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, 1999.
OR
--
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 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 (212) 319-8400
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 August 9, 1999 was 6,539,346.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASI Solutions Incorporated
Consolidated Balance Sheets
June 30, 1999 and March 31, 1999
June 30, March 31,
1999 1999
(Unaudited)
----------- -----------
ASSETS:
Current Assets:
Cash and cash equivalents $ 1,225,538 $ 7,595,366
Accounts receivable, net 13,811,681 12,874,967
Prepaid expenses and other current assets 519,741 576,424
Deferred income taxes 256,184 299,478
----------- -----------
Total current assets 15,813,144 21,346,235
Property and equipment, net 5,223,615 5,218,408
Intangible assets, net 23,029,369 23,258,472
Deferred financing costs 381,483 391,386
Other assets 323,379 325,518
Deferred income taxes 43,294
----------- -----------
Total assets $44,814,284 $50,540,019
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current portion, notes payable to bank $ 6,573,173 $ 7,143,658
Current portion, subordinated notes payable 1,666,667 1,666,666
Other debt 44,557 66,501
Accounts payable and accrued expenses 3,929,098 7,946,658
Accrued income taxes 478,003 326,964
----------- -----------
Total current liabilities 12,691,498 17,150,447
Deferred income taxes 543,593 543,593
Notes payable to bank, less current portion 10,423,631 11,224,900
Subordinated notes payable, less current portion 1,666,667
Other liabilities 287,604 268,373
----------- -----------
Total liabilities 23,946,326 30,853,980
Stockholders' Equity:
Common stock 65,844 65,432
Additional paid in capital 11,265,369 11,038,250
Accumulated other comprehensive income (61,249) (7,839)
Retained earnings 9,990,725 8,982,927
Treasury stock, 45,534 shares, at cost (392,731) (392,731)
----------- -----------
Total stockholders' equity 20,867,958 19,686,039
----------- -----------
Total liabilities & stockholders' equity $44,814,284 $50,540,019
=========== ===========
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, 1999 and 1998
1999 1998
----------- -----------
Revenue $15,899,242 $12,012,706
Cost of services 8,312,333 5,863,533
----------- -----------
Gross profit 7,586,909 6,149,173
Operating expenses:
General and administrative 3,639,977 2,559,252
Sales and marketing 1,321,365 1,133,642
Research and development 501,952 459,532
----------- -----------
Income from operations 2,123,615 1,996,747
Interest expense (income), net 399,075 491,884
----------- -----------
Income before provision for income taxes 1,724,540 1,504,863
Provision for income taxes 716,742 650,419
----------- -----------
Net income $ 1,007,798 $ 854,444
----------- -----------
Basic earnings per share $ 0.15 $ 0.13
=========== ===========
Diluted earnings per share $ 0.15 $ 0.13
=========== ===========
Weighted average common shares outstanding:
Basic shares 6,538,813 6,476,874
Diluted effect of stock options and warrants 206,526 188,374
----------- -----------
Diluted shares 6,745,339 6,665,248
=========== ===========
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, 1999 and 1998
1999 1998
----------- -----------
Cash flow from operating activities:
Net income: $ 1,007,798 $ 854,444
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 631,962 605,951
Provision for doubtful accounts 24,850
Accrual of straight-line rent 20,086
Loss on fixed asset disposal 509
Other 24,903
Changes in assets and liabilities:
Accounts receivable (942,667) 1,072,520
Prepaid expenses and other current assets 58,203 (150,785)
Other assets (3,774) 23,699
Accounts payable and accrued expenses (4,093,152) (1,420,685)
Income taxes 120,356 406,491
Other liabilities 23,918 170,000
----------- -----------
Net cash (used in) provided by operating activities (3,172,453) 1,607,080
----------- -----------
Cash flow from investing activities:
Fixed asset additions (416,903) (258,567)
Other (41,168)
----------- -----------
Net cash used in investing activities (416,903) (299,735)
----------- -----------
Cash flow from financing activities:
Repayment of debt (3,060,364) (2,691,195)
Restricted cash 1,891,821
Payment of financing costs (15,000)
Proceeds from issuance of common stock, net 227,531 82,147
----------- -----------
Net cash used in financing activities (2,847,833) (717,227)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 67,361 (4,588)
Net (decrease) increase in cash and cash equivalents (6,369,828) 585,530
Cash and cash equivalents at beginning of period 7,595,366 964,106
----------- -----------
Cash and cash equivalents at end of period $ 1,225,538 $ 1,549,636
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
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. C/3/ Solutions Incorporated ("C/3/") was formed on September 16,
1996 as a wholly owned subsidiary of the Company. On August 29, 1997, the
Company's newly created subsidiary, T/3/ Solutions Incorporated ("T/3/"),
acquired the assets of Effective Learning Systems. On November 13, 1997, the
Company's newly created subsidiary McLagan Partners, Inc. ("McLagan Partners")
acquired substantially all of the assets and business operations of McLagan
Partners Incorporated and Subsidiaries. The Company, Assessment Solutions, PRI,
C/3/, T/3/ and McLagan Partners are hereinafter referred to collectively as the
"Company."
The exchange described above has been accounted for as a reorganization since
all entities involved were under common control. The consolidated financial
statements reflect the interests attributable to the one controlling shareholder
of both combined entities at their historical basis of accounting. The
remaining interests have been accounted for as a purchase of minority interests
and the excess of the purchase price over the related historical cost of
$1,063,000 has been allocated to intangible assets. All intercompany accounts
and transactions have been eliminated in consolidation.
Effective April 16, 1997, the Company sold 1.8 million shares of common stock to
the public at a price of $6 per share in an initial public offering and pursuant
to an over-allotment option, the underwriter purchased 270,000 shares of common
stock at a price of $6 per share (the "Offering"). Proceeds from the Offering,
net of underwriters' discount and offering costs, were approximately $9,034,000.
Effective on the Offering date, the Company's Certificate of Incorporation (the
"Certificate") was restated to increase the number of authorized shares of
Common Stock to 18 million shares.
The 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
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, 1999. The results of the three months ended June 30, 1999 and
1998 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.
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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 three core areas: performance improvement
services, employment process outsourcing and compensation services and market
share studies. The Company believes these services position the Company as a
single-source solution for many organizations that outsource all or a portion of
their human resources functions. The Company markets its services principally
to Fortune 500 companies for which customer service, sales and call center
functions are critical components of their businesses. Industries served by the
Company include telecommunications, financial services, information technology,
consumer products and healthcare.
Impact Of Recently Issued Accounting Pronouncements
In fiscal 1999 the Company adopted, Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which requires that
changes in comprehensive income be shown in a financial statement that is
displayed with the same prominence as other financial statements. Such
information is included in the Statement of Stockholders' Equity.
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"), which changes the way public companies report information about
segments. SFAS 131, which is based on the management approach to segment
reporting, includes requirements to report selected segment information
quarterly and entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds and reports
revenues.
2
3. Stockholders' Equity:
---------------------
A summary of the changes in Stockholders' Equity for the three months ended June
30, 1999 is as follows:
Additional Accumulated
Common Paid-In Other Retained Treasury
Shares Stock Capital Comprehensive Earnings Stock Total
Income
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 6,497,631 $65,432 $11,038,250 $ (7,839) $8,982,927 $(392,731) $19,686,039
Issuance of Common Stock for
Employee Stock Purchase Plan 41,182 412 227,119 227,531
Translation adjustment (53,410) (53,410)
Net Income 1,007,798 1,007,798
-----------------------------------------------------------------------------------------------
Balance, June 30, 1999 6,538,813 $65,844 $11,265,369 $( 61,249) $9,990,725 $(392,731) $20,867,958
===============================================================================================
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
Common Stock, par value $.01 per share, of the Company. The Company incurred
$828,188 of costs associated with the acquisition.
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.
On August 29, 1997, the Company acquired the assets of Effective Learning
Systems, a New Jersey based training organization, for approximately $1,000,000.
While the effect of this acquisition on the financial statements of the Company
was not significant, the Company did enter into promissory notes, which were
fully paid as of March 31, 1999.
5. Industry Segment Information:
-----------------------------
ASI Solutions' reportable segments are performance improvement services,
employment process outsourcing and compensation services and market share
studies.
Revenues and profits in the performance improvement services segment are
generated by designing custom solutions for a client where ASI assesses job
candidates, trains existing employees and measures employee
3
performance through monitoring customer contact. Fees charged are generally
based on the number of people and calls processed plus a fee for the development
of a customized solution.
Revenues and profits in the employee process outsourcing segment are generated
by providing the following services: advertising for and recruiting of
applicants; establishing automated telephonic voice response systems to screen
prospective applicants; arranging for the physical facilities and equipment
necessary for the pre-screening process and performing background checks on
applicants. For larger engagements, the Company generally charges a fixed
minimum monthly fee which may increase based on the total number of people
processed. For other assignments, such as background checks, revenue is based
on a fixed fee for each candidate processed.
Revenues and profits in the compensation services and market share studies
segment are generated by providing survey services to the financial and
securities industries. These include compensation as well as market share
survey services for retail operations within the financial services industry.
Only participating clients may purchase surveys. The Company also provides
compensation services where revenue is generated based on a fee per assignment
basis.
The accounting polices of the segments are the same as those described in the
"Summary of Significant Accounting Policies". ASI Solutions evaluates the
performance of its segments and allocates resources to them based on their
operating contribution, which represents segment revenues less direct costs of
operation, excluding the allocation of corporate expenses. Identifiable assets
of the operating segments principally consist of net accounts receivable
associated with the segment activities. Accounts receivable from performance
improvement services and employment process outsourcing are managed on a
combined basis. All other identifiable assets not attributable to industry
segments are included in corporate assets. The Company does not track
expenditures for long lived assets on a segment basis.
The table below presents information on the revenues and operating contribution
for each segment for the three months ended June 30,1999, and items which
reconcile segment operating contribution to the Company's reported pre-tax
income.
4
Three Months Ended June 30,
1999 1998
(in thousands)
Revenue:
Performance Improvement Services $ 4,506 $ 3,918
Employment Process Outsourcing 6,683 5,310
Compensation Services and Market Share Studies 4,710 2,784
------- -------
$15,899 $12,012
------- -------
Operating contribution:
Performance Improvement Services $ 1,518 $ 1,589
Employment Process Outsourcing 2,606 2,167
Compensation Services and Market Share Studies 998 854
------- -------
$ 5,122 $ 4,610
------- -------
Consolidated expenses (income):
Interest, net $ 400 $ 492
Depreciation and Amortization 632 606
Selling, General and Administrative and
Research and Development 2,365 2,007
------- -------
3,397 3,105
------- -------
Income before income taxes $ 1,725 $ 1,505
------- -------
Identifiable Assets:
Performance Improvement and Employment Process
Outsourcing $14,141 $11,370
Compensation Services and Market Share Studies 5,217 3,695
Corporate 2,045 2,515
------- -------
$21,403 $17,580
======= =======
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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 revenue in the first quarter of fiscal 2000 increased 32.3% to
$15.9 million from $12.0 million in the first quarter of fiscal 1999. Revenue
increased in all three business areas. Net income was $1.0 million, or 6.3% of
revenue, up 18.0% from $.9 million, or 7.1% of revenue, in the first quarter of
fiscal 1999. Higher business volume accounts for the increase in net income.
Performance Improvement Services revenue was $4.5 million, an increase of $0.6
million or 15.0% from the first quarter of fiscal 1999 revenue of $3.9 million.
Higher training and development revenue and performance measurement revenue
account for the increase.
Employment Process Outsourcing revenue was $6.7 million, an increase of $1.4
million, or 25.9%, from the first quarter of fiscal 1999 revenue of $5.3
million. Volume grew across all areas.
Compensation Services and Market Share Studies revenue was $4.7 million, an
increase of $1.9 million or 69.2%, from the first quarter of fiscal 1999 revenue
of $2.8 million. Growth in survey participation and increased consulting work
also contributed to the increase.
Cost of services in the first quarter of fiscal 2000 increased $2.4 million, or
41.8%, to $8.3 million from $5.9 million in last year's first quarter.
Personnel additions and outside service expenditures associated with the higher
business volume account for the majority of the increase. As a percentage of
revenue, cost of services was 52.3% compared to 48.8% in last year's first
quarter due to the higher rate of expenditure.
General and administrative expense increased $1.1 million, or 42.2%, to $3.6
million in the first quarter of fiscal 2000 from $2.5 million in last year's
first quarter. The primary reason for the increase is the accrual of
compensation incentive related to the increase in revenue within the
Compensation Services and Market Share Studies business area. Personnel
additions and professional fees for information systems development also
contributed to the increase. As a percentage of revenue, general and
administrative expense was 22.9% compared to 21.3% in the first quarter of
fiscal 1999.
Sales and marketing expense increased $0.2 million, or 16.6%, to $1.3 million in
the first quarter of fiscal 2000 from $1.1 million in last year's first quarter.
Personnel additions for business development and sales conference expenses
account for the increase. As a percentage of revenue, sales and marketing
expense was 8.3% compared to 9.4% in the first quarter of last year. The
decrease is largely due to the fact that Compensation Services and Market Share
Studies, which has a lower amount of sales and marketing, accounts for a larger
percentage of revenue in the first quarter of fiscal 2000 compared to fiscal
1999's first quarter.
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Research and development expense was $0.5 million, an increase of $0.1 million,
or 9.2%, over the first fiscal quarter of fiscal 1999. As a percentage of
revenue, research and development expense was 3.2% compared to 3.8% in last
year's first quarter.
Net interest expense was $0.4 million, a decrease of $0.1 million from the first
quarter of fiscal 1999 due to lower average debt outstanding.
As a percentage of pre-tax income, the provision for income taxes was 41.6%
compared to 43.2% in the first quarter of fiscal 1999 due to lower state income
tax expense resulting from the mix of business by state.
(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. Historically, the
Company's source of liquidity has been cash flow generated internally from
operations, supplemented by short-term borrowings under bank lines of credit and
long-term equipment financing.
Cash flow used in operating activities in the first quarter of fiscal 2000 was
$3,172,000, on net income of $1,008,000, due to increases in accounts receivable
and reductions in accounts payable and accrued expenses. Cash flow used in
investing activities of $417,000 in fiscal 1999 was for fixed asset additions.
Cash flow used in financing activities was $2,847,000 in fiscal 1999 and was
primarily attributable to the repayment of outstanding debt.
In November 1997, the Company entered into a new bank credit agreement (the
"Credit Facility") which provides a $15 million term loan and a $5 million
revolving credit facility. The revolving credit facility was subsequently
increased to $10.0 million in December 1998. The term loan agreement expires
November 13, 2002, while the revolving credit facility expires November 13,
2000. At June 30, 1999, borrowings under the term loan were $12,500,000 and
borrowings under the revolving credit facility were $3,875,000. The Company also
had borrowings at June 30, 1999 under an equipment lease facility of $622,000.
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.
Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to market risk, i.e. the risk of loss arising from
adverse changes in interest rates and foreign currency exchange rates.
7
Year 2000 Compliance
The Company has conducted a review of its information systems to identify those
areas which could be affected by the "Year 2000" issue. Key financial,
informational and operational systems have been inventoried and assessed, and
detailed plans were developed and implemented for the required systems
modifications or replacements. Due to significant expansion experienced by the
Company during the last three years, the Company has created new software or
modified existing software to continue providing superior customer service.
Through that process, the majority of systems used by the Company have become
Year 2000 compliant. Also, as part of the expansion, the Company has upgraded
the information systems' infrastructure, via the procurement of new hardware and
software that are certified by their manufacturers as year 2000 compliant.
Remaining hardware and software that are not compliant is minimal and will be
phased out by September 30, 1999.
The Company estimates that there are no significant costs associated with the
finalization of its Year 2000 compliance plans and believes that any costs
incurred will be internal, non-incremental costs. In addition third party
customers and suppliers are in the process of providing written assurances for
the Company that they expect to be Year 2000 compliant over the next 12 months.
The Company has received assurance from the vast majority of these third parties
that they will be compliant. Management believes that third party non-
compliance will not materially impact the Company's operations.
Note on Forward-Looking Statements
Certain statements in this Form 10-Q 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.
In addition, the Company's discussion above regarding Year 2000 compliance
contains several forward-looking statements, including without limitation, the
Company's expectations as to when the phase out of non-compliant software and
hardware will be completed, its estimates of the costs involved in achieving
year 2000 readiness and its belief that third-party non-compliance would not
materially impact the Company's operations. 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, changes in the general economy such as
inflationary pressure, the availability of Year 2000 compliant replacement
software and hardware as well as qualified personnel and other information
technology resources and the actions of third parties and governmental agencies
with
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respect to Year 2000 issues. 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 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, 1999 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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