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 JUNE 30, 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 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 area code: (212) 319-8400
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 August 5, 1998 was 6,476,874.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASI SOLUTIONS INCORPORATED
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND MARCH 31, 1998
JUNE 30, MARCH 31,
1998 1998
(UNAUDITED)
--------------------- ---------------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 1,549,636 $ 964,106
Restricted cash 1,891,821
Accounts receivable, net 9,576,181 10,706,699
Prepaid expenses and other current assets 859,244 678,531
Deferred income taxes 106,158 106,158
--------------------- ---------------------
Total current assets 12,091,219 14,347,315
Property and equipment, net 5,215,718 5,318,524
Intangible assets, net 23,945,200 24,132,292
Deferred financing costs, net 437,260 460,075
Other assets 272,777 302,706
--------------------- ---------------------
Total assets $41,962,174 $44,560,912
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current portion, notes payable to bank $ 4,530,720 $ 4,951,602
Current portion, subordinated notes payable 1,666,666 1,666,666
Other acquisition debt 200,750 267,667
Accounts payable and accrued expenses 2,792,211 4,129,877
Accrued income taxes 442,469 171,864
--------------------- ---------------------
Total current liabilities 9,632,816 11,187,676
Deferred income taxes 423,140 423,140
Notes payable to bank, less current portion 13,121,804 13,668,558
Subordinated notes payable, less current portion 1,666,667 3,333,334
Other liabilities 485,591 252,663
--------------------- ---------------------
Total liabilities 25,330,018 28,865,371
Stockholders' Equity:
Common stock 65,225 65,123
Additional paid in capital 10,923,773 10,841,728
Accumulated other comprehensive income 9,406 9,382
Retained earnings 6,026,483 5,172,039
Treasury stock, 45,534 shares, at cost (392,731) (392,731)
--------------------- ---------------------
Total stockholders' equity 16,632,156 15,695,541
--------------------- ---------------------
Total liabilities & stockholders' equity $41,962,174 $44,560,912
===================== =====================
The accompanying notes are an integral part of these financial statements.
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ASI SOLUTIONS INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
1998 1997
Revenue $12,012,706 $6,700,275
Cost of services 5,863,533 3,444,723
---------------------- -----------------------
Gross profit 6,149,173 3,255,552
Operating expenses:
General and administrative 2,559,252 1,317,618
Sales and marketing 1,133,642 784,877
Research and development 459,532 474,644
---------------------- -----------------------
Income from operations 1,996,747 678,413
Interest expense (income), net 491,884 (62,232)
---------------------- -----------------------
Income before provision for income taxes 1,504,863 740,645
Provision for income taxes 650,419 322,575
---------------------- -----------------------
Net income $ 854,444 $ 418,070
Basic earnings per share $ 0.13 $ 0.07
====================== =======================
Diluted earnings per share $ 0.13 $ 0.07
====================== =======================
Weighted average common shares outstanding:
Basic shares 6,476,874 6,106,191
Diluted effect of stock options and
warrants 188,374 116,197
---------------------- -----------------------
Diluted shares 6,665,248 6,222,388
====================== =======================
The accompanying notes are an integral part of these financial statements.
2
ASI SOLUTIONS INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
1998 1997
---------------------- ----------------------
Cash flow from operating activities:
Net income: $ 854,444 $ 418,070
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 605,951 159,622
Provision for doubtful accounts 24,850 7,500
Accrual of straight-line rent 20,086 (5,560)
Loss on fixed asset disposal 509
Changes in assets and liabilities:
Accounts receivable 1,072,520 (310,121)
Prepaid expenses and other current assets (150,785) (5,254)
Other assets 23,699 (480,803)
Accounts payable and accrued expenses (1,420,685) (7,654)
Income taxes 406,491 (903,195)
Other liabilities 170,000
---------------------- ----------------------
Net cash provided by (used in) operating activities 1,607,080 (1,127,395)
---------------------- ----------------------
Cash flow from investing activities:
Fixed asset additions (258,567) (617,307)
Other (41,168)
---------------------- ----------------------
Net cash used in investing activities (299,735) (617,307)
---------------------- ----------------------
Cash flow from financing activities:
Repayment of debt (2,691,195) (1,860,032)
Restricted cash 1,891,821
Proceeds from issuance of common stock, net 82,147 10,004,254
---------------------- ----------------------
Net cash (used in) provided by financing activities (717,227) 8,144,222
---------------------- ----------------------
Effect of exchange rate changes on cash and cash
equivalents (4,588)
Net increase in cash and cash equivalents 585,530 6,399,520
Cash and cash equivalents at beginning of period 964,106 60,190
---------------------- ----------------------
Cash and cash equivalents at end of period $ 1,549,636 $ 6,459,710
====================== ======================
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.
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ASI SOLUTIONS INCORPORATED
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. 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 over-allotment option, the underwriter purchased 270,000 shares of common
stock at a price of $6 per share (the "Offering"). Proceeds from the Offering,
net of underwriters' discount and offering costs, were approximately $9,034,000.
Effective on the Offering date, the Company's Certificate of Incorporation (the
"Certificate") was restated to increase the number of authorized shares of
Common Stock to 18 million shares. 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
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
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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, 1998. The results of the three months ended June 30, 1998 and
1997 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 stockholders' equity.
2. OPERATIONS:
----------
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 that outsource all or a portion of their human resources
functions. The Company markets its services principally to Fortune 500
companies for which customer service, sales and call center functions are
critical components of their businesses. Industries served by the Company
include telecommunications, financial services, information technology, consumer
products and healthcare.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 has been adopted by the Company in fiscal
1999. There are no significant differences between comprehensive income and net
income in the periods presented.
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. The effect of
this change will provide additional disclosure in the notes to the financial
statements.
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3. STOCKHOLDERS' EQUITY:
---------------------
A Summary of the changes in Stockholders' Equity for the three months ended June
30, 1998 is as follows:
ADDITIONAL
COMMON PAID-IN
SHARES STOCK CAPITAL
- ------------------------------------------------------------------------
Balance, March 31, 1998 6,466,701 $65,123 $10,841,728
Issuance of Common Stock for
Employee Stock Purchase Plan 10,173 102 82,045
Translation Adjustment
Net Income
--------------------------------------
Balance, June 30, 1998 6,476,874 $65,225 $10,923,773
======================================
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED TREASURY
INCOME EARNINGS STOCK TOTAL
- ------------------------------------------------------------------------------------------
Balance, March 31, 1998 $9,382 $5,172,039 $(392,731) $15,695,541
Issuance of Common Stock for
Employee Stock Purchase Plan 82,147
Translation Adjustment 24 24
Net Income 854,444 854,444
---------------------------------------------------------
Balance, June 30, 1998 $9,406 $6,026,483 $(392,731) $16,632,156
=========================================================
4. 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 ASI, and 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 the aggregate amount of $1 million, on April 30, 2000, to
certain employees of McLagan, provided that such employees continue to be
employed by McLagan 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 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. At the request of the officers,
$841,278 in connection with this incentive compensation program was paid to
employees in fiscal 1998.
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%.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
QUARTERLY COMPARISON OF RESULTS OF OPERATIONS
The Company's first quarter revenue increased 79.3% to $12.0 million from $6.7
million in the first quarter of fiscal 1998. Net income was $0.9 million or 7.1%
of revenue, up 104.4% from $0.4 million or 6.2% of revenue, in the first quarter
of fiscal 1999. The increase in net income is primarily due to increased volume,
particularly in Employment Process Administration, and McLagan, the new
compensation and consulting business acquired in November 1997.
Assessment and Selection revenue was $2.5 million, a decrease of $0.5 million,
or 16.2%, from the first quarter of last year. Last year's first quarter was
exceptionally strong due to a large project performed for one of the Company's
telecommunications clients. This year's $2.5 million in revenue exceeded the
revenue in each of last year's second, third and fourth quarters.
Employment Process Administration revenue was $5.3 million, an increase of $2.8
million, or 107.8%, over last year's first quarter, due principally to higher
volume with a large telecommunications client and the expansion of services
provided to that client.
Customer Contact Monitoring revenue was $0.6 million, an increase of 32.2% from
the first quarter of last year. This is a new business area and the increase
was due to services provided to several new clients, as we continue to expand
our customer base.
Training and Development revenue was $0.8 million, an increase of 15.2%. Revenue
from new programs in connection with the August 1997 acquisition of Effective
Learning Systems contributed to the increase along with services provided to a
large technology client.
Revenue for Compensation Survey and Consulting, a new business area resulting
from the McLagan acquisition, was $2.8 million.
Cost of services increased $2.4 million, or 70.2%, to $5.9 million. The new
Compensation Survey and Consulting area accounted for $0.9 million of the
increase. The remainder of the increase was due to both personnel additions and
higher facility and equipment expenses. As a percentage of revenue, cost of
services was 48.8% compared to 51.4% in last year's quarter.
General and administrative expense increased $1.2 million, or 94.2%, to $2.6
million. Compensation Survey and Consulting accounted for virtually all of the
increase. Compensation and goodwill amortization were the largest expense
items. Other general and administrative expenses were essentially at the same
level as last year's first quarter. As a percentage of revenue, general and
administrative expense increased from 19.7% to 21.3%.
Sales and marketing expense increased by $0.3 million, or 44.4%, to $1.1 million
principally due to the addition of sales staff and to higher spending incurred
to promote business volume. As a
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percentage of revenue, sales and marketing expense decreased from 11.7% to 9.4%,
as revenue growth exceeded sales and marketing spending increases.
Research and development expense was $0.5 million, approximately the same as
last year. As a percentage of revenue, research and development expense was
3.8%, down from 7.1% last year due to the fact that Employment Process
Administration revenue, which accounts for a large portion of the revenue
increase, has a relatively lower amount of research and development expense, and
Compensation Survey and Consulting services which also accounts for a large
portion of the revenue increases has no research and development expense.
As a percentage of pre-tax income, the provision for income taxes declined
slightly to 43.2% from 43.6%.
Net interest expense was $492,000 compared to net interest income of $62,000
last year. The interest expense was primarily due to interest on the debt
incurred in the acquisition of McLagan and to interest related to the line of
credit.
(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 provided by operations was $1.6 in the first quarter of fiscal 1999
due to income generated from operations, lower receivables, and increases in
accounts payable and accrued expenses. Cash flow used in investing activities of
$300,000 was primarily for fixed asset additions. Cash flow used in financing
activities of $717,000 was primarily for repayment of debt.
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. On June 30, 1998, there were borrowings of
$2,600,000 against the revolving credit facility and $14,250,000 was outstanding
on the term loan. The Company also has two equipment notes payable to a bank
with a balance of $802,524 at June 30, 1998.
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.
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
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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.
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Securities and Exchange Commission recently adopted certain amendments to
its rules governing the submission by stockholders of proposals intended to be
presented at meetings of stockholders. These amendments, which became effective
on June 29, 1998, included granting the Company the right to exercise
discretionary voting authority with respect to certain stockholder proposals
that the Company did not have notice of within a specified time period prior to
the meeting. Due to the "advance notice" provisions contained in the Company's
By-laws, the amendments relating to discretionary voting authority will not
affect the timing or treatment of stockholder proposals intended to be presented
at the Company's 1999 Annual Meeting of Stockholders. Thus, stockholders wishing
to submit proposals to be presented at the Company's 1999 Annual Meeting of
Stockholders should follow the procedures outlined in the Proxy Statement
distributed to stockholders in connection with the Company's 1998 Annual Meeting
of Stockholders under the heading "Other Matters - Stockholder Proposals."
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed as part of this report:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
27.1 Financial Data Schedule.
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: August 10, 1998 By: /s/ MICHAEL J. MELE
--------------------
Michael J. Mele
Senior Vice President and Chief Financial Officer
(on behalf of the registrant and as principal
financial and accounting officer)
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