year. As a percentage of revenue, research and development expense was
4.2%, down from 8.0% last year.
As a percentage of pre-tax income, the provision for income taxes declined to
42.9% from 46% due primarily to higher costs in the same period for Fiscal 1997
resulting from an Internal Revenue Service examination and lower New York City
taxes in 1998 resulting from the transfer of a significant portion of operations
out of New York City.
Net interest expense was $236,000 compared to net interest income of $21,000
last year. The interest expense was primarily due to interest incurred on the
$20 million of debt incurred in the acquisition of McLagan.
(Percentages are based on actual amounts as opposed to the rounded amounts shown
above.)
6
YEAR-TO-DATE COMPARISON OF RESULTS OF OPERATIONS
The Company's year to date revenue increased 71% to $22 million from $12.9
million. Net income was $1.25 million or 5.7% of revenue, up 4.5% from $1.19
million, or 9.3% of revenue, in the first nine months of fiscal 1997. The newly
acquired Compensation Survey and Consulting business area accounted for $2.8
million of the revenue increase. Expenses associated with addition of personnel,
including several senior managers, and the increase in facilities, such as the
new operations center, account for most of the decline in the net income
percentage.
Year to date revenue increased in all business areas. Assessment and Selection
revenue was $7.7 million, an increase of $3.2 million, or 71.2%, principally due
to increased revenue with existing clients and the addition of several new
clients.
Employment Process Administration revenue was $8.4 million, an increase of $1.9
million, or 29.1%, due principally to higher volume with a major client and the
expansion of services provided to that client.
Customer Contact Monitoring revenue was $1.4 million, an increase of $0.9
million from last year. This is a new business area and the increase was due to
services provided to new clients, three of which were added in the third
quarter.
Training and Development revenue was $1.7 million, an increase of $0.3 million,
or 24.3%, and due in part to the addition of new clients and the acquisition of
Effective Learning Systems.
Compensation Survey and Consulting revenue, a new business area, was $2.8
million.
Cost of services increased $5.4 million, or 91.2%, to $11.3 million primarily
due to personnel additions and higher equipment expenses needed to meet the
increased business volume and to staff the new operations center. Expenses from
the recently acquired Compensation Survey and Consulting business area also
contributed to this increase. As a percentage of revenue, cost of services
increased to 51.3% from 45.9% due primarily to personnel and fixed expenses
incurred to expand the operations center capacity.
General and administrative expense increased $2.7 million, or 122.4%, to $4.9
million due to personnel additions in senior management and the finance staff as
well as higher outside services associated with operating as a publicly owned
entity. Higher fixed expenses associated with the new corporate offices, and
the amortization of goodwill associated with the acquisition of McLagan also
contributed to the increase. Compensation Survey and Consulting accounted for
$0.9 million of this increase. As a percentage of revenue, general and
administrative expense increased from 17.2% to 22.3%.
Sales and marketing expense increased by $1.0 million, or 79.5%, to $2.3 million
principally due to the addition of senior staff to manage business units and
sales areas, and to higher spending incurred to
7
promote awareness of the Company and business volume. As a percentage of
revenue, sales and marketing expense increased from 9.8% to 10.2%.
Research and development expense was $1.2 million, an increase of $0.4 million
from last year due to increased personnel, outside services and conference
expenses. As a percentage of revenue, research and development expense was
5.6%, down from 6.6% last year.
Net interest expense increased due to the interest on the $20 million of debt
incurred to acquire McLagan partially offset by the investment of the proceeds
of the initial public offering in April 1997.
As a percentage of pre-tax income, the provision for income taxes declined to
43.1% from 54.8% due primarily to higher costs in the same period for fiscal
1997 resulting from an Internal Revenue Service examination and lower New York
City taxes resulting from the transfer of a significant portion of operations
out of New York City.
(Percentages are based on actual amounts as opposed to 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. The Company funds its
operating and capital needs with cash flow generated from operations,
supplemented by short-term borrowings under bank lines of credit and long-term
equipment financing. The Company raised approximately $9 million after expenses
in an Initial Public Offering in April, 1997.
Cash flow used in operations was $284,985 in the first three quarters of fiscal
1998 due to higher receivables resulting from the growth in sales, a reduction
in accounts payable and accrued expenses and two income tax payments. Cash flow
used in investing activities of $26,827,740 was primarily for the acquisition of
McLagan and Effective Learning Systems and for the purchase of furniture,
computer and telecommunications equipment for the new operations center in
Melville, New York.
In November 1997, a new bank Credit Agreement was established which provided a
$15 million term loan and a $5 million revolving credit facility. This
agreement expires November 13, 2002. The Company also has a $1.9 million
equipment lease facility. At December 31, 1997, there were borrowings of
$700,000 against the revolving credit facility and $886,825 against the
equipment lease facility.
The Company has used approximately $3 million of the offering proceeds to repay
debt, $2.2 million to purchase equipment, $637,000 related to the acquisition of
Effective Learning Systems, $2.5 million related to the acquisition of McLagan
Partners Incorporated and has invested the remainder in liquid short term
investments.
8
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share ("SFAS No. 128"). Statement
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements.
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 No. 130 becomes effective in fiscal 1999.
Management has not yet evaluated the effects of this change on the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued 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 has not
yet evaluated the effect of this change on the Company's financial statements.
NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this 10Q and written and oral statements made by the
Company may contain, 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.
The words "believe", "expect", "intend", "estimate" and "anticipate" and other
expressions which are predictions of or indicate future events and trends and
which do not relate to historical matters identify forward-looking statements.
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 project cancellations or
the effect of a customer delaying a project, negative developments relating to
the Company's significant customers, a reduction in the demand for the Company's
services which could impact capacity utilization as well as sales volume, the
impact of intense competition, changes in the industry, and changes in the
general economy such as inflationary pressure which could increase the Company's
cost of borrowing and those factors discussed in the section entitled "Risk
Factors" as well as those discussed elsewhere in the Company's prospectus from
its initial public offering (a copy which will be provided without charge upon
request to the Company.) 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not Applicable.
10
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the Company's Initial Public Offering, the Company
filed a registration statement (the "Registration Statement") under the
Securities Act of 1933, as amended, whereby the Company registered
shares of its common stock, $.01 par value. The Registration Statement
was effective on April 9, 1997 and was assigned an SEC file number of
2-20401. The offering commenced on April 16, 1997 and all of the
securities registered in connection with the offering have been sold.
The managing underwriter was H.C. Wainwright & Co., Inc. The Company
received net proceeds of approximately $9,039,000 (the "Proceeds").
Since the effective date, the Company has spent the following
approximate amounts of the Proceeds toward the purposes indicated:
Working Capital $ 665,212
Repayment of Debt 3,064,000
Purchase of Equipment 2,186,211
Acquisition of Effective Learning Systems 636,916
Acquisition of McLagan Partners Incorporated 2,486,661
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.1* Amendment No. 06 dated October 6, 1997
to the agreement by and between
Assessment Solutions Incorporated and
TeleSector Resources Group, Inc., d/b/a
Bell Atlantic Network Services (the
"Bell Atlantic Contract")
10.2* Bell Atlantic Contract
Amendment No. 07 dated January 12, 1998
to the Bell Atlantic Contract
27.1 Financial Data Schedule.
________________________________________________________________________________
Portions of this document have been omitted pursuant to a request for
confidential treatment.
11
(b) A Form 8K was filed on November 13, 1997 regarding the acquisition of
substantially all of the assets and business of McLagan Partners
Incorporated and its related entities McLagan Partners International
Incorporated and McLagan Partners Asia Incorporated (collectively, the
"McLagan Companies"). The Financial Statements of the McLagan
Companies along with pro forma financial information reflecting the
acquisition were filed by amendment to this 8-K on January 27, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ASI SOLUTIONS INCORPORATED
Date: January , 1998 By:/s/ MICHAEL J. MELE
---------------------------------
Michael J. Mele
Vice President and Chief Financial Officer
(on behalf of the registrant and as principal
financial and accounting officer)
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