UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM 10-K
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x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
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SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2009
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o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
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SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number 0-20540
ON
ASSIGNMENT, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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95-4023433
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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26651
West Agoura Road
Calabasas, California 91302
(Address
of Principal Executive Offices)
Registrant’s
telephone number, including area code: (818)
878-7900
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, $0.01 par value
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The
NASDAQ Stock Market, LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
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 of the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
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Smaller
reporting company
o
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
As of
June 30, 2009, the aggregate market value of our common stock held by
non-affiliates of the registrant was approximately $93,459,068.
As of
March 10, 2010, the registrant had outstanding 36,371,091 shares of Common
Stock, $0.01 par value.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s proxy statement for the 2010 Annual Meeting of Stockholders,
to be filed within 120 days of the close of the registrant’s fiscal year 2009,
are incorporated by reference into Part III of this Annual Report on
Form 10-K.
ON
ASSIGNMENT, INC.
ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
TABLE
OF CONTENTS
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Item 1.
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4
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Item 1A.
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13
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Item 1B.
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20
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Item 2.
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20
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Item 3.
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21
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Item 4.
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Removed
and Reserved
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21
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Item 5.
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22
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Item 6.
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24
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Item 7.
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25
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Item 7A.
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37
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Item 8.
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38
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Item 9.
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68
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Item 9A.
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69
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Item 9B.
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70
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Item 10.
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72
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Item 11.
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72
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Item 12.
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72
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Item 13.
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72
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Item 14.
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72
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Item 15.
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73
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74
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2
SPECIAL
NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K
contains 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. Such statements are based upon current expectations, as
well as management’s beliefs and assumptions, and involve a high degree of risk
and uncertainty. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Statements that
include the words “believes,” “anticipates,” “plans,” “expects,” “intends,” and
similar expressions that convey uncertainty of future events or outcomes are
forward-looking statements. Forward-looking statements include statements
regarding our anticipated financial and operating performance for future
periods. Our actual results could differ materially from those discussed or
suggested in the forward-looking statements herein. Factors that could cause or
contribute to these differences or prove our forward-looking statements, by
hindsight, to be overly optimistic or unachievable include, but are not limited
to actual demand for our services, our ability to attract, train, and retain
qualified staffing consultants (which includes our sales and recruiting staff),
our ability to remain competitive in obtaining and retaining temporary staffing
clients, the availability of qualified temporary nurses and other qualified
contract professionals, our ability to manage our growth efficiently and
effectively, continued performance of our information systems and the factors
described in Item 1A of this Annual Report on Form 10-K under the Section titled
”Risk Factors.” Other factors also may contribute to the differences between our
forward-looking statements and our actual results. In addition, as a result of
these and other factors, our past financial performance should not be relied on
as an indication of future performance. All forward-looking statements in this
document are based on information available to us as of the date we file this
Annual Report on Form 10-K, and we assume no obligation to update any
forward-looking statement or the reasons why our actual results may
differ.
3
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PART
I
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Item
1. Business
Overview
and History
On
Assignment, Inc. is a diversified professional staffing firm providing
flexible and permanent staffing solutions in specialty skills including
Laboratory/Scientific, Healthcare/Nursing, Physician, Medical Financial,
Information Technology and Engineering. We provide clients in these markets with
short-term or long-term assignments of contract
professionals, contract-to-permanent placement and direct placement of
these professionals. As of December 31, 2009, our business consists of four
operating segments: Life Sciences, Healthcare, Physician and IT and
Engineering.
Our Life
Sciences segment includes our domestic and international life science staffing
businesses. Life Sciences segment revenues for 2009 were $93.7 million and
represented 22.5 percent of our total revenues. We provide locally-based
contract life science professionals to clients in the biotechnology,
pharmaceutical, food and beverage, medical device, personal care, chemical,
automotive, educational and environmental industries. Our contract professionals
include chemists, clinical research associates, clinical lab assistants,
engineers, biologists, biochemists, microbiologists, molecular biologists, food
scientists, regulatory affairs specialists, lab assistants and other skilled
scientific professionals.
Our
Healthcare segment includes our Nurse Travel and Allied Healthcare lines of
business. Healthcare segment revenues for 2009 were $97.1 million and
represented 23.3 percent of our total revenues. We offer our healthcare clients
locally-based and traveling contract professionals, from more than ten
healthcare and medical financial and allied occupations. Our contract
professionals include nurses, specialty nurses, health information management
professionals, dialysis technicians, surgical technicians, imaging technicians,
x-ray technicians, medical technologists, phlebotomists, coders, billers, claims
processors and collections staff.
Our
Physician segment consists of VISTA Staffing Solutions, Inc. (VISTA), which we
acquired on January 3, 2007. The Physician segment revenues for 2009 were $87.7
million and represented 21.1 percent of our total revenues. VISTA, based in Salt
Lake City, Utah, is a leading provider of physician staffing, known as locum
tenens, and permanent physician search services. We provide short and long-term
locum tenens services and full-service physician search and consulting services,
primarily in the United States, with some locum tenens placements in Australia
and New Zealand. We work with physicians in a wide range of specialties, placing
them in hospitals, community-based practices and federal, state and local
facilities.
Our IT
and Engineering segment consists of Oxford Global Resources, Inc. (Oxford) which
we acquired on January 31, 2007. IT and Engineering segment revenues
for 2009 were $138.1 million and represented 33.1 percent of our total revenues.
Oxford, based in Beverly, Massachusetts, delivers high-end consultants with
expertise in specialized information technology, hardware and software
engineering and mechanical, electrical, validation and telecommunications
engineering fields. We combine international reach with local depth, serving
clients through a network of Oxford International recruiting centers in the
United States and Europe, and Oxford & Associates branch offices in major
metropolitan markets across the United States.
We were
incorporated on December 30, 1985, and thereafter commenced operation of
our Lab Support line of business (now included in our Life Sciences operating
segment), our first contract staffing line of business. Utilizing our experience
and unique approach in servicing our clients and contract professionals, we
expanded our operations into other industries requiring specialty staffing. In
1994, through our acquisition of 1st
Choice Personnel, Inc. and Sklar Resource Group, Inc., we established
our Healthcare Financial Staffing service line of business (now a part of our
Healthcare operating segment). Originally named Finance Support, this service
line of business changed its name in 1997 and shifted in its business
development focus to medical billing and collections for hospitals, health
management organizations and physician groups. In 1996, we acquired Enviro Staff, and began providing
contract professionals to the environmental services industry. In 1998, we
acquired LabStaffers, Inc. to enhance our Life Sciences business. In 1999,
we expanded our Life Sciences operations into Europe. Also in 1999, we formed
our Clinical Lab Staff service line of business, and in 2001, we formed our
Diagnostic Imaging Staff service line of business. Both of these service lines
of business provide scientific and medical professionals to hospitals,
physicians’ offices, clinics, reference laboratories and HMO’s and are currently
included as a part of our Healthcare segment. In 2002, we acquired Health
Personnel Options Corporation, and established our Nurse Travel line of
business, which provides registered nurses to hospitals and managed healthcare
organizations. In 2003, we expanded the service offerings for our Life Sciences
operating segment to include clinical research and engineering. Our clinical
research line of business provides life science professionals in medical and
clinical trial research, and our engineering line of business provides contract
professionals in manufacturing, packaging, research and development and quality
control positions. In 2004, we expanded our service offerings in our Healthcare
operating segment to include local nursing
and health information management, which provides health information
professionals to healthcare clients to process insurance claims and manage
patient data. On January 3, 2007, we acquired VISTA and established our
Physician operating segment. On January 31, 2007, we acquired Oxford and
established our IT and Engineering operating segment. On October 1, 2009, we
acquired Fox Hill & Associates, a physician permanent placement business
specializing in retained and contingent search, which is included in our
Physician operating segment. The company was founded in 1978 and is
located in Milwaukee, Wisconsin.
4
Financial
information regarding our operating segments and our domestic and international
revenues are included under “Financial Statements and Supplementary Data” in
Part II, Item 8 of this Annual Report.
Our
principal executive office is located at 26651 West Agoura Road, Calabasas,
California 91302, and our telephone number is (818) 878-7900. We have
approximately 73 branch offices in 23 states within the United States and in
five foreign countries.
Industry
and Market Dynamics
General
Though
the most recent U.S. employment figures indicate a significant contraction in
job growth rates, from late 2007 through the present, the U.S. Bureau of Labor
Statistics estimates that total employment will grow by 15.3 million jobs, or 10
percent, between 2008 and 2018. By comparison, there were 10.4 million new jobs
created in the prior ten-year period, between 1998 and 2008. The U.S. Bureau of
Labor Statistics estimates that employment growth will continue to be
concentrated in the service sector with healthcare and social assistance, and
professional and business services providing the strongest employment
growth.
The Staffing Industry Analysts:
Staffing Industry Report (dated January 2010), an independent staffing
industry publication, estimates that total staffing industry revenues were $93
billion in 2009 and will be $97 billion in 2010, down from $127 billion in 2008.
The biggest industry segment, contract labor, is forecasted to grow at an annual
rate of 7 percent in 2010 with revenues of $76 billion in 2010, while permanent
placement is expected to contract by 5 percent in 2010. Within the contract help
segment, professional staffing is expected to grow at an annual rate of 5
percent in 2010 to revenues of $43 billion. While the current economic climate
has affected the staffing industry, we believe healthcare, life sciences and IT
clients will increase their use of outsourced labor through professional
staffing firms. By using outsourced labor, these end users will benefit from
cost structure advantages, improved flexibility to fluctuating demand in
business and access to greater expertise. Typically, life sciences and
healthcare clients’ products directly influence an individual’s health, welfare
and well being, which will also impact our customers’ decision to use our
services.
Life
Sciences
The Staffing Industry Analysts: Staffing
Industry Report (dated January 2010), states that the life sciences
professional staffing market will remain flat in 2010 compared to 2009. Demand
for staffing in our Life Sciences segment is driven primarily by clients with
research and development projects across a wide array of
industries.
Our Life
Sciences segment includes our domestic and international life science staffing
businesses. We provide locally-based, contract life science professionals to
clients in the biotechnology, pharmaceutical, food and beverage, personal care,
chemical, medical device, automotive, municipal, education and environmental
industries. Our Life Sciences segment operates from local branch offices in the
United States, United Kingdom, Netherlands, Belgium and Canada.
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Healthcare
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The Staffing Industry Analysts:
Staffing Industry Report (dated January 2010), estimates that the
healthcare staffing market will contract by 1 percent in 2010. Within the
healthcare staffing industry, allied health and locum tenens remain the areas
that are most resilient to changing economic conditions with estimated 2010
revenue growth of 2 percent and 3 percent, respectively.
In prior
years, nursing employment levels were affected by cutbacks in the use of agency
workers by hospitals and medical groups and their reluctance to pay market
rates. Today, as a result of the economy, hospitals are seeing fewer admissions
and procedures and are attempting to minimize expenses, which in turn have
impacted the demand for our services. Looking forward, contract nursing
employment growth could potentially be driven by various factors including a
supply shortage of nurses, more favorable nurse-patient ratios and an aging
population.
5
The
combination of healthcare clients facing shortages of operations-critical staff
that limit their ability to generate revenues, increased demand for health
services and advances in life
science and medical technology is expected to create significant demand for
workers with specialized science and medical skills. Also influencing the demand
for these workers is the departure of mature professionals from the ranks of
full-time employment as they retire, reduce hours worked and pursue other career
opportunities. This is evidenced by the continued increase in the
average age of nurses in the workforce.
Our
Healthcare segment provides locally-based and traveling contract professionals
to healthcare clients, including hospitals, integrated delivery systems, imaging
centers, clinics, physician offices, reference laboratories, universities,
managed care organizations and third-party administrators.
Physician
The Staffing Industry Analysts: Staffing
Industry Report (dated January 2010), states that the physician staffing
market will increase 3 percent in 2010. This is one of the fastest growing
sectors of the staffing markets. An ongoing shortage of physicians is fueling
this growth.
Our
Physician staffing business places physicians in a wide range of specialties
throughout the United States, as well as Australia and New Zealand, under the
brand VISTA. The physician staffing market requires a high degree of specialized
knowledge about credentialing and qualifications, as well as unique insurance
requirements that make it more difficult to replicate than certain other types
of staffing markets. Our Physician segment operates out of one primary
recruitment center with several branch offices.
IT
and Engineering
The Staffing Industry Analysts:
Staffing Industry Report (dated January 2010), estimates that the IT
staffing market will increase 8 percent in 2010. Demand in our IT and
Engineering business segment is driven by a shortage of highly skilled
professionals with specific expertise.
Our IT
and Engineering segment places only very highly qualified professionals across a
wide range of disciplines. The segment operates out of several large sales and
recruitment centers including one in Cork, Ireland under the brand Oxford
International, and a number of domestic branch offices under the brand Oxford
& Associates. Placements are highly diversified in that we average less than
two contract placements per client. In late 2009, Oxford re-opened a permanent
placement recruitment business.
Sales
and Fulfillment
General
Our
strategy is to serve the needs of our targeted industries by effectively
understanding and matching client staffing needs with qualified contract
professionals. In contrast to the mass market approach generally used for
contract office/clerical and light industrial personnel, we believe effective
assignments of contract healthcare, life science, physician and IT and
engineering professionals require the people involved in making assignments to
have significant knowledge of the client’s industry and the ability to assess
the specific needs of the client as well as the contract professionals’
qualifications. We believe that face-to-face selling in many circumstances is
significantly more effective than the telephonic solicitation of clients, a
tactic favored by many of our competitors. We believe our strategy of using
industry professionals to develop professional relationships provides us with a
competitive advantage in our industry which is recognized by our
clients.
Our
corporate offices are organized to perform many functions that allow staffing
consultants and recruiters to focus more effectively on business development and
the assignment of contract professionals. These functions include the recruiting
and hiring of staffing consultants, recruiters and support staff, as well as
ongoing training, coaching and administrative support. Our corporate offices
also select, open and maintain branch offices.
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Life
Sciences
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We have
developed a tailored approach to the assignment-making process that utilizes
staffing consultants. Unlike traditional approaches that tend to be focused on
telephonic solicitation, our Life Sciences staffing consultants are experienced
professionals who work in our branch office network in the United States, United
Kingdom, Netherlands, Belgium and Canada to enable face-to-face meetings with
clients and contract professionals. At December 31, 2009, we had 40 Life
Sciences segment branch offices. Most of our staffing consultants are either
focused on sales and business development or on fulfillment. Sales and business
development staffing consultants meet with clients’ managers to understand
client needs, formulate position descriptions and assess workplace environments.
Fulfillment staffing consultants meet with candidates to assess their
qualifications and interests and place these contract professionals on quality
assignments with clients.
6
Contract
professionals assigned to clients are generally our employees, although clients
provide on-the-job supervisors for these professionals. Therefore, clients
control and direct the work of contract professionals and approve hours worked,
while we are responsible for many of the activities typically handled by the
client’s human resources department.
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Healthcare
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The
sales, account management, and recruiting functions of our Nurse Travel
business are aligned with traditional nurse travel companies with an added
emphasis on rapid response fulfillment. We employ regional sales directors
and account managers to identify and sell a variety of nurse staffing solutions
to health care clients nationally. Our recruiters seek the most
experienced, highly skilled nurses and place them on assignments as contract
professionals with healthcare providers for periods ranging from four to
twenty-six weeks and longer. We service a diverse collection of healthcare
clients, including acute care hospitals, rehabilitation facilities, long-term
care facilities and integrated delivery systems. We seek to address
occupations that represent “high demand and highly-skilled” staff such as
emergency room, pediatrics, intensive care and operating room nurses, which are
essential to maintaining the hospital’s ability to care for patients and
maintain business and revenues. The critical nature of these occupations to
drive revenue motivates clients to respond to our ability to rapidly fill open
positions with experienced nurses. The recruitment and placement of nurse travel
assignments are primarily managed at our locations in Cincinnati, Ohio, Tupelo,
Mississippi and San Diego, California.
The
nurses we assign to our clients are our employees, although clients provide
on-the-job supervisors for the nurses. Therefore, clients control and direct the
work of nurses and approve hours worked, while we are responsible for many of
the activities typically handled by the client’s human resources
department.
At
December 31, 2009, we had 24 Allied Healthcare branch offices in the United
States, of which 12 share office space with the Life Sciences segment. We have
developed a tailored approach to the assignment-making process that utilizes
staffing consultants. Staffing consultants are experienced professionals who
work in our branch offices and personally meet with clients and contract
professionals. Our staffing consultants are typically either focused primarily
on sales and business development or on fulfillment. Sales and business
development staffing consultants meet with clients to understand their staffing
needs, formulate position descriptions and assess workplace environments.
Fulfillment staffing consultants meet with candidates to assess their
qualifications and interests and place these contract professionals on quality
assignments with clients.
The
contract professionals assigned to our Allied Healthcare clients are usually our
employees, although clients provide on-the-job supervisors for these
professionals. Therefore, clients control and direct the work of contract
professionals and approve hours worked, while we are responsible for many of the
activities typically handled by the client’s human resources
department.
Physician
The sales
and fulfillment functions at our Physician segment are similar to those of our
competitors. Our client sales specialists are organized by geographic
territories so that a single individual can handle a client’s physician staffing
needs for all disciplines. Our recruiters and schedulers are organized by
physician specialty and identify physician candidates with the skills,
experience and availability to meet our clients’ needs. Our Physician business
is headquartered in Salt Lake City, Utah, where the majority of our recruiters
and all back-office functions are located. In addition, we have four branch
locations that also carry out recruiting functions. We supply doctors in a wide
range of specialties throughout the United States, Australia and New Zealand.
Assignments are typically booked up to three months in advance and last six
weeks.
The
physicians we place at clients are independent contractors. Clients assign
shifts and approve hours worked, while we are responsible for issuing payments
to the physicians for services rendered to our clients.
IT
and Engineering
Our IT
and Engineering segment is headquartered outside of Boston, Massachusetts, where
all of the back-office activities are located. The segment operates in two
separate formats. The first operating format consists of 10 sales and recruiting
hubs that manage client orders submitted from anywhere in the country and
fulfill those orders with appropriate candidates identified from a nationwide
database of skilled IT and engineering professionals. The right candidates for
these assignments often reside in locations that are remote from the client
worksite and will travel away from their homes to perform the assignments. The
second operating format consists of 10 branch offices that typically receive
orders from clients
in their local market and fulfill those orders with professionals from the local
market. In each of these formats, we employ both client-oriented sales people
and recruiters. Because our IT and Engineering segment addresses a wide range of
disciplines within the IT and engineering markets, our sales people and
recruiters generally specialize in a given discipline. We have a sales and
recruiting hub in Cork, Ireland to service the European market. Our competitive
advantage in this segment comes from our effort to respond very quickly with
high quality candidates to a client’s request.
7
Contract
professionals assigned to clients are generally our
employees. Clients provide on-the-job supervisors for these
professionals, control and direct their work and approve all hours
worked. We are responsible for many of the activities typically
handled by the client’s human resources department.
Clients
General
During
the year ended December 31, 2009, we provided contract professionals to
approximately 4,864 clients. In 2009, we had no customers that represented 10
percent or more of our revenues.
All
contract assignments, regardless of their planned length, may be terminated with
limited notice by the client or the contract professional.
Life
Sciences
Our
clients in the Life Sciences segment include biotechnology and pharmaceutical
companies, along with a broad range of clients in food and beverage, medical
device, personal care, chemical, material sciences, energy, education and
environmental industries. Our primary contacts with our clients are a mix of end
users and process facilitators. End users consist of lab directors, managers and
department heads. Facilitators consist of human resource managers, procurement
departments and administrators. Facilitators are more price sensitive than end
users who typically are more focused on technical capabilities. Assignments in
our Life Sciences segment typically have a term of three to six
months.
Healthcare
In our
Healthcare segment, we serve a diverse collection of healthcare clients,
including hospitals, integrated delivery systems, imaging centers, clinics,
physician offices, reference laboratories, universities, managed care
organizations and third-party administrators. In doing so, we address
occupations that require “high demand and highly-skilled” staff, such as
operating room nurses and health information professionals who are essential to
the hospital’s ability to care for patients and maintain business and revenues.
Assignments in our Healthcare segment typically have a term of three to thirteen
weeks.
Physician
Clients
in our Physician segment include hospitals, doctors’ practice groups, large
healthcare systems and government agencies. We are called on to supply temporary
and permanent doctors because of the difficulty that healthcare providers have
finding qualified practitioners. Assignments in our Physician segment typically
have a term of six weeks.
IT
and Engineering
In our IT
and Engineering segment, we supply services to a wide range of clients. Our
clients range from very large companies that may, for example, be installing new
enterprise-wide computer systems and have a need for a project manager with a
certain type of experience to a system integrator who is looking for a similar
person. We can also provide contract professionals with a specific type of
embedded software expertise to a smaller company finishing up the development of
a new product. The disciplines in our IT and Engineering segment are quite
varied in the information technology, hardware/software, engineering and telecom
markets. Assignments in our IT and Engineering segment typically have a term of
approximately five months.
The
Contract Professional
General
Contract
professionals often work with a number of staffing companies and develop
relationships or loyalty based on a variety of factors, including competitive
salaries and benefits, availability and diversity of assignments, quality and
duration of assignments and responsiveness to requests for placement. Contract
professionals seeking traveling positions are also interested in the quality of
travel and housing accommodations as well as the quality of the clinical
experience while on assignment.
8
Hourly
wage or contract rates for our contract professionals are established based on
their specific skills and whether or not the assignment involves travel away
from the professional’s primary residence. Our staffing
consultants are our employees or are subcontracted from other affiliated
corporate entities. For our consultant employees we pay the related
costs of employment including social security taxes, federal and state
unemployment taxes, workers’ compensation insurance and other similar costs.
After achieving minimum service periods and hours worked, we also provide our
contract professional employees with paid holidays, and allow participation in
our 401(k) Retirement Savings Plan.
Life
Sciences
Our Life
Sciences segment’s professionals include chemists, clinical research associates,
clinical lab assistants, engineers, biologists, biochemists, microbiologists,
molecular biologists, food scientists, regulatory affairs specialists, lab
assistants and other skilled scientific professionals. These contract
professionals range from individuals with bachelor’s and/or master’s degrees and
considerable experience, to technicians with limited chemistry or biology
backgrounds and lab experience.
Healthcare
Our
Healthcare segment’s contract professionals include nurses, specialty nurses,
health information management professionals, pharmacists, pharmacy technicians,
dentists, respiratory therapists, rehabilitation professionals, surgical
technicians, imaging technicians, medical technologists,
phlebotomists, coders, billers, medical assistants, dental assistants,
hygienists, claims processors and collections staff.
Physician
The
physicians in our Physician segment, come from 33 different specialties
including emergency medicine, psychiatry, anesthesiology, radiology, family
practice, surgical specialties, internal medicine, pediatrics, obstetrics and
gynecology. All of these professionals are independent contractors.
IT
and Engineering
Our IT
and Engineering segment’s professionals come from various information
technology, hardware/software, telecom and engineering disciplines. Typically,
they have a great deal of knowledge and experience in a fairly narrow field
which makes them uniquely qualified to fill a given assignment.
Strategy
We remain
committed to growing our operations in the life science, healthcare, physician
and IT and engineering markets that we currently serve, primarily through
supporting our core service offerings and growing our newer service lines of
business.
In 2009,
we continued to focus on increasing market share in each of our segments,
increasing our gross margins, and controlling our operating costs. We
have increased interaction between our segments so that each can learn best
practices from the others. In the fourth quarter of 2008, we began to
feel the impact of the weakening worldwide economy. Given this change
in market demand, we shifted our focus to the areas that we can control, which
not only includes the management of margins and operating costs, but also the
generation of cash.
In
January 2007, we completed the acquisitions of VISTA and Oxford. Throughout the
balance of 2007, our strategy was in great part focused on assisting the newly
acquired Physician and IT and Engineering segments to continue to perform while
integrating with and operating as a part of On Assignment. In doing this, we
focused on increasing the number of staffing consultants in each segment. We
also focused on diversifying our client mix in the Healthcare segment through
the expansion of our client base. In addition, during 2007, we were successful
maintaining our pricing in all of our segments while controlling operating
costs.
As part
of our initiative to improve our sales capabilities, we completed Phases I, II
and III of the implementation of Vurv Technology (formerly known as RecruitMax),
a front office system, for our domestic Life Sciences and certain Allied
Healthcare service lines of business in 2006 and 2007. Phase IV of the
implementation for our Nurse Travel line of business was completed in the fourth
quarter of 2008. The application interfaces with the existing enterprise-wide
information system, PeopleSoft, used in our Life Sciences, IT and Engineering,
Nurse Travel and Allied Healthcare lines of business and provides additional
functionality, including applicant tracking and search tools, customer and
candidate contact
management and sales management tools. Phase V of the implementation, which will
support our IT and Engineering segment, is expected to be completed within the
next eighteen months. We believe these improvements should continue to increase
the productivity of our staffing consultants and streamline corporate
operations.
9
In 2010,
we anticipate that the markets we serve will improve with the economy. We have
made small investments in enhancing our permanent placement capabilities and we
will continue to invest in our existing businesses to support growth. In
addition, we will continue to review acquisition opportunities that may enable
us to leverage our current infrastructure and capabilities, increase our service
offerings and expand our geographic reach.
Competition
General
Many of
our competitors are larger than us and have substantially greater financial and
marketing resources than we do. We also compete with privately-owned temporary
staffing companies on a regional and local basis. Frequently, the strongest
competition in a particular market is a privately-held local company with
established relationships. These companies oftentimes are extremely competitive
on pricing. While their pricing strategies are not necessarily sustainable, they
can be problematic for us in the short-term.
The
principal competitive factors in attracting qualified candidates for temporary
employment or engagements are salaries, contract rates and benefits,
availability and variety of assignments, quality and duration of assignments and
responsiveness to requests for placement. We believe that many people seeking
temporary employment or engagements through us are also pursuing employment
through other means, including other temporary staffing. Therefore, the speed at
which we place prospective contract professionals and the availability of
appropriate assignments are important factors in our ability to complete
assignments of qualified candidates. In addition to having high quality contract
professionals to assign in a timely manner, the principal competitive factors in
obtaining and retaining clients in the temporary staffing industry are properly
assessing the clients’ specific job requirements, the appropriateness of the
contract professional assigned to the client, the price of services and the
monitoring of client satisfaction. Although we believe we compete favorably with
respect to these factors, we expect competition to continue to
increase.
Life
Sciences
Our Life
Sciences segment competes in the biotechnology, pharmaceutical, food and
beverage, medical device, personal care, chemical, material sciences, energy,
education and environmental markets. We believe our Life Sciences segment is one
of the few nationwide temporary staffing providers specializing exclusively in
the placement of life science professionals. Although other nationwide temporary
staffing companies compete with us with respect to scientific, clinical
laboratory, medical billing and collection personnel, many of these companies
focus on office/clerical and light and heavy industrial personnel, which account
for a significant portion of the overall contract staffing market. These
competitors include Manpower, Inc., Kelly Services, Inc., Adecco SA,
Yoh Company and the Allegis Group.
Healthcare
Our
Healthcare segment competes in the healthcare market, serving hospitals,
integrated delivery systems, imaging centers, clinics, physician offices,
reference laboratories, universities, managed care organizations and third-party
administrators. In the Nurse Travel line of business, our competitors include
AMN Healthcare Services, Inc., Cross Country, Inc. and several
privately-held companies. In the Allied Healthcare line of business, our
competitors include Cross Country, Inc., AMN Healthcare Services, Inc., Kforce
Inc. and the Allegis Group.
Physician
Our
Physician segment also competes in the healthcare market, serving hospitals,
doctors’ practice groups and private healthcare systems and government
administrated healthcare agencies. VISTA’s competitors include CHG Healthcare
Services, TeamHealth, Inc., Cross Country, Inc. and AMN Healthcare
Services, Inc., along with several other privately-held companies providing
locum tenens.
IT
and Engineering
Our IT
and Engineering segment competes in the higher-end of the market for information
technology and engineering consultants. Our IT specialties include
enterprise resource planning, business intelligence, customer relationship
management, supply chain management and database administration. Our
engineering specialties include hardware, software, mechanical, electrical,
validation, network, and telecommunications. Oxford’s competition ranges from
local and regional specialty staffing companies to large IT consulting firms
like Accenture, Inc., International Business Machines Corporation (IBM) and the
Yoh Company, and international staffing firms such as Aerotek and Robert Half
International, Inc.
10
Seasonality
Demand
for our staffing services historically has been lower during the first and
fourth quarters due to fewer business days resulting from client shutdowns,
adverse weather conditions and a decline in the number of contract professionals
willing to work during the holidays. As is common in the staffing
industry, we run special incentive programs to keep our contract professionals,
particularly nurses, working through the holidays. Demand for our staffing
services usually increases in the second and third quarters of the year.
In addition, our cost of services
typically increases in the first quarter primarily due to the reset of payroll
taxes.
Employees
At
December 31, 2009, we employed approximately 932 full-time regular
employees, including staffing consultants, regional sales directors, account
managers, recruiters and corporate office employees. During 2009, we employed
approximately 11,867 contract professionals and 1,016 locum tenens physicians.
Government
Regulation
The
healthcare industry is subject to extensive and complex federal and state laws
and regulations related to professional licensure, certification, conduct of
operations, payment for services, payment for referrals and insurance. Our
operations are subject to additional state and local regulations that require
temporary staffing companies placing healthcare personnel to be licensed or
separately registered to an extent beyond that required by temporary staffing
companies that only place non-healthcare personnel. To date, we have not
experienced any material difficulties in complying with such regulations and
obtaining required licensure.
Some
states require state licensure with associated fees for businesses that employ
and/or assign certain healthcare personnel at hospitals and other healthcare
facilities. We are currently licensed in all the states that require such
licenses. In addition, most of the contract healthcare professionals that we
employ are required to be individually licensed and/or certified under
applicable state laws. We take reasonable steps to ensure that our contract
professionals possess all current licenses and certifications required for each
placement. We provide state mandated workers’ compensation insurance,
unemployment insurance and professional liability insurance for our contract
professionals who are employees and our regular employees. We provide medical
malpractice insurance coverage under VISTA’s group medical malpractice insurance
policy for our locum tenens physicians. These expenses have a direct
effect on our cost of services, margins and likelihood of achieving or
maintaining profitability.
For a
further discussion of government regulation associated with our business, see
“Risk Factors” within Item 1A of Part I of this Annual Report.
Executive
Officers of the Company
The
executive officers of On Assignment, Inc. are as follows:
|
Name
|
Age
|
Position
|
|
Peter
T. Dameris
|
50
|
Chief
Executive Officer and President
|
|
James
L. Brill
|
58
|
Senior
Vice President, Finance and Chief Financial Officer
|
|
Emmett
B. McGrath
|
48
|
President,
Life Sciences and Allied Divisions
|
|
Mark
S. Brouse
|
56
|
President,
VISTA Staffing Solutions, Inc.
|
|
Michael
J. McGowan
|
56
|
President,
Oxford Global Resources, Inc.
|
Peter T. Dameris joined
the Company in November 2003 as Executive Vice President, Chief Operating
Officer and was promoted to President and Chief Executive Officer in
September 2004. He was appointed to the Board of Directors of the Company
in February 2005. From February 2001 through October 2002,
Mr. Dameris served as Executive Vice President and Chief Operating Officer
of Quanta Services, Inc. (NYSE: PWR), a leading provider of specialized
contracting services for the electric and gas utility, cable and
telecommunications industries. From December 1994 through
September 2000, Mr. Dameris served in a number of different positions
at Metamor Worldwide, Inc., an international, publicly-traded IT
consulting/staffing company, including Chairman of the Board, President and
Chief Executive Officer, Executive Vice President, General Counsel, Senior Vice
President and Secretary. In June 2000, Mr. Dameris successfully
negotiated the sale of Metamor for $1.9 billion. From November 2002 to
January 2006, Mr. Dameris was a member of the Board of
Directors of BindView Corporation (acquired by Symatec Corporation in
January 2006). Mr. Dameris is a member of the Board of Directors
of Seismic Micro-Technology. Mr. Dameris holds a Juris Doctorate
from the University of Texas Law School and a Bachelor’s in Business
Administration from Southern Methodist University.
11
James L. Brill joined the
Company in January 2007 as Senior Vice President, Finance and Chief
Financial Officer. Mr. Brill was Vice President, Finance and Chief Financial
Officer of Diagnostic Products Corporation, a manufacturer of immuno-diagnostic
kits, from July 1999 until it was acquired by Siemens in July 2006. From August
1998 to June 1999, Mr. Brill served as Chief Financial Officer of Jafra
Cosmetics International, a marketing and direct-selling company in the skin care
and beauty industry, and as Vice President of Finance and Administration and
Chief Financial Officer of Vertel Corporation, a provider of middleware for the
telecommunications industry, from 1996 to 1998. Mr. Brill also served as Senior
Vice President, Finance and Chief Financial Officer of Merisel, Inc., a computer
hardware and software distributor, from 1988 to 1996. Mr. Brill has been a
member of the Board of Directors of Onvia Inc. since March 2004. He holds a
Bachelor’s of Science degree from the United States Naval Academy and a Master’s
of Business Administration degree from the University of California Los
Angeles.
Emmett B. McGrath joined
the Company in September 2004 as President, Life Sciences U.S., and in
August 2005, Mr. McGrath was appointed as President of Life Sciences
Europe. Mr. McGrath was appointed as President of Allied Healthcare in November
2007. From February 1985 through August 2004, Mr. McGrath worked
at Yoh Company, a privately-held IT staffing firm. During his tenure
at Yoh, Mr. McGrath held various staffing positions, including Technical
Recruiter, Account Manager, Branch and District Management, Vice President and
Regional President. As Regional President, Mr. McGrath was responsible for
core lines of businesses, including Scientific, Information Technology,
Engineering, Healthcare, Telecommunications and Vendor on Premise (VOP)
programs. In addition, Mr. McGrath served on Yoh’s Executive Committee and
the Chairman’s Board of the Day & Zimmermann Group, Yoh’s parent
company. Mr. McGrath received a Bachelor’s of Science degree in Business
Administration, with an emphasis in Human Resources, from California State
University, Northridge in 1991.
Mark S. Brouse is President of
VISTA Staffing Solutions, Inc., On Assignment’s Physician segment. Mr. Brouse
joined On Assignment as a result of On Assignment’s January 2007 acquisition of
VISTA, a company he co-founded in 1990. Mr. Brouse began his career in
pharmaceutical sales in 1980, and in 1986 joined CompHealth, a locum tenens
staffing company, where he led specialty teams serving psychiatry and internal
medicine clients before founding VISTA. Mr. Brouse holds a Bachelor’s of Arts
degree in Chemistry from California State, Dominguez Hills, and is a member of
the Boards of Directors of the YMCA of Greater Salt Lake and PEHR Technologies,
an electronic medical records company.
Michael J. McGowan is
President of Oxford Global Resources, Inc., On Assignment’s IT and Engineering
segment. He has held this position since 1998. He joined Oxford in May of 1997
as Chief Operating Officer. Formerly, Mr. McGowan was Senior Vice President and
General Manager for Kelly Services’ Middle Markets Division, a provider of
staffing solutions. Prior to that time he was Vice President & General
Manager for The MEDSTAT Group, a healthcare information firm, and held
increasingly senior positions for Automatic Data Processing (ADP), a provider of
human resources, payroll and tax and benefits administration solutions, during a
sixteen year tenure. Mr. McGowan holds a Bachelor’s of Science degree in
Electrical Engineering from Michigan State University and a Master’s of Business
Administration degree from the Eli Broad Graduate School of Management, also at
Michigan State University. Mr. McGowan joined On Assignment as a result of the
Company’s acquisition of Oxford in January 2007.
Available
Information and Access to Reports
We
electronically file our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and all amendments to those
reports with the Securities and Exchange Commission (SEC). You may read and copy
any of our reports that are filed with the SEC in the following
manner:
|
·
|
At
the SEC’s Public Reference Room at 100 F Street NE, Washington, DC
20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at
(800) SEC-0330;
|
|
·
|
At
the SEC’s website,
http://www.sec.gov;
|
|
·
|
At
our website,
http://www.onassignment.com;
or
|
|
·
|
By
contacting our Investor Relations Department at (818)
878-7900.
|
Our
reports are available through any of the foregoing means and are available free
of charge on our website as soon as practicable after such material is
electronically filed with or furnished to the SEC. Also available on our website
(http://www.onassignment.com),
free of charge, are copies of our Code of Ethics for the Principle Executive
Officer and Senior Financial Officers, Code of Business Conduct and Ethics and
the charters for the committees of our Board of Directors. We intend to disclose
any amendment to, or waiver from, a provision of our Code of Ethics for
Principal Executive Officer and Senior Financial Officers on our website within
five business days following the date of the amendment or waiver
.
12
Item
1A. Risk Factors
Recent
U.S. economic conditions have been uncertain and challenging, which adversely
affects our business and results of operations.
Global
market and economic conditions have been unprecedented and challenging with
tighter credit conditions and recession in most major economies continuing into
2010. Continued concerns about the systemic impact of potential
long-term and wide-spread recession, energy costs, geopolitical issues, the
availability and cost of credit, and the global housing and mortgage markets
have contributed to market volatility and diminished expectations for western
and emerging economies. In 2009, added concerns fueled by the subprime mortgage
crisis, higher interest rates and inflation, federal government stimulus
spending, continued government conservatorship, government financial assistance
and other federal government interventions lead to
increased market uncertainty and instability in both U.S. and international
capital and credit markets. These conditions, combined with volatile
oil prices, lowered business and consumer confidence and high unemployment, have
contributed to economic slowdown and volatility of unprecedented
levels. Further regulation of the healthcare industry also has a
significant effect on spending in this area.
As a
result of these market conditions, the cost and availability of credit has been
and may continue to be adversely affected by illiquid credit markets and wider
credit spreads. Concern about the stability of the markets generally
and the strength of counterparties specifically has led many lenders and
institutional investors to reduce, and in some cases, cease to provide credit to
businesses and consumers. These factors have lead to a decrease in
spending by businesses and consumers alike, and a corresponding decrease in
demand for business services. Continued turbulence in the U.S. and
international markets and economies and prolonged declines in business consumer
spending may adversely affect our liquidity and financial condition, including
our ability to refinance maturing liabilities and access the capital markets to
meet liquidity needs.
Our
liquidity and our ability to obtain financing may be adversely impacted if any
of the lenders under our credit facilities suffers liquidity
issues. In such an event, we may not be able to draw on all, or a
substantial portion, of our credit facilities.
Temporary
staffing companies are negatively impacted by high unemployment rates which have
accompanied this period of economic turbulence. We experienced, and
may continue to experience, a decline in demand for our staffing services as the
U.S. suffers high levels of unemployment.
The
market condition has also affected the liquidity and financial condition of many
of our clients. The problems our clients are experiencing, including
with regard to their access to financing, liquidity issues, funding issues,
creditworthiness and their budgetary constraints may expose us to risks in
collections of our accounts receivable.
Our
results of operations may vary from quarter to quarter as a result of a number
of factors, which may make it difficult to evaluate our business and could cause
instability in the trading price of our common stock.
Factors
that may cause our quarterly results to fluctuate include:
|
·
|
the
level of demand for our temporary staffing services and the efficiency
with which we source and assign our contract professionals and support our
staffing consultants in the execution of their
duties;
|
|
·
|
changes
in our pricing policies or those of our competitors;
and
|
|
·
|
our
ability to control costs and manage our accounts receivable
balances.
|
In
addition, most temporary staffing companies experience seasonal declines in
demand during the first and fourth quarters as a result of fewer business days
and the reduced number of contract professionals willing to work during the
holidays. Historically, we have experienced variability in the duration and
depth of these seasonal declines, which in turn have materially affected our
quarterly results of operations and made period-to-period comparisons of our
financial and operating performance difficult.
If our
operating results are below the expectations of public market analysts or
investors in a given quarter, the trading price of our common stock could
decline.
Failure
to comply with restrictive covenants under our debt instruments could trigger
prepayment obligations or additional costs.
13
Failure
of internal controls may leave us susceptible to errors and fraud.
Our
management, including our CEO and CFO, does not expect that our disclosure
controls and internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable
assurance that the objectives of the control system are
met. Furthermore, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, would be detected.
Significant
legal actions could subject us to substantial uninsured
liabilities.
In recent
years, we have been subject to an increasing number of legal actions alleging
malpractice, vicarious liability, intentional torts, negligent hiring,
discrimination or related legal theories. We may be subject to liability in such
cases even if the contribution to the alleged injury was minimal. Many of these
actions involve large claims and significant defense costs. In addition, we may
be subject to claims related to torts or crimes committed by our corporate
employees or contract professionals. In most instances, we are required to
indemnify clients against some or all of these risks. A failure of any of our
corporate employees or contract professionals to observe our policies and
guidelines intended to reduce these risks; relevant client policies and
guidelines or applicable federal, state or local laws, rules and regulations
could result in negative publicity, payment of fines or other
damages.
To
protect ourselves from the cost of these types of claims, we maintain workers’
compensation and professional malpractice liability insurance and general
liability insurance coverage in amounts and with deductibles that we believe are
appropriate for our operations. Our coverage is, in part, self-insured and our
insurance coverage may not cover all claims against us or continue to be
available to us at a reasonable cost. If we are unable to maintain adequate
insurance coverage, we may be exposed to substantial liabilities.
If
we are unable to attract and retain qualified contract professionals for our
Life Sciences, Healthcare, Physician and IT and Engineering segments, our
business could be negatively impacted.
Our
business is substantially dependent upon our ability to attract and retain
contract professionals who possess the skills, experience and, as required,
licenses to meet the specified requirements of our clients. We compete for such
contract professionals with other temporary staffing companies and with our
clients and potential clients. There can be no assurance that qualified
healthcare, nursing, life sciences, physician, IT and engineering professionals
will be available to us in adequate numbers to staff our operating segments.
Moreover, our contract professionals are often hired to become regular employees
of our clients. Attracting and retaining contract professionals depends on
several factors, including our ability to provide contract professionals with
desirable assignments and competitive benefits and wages. The cost of attracting
and retaining contract professionals may be higher than we anticipate and, as a
result, if we are unable to pass these costs on to our clients, our likelihood
of achieving or maintaining profitability could decline. In periods of high
unemployment, contract professionals frequently opt for full-time employment
directly with clients and, due to a large pool of available candidates, clients
are able to directly hire and recruit qualified candidates without the
involvement of staffing agencies. If we are unable to attract and
retain a sufficient number of contract professionals to meet client demand, we
may be required to forgo staffing and revenue opportunities, which may hurt the
growth of our business.
We
may not successfully make or integrate acquisitions, which could harm our
business and growth.
As part
of our growth strategy, we intend to opportunistically pursue selected
acquisitions. We compete with other companies in the professional staffing and
consulting industries for acquisition opportunities, and we cannot assure you
that we will be able to effect future acquisitions on commercially reasonable
terms or at all. To the extent we enter into acquisition transactions in the
future, we may experience:
|
·
|
delays
in realizing or a failure to realize the benefits, cost savings and
synergies that we anticipate;
|
|
·
|
difficulties
or higher-than-anticipated costs associated with integrating any acquired
companies into our businesses;
|
|
·
|
attrition
of key personnel from acquired
businesses;
|
|
·
|
diversion
of management’s attention from other business
concerns;
|
|
·
|
inability
to maintain the business relationships and reputation of the acquired
companies;
|
14
|
·
|
difficulties
in integrating the acquired companies into our information systems,
controls, policies and procedures;
|
|
·
|
additional
risks relating to the businesses or industry of the acquired companies
that are different from ours;
|
|
·
|
unexpected
costs or charges; and
|
|
·
|
unforeseen
operating difficulties that require significant financial and managerial
resources that would otherwise be available for the ongoing development or
expansion of our existing
operations.
|
To
undertake more transactions, we may incur additional debt in the future. We may
face unexpected contingent liabilities arising from these or future acquisitions
that could harm our business. We may also issue additional equity in connection
with future transactions, which would dilute our existing
shareholders.
If
we cannot attract, develop and retain qualified and skilled sales and recruiting
staff, our business growth will suffer.
A key
component of our ability to grow our lines of business is our ability to
attract, develop and retain qualified and skilled sales and recruiting staff,
particularly persons with industry experience. The available pool of qualified
staffing consultant candidates is limited, and further constrained by the
industry practice of entering into non-compete agreements with these employees,
which may restrict their ability to accept employment with other staffing firms,
including us. We cannot assure that we will be able to recruit, develop and
retain qualified sales and recruiting staff in sufficient numbers or that our
staffing consultants will achieve productivity levels sufficient to enable
growth of our business. Failure to attract and retain productive sales and
recruiting staff could adversely affect our business, financial condition and
results of operations.
Reclassification
of our independent contractors by tax authorities could materially and adversely
affect our business model and could require us to pay significant retroactive
wages, taxes and penalties.
We
consider our locum tenens physicians to be independent contractors rather than
employees. As such, we do not withhold or pay income or other employment related
taxes or provide workers’ compensation insurance for them. Our classification of
locum tenens physicians as independent contractors is consistent with general
industry standard, but can nonetheless be challenged by the contractors
themselves as well as the relevant taxing authorities. If federal or state
taxing authorities determine that locums tenens physicians engaged as
independent contractors are employees, our business model for that segment would
be materially and adversely affected. Although we believe we would qualify for
safe harbor under the provisions of Section 530 of the Revenue Act of 1978, Pub.
L. No. 95−600 (“Section 530”), and any similar applicable state laws, we could
incur significant liability for past wages, taxes, penalties and other
employment benefits if we could not so qualify. In addition, many states have
laws that prohibit non−physician owned companies from employing physicians. If
our independent contractor physicians are classified as employees, we could be
found in violation of such state laws, which could subject us to liability in
those states and thereby negatively impact on our profitability.
If
our information systems do not function in a cost effective manner, our business
will be harmed.
The
operation of our business is dependent on the proper functioning of our
information systems. In 2009, we continued to upgrade our information technology
systems, including our PeopleSoft and Vurv Technology enterprise-wide
information systems used in daily operations to identify and match staffing
resources and client assignments, track regulatory credentialing, manage
scheduling and also perform billing and accounts receivable functions. If the
systems fail to perform reliably or otherwise do not meet our expectations, or
if we fail to successfully complete the implementation of other modules of the
systems, we could experience business interruptions that could result in
deferred or lost sales. Our information systems are vulnerable to fire, storm,
flood, power loss, telecommunications failures, physical or software break-ins
and similar events. Our network infrastructure is currently located at our
facility in Salt Lake City, Utah. As a result, any system failure or service
outage at this primary facility could result in a loss of service for the
duration of the failure of the outage. Our location in Southern California is
susceptible to earthquakes and has, in the past, experienced power shortages and
outages, any of which could result in system failures or outages. If our
information systems fail or are otherwise unavailable, these functions would
have to be accomplished manually, which could impact our ability to respond to
business opportunities quickly, to pay our staff in a timely fashion and to bill
for services efficiently.
If
we are not able to remain competitive in obtaining and retaining temporary
staffing clients, our future growth will suffer.
15
The
contract staffing industry is highly competitive and fragmented with limited
barriers to entry. We compete in national, regional and local markets with
full-service agencies and in regional and local markets with specialized
contract staffing agencies. Some of our competitors in the Nurse Travel line of
business include AMN Healthcare Services, Inc., Cross
Country, Inc. and several privately-held companies. Some of our competitors
in the Life Sciences segment and Allied Healthcare line of business include
Kelly Services, Inc., Kforce Inc., Manpower, Inc., Adecco, SA, Yoh
Company, and Allegis Group. Competitors for the Physician segment include CHG
Healthcare Services, Cross Country, TeamHealth, Inc. and AMN Healthcare
Services, Inc., along with several other privately-held companies specializing
in locum tenens services. Competitors of our IT and Engineering segment include
Robert Half International, Accenture, Yoh Company and Aerotek. Several of these
companies have significantly greater marketing and financial resources than we
do. Our ability to attract and retain clients is based on the value of the
service we deliver, which in turn depends principally on the speed with which we
fill assignments and the appropriateness of the match based on clients’
requirements and the skills and experience of our contract professionals. Our
ability to attract and retain skilled, experienced contract professionals is
based on our ability to pay competitive wages or contract rates, to provide
competitive benefits and provide multiple, continuous assignments. To the extent
that competitors seek to gain or retain market share by reducing prices or
increasing marketing expenditures, we could lose revenues and our gross and
operating margins could decline, which could seriously harm our operating
results and cause the trading price of our stock to decline. As we expand into
new geographic markets, our success will depend in part on our ability to gain
market share from competitors. We expect competition for clients to increase in
the future, and the success and growth of our business depend on our ability to
remain competitive.
Agreements
may be terminated by clients and contract professionals at will and the
termination of a significant number of such agreements would adversely affect
our revenues and results of operations.
Each
contract professional’s employment or independent contractor’s relationship with
us is terminable at will. A locum tenens physician may generally terminate his
or her contract with VISTA for non-emergency reasons upon 60 days notice. The
duration of agreements with clients are generally dictated by the contract.
Usually, contracts with clients may be terminated with 30 days notice by us or
by the clients and, oftentimes, assignments may be terminated with less than one
week’s notice. We cannot assure that existing clients will continue to use our
services at historical levels, if at all. In addition, we
continue to participate in an increasing number of third party contracts as a
subcontractor and that require us to participate in vendor management contracts,
which may subject us to a greater risks or lower margins. If clients
terminate a significant number of our staffing agreements or assignments and we
are unable to generate new contract staffing orders to replace lost revenues or
a significant number of our contract professionals terminate their employment
with us and we are unable to find suitable replacements, our revenues and
results of operations could be harmed.
We
are subject to business risks associated with international operations, which
could make our international operations significantly more costly.
As of
December 31, 2009, we had international sales in the United Kingdom,
Netherlands, Belgium, Canada, Ireland, Virgin Islands, New Zealand and
Australia. Our international operations comprised approximately 5% of total
sales for each of the three years ended December 31, 2009. We have limited
experience in marketing, selling and, particularly, supporting our services
outside of North America.
Operations
in certain markets are subject to risks inherent in international business
activities, including:
|
·
|
fluctuations
in currency exchange rates;
|
|
·
|
complicated
work permit requirements;
|
|
·
|
varying
economic and political conditions;
|
|
·
|
seasonal
reductions in business activity during the summer months in Europe and
Asia;
|
|
·
|
overlapping
or differing tax structures;
|
|
·
|
difficulties
collecting accounts receivable; and
|
|
·
|
regulations
concerning pay rates, benefits, vacation, union membership, redundancy
payments and the termination of
employment.
|
Our
inability to effectively manage our international operations could result in
increased costs and adversely affect our results of operations.
Improper
activities of our contract professionals could result in damage to our business
reputation, discontinuation of our client relationships and exposure to
liability.
We may be
subject to possible claims by our clients related to errors and omissions,
misuse of proprietary information, discrimination and harassment, theft and
other criminal activity, malpractice and other claims stemming from the improper
activities or alleged activities of our contract professionals. We cannot assure
that our current liability insurance coverage will be adequate or will continue
to be available in sufficient amounts to cover damages or other costs associated
with such claims. Claims raised by clients stemming from the improper actions of
our contract professionals, even if without merit, could cause us to incur
significant expense associated with the costs or damages related to such claims.
Further, such claims by clients could damage our business reputation and result
in the discontinuation of client relationships.
16
Claims
against us by our contract professionals for damages resulting from the
negligence or mistreatment by our clients could result in significant costs and
adversely affect our recruitment and retention efforts.
We may be
subject to possible claims by our contract professionals alleging
discrimination, sexual harassment, negligence and other similar activities. Our
physicians, nurses and healthcare professionals may also be subject to medical
malpractice claims. We cannot assure that our current liability insurance
coverage will be adequate or will continue to be available in sufficient amounts
to cover damages or other costs associated with such claims. Claims raised by
our contract professionals, even if without merit, could cause us to incur
significant expense associated with the costs or damages related to such claims.
Further, any associated negative publicity could adversely affect our ability to
attract and retain qualified contract professionals in the future.
If
we are required to further write down goodwill or identifiable intangible
assets, the related charge could materially impact our reported net income or
loss for the period in which it occurs.
We have
approximately $202.8 million in goodwill on our balance sheet at
December 31, 2009, as well as $25.5 million in identifiable intangible
assets. As part of the analysis of goodwill impairment, Accounting Standards
Codification Topic 350, Intangibles - Goodwill and Other, requires
the Company’s management to estimate the fair value of the reporting units on at
least an annual basis and more frequently if events or changes in circumstances
indicate that the carrying amount may not be recoverable. At December 31,
2009, we performed our annual goodwill and indefinite lived intangible assets
impairment test and concluded that there was no further impairment of goodwill
and intangible assets. In addition, at December 31, 2009, we determined that
there were no events or changes in circumstances that indicated that the
carrying values of other identifiable intangible assets subject to amortization
may not be recoverable. While we believe that our goodwill was not impaired at
December 31, 2009, our market capitalization experienced significant declines
during 2009. Declines in our market capitalization or any other
impairment indicators subsequent to the balance sheet date could be an early
indication that goodwill may become impaired in the future. Although
a future impairment of goodwill and identifiable intangible assets would not
affect our cash flow, it would negatively impact our operating
results.
If
we are subject to material uninsured liabilities under our partially
self-insured workers’ compensation program and medical malpractice coverage, our
financial results could be adversely affected.
We
maintain a partially self-insured workers’ compensation program and medical
malpractice coverage. In connection with these programs, we pay a base premium
plus actual losses incurred up to certain levels. We are insured for losses
greater than certain levels, both per occurrence and in the aggregate. There can
be no assurance that our loss reserves and insurance coverage will be adequate
in amount to cover all workers’ compensation or medical malpractice claims. If
we become subject to substantial uninsured workers’ compensation or medical
malpractice liabilities or there is a significant change in the circumstances
related to claims, our results of operations and financial condition could be
adversely affected.
Our
costs of providing travel and housing for traveling contract professionals may
be higher than we anticipate and, as a result, our margins could
decline.
If our
travel and housing costs, including the costs of airline tickets, rental cars,
apartments and rental furniture for our traveling contract professionals exceed
the levels we anticipate, and we are unable to pass such increases on to our
clients, our margins may decline. To the extent the length of our apartment
leases exceed the terms of our staffing contracts, we bear the risk that we will
be obligated to pay rent for housing we do not use. If we cannot source a
sufficient number of appropriate short-term leases in regional markets, or if,
for any reason, we are unable to efficiently utilize the apartments we do lease,
we may be required to pay rent for unutilized or underutilized
housing. Effective management of travel costs will be necessary to
prevent a decrease in gross profit and gross and operating margins.
Demand
for our services is significantly impacted by changes in the general level of
economic activity and continued periods of reduced economic activity could
negatively impact our business and results of operations.
Demand
for the contract staffing services that we provide is significantly impacted by
changes in the general level of economic activity, particularly any negative
effect on healthcare, research and development and quality control and capital
spending. As economic activity slows, many clients or potential clients for our
services reduce their usage of and reliance upon contract professionals before
laying off their regular, full-time employees. During periods of reduced
economic activity, we may also be subject to increased competition for market
share and pricing pressure. As a result, continued periods of reduced economic
activity could harm our business and results of operations.
We
do not have long-term or exclusive agreements with our temporary staffing
clients and growth of our business depends upon our ability to continually
secure and fill new orders.
17
We do not
have long-term agreements or exclusive guaranteed order contracts with our
temporary staffing clients. Assignments for our Life Sciences segment typically
have a term of three to six months. Assignments for our Healthcare segment
typically have a term of two to thirteen weeks. Assignments for our Physician
segment typically have a term of six weeks. Assignments for our IT and
Engineering segment typically have a term of approximately five months. The
success of our business depends upon our ability to continually secure new
orders from clients and to fill those orders with our contract professionals.
Our agreements do not provide for exclusive use of our services, and clients are
free to place orders with our competitors. As a result, it is imperative to our
business that we maintain positive relationships with our clients. If we fail to
maintain positive relationships with these clients, we may be unable to generate
new contract staffing orders, and the growth of our business could be adversely
affected.
Fluctuation
in patient occupancy rates at client facilities could adversely affect demand
for services of our Healthcare and Physician segments and our results of
operations.
Client
demand for our Healthcare and Physician segment services is significantly
impacted by changes in patient occupancy rates at our hospital and healthcare
clients’ facilities. Increases in occupancy often result in increased client
need for contract professionals before full-time employees can be hired. During
periods of decreased occupancy, however, hospitals and other healthcare
facilities typically reduce their use of contract professionals before laying
off their regular, full-time employees. During periods of decreased occupancy,
we may experience increased competition to service clients, including pricing
pressure. Occupancy at certain healthcare clients’ facilities also fluctuates
due to the seasonality of some elective procedures and patients declining
elective procedures. Periods of decreased occupancy at client healthcare
facilities could materially adversely affect our results of
operations.
The
loss of key members of our senior management team could adversely affect the
execution of our business strategy and our financial results.
We
believe that the successful execution of our business strategy and our ability
to build upon the significant recent investments in our business and
acquisitions of new businesses depends on the continued employment of key
members of our senior management team. If any members of our senior management
team become unable or unwilling to continue in their present positions, our
financial results and our business could be materially adversely
affected.
Future
changes in reimbursement trends could hamper our Healthcare and Physician
segments clients’ ability to pay us, which would harm our financial
results.
Many of
our Healthcare and Physician segments’ clients are reimbursed under the federal
Medicare program and state Medicaid programs for the services they provide. In
recent years, federal and state governments have made significant changes in
these programs that have reduced reimbursement rates. In addition, insurance
companies and managed care organizations seek to control costs by requiring that
healthcare providers, such as hospitals, discount their services in exchange for
exclusive or preferred participation in their benefit plans. Future federal and
state legislation or evolving commercial reimbursement trends may further
reduce, or change conditions for, our clients’ reimbursement. Limitations on
reimbursement could reduce our clients’ cash flows, thereby hampering their
ability to pay us.
If
our insurance costs increase significantly, these incremental costs could
negatively affect our financial results.
The costs
related to obtaining and maintaining workers’ compensation insurance, medical
malpractice insurance, professional and general liability insurance and health
insurance for our contract professionals have been increasing. If the cost of
carrying this insurance continues to increase significantly, this may reduce our
gross and operating margins and affect our financial results.
Healthcare
reform could negatively impact our business opportunities, revenues and gross
and operating margins.
The U.S.
government has undertaken efforts to reform the healthcare system through
legislation and regulation. Healthcare reform proposals are generally
intended to expand healthcare coverage for the uninsured and reduce the growth
of total healthcare expenditures. While the U.S. Congress has not adopted any
comprehensive reform proposals, Congress continues to consider such proposals.
If any of these proposals are approved, hospitals and other healthcare
facilities may react by spending less on healthcare staffing, including nurses
and physicians. If this were to occur, we would have fewer business
opportunities, which could seriously harm our business. In addition,
healthcare reform proposals, if approved, may require employers to provide
healthcare insurance coverage to its employees. If we are required to
provide healthcare insurance coverage to our contract employees, we may not be
able to increase client bill rates to cover the additional expense and this may
reduce our gross and operating margins and affect our financial
results.
18
Furthermore,
third-party payers, such as health maintenance organizations, increasingly
challenge the prices charged for medical care. Failure by hospitals and other
healthcare facilities to obtain full reimbursement from those third-party payers
could reduce the demand or the price paid for our staffing
services.
We
operate in a regulated industry and changes in regulations or violations of
regulations may result in increased costs or sanctions that could reduce our
revenues and profitability.
Our
organization is subject to extensive and complex federal and state laws and
regulations including but not limited to laws and regulations related to
professional licensure, payroll tax, conduct of operations, payment for services
and payment for referrals. If we fail to comply with the laws and regulations
that are directly applicable to our business, we could suffer civil and/or
criminal penalties or be subject to injunctions or cease and desist
orders.
Extensive
and complex laws that apply to our hospital and healthcare facility clients,
including laws related to Medicare, Medicaid and other federal and state
healthcare programs, could indirectly affect the demand or the prices paid for
our services. For example, our hospital and healthcare facility clients could
suffer civil and/or criminal penalties and/or be excluded from participating in
Medicare, Medicaid and other healthcare programs if they fail to comply with the
laws and regulations applicable to their businesses. In addition, our hospital
and healthcare facility clients could receive reduced reimbursements or be
excluded from coverage because of a change in the rates or conditions set by
federal or state governments. In turn, violations of or changes to these laws
and regulations that adversely affect our hospital and healthcare facility
clients could also adversely affect the prices that these clients are willing or
able to pay for our services.
We
may be subject to increases in payroll-related costs and state unemployment
insurance taxes which, as a result, our margins could decline.
We currently pay federal, state and
local payroll costs and taxes for our corporate employees and contract
professional employees. If we are subject to significant increases in
costs associated with payroll and state unemployment taxes, we may not be able
to increase client bill rates to cover the additional expense and this may
reduce our gross and operating margins and affect our financial
results.
The
trading price of our common stock has experienced significant fluctuations,
which could make it difficult for us to access the public markets for financing
or use our common stock as consideration in a strategic
transaction.
In 2009,
the trading price of our common stock experienced significant fluctuations, from
a high of $7.52 to a low of $1.28. The closing price of our common stock on The
NASDAQ Global Select Market was $7.06 on March 10, 2010. Our common stock may
continue to fluctuate widely as a result of a large number of factors, many of
which are beyond our control, including:
|
·
|
period
to period fluctuations in our financial results or those of our
competitors;
|
|
·
|
failure
to meet previously announced guidance or analysts’ expectations of our
quarterly results;
|
|
·
|
announcements
by us or our competitors of acquisitions, significant contracts,
commercial relationships or capital
commitments;
|
|
·
|
commencement
of, or involvement in, litigation;
|
|
·
|
any
major change in our board or
management;
|
|
·
|
changes
in government regulations, including those related to Medicare and
Medicaid reimbursement policies;
|
|
·
|
recommendations
by securities analysts or changes in earnings
estimates;
|
|
·
|
announcements
about our earnings that are not in line with analyst
expectations;
|
|
·
|
the
volume of shares of common stock available for public
sale;
|
|
·
|
announcements
by our competitors of their earnings that are not in line with analyst
expectations;
|
|
·
|
sales
of stock by us or by our
shareholders;
|
|
·
|
short
sales, hedging and other derivative transactions in shares of our common
stock; and
|
|
·
|
general economic
conditions, slow or negative growth of unrelated markets and other
external factors.
|
The stock
market has experienced extreme price and volume fluctuations that have affected
the trading prices of the common stock of many companies involved in the
temporary staffing industry. As a result of these fluctuations, we may encounter
difficulty should we determine to access the public markets for financing or use
our common stock as consideration in a strategic transaction.
19
We cannot
predict what effect, if any, future sales of our common stock, or the
availability of our common stock for sale will have on the market price of our
common stock. Sales of substantial amounts of our common stock in the public
market by management or us, or the perception that such sales could occur, could
adversely affect the market price of our common stock and may make it more
difficult for you to sell your common stock at a time and price which you may
deem appropriate.
We
have adopted anti-takeover measures that could prevent a change in our
control.
In June
2003, we adopted a shareholder rights plan that has certain anti-takeover
effects and will cause substantial dilution to a person or group that attempts
to acquire us in a manner or on terms that have not been approved by our board
of directors. This plan could delay or impede the removal of incumbent directors
and could make more difficult a merger, tender offer or proxy contest involving
us, even if such events could be beneficial, in the short-term, to the interests
of our shareholders. In addition, such provisions could limit the price that
some investors might be wiling to pay in the future for shares of our common
stock. Our certificate of incorporation and bylaws contain provisions that limit
liability and provide for indemnification of our directors and officers, and
provide that our stockholders can take action only at a duly called meeting of
stockholders. These provisions and others also may have the affect of deterring
hostile takeovers or delaying changes in control or management.
Provisions
in our corporate documents and Delaware law may delay or prevent a change in
control that our stockholders consider favorable.
Provisions
in our certificate of incorporation and bylaws could have the effect of delaying
or preventing a change of control or changes in our management. These provisions
include the following:
|
·
|
Our
board of directors has the right to elect directors to fill a vacancy
created by the expansion of the board of directors or the resignation,
death or removal of a director, which prevents stockholders from being
able to fill vacancies on our board of
directors.
|
|
·
|
Our
stockholders may not act by written consent. In addition, a holder or
holders controlling a majority of our capital stock would not be able to
take certain actions without holding a stockholder’s meeting, and only
stockholders owning at least 50 percent of our entire voting stock must
request in writing in order to call a special meeting of stockholders
(which is in addition to the authority held by our board of directors to
call a special stockholder
meeting).
|
|
·
|
Stockholders
must provide advance notice to nominate individuals for election to the
board of directors or to propose matters that can be acted upon at a
stockholders’ meeting. These provisions may discourage or deter a
potential acquirer from conducting a solicitation of proxies to elect the
acquirer’s own slate of directors or otherwise attempting to obtain
control of our company.
|
|
·
|
Our
board of directors may issue, without stockholder approval, up to 1
million shares of undesignated or “blank check” preferred stock. The
ability to issue undesignated or “blank check” preferred stock makes it
possible for our board of directors to issue preferred stock with voting
or other rights or preferences that could impede the success of any
attempt or make it more difficult for a third party to acquire
us.
|
As a Delaware
corporation, we are also subject to certain Delaware anti-takeover provisions,
including Section 203 of the Delaware General Corporation Law. Under these
provisions, a corporation may not engage in a business combination with any
large stockholders who hold 15 percent or more of our outstanding voting capital
stock in a merger or business combination unless the holder has held the stock
for 3 years, the board of directors has expressly approved the merger or
business transaction or at least two-thirds of the outstanding voting capital
stock not owned by such large stockholder approve the merger or the transaction.
These provisions of Delaware law may have the effect of delaying, deferring or
preventing a change of control, and may discourage bids for our common stock at
a premium over its market price. In addition, our board of directors could rely
on these provisions of Delaware law to discourage, prevent or delay an
acquisition of us.
Item
1B. Unresolved Staff Comments
Item
2. Properties
As of
December 31, 2009, we leased approximately 30,500 square feet of office space
through March 2011 for our field support and corporate headquarters in
Calabasas, California. Additionally, we leased 16,600 square feet of
office space for our field support offices in Blue Ash, Ohio. As of
December 31, 2009, we leased approximately 56,000 square feet of
office space through December 2016 at our VISTA headquarters in Salt Lake City,
Utah, and 48,300 square feet of office space through December 2015 at our Oxford
headquarters in Beverly, Massachusetts.
20
In
addition, we lease approximately 369,000 square feet of office space in
approximately 73 branch office locations in the United States, United Kingdom,
Netherlands, Belgium, Ireland and Canada. A branch office typically occupies
space ranging from approximately 1,000 to 3,000 square feet with lease terms
that typically range from six months to five years.
Item
3. Legal Proceedings
We are involved in
various legal proceedings, claims and litigation arising in the ordinary course
of business. However, based on the facts currently available, we do not believe
that the disposition of matters that are pending or asserted will have a
material adverse effect on our financial position, results of
operations or cash flows.
Item
4. Removed and Reserved
21
Item
5. Market for Registrant’s Common Equity and Related Stockholder
Matters
Our
common stock trades on The NASDAQ Global Select Market under the symbol ASGN.
The following table sets forth the range of high and low sales prices as
reported on The NASDAQ Global Select Market for each quarterly period within the
two most recent fiscal years. At March 10, 2010, we had approximately 41
holders of record, approximately 3,400 beneficial owners of our common stock and
36,371,091 shares outstanding.
|
Price
Range of
Common
Stock
|
|||||||
|
High
|
Low
|
||||||
|
Year
Ended December 31, 2009
|
|||||||
|
First
Quarter
|
$ | 5.79 | $ | 1.28 | |||
|
Second
Quarter
|
$ | 4.41 | $ | 2.40 | |||
|
Third
Quarter
|
$ | 6.29 | $ | 3.53 | |||
|
Fourth
Quarter
|
$ | 7.52 | $ | 5.15 | |||
|
Year
Ended December 31, 2008
|
|||||||
|
First
Quarter
|
$ | 6.98 | $ | 4.32 | |||
|
Second
Quarter
|
$ | 8.82 | $ | 6.26 | |||
|
Third
Quarter
|
$ | 9.70 | $ | 7.26 | |||
|
Fourth
Quarter
|
$ | 7.92 | $ | 4.05 | |||
Since
inception, we have not declared or paid any cash dividends on our common stock,
and we currently plan to retain all earnings to support the development and
expansion of our business and we have no present intention of paying any
dividends on our common stock in the foreseeable future. However, the board of
directors periodically reviews our dividend policy to determine whether the
declaration of dividends is appropriate. Terms of our senior credit facility
restrict our ability to pay dividends of more than $2.0 million per
year.
On
June 15, 2001, the Company’s Board of Directors authorized the repurchase
of up to 2,940,939 shares of common stock. As of December 31, 2003, the
Company had repurchased 2,662,500 shares of its common stock at a total cost of
$23.0 million. The Company did not repurchase any shares during 2004, 2005 and
2006. In 2007, the Company repurchased the remaining
278,439 shares of its common stock for $2.0 million. At December 31, 2009,
the Company has no remaining authorization to repurchase shares. Effective
December 31, 2009, the Company retired all of its treasury stock.
Stock
Performance Graph
The
following graph compares the performance of On Assignment’s common stock price
during the period from December 31, 2004 to December 31, 2009 with the composite
prices of companies listed on the NASDAQ Stock Market and of companies included
in the SIC Code No. 736—Personnel Supply Services Companies Index. The companies
listed in the SIC Code No. 736 include peer companies in the same industry or
line of business as On Assignment.
The graph
depicts the results of investing $100 in On Assignment’s common stock, the
NASDAQ Stock Market composite index and an index of the companies listed in the
SIC Code No. 736 on December 31, 2004 and assumes that dividends were reinvested
during the period.
The
comparisons shown in the graph below are based upon historical data, and we
caution stockholders that the stock price performance shown in the graph below
is not indicative of, nor intended to forecast, potential future
performance.
22
|
Year
Ended December 31,
|
|||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||
|
On
Assignment, Inc.
|
$ | 137.76 | $ | 109.25 | $ | 135.07 | $ | 226.40 | $ | 210.21 | $ | 100.00 | |||||||||||
|
SIC
Code No. 736 Index—Personnel Supply Services Company Index
|
$ | 90.49 | $ | 62.89 | $ | 96.37 | $ | 130.20 | $ | 103.47 | $ | 100.00 | |||||||||||
|
NASDAQ
Stock Market Index
|
$ | 108.56 | $ | 74.71 | $ | 124.57 | $ | 112.68 | $ | 102.20 | $ | 100.00 | |||||||||||
23
Item
6. Selected Financial Data
The
following table presents selected financial data of On Assignment. This selected
financial data should be read in conjunction with the consolidated financial
statements and notes thereto included under “Financial Statements and
Supplementary Data” in Part II, Item 8 of this report.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007(1)
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Revenues
|
$ | 416,613 | $ | 618,058 | $ | 567,180 | $ | 287,566 | $ | 237,856 | ||||||||||
|
Cost
of services
|
280,245 | 418,602 | 387,643 | 209,725 | 174,627 | |||||||||||||||
|
Gross
profit
|
136,368 | 199,456 | 179,537 | 77,841 | 63,229 | |||||||||||||||
|
Selling,
general and administrative expenses
|
121,141 | 155,942 | 151,942 | 67,900 | 64,135 | |||||||||||||||
|
Operating
income (loss)
|
15,227 | 43,514 | 27,595 | 9,941 | (906 | ) | ||||||||||||||
|
Interest
expense
|
(6,612 | ) | (9,998 | ) | (12,174 | ) | (54 | ) | — | |||||||||||
|
Interest
income
|
170 | 715 | 1,394 | 1,698 | 681 | |||||||||||||||
|
Income
(loss) before income taxes
|
8,785 | 34,231 | 16,815 | 11,585 | (225 | ) | ||||||||||||||
|
Provision
(benefit) for income taxes
|
4,078 | 15,261 | 7,493 | 541 | (2) | (129 | ) | |||||||||||||
|
Net
income (loss)
|
$ | 4,707 | $ | 18,970 | $ | 9,322 | $ | 11,044 | $ | (96 | ) | |||||||||
|
Earnings
(loss) per share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.13 | $ | 0.53 | $ | 0.27 | $ | 0.41 | $ | (0.00 | ) | |||||||||
|
Diluted
|
$ | 0.13 | $ | 0.53 | $ | 0.26 | $ | 0.39 | $ | (0.00 | ) | |||||||||
|
Number
of shares and share equivalents used to calculate earnings (loss) per
share:
|
||||||||||||||||||||
|
Basic
|
36,011 | 35,487 | 35,138 | 27,155 | 25,464 | |||||||||||||||
|
Diluted
|
36,335 | 35,858 | 35,771 | 28,052 | 25,464 | |||||||||||||||
|
Balance
Sheet Data (at end of period):
|
||||||||||||||||||||
|
Cash,
cash equivalents, restricted cash and current portion of marketable
securities
|
$ | 25,974 | $ | 46,271 | $ | 37,764 | $ | 110,161 | $ | 25,365 | ||||||||||
|
Working
capital
|
62,238 | 91,192 | 79,009 | 135,501 | 47,629 | |||||||||||||||
|
Total
assets
|
343,462 | 401,850 | 384,680 | 186,995 | 93,705 | |||||||||||||||
|
Long-term
liabilities
|
84,847 | 129,805 | 140,803 | 627 | 70 | |||||||||||||||
|
Stockholders’
equity
|
226,661 | 218,514 | 193,034 | 165,944 | 76,637 | |||||||||||||||
(1) On
January 3, 2007, we acquired VISTA Staffing Solutions, Inc., and on January 31,
2007, we acquired Oxford Global Resources, Inc.
(2) In
2006, there was a reversal of the valuation allowance of $4.9 million that was
recorded against our net deferred income tax assets in 2004 and
2005.
24
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
This
discussion contains 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. Such statements are based
upon current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, the words “believes,” “anticipates,”
“plans,” “expects,” “intends” and similar expressions that convey uncertainty of
future events or outcomes are forward-looking statements. Forward-looking
statements include statements regarding our anticipated financial and operating
performance for future periods. Our actual results could differ materially from
those discussed or suggested in the forward-looking statements herein. Factors
that could cause or contribute to such differences or prove our forward-looking
statements, by hindsight, to be overly optimistic or unachievable include, but
are not limited to, the following:
|
·
|
actual
demand for our services;
|
|
·
|
our
ability to attract, train, and retain qualified staffing
consultants;
|
|
·
|
our
ability to remain competitive in obtaining and retaining temporary
staffing clients;
|
|
·
|
the
availability of qualified temporary nurses and other qualified contract
professionals;
|
|
·
|
our
ability to manage our growth efficiently and effectively;
and
|
|
·
|
continued
performance of our information
systems.
|
For a
discussion of these and other factors that may impact our realization of our
forward-looking statements, see “Risk Factors” within Item 1A of Part I of
this Annual Report on Form 10-K. Other factors may also contribute to the
differences between our forward-looking statements and our actual results. In
addition, as a result of these and other factors, our past financial performance
should not be relied on as an indication of future performance. All
forward-looking statements in this document are based on information available
to us as of the date we file this Annual Report on Form 10-K, and we assume no
obligation to update any forward-looking statement or the reasons why our actual
results may differ.
Overview
On
Assignment, Inc. is a diversified professional staffing firm providing flexible
and permanent staffing solutions in specialty skills including
Laboratory/Scientific, Healthcare/Nursing, Physicians, Medical Financial,
Information Technology and Engineering. We provide clients in these markets with
short-term or long-term assignments of contract professionals,
contract-to-permanent placement and direct placement of these professionals. Our
business currently consists of four operating segments: Life Sciences,
Healthcare, Physician, and IT and Engineering.
Economic
conditions in 2009 were challenging with tight credit markets, volatile
financial markets, low consumer confidence and high unemployment
rates.
Our
consolidated revenues and gross profit decreased in 2009 compared to 2008 as
demand for temporary staffing services weakened as a result of the economic
environment. Despite the decrease in revenues, we remained
disciplined in maintaining margins and positioning our Company for future growth
and profitability. In 2009, we generated higher operating cash flows
than in 2008 and decreased our long-term debt.
Many
strategic factors helped sustain our business during 2009, including our
business model that includes professional diversification, expanded product
lines and a commitment to excellent service to better serve our end
markets. Our four operating segments, Life Sciences, Healthcare,
Physician and IT and Engineering segments provide a mutually supportive
infrastructure where we share best practices and maximize cross selling
opportunities.
We are
confident that as conditions in the U.S. and global economy improve in 2010, we
will be in a position of great opportunity as companies with a need to create
new jobs, yet with uncertainty about sustainable growth, will turn to
professional staffing firms for their contract needs.
25
Results
of Operations
The
following table summarizes selected income statement data expressed as a
percentage of revenues:
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of services
|
67.3 | 67.7 | 68.3 | |||||||||
|
Gross
profit
|
32.7 | 32.3 | 31.7 | |||||||||
|
Selling,
general and administrative expenses
|
29.1 | 25.2 | 26.8 | |||||||||
|
Operating
income
|
3.6 | 7.1 | 4.9 | |||||||||
|
Interest
income
|
0.0 | 0.1 | 0.2 | |||||||||
|
Interest
expense
|
(1.5 | ) | (1.6 | ) | (2.1 | ) | ||||||
|
Income
before income taxes
|
2.1 | 5.6 | 3.0 | |||||||||
|
Provision
for income taxes
|
1.0 | 2.5 | 1.4 | |||||||||
|
Net
income
|
1.1 | % | 3.1 | % | 1.6 | % | ||||||
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2009
COMPARED
WITH THE YEAR ENDED DECEMBER 31, 2008
Revenues.
|
Year
Ended December 31,
|
Change
|
|||||||||||||||
|
2009
|
2008
|
$ | % | |||||||||||||
|
Revenues
by segment (in thousands):
|
||||||||||||||||
|
Life
Sciences
|
$ | 93,664 | $ | 129,483 | $ | (35,819 | ) | (27.7 | %) | |||||||
|
Healthcare
|
97,137 | 180,671 | (83,534 | ) | (46.2 | %) | ||||||||||
|
Physician
|
87,719 | 89,217 | (1,498 | ) | (1.7 | %) | ||||||||||
|
IT
and Engineering
|
138,093 | 218,687 | (80,594 | ) | (36.9 | %) | ||||||||||
|
Total
Revenues
|
$ | 416,613 | $ | 618,058 | $ | (201,445 | ) | (32.6 | %) | |||||||
Revenues
decreased $201.4 million, or 32.6 percent, as a result of weakened demand for
our services in all segments.
Life
Sciences segment revenues decreased $35.8 million, or 27.7 percent. The decrease
in revenues was primarily attributable to a 24.8 percent decrease in the average
number of contract professionals on assignment, as well as a $3.4 million, or
54.8 percent decrease in direct hire and conversion fees. Based on our research
and client feedback, we believe this was a direct result of our clients’
decisions to focus more on cost containment than on completing projects and
developing new products or enhancing existing product lines during this
challenging economic period, decreased venture capital funding in the life
sciences sector, softness in the clinical trials arena, which is closely tied to
the struggling pharmaceutical industry, decreased demand for recent graduates
and lower level scientific skill disciplines.
Healthcare
segment revenues (comprised of our Nurse Travel and Allied Healthcare lines of
business) decreased $83.5 million, or 46.2 percent. Nurse Travel revenues
decreased $69.4 million, or 55.5 percent, to $55.6 million primarily as a result
of a 51.1 percent decrease in the average number of nurses on assignment and a
3.4 percent decrease in the average bill rate. Allied Healthcare revenues
decreased $14.1 million, or 25.3 percent, to $41.5 million due to a 21.1 percent
decrease in the average number of contract professionals on assignment,
partially offset by a 6.5 percent increase in the average bill rate. Based on
our research and client feedback, we believe the decrease in revenues was
attributable to less demand from hospitals and other healthcare facilities as
they reduced their usage of contract professionals in response to declining
patient admissions, endowment balances, reduced charitable contributions and the
inability to access the credit markets during this challenging economic
period.
Physician
segment revenues decreased $1.5 million, or 1.7 percent. The decrease in revenue
was primarily attributable to a 13.2 percent decrease in the average number of
physicians on assignment and a $0.9 million decrease in reimbursable revenue for
billable expenses, partially offset by a 2.3 percent increase in the average
bill rate. Based on industry research and client feedback, we believe
the decrease in revenues reflects the uncertainty surrounding health care reform
and the decline in patient admissions which has slowed down our clients’ hiring
decisions.
26
IT and
Engineering segment revenues decreased $80.6 million, or 36.9
percent. The decrease in revenues was primarily due to a 31.8 percent
decrease in the average number of contract professionals on assignment, an 8.8
percent decrease in the average bill rate and a $3.7 million decrease in
reimbursable revenue for billable expenses. Based on client feedback,
the decrease in revenues was mainly the result of the current economic
environment and the lack of capital available to clients for projects and
programs.
Gross
Profit and Gross Margins.
|
Year
Ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Gross
Profit
|
Gross
Margin
|
Gross
Profit
|
Gross
Margin
|
|||||||||||||
|
|
||||||||||||||||
|
Gross
Profit by segment (in thousands):
|
||||||||||||||||
|
Life
Sciences
|
$ | 30,470 | 32.5 | % | $ | 43,502 | 33.6 | % | ||||||||
|
Healthcare
|
27,329 | 28.1 | % | 46,265 | 25.6 | % | ||||||||||
|
Physician
|
28,545 | 32.5 | % | 27,369 | 30.7 | % | ||||||||||
|
IT
and Engineering
|
50,024 | 36.2 | % | 82,320 | 37.6 | % | ||||||||||
|
Total
Gross Profit
|
$ | 136,368 | 32.7 | % | $ | 199,456 | 32.3 | % | ||||||||
The
year-over-year gross profit decrease was primarily due to the decline in
revenues in all four segments, partially offset by a 46 basis point expansion in
consolidated gross margin. The increase in gross margin was primarily
attributable to margin expansion in the Healthcare and Physician segments and a
shift in mix from our Nurse Travel line of business which has the lowest gross
margin.
Life
Sciences segment gross profit decreased $13.0 million, or 30.0 percent. The
decrease in gross profit was primarily due to a 27.7 percent decrease in the
segment revenues and a 107 basis point contraction in gross margin mainly due to
a $3.4 million decrease in direct hire and conversion fee revenues. The
contraction in gross margin was partially offset by a $0.5 million decrease in
workers’ compensation expense as a result of both lower claim frequency and
favorable settlements.
Healthcare
segment gross profit decreased $18.9 million, or 40.9 percent. The decrease in
gross profit was due to a 46.2 percent decrease in the segment revenues,
partially offset by a 252 basis point expansion in gross margin. The expansion
in gross margin was primarily due to a 117 basis point decrease in travel
related expenses, an 88 basis point reduction in other employee-related expenses
and a 38 basis point decrease in workers’ compensation expense as a result of
our loss control efforts. The expansion in gross margin was partially offset by
an 8.5 percent decrease in the bill/pay spread. Within this segment Allied
Healthcare gross profit decreased 22.4 percent while gross margin expanded 123
basis points and Nurse Travel gross profit decreased 52.4 percent while gross
margin increased 160 basis points.
Physician
segment gross profit increased $1.2 million, or 4.3 percent. The increase in
gross profit was attributable to a 186 basis point expansion in gross margin,
partially offset by a $1.5 million decrease in revenue. The expansion in gross
margin was primarily due to a 6.9 percent increase in the bill/pay spread as
well as a 0.9 million increase in direct hire and conversion fee revenues. The
expansion in gross margin was partially offset by an increase of $0.5 million in
medical malpractice expense, which included a $0.6 million non-cash expense
related to the Company’s adjustment of the discount rate applied to our medical
malpractice liability because of the decrease in interest rates.
IT and
Engineering segment gross profit decreased $32.3 million, or 39.2 percent,
primarily due to a 36.9 percent decrease in revenues and a contraction in gross
margin of 142 basis points. The contraction in gross margin was
primarily due to an 11.3 percent decrease in the bill/pay spread and a $1.0
million decrease in direct hire and conversion fee revenues.
Selling, General
and Administrative Expenses. Selling, general and
administrative (SG&A) expenses include field operating expenses, such as
costs associated with our network of staffing consultants and branch offices for
each of our four segments, including staffing consultant compensation, rent,
other office expenses, marketing and recruiting expenses for our contract
professionals. SG&A expenses also include our corporate and branch office
support expenses, such as the salaries of corporate operations and support
personnel, recruiting and training expenses for field staff, marketing staff
expenses, expenses related to being a publicly-traded company and other general
and administrative expenses.
27
Interest expense
and interest income. Interest expense was $6.6 million in 2009
compared with $10.0 million in 2008. This decrease was primarily due
to a $1.3 million gain in 2009 compared with a $0.1 million loss in 2008 for the
mark-to-market adjustment on our interest rate swap, which expired on June 30,
2009 and lower average debt balances, partially offset by higher interest rates
as a result of the debt amendment completed in the first quarter of
2009.
Interest
income was $0.2 million and $0.7 million for the years ended 2009 and 2008,
respectively. Interest income in the current period decreased compared to 2008
due to lower account balances invested in interest-bearing accounts and lower
average interest rates.
Provision for
Income Taxes. The provision for income taxes was $4.1 million for the
year ended December 31, 2009 compared with $15.3 million for 2008. The annual
effective tax rate for 2009 was 46.4 percent compared with 44.6 percent
for 2008. The increase in the annual effective tax rate was attributable to
a decline in the income before income taxes for the year while our level of
permanent differences was comparable with 2008.
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2008
COMPARED
WITH THE YEAR ENDED DECEMBER 31, 2007
Revenues.
|
Year
Ended December 31,
|
Change
|
|||||||||||||||
|
2008
|
2007
|
$ | % | |||||||||||||
|
Revenues
by segment (in thousands):
|
||||||||||||||||
|
Life
Sciences
|
$ | 129,483 | $ | 134,622 | $ | (5,139 | ) | (3.8 | %) | |||||||
|
Healthcare
|
180,671 | 175,079 | 5,592 | 3.2 | % | |||||||||||
|
Physician
|
89,217 | 74,599 | 14,618 | 19.6 | % | |||||||||||
|
IT
and Engineering
|
218,687 | 182,880 | 35,807 | 19.6 | % | |||||||||||
|
Total
Revenues
|
$ | 618,058 | $ | 567,180 | $ | 50,878 | 9.0 | % | ||||||||
Revenues
increased $50.9 million, or 9.0 percent as a result of growth in our Healthcare,
Physician, IT and Engineering segments. The growth was due to both demand in our
end markets, as well as an expanded and more experienced sales and fulfillment
team. In
the latter half of 2007, we made management changes and realigned certain
geographic markets in our Healthcare segment in order to generate higher revenue
growth. The 2008 period included twelve months of activity from the IT and
Engineering segment, as opposed to only eleven months in the 2007
period.
Life
Sciences segment revenues decreased $5.1 million, or 3.8 percent. The decrease
in revenues was primarily attributable to a 9.8 percent decrease in the average
number of contract professionals on assignment, a $0.6 million, or 28.3 percent,
decrease in conversion fee revenues and the deteriorating foreign exchange rate
for the British Pound and the Euro combined with a deepening recession in the
United Kingdom and the United States. These decreases were partially
offset by a 5.4 percent increase in the average bill rate and a $0.2 million
increase in permanent placement fees. The year-over-year decrease in revenues
was a direct result of our clients’ decisions to focus more on cost containment
than on completing projects, developing new products or enhancing existing
product lines during this challenging economic period.
The
overall increase in Healthcare segment revenues, which include our Nurse Travel
and Allied Healthcare lines of business, consisted of an increase in both the
Nurse Travel and Allied Healthcare lines of business revenues. Nurse Travel
revenues increased $5.3 million, or 4.4 percent, to $125.1 million. The increase
in revenues was primarily attributable to a 4.0 percent increase in the average
number of nurses on assignment, as well as a 2.9 percent increase in the average
bill rate. The Nurse Travel revenues in 2008 also included $2.4 million related
to supporting a long standing customer that experienced a labor disruption. The Nurse
Travel results include a decrease in revenues derived from hospitals that
experienced labor disruptions, which for the year ended December 31, 2007 were
$2.8 million. Allied Healthcare revenues increased $0.3 million, or
0.6 percent due to a 4.8 percent increase in the average bill rate and an
increase in billable expenses, partially offset by a 6.7 percent decrease in the
average number of contract professionals on assignment. In addition, direct hire
revenues in the Allied Healthcare line of business decreased $0.2 million, or
13.5 percent.
28
Physician
segment revenues increased $14.6 million, or 19.6 percent. The increase in
revenues in 2008 was primarily due to an 11.2 percent increase in the average
number of contract professionals on assignment as well as a 7.3 percent increase
in the average bill rate as a result of a strong demand environment as a result
of a shortage of physicians.
The IT
and Engineering segment revenues increased $35.8 million, or 19.6 percent. The
increase in revenue was primarily due to a 7.3 percent increase in the average
number of contract professionals on assignment, a 3.5 percent increase in the
average bill rate as well as an increase in conversion and direct hire fee
revenue and billable expenses. In addition, revenues for 2007 only included
eleven months of results because the Company completed its acquisition of Oxford
on January 31, 2007.
Gross
Profit and Gross Margins.
|
Year
Ended December 31,
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Gross
Profit
|
Gross
Margin
|
Gross
Profit
|
Gross
Margin
|
|||||||||||||
|
|
||||||||||||||||
|
Gross
Profit by segment (in thousands):
|
||||||||||||||||
|
Life
Sciences
|
$ | 43,502 | 33.6 | % | $ | 45,024 | 33.4 | % | ||||||||
|
Healthcare
|
46,265 | 25.6 | % | 44,269 | 25.3 | % | ||||||||||
|
Physician
|
27,369 | 30.7 | % | 21,808 | 29.2 | % | ||||||||||
|
IT
and Engineering
|
82,320 | 37.6 | % | 68,436 | 37.4 | % | ||||||||||
|
Total
Gross Profit
|
$ | 199,456 | 32.3 | % | $ | 179,537 | 31.7 | % | ||||||||
The
year-over-year gross profit increase was due to growth in revenues in the IT and
Engineering, Physician and Healthcare segments and a 62 basis point expansion in
consolidated gross margin. The expansion in gross margin was primarily
attributable to increases in margins in the Physician and Healthcare segments
and to a higher proportion of revenues from the IT and Engineering segment,
which has higher gross margins than the other segments. The 2008
period included twelve months of reportable activity from the IT and Engineering
segment as compared with only eleven months in the 2007 period.
Life
Sciences segment gross profit decreased $1.5 million, or 3.4 percent. The
decrease in gross profit was primarily due to a 3.8 percent decrease in the
segment revenues partially offset by an increase of 16 basis points in gross
margin. The increase in gross margin was predominantly due to a 7.1 percent
increase in bill/pay spread as a result of our continued focus on pricing
policies and increased direct hire revenues.
Healthcare
segment gross profit increased $2.0 million, or 4.5 percent. The increase in
gross profit was due to a 3.2 percent increase in the segment revenues and an
increase in gross margin. Gross margin for the segment increased 32 basis points
due to an increase in the bill/pay spread, partially offset by an increase in
other contract employee expenses. This segment includes gross profit from the
Nurse Travel and Allied Healthcare lines of business. Allied Healthcare gross
profit increased 0.7 percent and gross margin increased 2 basis points while
Nurse Travel gross profit increased 7.0 percent and gross margin increased 57
basis points. Gross margins in the first quarter of a year tend to be lower than
the fourth quarter of the preceding year due to the reset of certain payroll
taxes.
Physician
segment gross profit increased $5.6 million, or 25.5 percent. The increase in
gross profit was primarily attributable to a 19.6 percent increase in revenues
as well as an increase in gross margin. Gross margin for the segment increased
145 basis points primarily due to an increase in bill/pay spread, partially
offset by increased medical malpractice expense. The segment began adjusting
bill rates simultaneously with adjustments in the pay rates when possible which
positively impacted the bill/pay spread in 2008.
IT and
Engineering segment gross profit increased $13.9 million, or 20.3 percent,
primarily due to a 19.6 percent increase in revenues, as the 2008 period
included twelve months of reportable activity versus eleven months in 2007, as
well as an increase in gross margin for the segment. Gross margin for the
segment increased 22 basis points, primarily due to an increase in bill/pay
spread and a $0.8 million, or 83.7 percent increase in conversion fee revenue,
partially offset by a $3.2 million, or 31.0 percent increase in other contract
employment expenses.
29
Selling, General
and Administrative Expenses. SG&A expenses include field
operating expenses, such as costs associated with our network of staffing
consultants and branch offices for our Life Sciences segment and our Allied
Healthcare lines of business, including staffing consultant compensation, rent
and other office expenses, as well as marketing and recruiting for our contract
professionals. Nurse Travel SG&A expenses include compensation for regional
sales directors, account managers and recruiters, as well as rent and other
office
expenses and marketing for traveling nurses. SG&A expenses from our
Physician and IT and Engineering segments include compensation for sales
personnel, as well as rent and other office expenses and marketing for these
segments. SG&A expenses also include our corporate and branch office support
expenses, such as the salaries of corporate operations and support personnel,
recruiting and training expenses for field staff, marketing staff expenses,
rent, expenses related to being a publicly-traded company and other general and
administrative expenses.
SG&A
expenses increased $4.0 million, or 2.6 percent, to $155.9 million from $151.9
million. The increase in SG&A was primarily due to a $10.2 million increase
in compensation and benefits as a result of increased revenues, and SG&A
expenses of the IT and Engineering segment being included for twelve months in
2008 compared to only eleven months in 2007. The increase
in SG&A expense was partially offset by a $7.0 million decrease in
depreciation and amortization expenses, primarily related to a reduction of the
amortization amount for other intangibles in 2008. Total SG&A as a
percentage of revenues decreased to 25.2 percent in the 2008 period from 26.8
percent in the 2007 period, primarily due to decreased depreciation and
amortization expense.
Interest expense
and interest income. Interest expense was $10.0 million and
$12.2 million for the years ended December 31, 2008 and 2007, respectively. The decrease
in interest expense was primarily due to lower average debt balances in 2008 due
to $9.7 million principal payments in 2007, and a decrease in average interest
rates during 2008. On December 31, 2008 and 2007, the value of our interest rate
swap was marked-to-market, and we recorded a loss of $0.1 million and $1.2
million, respectively, for the years then ended, which is shown in interest
expense, and the related liability of $1.3 million and $1.2 million,
respectively, was included in the Consolidated Balance Sheets in
other current liabilities.
Interest
income was $0.7 million and $1.4 million for the years ended December 31, 2008
and 2007, respectively. Interest income in the current period was also lower due
to lower average interest rates in 2008.
Provision for
Income Taxes. The provision for income taxes was $15.3 million for the
year ended December 31, 2008 compared to $7.5 million for the same period in the
prior year. The annual effective tax rate was 44.6 percent for 2008 and
2007.
Liquidity
and Capital Resources
Our
working capital at December 31, 2009 was $62.2 million and our cash and cash
equivalents were $26.0 million. Our operating cash flows have been our primary
source of liquidity and historically have been sufficient to fund our working
capital and capital expenditure needs. Our working capital requirements consist
primarily of the financing of accounts receivable, payroll expenses and the
periodic payments of principal and interest on our term loan.
Net cash
provided by operating activities was $42.0 million for 2009 compared with $35.4
million for 2008. This increase was due to cash
generated from the reduction in net operating assets and liabilities during
2009, mainly from lower accounts receivable. The decrease in accounts
receivable reflects the decline in revenues during the year and improved days
sales outstanding.
Net cash
used in investing activities was $13.8 million during 2009 compared
with $17.7 million during 2008, primarily due to lower capital
expenditures. Net cash from investing activities included proceeds of
$0.5 million from insurance settlements in the third quarter of 2009. Capital
expenditures related to information technology projects, leasehold improvements
and various property and equipment purchases during 2009 totaled $4.7 million,
compared with $8.2 million during 2008. We estimate capital expenditures to be
approximately $4.8 million for 2010.
Net cash
used in financing activities was $49.0 million for 2009, compared with net cash
used in financing activities of $8.4 million for 2008. During 2009,
we paid down our term loan facility by $48.0 million compared with $10.0 million
paid down during 2008.
Under
terms of our credit facility, we are required to maintain certain financial
covenants, including a minimum total leverage ratio, a minimum interest coverage
ratio and a limitation on capital expenditures. The facility also restricts our
ability to pay dividends of more than $2.0 million per year. On March 27, 2009,
we entered into an amendment to our credit facility that modified certain
financial covenants. Under the terms of the amended facility, the
maximum total leverage ratio (total debt to EBITDA, as defined by the credit
agreement for the preceding 12 months) is as follows:
|
January
1, 2009 – December 31, 2009
|
3.25
to 1.00
|
|
January
1, 2010 – September 30, 2010
|
3.00
to 1.00
|
|
October 1, 2010 – December 31, 2011
|
2.75
to 1.00
|
|
January 1, 2012 and thereafter
|
2.50 to 1.00
|
30
Additionally,
the minimum interest coverage ratio (EBITDA to interest expense, as defined by
the credit agreement for the preceding 12 months) is 4.00 to 1.00 until
maturity. The amendment also modified the definition of the LIBOR
rate to include a 3.0 percent floor and increased the spread on revolving and
term loans by 150 basis points to 3.75 percent. As a condition to the
effectiveness of the amendment, we paid down the principal balance on the term
loan by $15.0 million. In 2009, we paid down an additional $33.0
million on the principal balance of our term loan. The payments were
sufficient to cover the excess cash flow payment required by the bank, as well
as all minimum quarterly payments until maturity on January 31,
2013. Based on our current operating plan, we believe we will
maintain compliance with the covenants contained in our credit facility for the
next 12 months.
The VISTA
earn-out related to the 2008 operating performance of VISTA was paid in April
2009. We notified the selling shareholders of VISTA of certain claims
for indemnification, totaling $1.4 million, which was recorded as a decrease to
goodwill and an increase in other current assets as of December 31,
2008. We anticipate that the remaining balance of $0.5 million of the
indemnification payments will be settled by the agreement of all applicable
parties to the terms and provisions related to such payment in 2010. In October
2009, we paid $4.8 million of the earn-out related to the 2008 operating
performance of Oxford. The Company has no additional earn-out payment
obligations.
We
continue to make progress on enhancements to our front-office and back-office
information systems. These enhancements include the consolidation of
back-office systems across all corporate functions, as well as enhancements to
and broader application of our front-office software across all lines of
business. The timing of the full integration of information systems used by
VISTA and Oxford will remain a consideration of management.
We
believe that our working capital as of December 31, 2009, our credit facility
and positive operating cash flows expected from future activities will be
sufficient to fund future requirements of our debt obligations, accounts payable
and related payroll expenses as well as capital expenditure initiatives for the
next twelve months.
Commitments
and Contingencies
We lease
space for our corporate and branch offices. Rent expense was $8.2 million in
2009, $9.5 million in 2008 and $8.8 million in 2007.
The following
table sets forth, on an aggregate basis, at December 31, 2009, the amounts
of specified contractual cash obligations required to be paid in the periods
shown (in thousands):
|
Contractual Obligations
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||
|
Long-term
debt obligations
|
$ | ― | $ | ― | $ | ― | $ | 77,913 | $ | ― | $ | ― | $ | 77,913 | |||||||||||||
|
Operating
lease obligations
|
6,196 | 3,939 | 2,492 | 1,936 | 1,733 | 2,317 | 18,613 | ||||||||||||||||||||
|
Total
|
$ | 6,196 | $ | 3,939 | $ | 2,492 | $ | 79,849 | $ | 1,733 | $ | 2,317 | $ | 96,526 | |||||||||||||
For
additional information about these contractual cash obligations, see Note 7
to our Consolidated Financial Statements appearing in Part II, Item 8 of
this report. Interest payments related to our bank debt are not set forth in the
table above.
As of
December 31, 2009, included in other current assets is a balance of $0.5 million
for claims indemnifiable by the selling shareholders of VISTA, which we
anticipate will be settled by the agreement of all applicable parties to the
terms and provisions related to such payment in 2010. See Note 3 to our
Consolidated Financial Statements appearing in Part II, Item 8 of this
report.
We are partially
self-insured for our workers' compensation liability related to the Life
Sciences, Healthcare and IT and Engineering segments as well as its medical
malpractice liability in relation to the Physician segment. In connection with
this program, we pay a base premium plus actual losses incurred up to certain
levels and are insured for losses greater than certain levels per occurrence and
in the aggregate. The self-insurance claim liability is determined based on
claims filed and claims incurred but not yet reported. We account for claims
incurred but not yet reported based on estimates derived from historical claims
experience and current trends of industry data. Changes in estimates,
differences in estimates and actual payments for claims are recognized in the
period that the estimates changed or payments were made. The self-insurance
claim liability was approximately $10.3 million and $9.8 million at
December 31, 2009 and 2008, respectively. Additionally, we
have letters of credit outstanding to secure obligations
for workers’ compensation claims with various insurance
carriers. The letters of credit outstanding at December 31, 2009 and
2008 were $3.8 million and $3.5 million, respectively.
As
of December 31, 2009 and 2008, we have an income tax reserve in other
long-term liabilities related to our uncertain tax positions of $0.3
million.
31
We are
involved in various other legal proceedings, claims and litigation arising in
the ordinary course of business. However, based on the facts currently
available, we do not believe that the disposition of matters that are pending or
asserted will have a material adverse effect on our consolidated financial
statements.
Off-Balance
Sheet Arrangements
As of
December 31, 2009, the Company had no significant off-balance sheet
arrangements other than operating leases and letters of credit
outstanding.
Accounting
Standards Updates
The Company
adopted the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) in the quarter ended September 30, 2009. The ASC does not
alter current accounting principles generally accepted in the Unites States of
America (GAAP), but rather integrated existing accounting standards with other
authoritative guidance. The ASC provides a single source of authoritative GAAP
for nongovernmental entities and supersedes all other previously issued non-SEC
accounting and reporting guidance. The adoption of the ASC did not have any
effect on the Company’s consolidated financial statements.
In
January 2010, the FASB issued an update to ASC Topic 820, Fair Value Measurements and
Disclosures (ASC 820), which requires new disclosures for fair value
measurements and provides clarification for existing disclosures requirements.
More specifically, this update will require (a) an entity to disclose separately
the amounts of significant transfers in and out of Levels 1 and 2 fair value
measurements and to describe the reasons for the transfers; and (b) information
about purchases, sales, issuances and settlements to be presented separately
(i.e. present the activity on a gross basis rather than net) in the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3 inputs). This guidance clarifies existing disclosure requirements for
the level of disaggregation used for classes of assets and liabilities measured
at fair value and requires disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value
measurements using Level 2 and Level 3 inputs. The new disclosures and
clarifications of existing disclosure are effective for fiscal years beginning
after December 15, 2009, except for the disclosure requirements related to the
purchases, sales, issuances and settlements in the rollforward activity of Level
3 fair value measurements, which are effective for fiscal years ending after
December 31, 2010. The Company is in the process of evaluating the impact of
this guidance on the Company’s consolidated financial statements, which will be
effective in the quarter ended March 31, 2010.
In
September 2009, the FASB issued an update to ASC Topic 605, Revenue Recognition, which
establishes the criteria for separating consideration in multiple-element
arrangements. The updated guidance requires companies allocating the
overall consideration to each deliverable to use an estimated selling price of
individual deliverables in the arrangement in the absence of vendor-specific
evidence or other third-party evidence of the selling price for the deliverables
and it also provides additional factors that should be considered when
determining whether software in a tangible product is essential to its
functionality. The Company is in the process of evaluating the impact of this
guidance on the Company’s consolidated financial statements, which will be
effective January 1, 2011.
In August
2009, the FASB issued an update to ASC 820 on measuring
liabilities at fair value. The guidance provides clarification that in
circumstances in which a quoted market price in an active market for an
identical liability is not available, an entity is required to measure fair
value using a valuation technique that uses the quoted price of an identical
liability when traded as an asset or, if unavailable, quoted prices for similar
liabilities or similar assets when traded as assets. If none of this information
is available, an entity should use a valuation technique in accordance with
existing fair valuation principles. The Company adopted the
measurement requirements of this guidance in the quarter ended December 31, 2009
with no impact on the consolidated financial statements.
In May
2009, the FASB issued an update to ASC Topic 855, Subsequent Events, on
accounting and disclosure. The Company
adopted this guidance in the quarter ended June 30, 2009 with no impact on the
consolidated financial statements. See Note 1 to our Consolidated Financial
Statements appearing in Part II, Item 8 of this report under Subsequent Events for the
related disclosure required by this standard.
In April 2009, the FASB issued
an update to ASC 820 on determining fair value when the volume and level of
activity for an asset or liability has significantly decreased, and in
identifying transactions that are not orderly. The Company adopted
this guidance in the quarter ended June 30, 2009 with no impact to the
consolidated financial statements.
32
In April
2009, the FASB issued an update to ASC Topic 825, Financial Instruments, to
include additional requirements regarding interim disclosures about the fair
value of financial instruments which were previously only disclosed on an annual
basis. The Company adopted these requirements in the quarter ended June 30,
2009. See Note 12 to our Consolidated Financial Statements appearing in Part II,
Item 8 of this report for the disclosures required by this
standard.
On
January 1, 2009, the Company implemented the deferred provisions under ASC 820
related to non-financial assets and liabilities measured on a non-recurring
basis. See Note 12 to our Consolidated Financial Statements appearing
in Part II, Item 8 of this report for the disclosures required by this
standard.
On
January 1, 2009, the Company adopted the guidance in ASC Topic 815, Derivative Instruments and Hedging
Activities. See Note 13 to our Consolidated Financial Statements
appearing in Part II, Item 8 of this report for the disclosures required by this
standard.
Critical
Accounting Policies
Our
accounting policies are described in Note 1 of the Notes to Consolidated
Financial Statements in Part II, Item 8 of this report. We prepare our financial
statements in conformity with accounting principles generally accepted in the
United States, which require us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the year. Actual results could differ
from those estimates. We consider the following policies to be most critical in
understanding the judgments that are involved in preparing our financial
statements and the uncertainties that could impact our results of operations,
financial condition and cash flows.
Allowance for Doubtful Accounts and
Billing Adjustments. We estimate an allowance for doubtful accounts as
well as an allowance for billing adjustments related to trade receivables based
on our analysis of historical collection and adjustment experience. We apply
actual collection and adjustment percentages to the outstanding accounts
receivable balances at the end of the period. If we experience a significant
change in collections or billing adjustment experience, our estimates of the
recoverability of accounts receivable could change by a material
amount.
Workers’ Compensation and Medical
Malpractice Loss Reserves. We are partially self-insured for our workers’
compensation liability related to the Life Sciences, Healthcare and IT and
Engineering segments as well as our medical malpractice liability in relation to
the Physician segment. In connection with these programs, we pay a base premium
plus actual losses incurred, not to exceed certain stop-loss limits. We are
insured for losses above these limits, both per occurrence and in the aggregate.
The self-insurance claim liability is determined based on claims filed and
claims incurred but not reported. We account for claims incurred but not yet
reported based on estimates derived from historical claims experience and
current trends of industry data. Changes in estimates and differences in
estimates and actual payments for claims are recognized in the period that the
estimates changed or the payments were made.
Contingencies. We record an
estimated loss from a loss contingency when information available prior to
issuance of our financial statements indicates it is probable that an asset has
been impaired or a liability has been incurred at the date of the financial
statements, and the amount of the loss can be reasonably estimated. Accounting
for contingencies, such as legal settlements, workers’ compensation matters and
medical malpractice insurance matters, requires us to use our judgment. While we
believe that our accruals for these matters are adequate, if the actual loss
from a loss contingency is significantly different than the estimated loss,
results of operations may be over or understated.
Income taxes. We account for
income taxes under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation
allowance if it is more likely than not that a portion of the deferred tax asset
will not be realized.
We make a
comprehensive review of our portfolio of uncertain tax positions
regularly. In this regard, an uncertain tax position represents our
expected treatment of a tax position taken in a filed tax return, or planned to
be taken in a future tax return or claim, that has not been reflected in
measuring income tax expense for financial reporting purposes. Until
these positions are sustained by the taxing authorities, we have not recognized
the tax benefits resulting from such positions and report the tax effects as a
liability for uncertain tax positions in our consolidated balance
sheets.
33
Goodwill and Identifiable Intangible
Assets. Goodwill and other intangible assets having an indefinite useful
life are not amortized for financial statement purposes. Goodwill and intangible
assets with indefinite lives are reviewed for impairment on an annual basis as
of December 31, and whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable.
Intangible
assets with indefinite lives consist of trademarks. In order to test the
trademarks for impairment, we determine the fair value of the trademarks and
compare such amount to its carrying value. We determine the fair value of the
trademarks using a projected discounted cash flow analysis based on the
relief-from-royalty approach. The principal factors used in the discounted cash
flow analysis requiring judgment are projected net sales, discount rate,
royalty rate and terminal value assumption. The royalty rate used in the
analysis is based on transactions that have occurred in our
industry. Intangible assets having finite lives are amortized over
their useful lives and are reviewed to ensure that no conditions exist
indicating the recorded amount is not recoverable from future undiscounted cash
flows.
Goodwill
is tested for impairment using a two-step process that begins with an estimation
of the fair value of a reporting unit. This first step is a screen for
impairment and compares the fair value of a reporting unit to its carrying
value. The second step, if necessary, measures the amount of impairment,
if any. We determine the fair value based upon discounted cash flows prepared
for each reporting unit. Cash flows are developed for each reporting unit based
on assumptions including revenue growth expectations, gross margins, operating
expense projections, working capital, capital expense requirements and tax
rates. The multi-year financial forecasts for each reporting unit used in the
cash flow models considered several key business drivers such as new product
lines, historical performance and industry and economic trends, among other
considerations.
The
principal factors used in the discounted cash flow analysis requiring judgment
are the projected results of operations, discount rate, and terminal value
assumptions. The discount rate is determined using the weighted average cost of
capital (WACC). The WACC takes into account the relative weights of
each component of our consolidated capital structure (equity and debt) and
represents the expected cost of new capital adjusted as appropriate to consider
lower risk profiles associated with such things as longer term contracts and
barriers to market entry. It also considers our risk-free rate of
return, equity market risk premium, beta and size premium adjustment. A single
discount rate is utilized across each reporting unit since we do not believe
that there would be significant differences by reporting
unit. Additionally, the selection of the discount rate accounts for
any uncertainties in the forecasts. The terminal value assumptions
are applied subsequent to the tenth year of the discounted cash flow
model.
For
purposes of establishing inputs for the estimated fair value calculations
described above, we applied annual revenue growth rates based on the then
current economic and market conditions and a terminal growth rate of 4.0
percent. These growth factors were applied to each reporting unit for
the purpose of projecting future cash flows. The cash flows as of
December 31, 2008 were discounted at a rate of approximately 12.0
percent. No impairment of goodwill or intangible assets with
indefinite lives was determined to exist as of December 31, 2008.
We
determined that there had been a triggering event as of March 31, 2009 due to
the fact that the market capitalization was below book value, and there was a
significant decline in forecasted cash flows for 2009. We
revised the assumptions used to determine the fair value of each reporting unit
as of March 31, 2009 from those assumptions used at December 31, 2008 to reflect
estimated reductions in future expected cash flows for 2009 and 2010 and to
increase forecasts for 2011 and later years based on our review of the
historical revenue growth rates. The discount rate used was approximately 13.5
percent. The interim analysis performed at March 31, 2009 did not
indicate impairment.
We
determined that there continued to be a triggering event as of June 30, 2009 due
to the fact that our market capitalization continued to be below book value, and
due to additional reductions in forecasted cash flows for 2009 based on actual
results through June 30, 2009. We performed step one of the
impairment analysis as of June 30, 2009. The assumptions used to
determine the fair value of each reporting unit as of June 30, 2009 were revised
from the assumptions used at March 31, 2009 to reflect further reductions in
future expected cash flows for 2009 and 2010, offset by future expected
increases in cash flows from cost savings measures taken in 2009 and revised
cash flow forecasts for later years to incorporate future cost savings resulting
from initiatives which contemplate further synergies from system and operational
improvements in infrastructure and field support. Given the current economic
environment, we evaluated historical revenue growth rates experienced during a
recovery from a recession in establishing inputs. Despite the
significant decline in revenue in 2009 as a result of the economic downturn,
large annual increases were forecasted over the next four to five years
anticipating an economic recovery. Revenue was forecasted to stabilize in the
second half of 2009. Revenue growth rates in the years beginning in
2010 reflect a recovery from the recession, but were within the range of
historical growth rates we have experienced during similar economic
recoveries. The discount rate used was approximately 16.0
percent as of June 30, 2009 due primarily to increases in the cost of debt, the
small company risk premium based on current market capitalization and the
risk-free interest rate in the second quarter. The interim analysis
performed at June 30, 2009 did not indicate impairment.
34
Given that our market capitalization as of June 30, 2009 was significantly below
book value, we performed a review of market-based data to perform the step
one analysis. The market data review included a comparable trading multiple
analysis based on public company competitors in the staffing
industry. We also performed a selected transaction premiums paid
analysis using 2009 transactions with characteristics similar to
ours. Both market analyses were performed on a consolidated
basis to assess the reasonableness of the results of the discounted cash flow
analysis. We performed the market analyses on a consolidated basis
because we did not believe that there were direct competitors with publicly
available financial data that were comparable to each of our reporting
units.
Based on
these analyses, the fair value determination based on the discounted cash flow
model was determined to be reasonable in comparison to the fair values derived
from these other valuation methods.
During
the quarter ended September 30, 2009, overall operating results for our
reporting units, with the exception of the Nurse Travel reporting unit, were
consistent with our forecasts. Additionally, our stock price
increased during the third quarter and the excess of book value over our market
capitalization declined significantly. As a result, with the
exception of the Nurse Travel reporting unit, we determined that none of our
other reporting units had triggering events as of September 30,
2009. We evaluated the Nurse Travel reporting unit and noted no
impairment as of September 30, 2009.
During
the quarter ended December 31, 2009, overall operating results for our reporting
units, with the exception of the Physician reporting unit, were consistent with
our forecasts. Additionally, our stock price continued to increase
during the fourth quarter and the excess of book value over our market
capitalization continued to decline and was within a reasonable
range. We performed the step one analyses for each reporting unit
because December 31 is our annual impairment test date. We noted no
impairment for any of the reporting units as of December 31, 2009. The discount
rate that was used was 16.9 percent. The Company performed a
review of market-based data to perform the step one analysis as part of its
annual impairment test. The market data review included a comparable
trading multiple analysis based on public company competitors in the staffing
industry. The market analysis was performed on a consolidated basis
to assess the reasonableness of the results of the discounted cash flow
analysis. The market analysis was performed on a consolidated basis
because the Company did not believe that there were direct competitors with
publicly available financial data that were comparable to each of our reporting
units. Based on this analysis, the fair value determination based on
the discounted cash flow model was determined to be reasonable in comparison to
the fair values derived from these other valuation methods.
While the
Nurse Travel reporting unit’s revenues declined to an amount which was below our
forecasted amount in the third quarter, it met the forecasted amounts in the
fourth quarter of 2009. Our forecasted revenues for each of the five
years beginning in 2011 are less than 2008 actual revenues. As of
December 31, 2009, the Nurse Travel reporting unit represented 7.6 percent of
our $202.8 million goodwill balance and the estimated fair value of the
reporting unit as determined by the discounted cash flow analysis exceeded the
carrying value by 53.5 percent.
The
current economic environment significantly impacted the results of the IT and
Engineering reporting unit and as a result, the assumptions related to its
forecasts require a higher degree of management estimate and
judgment. The forecasted results, particularly as it relates to
revenue, are dependent on our assumptions about the timing and degree of
recovery for this reporting unit. This is also the case for the Nurse
Travel reporting unit and the related assumptions described
above. The IT and Engineering reporting unit represented 73.2 percent
of our $202.8 million goodwill balance and the percentage by which the estimated
fair value of the reporting unit as determined by the discounted cash flow
analysis exceeded its carrying value at December 31, 2009 was 7.7
percent. We reviewed the reporting unit’s historical revenue growth
over the past ten years noting that the assumptions used for the revenue growth
rates in the discounted cash flow analysis lead to a result 0.5 percent
higher than what the reporting unit had achieved
historically. Our second quarter forecasts projected IT and
Engineering revenues to begin to stabilize in the second half of 2009 and to
increase beginning in 2010. Our third quarter results showed the
stabilization that we anticipated and they achieved growth in the fourth
quarter. Given that our forecasts assume recovery and revenue growth from
the recession beginning in 2010, we have disclosed below the five-year
compounded annual revenue growth rates for periods after the 2009 decline that
were used in the discounted cash flow analysis to show the level of expected
revenue growth after the economic downturn. We have also provided a
comparison below of these revenue growth rates reflected in the discounted cash
flow analysis to the historical five-year compounded annual growth rates. This
comparison demonstrates that the revenue growth rates reflected in the
discounted cash flow analysis were reasonable based on the reporting unit’s
historical financial performance.
The IT
and Engineering reporting unit was heavily impacted by the economic environment
because this business is concentrated in highly specialized projects which
decline significantly when companies are not investing in capital
expenditures. However, historically the reverse has occurred during a
period of economic recovery since the work that the reporting unit performs is
necessary to develop systems or product enhancements. The
ten-year compounded annual revenue growth rate between 2008 and 2018 for the
reporting unit forecasted in the December 31, 2009 analysis was 5.1 percent and
its historical ten-year compounded annual revenue growth rate between 1998 and
2008 was 4.6 percent. Both of these
35
periods
include the impact of an economic decline and a subsequent recovery. Had we
used a ten-year compounded annual revenue growth rate of 4.6 percent in our
discounted cash flow analysis, the percentage by which the estimated fair value
would have exceeded its carrying value at December 31, 2009 was 3.6 percent.
The reporting unit experienced an economic downturn between 2002 and 2003
and as a result, revenues declined by 38.7 percent. When the economy
recovered over the next several years through 2008, the five-year compounded
annual revenue growth rate was 16.3 percent. In the discounted cash
flow analysis, we used a five-year compounded annual revenue growth rate between
2009 and 2014 of 15.9 percent reflecting the expected stabilization of revenues
in the second half of 2009 and the economic recovery at the beginning of 2010,
which we believe is reasonable based on the historical growth rates recovering
from an economic downturn.
The
Physician segment’s revenues were growing the first half of 2009, which was
offset by a recent decline which resulted in a small year-over-year decline of
1.7 percent. We believe that the decline in the Physician reporting
unit is not sustainable and will not significantly impact the forecasts for the
future years. As such,
the five-year compounded annual growth rate for VISTA between 2008 and 2013 has
remained consistent around 6.6 to 6.7 percent between the third and fourth
quarter discounted cash flow analyses. This is based on various factors
such as the growth of the permanent placement business in the third and fourth
quarter which are high margin and the increase in the gross margins throughout
2009. The Physician reporting unit represented 18.3 percent of our
$202.8 million goodwill balance and the percentage by which the estimated fair
value of the reporting unit as determined by the discounted cash flow analysis
exceeded its carrying value at December 31, 2009 was 5.2 percent.
In
addition to the sensitivity to changes in assumptions related to revenue growth
and timing described above, the discounted cash flows and the resulting fair
value estimates of our reporting units are highly sensitive to changes in other
assumptions which include an increase of less than 100 basis points in the
discount rate and/or a less than five percent decline in the cash flow
projections of a reporting unit could cause the fair value of certain
significant reporting units to be below their carrying
value. Additionally, we have assumed that there will be an economic
recovery at the beginning of 2010 for all of the reporting units. Changes in the
timing of the recovery and the impact on our operations and costs may also
affect the sensitivity of the projections including achieving future cost
savings resulting from initiatives which contemplate further synergies from
system and operational improvements in infrastructure and field support which
were included in our forecasts. Ultimately, future changes in these
assumptions may impact the estimated fair value of a reporting unit and cause
the fair value of the reporting unit to be below their carrying value, which
would require a step two analysis and may result in impairment of
goodwill.
Due to
the many variables inherent in the estimation of a business’s fair value and the
relative size of recorded goodwill, changes in assumptions may have a material
effect on the results of our impairment analysis. Downward revisions of our
forecasts, extended delays in the economic recovery, or a sustained decline of
our stock price resulting in market capitalization significantly below book
value could lead to an impairment of goodwill or intangible assets with
indefinite lives in future periods.
Impairment or Disposal of Long-Lived
Assets. We evaluate long-lived assets, other than goodwill and
identifiable intangible assets with indefinite lives, for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. An impairment loss is recognized when the sum of the
undiscounted future cash flows is less than the carrying amount of the asset, in
which case a write-down is recorded to reduce the related asset to its estimated
fair value. There was
no impairment of long-lived assets in 2009, 2008 or
2007.
Business
Combinations. We record acquisition transactions in accordance
with the purchase method of accounting, and therefore this requires us to use
judgment and estimates related to the allocation of the purchase price to the
intangibles assets of the acquisition and the remaining amount, net of assets
and liabilities assumed, to goodwill. On January 1, 2009, we adopted
new accounting guidance for business combinations as issued by FASB which
establishes principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements the identifiable
assets acquired, liabilities assumed, and any noncontrolling interests in the
acquiree, as well as the goodwill acquired. Significant changes from previous
guidance resulting from this new guidance include the expansion of the
definitions of a “business” and a “business combination.” For all business
combinations (whether partial, full or step acquisitions), the acquirer will
record 100% of all assets and liabilities of the acquired business, including
goodwill, generally at their fair values; contingent consideration will be
recognized at its fair value on the acquisition date and; for certain
arrangements, changes in fair value will be recognized in earnings until
settlement, Acquisition-related transaction and restructuring costs will be
expensed rather than treated as part of the cost of the acquisition. The new
accounting guidance also establishes disclosure requirements to enable users to
evaluate the nature and financial effects of the business
combination.
Stock-Based
Compensation. We account for restricted stock awards and stock
units based upon the fair market value of our common stock at the date of
grant. Market-based awards are valued using a Monte Carlo
simulation model. Compensation expense for performance-based awards
is measured based on the amount of shares ultimately expected to vest, estimated
at each reporting date based on management’s expectations regarding the relevant
performance criteria. We account for stock options granted and ESPP
shares based on an estimated
fair market value using a Black-Scholes option valuation model. This
methodology requires the use of subjective assumptions, including expected stock
price volatility and the estimated life of each award. The fair value
of equity-based compensation awards less the estimated forfeitures is amortized
over the service period of the award.
36
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
We are
exposed to certain market risks arising from transactions in the normal course
of business, principally risks associated with foreign currency fluctuations and
interest rates. We are exposed to foreign currency risk from the translation of
foreign operations into U.S. dollars. Based on the relative size and nature of
our foreign operations, we do not believe that a ten percent change in the value
of foreign currencies relative to the U.S. dollar would have a material impact
on our financial statements. Our primary exposure to market risk is interest
rate risk associated with our debt instruments. See “Item
6. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for further description of our debt
instruments. The interest rate swap that we entered into with a
financial institution on May 2, 2007 expired as of June 30, 2009 in accordance
with the terms of the agreement. Prior to the expiration of the interest rate
swap on June 30, 2009, the Company entered into an interest rate cap contract
effective July 1, 2009, in order to mitigate the interest rate risk as required
by the amended credit agreement. The interest rate cap contract is
for a notional amount of $51.0 million with a one-month LIBOR cap of 3.0 percent
for a term of one year. See Note 13 to Consolidated Financial
Statements in Part II, Item 8 of this report for additional information on
the interest rate swap agreement and interest rate cap contract entered into by
the Company. Excluding the effect of our interest rate swap agreement and
interest rate cap contract, a 1 percent change in interest rates on variable
rate debt would have resulted in interest expense fluctuating approximately $1.0
million and $1.4 million, respectively, during the year ended December 31, 2009
and 2008, respectively. Including the effect of our interest rate swap agreement
and interest rate cap contract, a 1 percent change in interest rates on variable
debt would have resulted in interest expense fluctuating approximately $0.7
million and $0.6 million during the year ended December 31, 2009 and 2008,
respectively. However, given that our loan agreement has an interest
rate floor (3.0 percent in the case of LIBOR), short-term rates would have to
increase by approximately 250 basis points before it would impact us. We have
not entered into any market risk sensitive instruments for trading
purposes.
37
Item
8. Financial Statements and Supplementary Data
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of On Assignment, Inc.
Calabasas,
California
We have
audited the accompanying consolidated balance sheets of On Assignment, Inc. and
subsidiaries (the "Company") as of December 31, 2009 and 2008, and the related
consolidated statements of operations and comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2009. Our audits also included the financial statement schedule listed in
the Index at Item 15. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of On Assignment, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 16, 2010 expressed an unqualified
opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche
LLP
Los
Angeles, California
March 16,
2010
38
ON
ASSIGNMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share data)
|
December
31,
|
|||||||
|
2009
|
2008
|
||||||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$ | 25,974 | $ | 46,271 | |||
|
Accounts
receivable, net of allowance for doubtful accounts and billing adjustments
of $1,949 and $2,443, respectively
|
50,173 | 78,370 | |||||
|
Advances
and deposits
|
163 | 311 | |||||
|
Prepaid
expenses
|
3,445 | 4,503 | |||||
|
Prepaid
income taxes
|
4,717 | 3,759 | |||||
|
Deferred
income tax assets
|
7,507 | 9,347 | |||||
|
Other
|
2,213 | 2,162 | |||||
|
Total
current assets
|
94,192 | 144,723 | |||||
|
Property
and equipment, net
|
15,618 | 17,495 | |||||
|
Goodwill
|
202,814 | 202,777 | |||||
|
Identifiable
intangible assets, net
|
25,523 | 31,428 | |||||
|
Other
assets
|
5,315 | 5,427 | |||||
|
Total
Assets
|
$ | 343,462 | $ | 401,850 | |||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable
|
$ | 4,164 | $ | 5,204 | |||
|
Accrued
payroll and contract professional pay
|
11,625 | 19,836 | |||||
|
Deferred
compensation
|
2,070 | 1,610 | |||||
|
Workers’
compensation and medical malpractice loss reserves
|
10,349 | 9,754 | |||||
|
Accrued
earn-out payments
|
— | 10,168 | |||||
|
Other
|
3,746 | 6,959 | |||||
|
Total
current liabilities
|
31,954 | 53,531 | |||||
|
Deferred
income taxes
|
5,697 | 1,997 | |||||
|
Long-term
debt
|
77,913 | 125,913 | |||||
|
Other
long-term liabilities
|
1,237 | 1,895 | |||||
|
Total
liabilities
|
116,801 | 183,336 | |||||
|
Commitments
and Contingencies (Note 7)
|
|||||||
|
Stockholders’
Equity:
|
|||||||
|
Preferred
stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or
outstanding
|
— | — | |||||
|
Common
stock, $0.01 par value, 75,000,000 shares authorized, 36,262,810 and
38,816,844 issued, respectively
|
363 | 388 | |||||
|
Paid-in
capital
|
220,082 | 227,522 | |||||
|
Retained
earnings
|
5,090 | 16,215 | |||||
|
Accumulated
other comprehensive income
|
1,126 | 800 | |||||
| 226,661 | 244,925 | ||||||
|
Less:
Treasury stock at cost, 3,097,364 shares in 2008
|
— | 26,411 | |||||
|
Total
stockholders’ equity
|
226,661 | 218,514 | |||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 343,462 | $ | 401,850 | |||
See notes
to consolidated financial statements.
39
ON
ASSIGNMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In
thousands, except per share data)
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
$ | 416,613 | $ | 618,058 | $ | 567,180 | ||||||
|
Cost
of services
|
280,245 | 418,602 | 387,643 | |||||||||
|
Gross
profit
|
136,368 | 199,456 | 179,537 | |||||||||
|
Selling,
general and administrative expenses
|
121,141 | 155,942 | 151,942 | |||||||||
|
Operating
income
|
15,227 | 43,514 | 27,595 | |||||||||
|
Interest
expense
|
(6,612 | ) | (9,998 | ) | (12,174 | ) | ||||||
|
Interest
income
|
170 | 715 | 1,394 | |||||||||
|
Income
before income taxes
|
8,785 | 34,231 | 16,815 | |||||||||
|
Provision
for income taxes
|
4,078 | 15,261 | 7,493 | |||||||||
|
Net
income
|
$ | 4,707 | $ | 18,970 | $ | 9,322 | ||||||
|
Earnings
per share:
|
||||||||||||
|
Basic
|
$ | 0.13 | $ | 0.53 | $ | 0.27 | ||||||
|
Diluted
|
$ | 0.13 | $ | 0.53 | $ | 0.26 | ||||||
|
Number
of shares and share equivalents used to calculate earnings per
share:
|
||||||||||||
|
Basic
|
36,011 | 35,487 | 35,138 | |||||||||
|
Diluted
|
36,335 | 35,858 | 35,771 | |||||||||
|
Reconciliation
of net income to comprehensive income:
|
||||||||||||
|
Net
income
|
$ | 4,707 | $ | 18,970 | $ | 9,322 | ||||||
|
Foreign
currency translation adjustment
|
326 | (1,390 | ) | 628 | ||||||||
|
Comprehensive
income
|
$ | 5,033 | $ | 17,580 | $ | 9,950 | ||||||
See notes
to consolidated financial statements.
40
ON
ASSIGNMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in
thousands, except share data)
See notes to consolidated financial statements.
|
Common
Stock
|
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income
|
Treasury
Stock
|
Total
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||||||
|
Balance
at January 1, 2007
|
36,769,713 | $ | 367 | $ | 199,355 | $ | (11,860 | ) | $ | 1,562 | (2,711,566 | ) | $ | (23,480 | ) | $ | 165,944 | |||||||||||||||
|
Exercise
of common stock options
|
362,394 | 4 | 2,012 | — | — | — | — | 2,016 | ||||||||||||||||||||||||
|
Employee
Stock Purchase Plan
|
126,484 | 1 | 1,105 | — | — | — | — | 1,106 | ||||||||||||||||||||||||
|
Stock
issued for acquisition
|
795,292 | 8 | 9,992 | — | — | — | — | 10,000 | ||||||||||||||||||||||||
|
Stock
repurchase
|
— | — | — | — | — | (278,439 | ) | (1,997 | ) | (1,997 | ) | |||||||||||||||||||||
|
Stock-based
compensation expense
|
— | — | 6,092 | — | — | — | — | 6,092 | ||||||||||||||||||||||||
|
Vesting
of restricted stock units and restricted stock awards
|
162,538 | 2 | (2 | ) | — | — | (48,933 | ) | (523 | ) | (523 | ) | ||||||||||||||||||||
|
Adjustment
for adoption of accounting pronouncement for uncertain tax
positions
|
— | — | — | (217 | ) | — | — | — | (217 | ) | ||||||||||||||||||||||
|
Excess
tax benefits from stock-based compensation
|
— | — | 663 | — | — | — | — | 663 | ||||||||||||||||||||||||
|
Translation
adjustments
|
— | — | — | — | 628 | — | — | 628 | ||||||||||||||||||||||||
|
Net
income
|
— | — | — | 9,322 | — | — | — | 9,322 | ||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
38,216,421 | 382 | 219,217 | (2,755 | ) | 2,190 | (3,038,938 | ) | (26,000 | ) | 193,034 | |||||||||||||||||||||
|
Exercise
of common stock options
|
98,187 | 1 | 482 | — | — | — | — | 483 | ||||||||||||||||||||||||
|
Employee
Stock Purchase Plan
|
315,827 | 3 | 1,576 | — | — | — | — | 1,579 | ||||||||||||||||||||||||
|
Stock-based
compensation expense
|
— | — | 6,288 | — | — | — | — | 6,288 | ||||||||||||||||||||||||
|
Vesting
of restricted stock units and restricted stock awards
|
186,409 | 2 | (2 | ) | — | — | (58,426 | ) | (411 | ) | (411 | ) | ||||||||||||||||||||
|
Tax
deficiency from stock-based compensation
|
— | — | (39 | ) | — | — | — | — | (39 | ) | ||||||||||||||||||||||
|
Translation
adjustments
|
— | — | — | — | (1,390 | ) | — | — | (1,390 | ) | ||||||||||||||||||||||
|
Net
income
|
— | — | — | 18,970 | — | — | — | 18,970 | ||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
38,816,844 | 388 | 227,522 | 16,215 | 800 | (3,097,364 | ) | (26,411 | ) | 218,514 | ||||||||||||||||||||||
|
Exercise
of common stock options
|
17,925 | — | 98 | — | — | — | — | 98 | ||||||||||||||||||||||||
|
Employee
Stock Purchase Plan
|
227,784 | 2 | 455 | — | — | — | — | 457 | ||||||||||||||||||||||||
|
Stock-based
compensation expense
|
— | — | 5,015 | — | — | — | — | 5,015 | ||||||||||||||||||||||||
|
Vesting
of restricted stock units and restricted stock awards
|
297,621 | 3 | (1,073 | ) | — | — | — | — | (1,070 | ) | ||||||||||||||||||||||
|
Tax
deficiency from stock-based compensation
|
— | — | (1,386 | ) | — | — | — | — | (1,386 | ) | ||||||||||||||||||||||
|
Retirement
of Treasury Stock
|
(3,097,364 | ) | (30 | ) | (10,549 | ) | (15,832 | ) | — | 3,097,364 | 26,411 | — | ||||||||||||||||||||
|
Translation
adjustments
|
— | — | — | — | 326 | — | — | 326 | ||||||||||||||||||||||||
|
Net
income
|
— | — | — | 4,707 | — | — | — | 4,707 | ||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
36,262,810 | $ | 363 | $ | 220,082 | $ | 5,090 | $ | 1,126 | — | — | $ | 226,661 | |||||||||||||||||||
See notes to consolidated financial statements.
41
ON
ASSIGNMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||
|
Net
income
|
$ | 4,707 | $ | 18,970 | $ | 9,322 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
|
5,731 | 5,106 | 6,194 | |||||||||
|
Amortization
of intangible assets
|
6,075 | 9,436 | 15,342 | |||||||||
|
Provision
for doubtful accounts and billing adjustments
|
296 | 641 | 680 | |||||||||
|
Deferred
income tax provision (benefit)
|
4,287 | 9 | (4,163 | ) | ||||||||
|
Stock-based
compensation
|
5,007 | 6,349 | 6,359 | |||||||||
|
Amortization
of deferred loan costs
|
894 | 591 | 542 | |||||||||
|
Change
in fair value of interest rate swap
|
(1,345 | ) | 139 | 1,206 | ||||||||
|
(Gain)
loss on officers’ life insurance policies
|
(478 | ) | 851 | (166 | ) | |||||||
|
Gross
excess tax benefits from stock-based compensation
|
(34 | ) | (327 | ) | (860 | ) | ||||||
|
(Gain)
loss on disposal of property and equipment
|
(246 | ) | 112 | 317 | ||||||||
|
Workers’
compensation and medical malpractice provision
|
4,283 | 5,384 | 4,095 | |||||||||
|
Changes
in operating assets and liabilities, net of effect of
acquisitions:
|
||||||||||||
|
Accounts
receivable
|
28,024 | (1,142 | ) | (7,335 | ) | |||||||
|
Prepaid
expenses
|
1,076 | (411 | ) | (70 | ) | |||||||
|
Prepaid
income taxes
|
(958 | ) | (4,802 | ) | 358 | |||||||
|
Accounts
payable
|
(695 | ) | (809 | ) | 1,035 | |||||||
|
Accrued
payroll and contract professional pay
|
(9,017 | ) | 877 | 1,074 | ||||||||
|
Deferred
compensation
|
460 | (427 | ) | 677 | ||||||||
|
Workers’
compensation and medical malpractice loss reserves
|
(3,688 | ) | (4,551 | ) | (3,321 | ) | ||||||
|
Other
|
(2,366 | ) | (638 | ) | 2,372 | |||||||
|
Net
cash provided by operating activities
|
42,013 | 35,358 | 33,658 | |||||||||
|
Cash
Flows from Investing Activities:
|
||||||||||||
|
Purchase
of property and equipment
|
(4,673 | ) | (8,201 | ) | (5,899 | ) | ||||||
|
Proceeds
from insurance settlements
|
512 | — | — | |||||||||
|
Net
cash paid for acquisitions
|
(10,239 | ) | (9,013 | ) | (232,273 | ) | ||||||
|
Decrease
in restricted cash
|
— | — | 4,678 | |||||||||
|
Other
|
572 | (499 | ) | (530 | ) | |||||||
|
Net
cash used in investing activities
|
(13,828 | ) | (17,713 | ) | (234,024 | ) | ||||||
|
Cash Flows from Financing
Activities:
|
||||||||||||
|
Proceeds
from stock transactions
|
555 | 2,064 | 3,121 | |||||||||
|
Payment
of employment taxes related to release of restricted stock
awards
|
(325 | ) | (411 | ) | (523 | ) | ||||||
|
Gross
excess tax benefits from stock-based compensation
|
34 | 327 | 860 | |||||||||
|
Shelf
offering costs
|
— | — | (300 | ) | ||||||||
|
Proceeds
from issuance of long-term debt
|
— | — | 145,000 | |||||||||
|
Debt
issuance or amendment costs
|
(1,065 | ) | — | (4,153 | ) | |||||||
|
Repurchase
of common stock
|
— | — | (1,997 | ) | ||||||||
|
Payments
of other long-term liabilities
|
(156 | ) | (383 | ) | (144 | ) | ||||||
|
Principal
payments of long-term debt
|
(48,000 | ) | (10,000 | ) | (9,725 | ) | ||||||
|
Net
cash (used in) provided by financing activities
|
(48,957 | ) | (8,403 | ) | 132,139 | |||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
475 | (735 | ) | 508 | ||||||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
(20,297 | ) | 8,507 | (67,719 | ) | |||||||
|
Cash
and Cash Equivalents at Beginning of Year
|
46,271 | 37,764 | 105,483 | |||||||||
|
Cash
and Cash Equivalents at End of Year
|
$ | 25,974 | $ | 46,271 | $ | 37,764 | ||||||
See notes
to consolidated financial statements.
42
ON
ASSIGNMENT, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
|
Year
Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
Supplemental
Disclosure of Cash Flow Information
|
|||||||||||
|
Cash
paid for:
|
|||||||||||
|
Income
taxes, net of refunds
|
$ | 1,230 | $ | 20,255 | $ | 9,586 | |||||
|
Interest
|
$ | 8,564 | $ | 9,370 | $ | 10,491 | |||||
|
Acquisitions:
|
|||||||||||
|
Goodwill
|
$ | — | $ | 9,013 | $ | 177,478 | |||||
|
Intangible
assets acquired
|
170 | — | 55,640 | ||||||||
|
Net
tangible assets acquired
|
44 | — | 18,841 | ||||||||
|
Fair
value of assets acquired, net of cash received
|
$ | 214 | $ | 9,013 | $ | 251,959 | |||||
|
Supplemental
Disclosure of Non-Cash Transactions
|
|||||||||||
|
Payable
for employment taxes withheld related to release of restricted stock
awards
|
$ | 745 | $ | — | $ | — | |||||
|
Common
stock issued in connection with acquisition
|
$ | — | $ | — | $ | 10,000 | |||||
|
Accrued
earn-out payments and escrow claim receivable
|
$ | — | $ | 8,766 | $ | 8,525 | |||||
|
Acquisition
through notes payable
|
$ | 143 | $ | — | $ | — | |||||
|
Acquisition
of property and equipment through accounts payable
|
$ | 555 | $ | 1,251 | $ | 452 | |||||
See notes
to consolidated financial statements.
43
ON
ASSIGNMENT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies.
Principles of Consolidation.
The consolidated financial statements include the accounts of the Company
and its wholly-owned domestic and foreign subsidiaries. All intercompany
accounts and transactions have been eliminated.
Reclassifications. Certain
reclassifications have been made to the prior year to conform with the current
year presentation within cash flows from financing activities to provide for
expanded disclosure as it relates to stock transactions.
Accounting Standards
Codification. The Company adopted the Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) in the quarter ended
September 30, 2009. The ASC does not alter current accounting principles
generally accepted in the Unites States (GAAP), but rather integrated existing
accounting standards with other authoritative guidance. The ASC provides a
single source of authoritative GAAP for nongovernmental entities and supersedes
all other previously issued non-SEC accounting and reporting guidance. The
adoption of the ASC did not have any effect on the Company’s consolidated
financial statements.
Cash and Cash Equivalents.
The Company considers all highly liquid investments with a maturity of three
months or less on the date of purchase to be cash equivalents.
Accounts Receivable. The
Company estimates an allowance for doubtful accounts and an allowance for
billing adjustments related to trade receivables based on an analysis of
historical collection and billing adjustment experience. The Company applies
actual historical collection and adjustment percentages to the outstanding
accounts receivable balances at the end of the period. If the Company
experiences a significant change in collections or billing adjustment
experience, the estimates of the recoverability of accounts receivable could
change by a material amount.
Property and Equipment.
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets, generally three to five years. Leasehold improvements are
amortized over the shorter of the life of the related asset or the life of the
lease. Costs associated with customized internal-use software systems that have
reached the application stage and meet recoverability tests are capitalized.
Such capitalized costs include external direct costs utilized in developing or
obtaining the applications and payroll and payroll-related expenses for
employees who are directly associated with the applications.
Goodwill and Identifiable
Intangibles. Goodwill and other intangible assets having an indefinite
useful life are not amortized for financial statement purposes. Goodwill and
intangible assets with indefinite lives are reviewed for impairment on an annual
basis as of December 31, and whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.
Intangible
assets with indefinite lives consist of trademarks. In order to test
the trademarks for impairment, we determine the fair value of the trademarks and
compare such amount to its carrying value. We determine the fair value of the
trademarks using a projected discounted cash flow analysis based on the
relief-from-royalty approach. The principal factors used in the discounted cash
flow analysis requiring judgment are projected net sales, discount rate, royalty
rate and terminal value assumption. The royalty rate used in the analysis is
based on transactions that have occurred in our industry. Intangible
assets having finite lives are amortized over their useful lives and are
reviewed to ensure that no conditions exist indicating the recorded amount is
not recoverable from future undiscounted cash flows.
Goodwill
is tested for impairment using a two-step process that begins with an estimation
of the fair value of a reporting unit. This first step is a screen
for impairment and compares the fair value of a reporting unit to its carrying
value. The second step, if necessary, measures the amount of
impairment, if any. We determine the fair value based upon discounted cash flows
prepared for each reporting unit. Cash flows are developed for each reporting
unit based on assumptions including revenue growth expectations, gross margins,
operating expense projections, working capital, capital expense requirements and
tax rates. The multi-year financial forecasts for each reporting unit used in
the cash flow models consider several key business drivers such as new product
lines, historical performance and industry and economic trends, among other
considerations.
44
The principal
factors used in the discounted cash flow analysis requiring judgment are the
projected results of operations, discount rate, and terminal value assumptions.
The discount rate is determined using the weighted average cost of capital
(WACC). The WACC takes into account the relative weights of each
component of our consolidated capital structure (equity and debt) and represents
the expected cost of new capital adjusted as appropriate to consider lower risk
profiles associated with such things as longer term contracts and barriers to
market entry. It also considers our risk-free rate of return, equity
market risk premium, beta and size premium adjustment. A single discount rate is
utilized across each reporting unit since we do not believe that there would be
significant differences by reporting unit. Additionally, the
selection of the discount rate accounts for any uncertainties in the
forecasts. The terminal value assumptions are applied subsequent to
the tenth year of the discounted cash flow model. See Note 5 for the details of
goodwill impairment testing by reportable segment.
Impairment of Long-Lived
Assets. The Company evaluates long-lived assets, other than goodwill and
identifiable intangible assets with indefinite lives, for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. An impairment loss is recognized when the sum of the
undiscounted future cash flows is less than the carrying amount of the asset, in
which case a write-down is recorded to reduce the related asset to its estimated
fair value. There was no impairment of long-lived assets in
2009, 2008 or 2007.
Workers’ Compensation and Medical
Malpractice Loss Reserves. The Company self-insures its workers’
compensation and medical malpractice liabilities up to certain stop-loss limits.
The Company is insured for losses above these limits, both per occurrence and in
the aggregate. The self-insurance claim liability is determined based on claims
filed and claims incurred but not reported.
Contingencies. The Company
records an estimated loss from a loss contingency when information available
prior to issuance of its financial statements indicates it is probable that an
asset has been impaired or a liability has been incurred at the date of the
financial statements, and the amount of the loss can be reasonably estimated.
Accounting for contingencies, such as legal settlements, workers’ compensation
matters and medical malpractice insurance matters, requires the Company to use
judgment. While the Company believes that the accruals for these matters are
adequate, if the actual loss from a loss contingency is significantly different
than the estimated loss, results of operations may be over or
understated.
Income Taxes. Income taxes
are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation
allowance if it is more likely than not that a portion of the deferred tax asset
will not be realized.
Revenue Recognition. Revenues
from contract assignments, net of sales adjustments and discounts, are
recognized when earned, based on hours worked by the Company’s contract
professionals on a weekly basis. Conversion and direct hire fees are recognized
when earned, upon conversion or direct hire of a contract professional to a
client’s regular employee. In addition, the Company records a sales allowance
against consolidated revenues, which is an estimate based on historical billing
adjustment experience. The sales allowance is recorded as a reduction to
revenues and an increase to the allowance for billing adjustments. The billing
adjustment reserve includes an allowance for fallouts. Fallouts are direct hire
and conversion fees that do not complete the contingency period. The contingency
period is typically 90 days or less. The Company includes reimbursed expenses,
including those related to travel and out-of-pocket expenses, in revenues and
the associated amounts of reimbursable expenses in cost of
services.
The
Company generally records revenue on a gross basis as a principal versus on a
net basis as an agent in the consolidated statement of
operations. The key indicators supporting the Company’s conclusion
that it acts as a principal in substantially all of its transactions are that
the Company (i) has the direct contractual relationships with its customers,
(ii) bears the risks and rewards of the transactions, and (iii) has the
discretion to select the contract professionals and establish their
price. To the extent that the Company concludes that it does not act
as the principal in the arrangement, revenues are recorded on a net
basis.
Foreign Currency Translation.
The functional currency of the Company’s foreign operations is their local
currency, and as such, their assets and liabilities are translated into U.S.
dollars at the rate of exchange in effect on the balance sheet date. Revenue and
expenses are translated at the average rates of exchange prevailing during each
monthly period. The related translation adjustments are recorded as cumulative
foreign currency translation adjustments in accumulated other comprehensive
income as a separate component of stockholders’ equity. Gains and losses
resulting from foreign currency transactions, which are not material, are
included in SG&A expenses in the Consolidated Statements of Operations and
Comprehensive Income.
45
Business
Combinations. The Company records acquisition transactions in
accordance with the purchase method of accounting, and therefore this requires
us to use judgment and estimates related to the allocation of the purchase price
to the intangibles assets of the acquisition and the remaining amount, net of
assets and liabilities assumed, to goodwill. On January 1, 2009, new
accounting guidance for business combinations was adopted as issued by FASB
which establishes principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements the identifiable
assets acquired, liabilities assumed, and any noncontrolling interests in the
acquiree, as well as the goodwill acquired. Significant changes from previous
guidance resulting from this new guidance include the expansion of the
definitions of a “business” and a “business combination.” For all business
combinations (whether partial, full or step acquisitions), the acquirer will
record 100% of all assets and liabilities of the acquired business, including
goodwill, generally at their fair values; contingent consideration will be
recognized at its fair value on the acquisition date and; for certain
arrangements, changes in fair value will be recognized in earnings until
settlement; and acquisition-related transaction and restructuring costs will be
expensed rather than treated as part of the cost of the acquisition. The new
accounting guidance also establishes disclosure requirements to enable users to
evaluate the nature and financial effects of the business
combination.
Stock-Based Compensation. The
fair value of restricted stock awards and stock units is calculated based upon
the fair market value of the Company’s common stock at the date of
grant. Market-based awards are valued using a Monte Carlo simulation
model. Compensation expense for performance-based awards is measured
based on the amount of shares ultimately expected to vest, estimated at each
reporting date based on management’s expectations regarding the relevant
performance criteria. The fair value of stock options and ESPP shares
is estimated using a Black-Scholes option valuation model. This
methodology requires the use of subjective assumptions including expected stock
price volatility and the estimated life of each award. The fair value
of equity-based compensation awards less the estimated forfeitures is amortized
over the vesting period of the award.
Use of Estimates. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentration of Credit Risk.
Financial instruments that potentially subject the Company to credit risks
consist primarily of cash, cash equivalents and trade receivables. The Company
places its cash and cash equivalents in low risk investments with quality credit
institutions and limits the amount of credit exposure with any single
institution above FDIC insured limits. For the Life Sciences, Physician, IT and
Engineering segments, and the Nurse Travel and the Allied Healthcare lines of
businesses, concentration of credit risk with respect to accounts receivable is
limited because of the large number of geographically dispersed customers, thus
spreading the trade credit risk. The Company performs ongoing credit evaluations
to identify risks and maintains an allowance to address these
risks.
Fair Value of Financial
Instruments. The interest rate cap is the only financial instrument
carried at fair value on a recurring basis at December 31, 2009. The interest
rate swap was carried at fair value on a recurring basis but it expired on June
30, 2009. See Note 13 for the fair value disclosures of the interest rate cap
and interest rate swap. The recorded values of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate their fair value based on their short-term
nature. The life insurance policies and the long-term
debt are not measured at fair value on a recurring basis. See Note 12
for fair value disclosures. Certain assets and liabilities, such as goodwill,
are not measured at fair value on an ongoing basis but are subject to fair value
adjustments in certain circumstances (e.g., when there is evidence of
impairment).
Derivative Instruments. The
Company utilizes derivative financial instruments to manage interest rate risk.
The Company does not use derivative financial instruments for trading or
speculative purposes, nor does it use leveraged financial
instruments.
Advertising Costs.
Advertising costs, which are expensed as incurred, were $3.5 million for the
year ended December 31, 2009, $4.9 million for the year ended December 31, 2008
and $4.3 million for the year ended December 31, 2007.
Treasury
Stock. Our treasury stock balance was primarily derived from
the repurchases of our common stock in open market transactions. The
Company retired all treasury stock during the fourth quarter of 2009, which
reduced additional paid in capital by $10.5 million and retained earnings by
$15.8 million.
Subsequent Events. Management
has evaluated subsequent events after the balance sheet date through the
issuance date for appropriate accounting treatment and
disclosure.
46
Recent Accounting
Pronouncements.
In January 2010,
the FASB issued an update to ASC Topic 820, Fair Value Measurements and
Disclosures (ASC 820), which requires new disclosures for fair value
measurements and provides clarification for existing disclosure requirements.
More specifically, this update will require (a) an entity to disclose separately
the amounts of significant transfers in and out of Levels 1 and 2 fair value
measurements and to describe the reasons for the transfers; and (b) information
about purchases, sales, issuances and settlements to be presented separately
(i.e. present the activity on a gross basis rather than net) in the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3 inputs). This guidance clarifies existing disclosure requirements for
the level of disaggregation used for classes of assets and liabilities measured
at fair value and requires disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value
measurements using Level 2 and Level 3 inputs. The new disclosures and
clarifications of existing disclosure are effective for fiscal years beginning
after December 15, 2009, except for the disclosure requirements related to the
purchases, sales, issuances and settlements in the rollforward activity of Level
3 fair value measurements, which are effective for fiscal years ending after
December 31, 2010. The Company is in the process of evaluating the impact of
this guidance on the Company’s consolidated financial position or results of
operations, which will be effective in the quarter ended March 31,
2010.
In
September 2009, the FASB issued an update to ASC Topic 605, Revenue Recognition, which
establishes the criteria for separating consideration in multiple-element
arrangements. The updated guidance requires companies allocating the
overall consideration to each deliverable to use an estimated selling price of
individual deliverables in the arrangement in the absence of vendor-specific
evidence or other third-party evidence of the selling price for the deliverables
and it also provides additional factors that should be considered when
determining whether software in a tangible product is essential to its
functionality. The Company is in the process of evaluating the impact of this
guidance on the Company’s consolidated financial statements, which will be
effective January 1, 2011.
In August
2009, the FASB issued an update to ASC 820 on measuring
liabilities at fair value. The updated guidance provides clarification that in
circumstances in which a quoted market price in an active market for an
identical liability is not available, an entity is required to measure fair
value using a valuation technique that uses the quoted price of an identical
liability when traded as an asset or, if unavailable, quoted prices for similar
liabilities or similar assets when traded as assets. If none of this information
is available, an entity should use a valuation technique in accordance with
existing fair valuation principles. The Company adopted the
measurement requirements of this guidance in the quarter ended December 31, 2009
with no impact on the consolidated financial statements.
In May
2009, the FASB issued an update to ASC Topic 855, Subsequent Events, on
accounting and disclosure. The Company
adopted this guidance in the quarter ended June 30, 2009 with no impact on the
consolidated financial statements except for the inclusion of the required
disclosure in the subsequent events accounting policy stated above.
In April
2009, the FASB issued an update to ASC 820 on determining fair value when the
volume and level of activity for an asset or liability has significantly
decreased, and in identifying transactions that are not orderly. The
Company adopted this guidance in the quarter ended June 30, 2009 with no impact
to the consolidated financial statements.
In
April 2009, the FASB issued an update to ASC Topic 805, Business Combinations, to
include additional requirements regarding accounting for assets acquired and
liabilities assumed in a business combination. The Company implemented these
requirements with no impact on the consolidated financial
statements.
In April
2009, the FASB issued an update to ASC Topic 825, Financial Instruments, to
include additional requirements regarding interim disclosures about the fair
value of financial instruments which were previously only disclosed on an annual
basis. The Company adopted these requirements in the quarter ended June 30,
2009. See Note 12 for the disclosures required by this standard.
On
January 1, 2009, the Company implemented the deferred provisions under ASC 820
related to non-financial assets and liabilities. See Note 12 for the
disclosures required by this standard.
On
January 1, 2009, the Company adopted the guidance in ASC Topic 815, Derivative Instruments and Hedging
Activities. See Note 13 for the disclosures required by this
standard.
47
2.
Property and Equipment.
Property
and equipment at December 31, 2009 and 2008 consisted of the following (in
thousands):
|
2009
|
2008
|
|||||||
|
Furniture
and fixtures
|
$ | 3,635 | $ | 3,535 | ||||
|
Computers
and related equipment
|
4,433 | 4,401 | ||||||
|
Computer
software
|
19,688 | 22,773 | ||||||
|
Machinery
and equipment
|
1,265 | 1,192 | ||||||
|
Leasehold
improvements
|
3,522 | 3,919 | ||||||
|
Work-in-progress
|
4,579 | 3,596 | ||||||
| 37,122 | 39,416 | |||||||
|
Less
accumulated depreciation and amortization
|
(21,504 | ) | (21,921 | ) | ||||
|
Total
|
$ | 15,618 | $ | 17,495 | ||||
Depreciation and
amortization expense related to property and equipment for the year ended
December 31, 2009 was $5.7 million, $5.1 million for the year ended
December 31, 2008 and $6.2 million for the year ended December 31,
2007.
As
discussed in Note 1 under
Property and Equipment, the Company capitalizes costs associated with
customized internal-use software systems that have reached the application stage
and meet recoverability tests. All software costs capitalized are amortized over
an estimated useful life of three to five years.
The
Company has capitalized costs related to its various technology initiatives. The
net book value of the property and equipment related to software development was
$7.5 million as of December 31, 2009 and $7.6 million as of December 31, 2008,
which includes work-in-progress of $4.5 million and $3.5 million. The Company
has also capitalized website development costs of $0.1 million as of December
31, 2009 and $0.3 million as of December 31, 2008 of which no costs were
considered work-in-progress.
3.
Acquisitions.
On
October 1, 2009, we acquired Fox Hill Associates, a physician permanent
placement business specializing in retained and contingent search, included in
our Physician operating segment. Pro-forma
results of operations have not been presented because the acquisition, which had
a purchase price of $0.2 million, was not material in relation to our
consolidated financial position and results of operations.
On
January 3, 2007, the Company acquired VSS Holding, Inc. and its subsidiaries,
which includes VISTA Staffing Solutions, Inc. (VISTA), a privately-owned leading
provider of physician staffing, known as locum tenens, and permanent physician
search services. VISTA is headquartered in Salt Lake City, Utah and works with
more than 1,000 physicians covering approximately thirty medical specialties.
The primary reasons for the VISTA acquisition were to diversify the Company’s
existing healthcare offerings, to complement its existing Nurse Travel business
line with cross-selling opportunities and to leverage its SG&A expenses,
including housing, travel and credentialing costs.
The total
purchase price of $48.6 million consisted of (i) an initial cash payment of
$41.1 million, which included a $4.1 million holdback for potential claims
indemnified by the selling shareholders, (ii) $0.9 million in direct acquisition
costs, (iii) $2.6 million payment in April of 2008 of the earn-out related to
the 2007 operating performance, and (iv) $5.3 million payment in April of 2009
of the earn-out related to the 2008 operating performance. VISTA’s purchase
price included a $4.1 million holdback for potential claims that are
indemnifiable by the selling shareholders pursuant to the acquisition agreement.
The Company released $3.6 million of the $4.1 million holdback for potential
claims that are indemnifiable by the selling shareholders of VISTA as of
December 31, 2009. Of the $3.6 million released from escrowed
amounts, $2.9 million was distributed to VISTA’s selling shareholders and $0.7
million was distributed to the Company. The Company filed for claims
indemnifiable by the selling shareholders of VISTA for $1.4 million, which was
recorded as a decrease to goodwill and an increase in other current assets as of
December 31, 2008. The holdback is estimated to be reduced by the
claims indemnifiable and will be released from escrow to the selling
shareholders when agreement is achieved. At December 31, 2009, there
were still $0.5 million of remaining escrowed amounts pending resolution of the
Company’s claims for indemnification which is expected to be settled in
2010.
48
On
January 31, 2007, the Company acquired Oxford Global Resources, Inc. (Oxford), a
leading provider of high-end information technology and engineering staffing
services. The primary reasons for the Oxford acquisition were to enter the
markets for information technology and engineering staffing services and to
leverage the Company’s existing SG&A infrastructure.
The total
purchase price of $212.6 million consisted of (i) an initial price of $200.1
million, comprised of $190.1 million paid in cash and 795,292 shares of the
Company’s common stock valued at $10.0 million, (ii) $1.3 million in direct
acquisition costs, (iii) $6.3 million payment in April 2008 of the earn-out
related to the 2007 operating performance of Oxford, and (iv) $4.8 million
payment in October 2009 of the earn-out related to the 2008 operating
performance of Oxford. The initial price included a $20.0 million
holdback for potential claims indemnifiable by the Oxford shareholders, which
was held in escrow and was included as part of the purchase price allocation.
This holdback was released from escrow to the selling shareholders on August 3,
2008.
The
Company recorded the acquisition using the purchase method of accounting, and
thus the results of operations from Oxford are included in the Company’s
consolidated financial statements (IT and Engineering segment) from the
acquisition date. The purchase price was allocated to the assets acquired and
liabilities assumed based on their fair values as of the date of the
acquisition. The purchase price was allocated as follows: $17.1 million to net
tangible assets acquired, $30.3 million to intangible assets with definite
lives, $15.6 million to identified intangible assets with indefinite lives
(trademarks) and $149.6 million to goodwill. The weighted average amortization
period for the identifiable intangible assets with definite lives is estimated
to be 2.1 years. Intangible assets with definite lives include contractor
relations of $20.8 million (1.7 year weighted average amortization period),
customer relations of $8.7 million (3.0 year weighted average amortization
period), in-use software of $0.5 million (2.0 year weighted average amortization
period) and non-compete agreements of $0.3 million (3.0 year weighted average
amortization period). The Company is reducing its federal and state income tax
liability by approximately $5.0 million per year over fifteen years as a result
of an election to classify the Oxford acquisition as an asset sale for tax
purposes under section 338(h)(10) of the Internal Revenue Code of 1986, as
amended.
The
Company utilized its existing cash and proceeds from the $165.0 million senior
secured credit facility to finance the acquisitions. See Note 4 for a discussion
of the credit facility.
The
summary below presents the amounts assigned to each major asset and liability
caption of VISTA and Oxford and presents pro-forma consolidated results of
operations for the year ended December 31, 2007 as if the acquisition of VISTA
and Oxford described above had occurred at the beginning of the earliest year
presented. The unaudited pro-forma financial information presented below gives
effect to certain adjustments, the amortization of intangible assets and
interest expense on acquisition related debt, other non-recurring expenses
related to VISTA and Oxford’s former owners and the shares issued as a result of
the shelf offering as if they had been issued at the beginning of 2007. The
pro-forma financial information is not necessarily indicative of the operating
results that would have occurred had the acquisition been consummated as of the
date indicated, nor are they necessarily indicative of future operating
results.
49
The
purchase price allocation as of December 31, 2009 was as follows (in
thousands):
|
As
of December 31, 2009
|
|||||||
|
VISTA
|
Oxford
|
||||||
|
Current
assets
|
$ | 12,840 | $ | 24,938 | |||
|
Property
and equipment
|
2,221 | 3,433 | |||||
|
Goodwill
|
37,163 | 149,573 | |||||
|
Identifiable
intangible assets
|
9,640 | 45,900 | |||||
|
Long-term
deposits and other long-term assets
|
58 | 644 | |||||
|
Total
assets acquired
|
$ | 61,922 | $ | 224,488 | |||
|
Current
liabilities
|
$ | 9,128 | $ | 11,073 | |||
|
Long-term
liabilities
|
4,239 | 853 | |||||
|
Total
liabilities assumed
|
13,367 | 11,926 | |||||
|
Total
purchase price
|
$ | 48,555 | $ | 212,562 | |||
The
Pro-Forma Consolidated Statement of Operations for the year ended December 31,
2007 was as follows (in thousands, except per share data):
|
Year
ended December 31,
|
|||
|
2007
|
|||
|
Revenues
|
$ | 582,712 | |
|
Cost
of service
|
397,528 | ||
|
Gross
profit
|
185,184 | ||
|
Selling,
general and administrative expenses
|
157,098 | ||
|
Operating
income
|
$ | 28,086 | |
|
Net
income
|
$ | 8,951 | |
|
Basic
earnings per share
|
$ | 0.25 | |
4. Long-Term Debt.
Long-term
debt at December 31, 2009 and 2008 consisted of the following (in
thousands):
|
2009
|
2008
|
||||||
|
Senior
Secured Debt:
|
|||||||
|
$20
million revolving credit facility, due January 2012
|
$ | — | $ | — | |||
|
$145
million term loan facility, due January 2013
|
77,913 | 125,913 | |||||
|
Total
|
$ | 77,913 | $ | 125,913 | |||
Under
terms of the senior credit facility, the Company is required to maintain certain
financial covenants, including a maximum total leverage ratio, a minimum
interest coverage ratio and a limitation on capital expenditures. In addition,
terms of the credit facility restrict the Company’s ability to pay dividends of
more than $2.0 million per year. On March 27, 2009, the Company
entered into an amendment to its senior credit facility that modified certain
financial covenants. Under the terms of the amended facility, the
maximum total leverage ratio (total debt to adjusted earnings before interest,
taxes, depreciation and amortization, or EBITDA, as defined by the credit
agreement for the preceding 12 months) is as follows:
|
January
1, 2009 – December 31, 2009
|
3.25
to 1.00
|
|
January
1, 2010 – September 30, 2010
|
3.00
to 1.00
|
|
October 1, 2010 – December 31, 2011
|
2.75
to 1.00
|
|
January 1, 2012 and thereafter
|
2.50 to 1.00
|
The
minimum interest coverage ratio (EBITDA to interest expense, as defined by the
credit agreement for the preceding 12 months) is 4.00 to 1.00 until
maturity. The amendment also modified the definition of the LIBOR
rate to include a 3.0 percent floor and increased the spread on revolving and
term loans by 150 basis points to 3.75 percent. In connection with the
amendment, the Company paid down the principal balance on the term loan by $15.0
million. The credit facility is secured by all of the assets of the
Company. As of December 31, 2009, the Company was in compliance with
all covenants under its agreement with the credit facility.
In 2009,
the Company paid down the principal balance of its term loan by a total of $48.0
million. The payments were sufficient to cover the excess cash flow
payment required by the bank for 2009, as well as all minimum quarterly payments
until maturity on January 31, 2013.
50
5.
Goodwill and Other Identifiable Intangible Assets.
The
Company acquired VISTA and Oxford in the first quarter of 2007(see Note 3). In
December 2007, a small portion of the Oxford business (RMS) was sold for $1.0
million, reducing the acquired goodwill balance allocated to that respective
portion of the business.
The
changes in the carrying amount of goodwill for the years ended December 31, 2009
and 2008 are as follows (in thousands):
|
Life
Sciences
|
Healthcare
|
Physician
|
IT
and Engineering
|
Total
|
||||||||||||||||
|
Balance
as of December 31, 2009
|
$ | 1,197 | $ | 15,912 | $ | 37,163 | $ | 148,542 | $ | 202,814 | ||||||||||
|
Additional
consideration for earn-outs
|
― | ― | 20 | 17 | 37 | |||||||||||||||
|
Balance
as of December 31, 2008
|
$ | 1,197 | $ | 15,912 | $ | 37,143 | $ | 148,525 | $ | 202,777 | ||||||||||
|
Additional
consideration for earn-outs and escrow claim receivable
|
― | ― | 4,299 | 4,952 | 9,251 | |||||||||||||||
|
Additional
consideration for RMS sale
|
― | ― | ― | (26 | ) | (26 | ) | |||||||||||||
|
Balance
as of December 31, 2007
|
$ | 1,197 | $ | 15,912 | $ | 32,844 | $ | 143,599 | $ | 193,552 | ||||||||||
The Company’s
accumulated goodwill impairment losses at December 31, 2009 and 2008 were $26.4
million recorded in connection with our Health Personnel Options Corporation
acquisition made in 2002 which is included in our Healthcare operating
segment.
As of December 31, 2009 and December 31, 2008, the Company had the
following acquired identifiable intangible assets (in thousands):
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||||||||||
|
Estimated
Useful Life
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
||||||||||||||||||
|
Intangible
assets subject to amortization:
|
||||||||||||||||||||||||
|
Customer
relations
|
3
months - 7 years
|
$ | 6,660 | $ | 6,257 | $ | 403 | $ | 17,615 | $ | 14,387 | $ | 3,228 | |||||||||||
|
Contractor
relations
|
3 -
7 years
|
26,010 | 23,100 | 2,910 | 26,012 | 20,134 | 5,878 | |||||||||||||||||
|
Non-compete
agreements
|
2 -
3 years
|
340 | 330 | 10 | 390 | 268 | 122 | |||||||||||||||||
|
In-use
software
|
2
years
|
500 | 500 | ― | 500 | 500 | ― | |||||||||||||||||
| 33,510 | 30,187 | 3,323 | 44,517 | 35,289 | 9,228 | |||||||||||||||||||
|
Intangible
assets not subject to amortization:
|
||||||||||||||||||||||||
|
Trademarks
|
22,200 | — | 22,200 | 22,200 | — | 22,200 | ||||||||||||||||||
|
Goodwill
|
202,814 | — | 202,814 | 202,777 | — | 202,777 | ||||||||||||||||||
|
Total
|
$ | 258,524 | $ | 30,187 | $ | 228,337 | $ | 269,494 | $ | 35,289 | $ | 234,205 | ||||||||||||
Amortization
expense for intangible assets subject to amortization was $6.1 million, $9.4
million and $15.3 million for the years ended December 31, 2009, 2008 and
2007, respectively. Estimated amortization for each of the five years in the
period ended December 31, 2014
is $1.7 million in
2010, $0.7 million in 2011, $0.4 million in 2012, $0.3 million in 2013 and $0.2
million in 2014.
Goodwill
and other intangible assets having an indefinite useful life are not amortized
for financial statement purposes. Goodwill and intangible assets with indefinite
lives are reviewed for impairment on an annual basis as of December 31, and
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.
For
purposes of establishing inputs for the estimated fair value calculations
described above, an annual revenue growth rate was applied based on the then
current economic and market conditions and a terminal growth rate of 4.0
percent. These growth factors were applied to each reporting unit for
the purpose of projecting future cash flows. The cash flows as of
December 31, 2008 were discounted at a rate of approximately 12.0
percent. No impairment of goodwill or intangible assets with
indefinite lives was determined to exist as of December 31, 2008.
The
Company determined that there had been a triggering event as of March 31, 2009
due to the fact that the market capitalization was below book value, and there
was a significant decline in forecasted cash flows for
2009. The Company revised the assumptions used to determine the
fair value of each reporting unit as of March 31, 2009 from those assumptions
used at December 31, 2008 to reflect estimated reductions in future expected
cash flows for 2009 and 2010 and to increase forecasts for 2011 and later years
based on our review of the historical revenue growth rates. The discount rate
used was approximately 13.5 percent. The interim analysis performed
at March 31, 2009 did not indicate impairment.
51
The
Company determined that there continued to be a triggering event as of June 30,
2009 due to the fact that our market capitalization continued to be below book
value, and due to additional reductions in forecasted cash flows for 2009 based
on actual results through June 30, 2009. Step one of the impairment
analysis was performed as of June 30, 2009. The assumptions used to
determine the fair value of each reporting unit as of June 30, 2009 were revised
from the assumptions used at March 31, 2009 to reflect further reductions in
future expected cash flows for 2009 and 2010, offset by future expected
increases in cash flows from cost savings measures taken in 2009 and revised
cash flow forecasts for later years to incorporate future cost savings resulting
from initiatives which contemplate further synergies from system and operational
improvements in infrastructure and field support. Given the current economic
environment as of June 30, 2009, the Company evaluated historical revenue growth
rates experienced during a recovery from a recession in establishing
inputs. Despite the significant decline in revenue in 2009 as a
result of the economic downturn, large annual increases were forecasted over the
next four to five years anticipating an economic recovery. Revenue was
forecasted to stabilize in the second half of 2009. Revenue growth
rates in the years beginning in 2010 reflect a recovery from the recession, but
were within the range of historical growth rates experienced during similar
economic recoveries. The discount rate used was approximately
16.0 percent as of June 30, 2009 due primarily to increases in the cost of debt,
the small company risk premium based on current market capitalization and the
risk-free interest rate in the second quarter. The interim analysis
performed at June 30, 2009 did not indicate impairment.
Given
that our market capitalization as of June 30, 2009 was significantly below book
value, the Company performed a review of market-based data to perform the step
one analysis. The market data review included a comparable trading
multiple analysis based on public company competitors in the staffing
industry. The Company also performed a selected transaction premiums
paid analysis using 2009 transactions with characteristics similar to
ours. Both market analyses were performed on a consolidated
basis to assess the reasonableness of the results of the discounted cash flow
analysis. The market analyses were performed on a consolidated basis
because the Company did not believe that there were direct competitors with
publicly available financial data that were comparable to each of our reporting
units.
Based on
these analyses, the fair value determination based on the discounted cash flow
model was determined to be reasonable in comparison to the fair values derived
from these other valuation methods.
During
the quarter ended September 30, 2009, operating results for the reporting units,
with the exception of the Nurse Travel reporting unit, were consistent with
forecasts for the quarter. Additionally, the Company’s stock price
increased during the third quarter and the excess of book value over market
capitalization declined significantly. As a result, with the
exception of the Nurse Travel reporting unit, none of our other reporting units
had triggering events as of September 30, 2009. The Nurse Travel
reporting unit was evaluated with no impairments noted as of September 30,
2009.
During
the quarter ended December 31, 2009, overall operating results for the reporting
units, with the exception of the Physician reporting unit, were consistent with
forecasts. Additionally, the stock price continued to increase during
the fourth quarter and the excess of book value over market capitalization
continued to decline and was within a reasonable range. Step one
analyses were performed for each reporting unit because December 31 is our
annual impairment test date. No impairment was noted for any of the
reporting units as of December 31, 2009. The discount rate that was used was
16.9 percent. The Company performed a review of market-based
data to perform the step one analysis as part of its annual impairment
test. The market data review included a comparable trading multiple
analysis based on public company competitors in the staffing
industry. The market analysis was performed on a consolidated basis
to assess the reasonableness of the results of the discounted cash flow
analysis. The market analysis was performed on a consolidated basis
because the Company did not believe that there were direct competitors with
publicly available financial data that were comparable to each of our reporting
units. Based on this analysis, the fair value determination based on
the discounted cash flow model was determined to be reasonable in comparison to
the fair values derived from these other valuation methods.
While the
Nurse Travel reporting unit’s revenues declined to an amount which was below the
forecasted amount in the third quarter, it met the forecasted amounts in the
fourth quarter of 2009. Forecasted revenues for each of the five
years beginning in 2011 are less than 2008 actual revenues. As of
December 31, 2009, the Nurse Travel reporting unit represented 7.6 percent of
our $202.8 million goodwill balance and the estimated fair value of the
reporting unit as determined by the discounted cash flow analysis exceeded the
carrying value by 53.5 percent.
52
The
current economic environment significantly impacted the results of the IT and
Engineering reporting unit and as a result, the assumptions related to its
forecasts require a higher degree of management estimate and
judgment. The forecasted results, particularly as it relates to
revenue, are dependent on the Company’s assumptions about the timing and degree
of recovery for this reporting unit. This is also the case for the
Nurse Travel reporting unit and the related assumptions described
above. The IT and Engineering reporting unit represented 73.2 percent
of the $202.8 million goodwill balance and the percentage by which its fair
value exceeded its carrying value at December 31, 2009 was 7.7
percent. The reporting unit’s historical revenue growth over the past
ten years was reviewed noting that the assumptions used for the revenue growth
rates in the discounted cash flow analysis lead to a result 0.5 percent
higher than what the reporting unit had achieved
historically. Second quarter forecasts projected IT and Engineering
revenues to begin to stabilize in the second half of 2009 and to increase
beginning in 2010. Third quarter results showed the stabilization
anticipated and they achieved growth in the fourth quarter. Given
that the Company’s forecasts assume recovery and revenue growth from the
recession beginning in 2010, disclosed below are the five-year compounded annual
revenue growth rates for periods after the 2009 decline that were used in the
discounted cash flow analysis to show the level of expected revenue growth after
the economic downturn. A comparison has been provided below of these
revenue growth rates reflected in the discounted cash flow analysis to the
historical five-year compounded annual growth rates. This comparison
demonstrates that the revenue growth rates reflected in the discounted cash flow
analysis were reasonable based on the reporting unit’s historical financial
performance.
The IT
and Engineering reporting unit was heavily impacted by the economic environment
because this business is concentrated in highly specialized projects which
decline significantly when companies are not investing in capital
expenditures. However, historically the reverse has occurred during a
period of economic recovery since the work that the reporting unit performs is
necessary to develop systems or product enhancements. The
ten-year compounded annual revenue growth rate between 2008 and 2018 for the
reporting unit forecasted in the December 31, 2009 analysis was 5.1 percent and
its historical ten-year compounded annual revenue growth rate between 1998 and
2008 was 4.6 percent. Both of these periods include the impact of an economic
decline and a subsequent recovery. Had we
used a ten-year compounded annual revenue growth rate of 4.6 percent in our
discounted cash flow analysis, the percentage by which the estimated fair value
would have exceeded its carrying value at December 31, 2009 was 3.6 percent.
The reporting unit experienced an economic downturn between 2002 and 2003
and as a result, revenues declined by 38.7 percent. When the economy
recovered over the next several years through 2008, the five-year compounded
annual revenue growth rate was 16.3 percent. In the discounted cash
flow analysis, a five-year compounded annual revenue growth rate has been used
between 2009 and 2014 of 15.9 percent reflecting the expected stabilization of
revenues in the second half of 2009 and the economic recovery at the beginning
of 2010, which the Company believes is reasonable based on the historical growth
rates recovering from an economic downturn.
The
Physician segment’s revenues were growing the first half of 2009, which was
offset by a recent decline which resulted in a small year-over-year decline of
1.7 percent. The Company does not believe that the decline in the
Physician reporting unit is sustainable and will not significantly impact the
forecasts for the future years. As such,
the five-year compounded annual growth rate for VISTA between 2008 and 2013 has
remained consistent around 6.6 to 6.7 percent between the third and fourth
quarter discounted cash flow analyses. This is based on various factors
such as the growth of the permanent placement business in the third and fourth
quarter which are high margin and the increase in the gross margins throughout
2009. The Physician reporting unit represented 18.3 percent of our $202.8
million goodwill balance and the percentage by which the estimated fair value of
the reporting unit as determined by the discounted cash flow analysis exceeded
its carrying value at December 31, 2009 was 5.2 percent.
In
addition to the sensitivity to changes in assumptions related to revenue growth
and timing described above, the discounted cash flows and the resulting fair
value estimates of our reporting units are highly sensitive to changes in other
assumptions. Therefore, in some instances, minor changes in these
assumptions could impact whether the fair value of the reporting unit is greater
than its carrying value. For example, an increase of less than 100
basis points in the discount rate and/or a less than five percent decline in the
cash flow projections of a reporting unit could cause the fair value of certain
significant reporting units to be below their carrying
value. Additionally, the Company has assumed that there will be an
economic recovery at the beginning of 2010 for all of the reporting units.
Changes in the timing of the recovery and the impact on the Company’s operations
and costs may also affect the sensitivity of the
projections. Ultimately, future changes in these assumptions may
impact the estimated fair value of a reporting unit and cause the fair value of
the reporting unit to be below their carrying value, which would require a step
two analysis and may result in impairment of goodwill.
Due to
the many variables inherent in the estimation of a business’s fair value and the
relative size of recorded goodwill, changes in assumptions may have a material
effect on the results of our impairment analysis. Downward revisions of the
Company’s forecasts, extended delays in the economic recovery, or a sustained
decline of the stock price resulting in market capitalization significantly
below book value could lead to an impairment of goodwill or intangible assets
with indefinite lives in future periods.
53
6.
401(k) Retirement Savings Plan, Deferred Compensation Plan and Change in
Control Severance Plan.
Under the
Company’s 401(k) Retirement Savings Plan, which covers eligible employees of On
Assignment and its wholly-owned subsidiaries, Assignment Ready Inc., On
Assignment Staffing Services, Inc., VISTA, and Oxford, eligible employees may
elect to have a portion of their salary deferred and contributed to the plans.
The amount of salary deferred, up to certain limits set by the IRS, is not
subject to federal and state income tax at the time of deferral, but together
with any earnings on deferred amounts, is subject to taxation upon distribution.
The plan covers all eligible employees and permits matching or other
discretionary contributions at the Company’s discretion. Eligible employees may
enroll once they complete three months of service prior to the next quarterly
offering. The Company made no contributions to the 401(k) plan during 2009 and
it made $1.3 million during 2008 and $1.1 million of contributions during
2007.
Effective
January 1, 1998, the Company implemented the On Assignment, Inc.
Deferred Compensation Plan. The plan permits a select group of management and
highly compensated employees and directors that contribute materially to the
continued growth, development and future business success of the Company to
annually elect to defer up to 100 percent of their base salary, annual bonus,
stock option gain or fees on a pre-tax basis and earn tax-deferred returns on
these amounts. On September 4, 2008, effective as of January 1, 2008, the
Company amended the On Assignment Deferred Compensation Plan so that it applies
to deferrals made before January 1, 2005 only (hereinafter referred to as the
1998 Deferred Compensation Plan) and, also effective January 1, 2008, adopted a
new plan, called the On Assignment Deferred Compensation Plan – Effective
January 1, 2008, applicable to deferrals made on or after January 1, 2005
(referred to herein as the 2008 Deferred Compensation Plan). The
plans are not intended to be “qualified” within the meaning of IRS Code Section
401(a), rather, the plans are “unfunded and maintained by an employer primarily
for the purpose of providing deferred compensation for a select group of
management or highly compensated employees” within the meaning of
the Employee Retirement Income Security Act of 1974, as amended (ERISA),
Sections 201(2), 301(a)(3) and 401(a)(1).
Distributions
from the 1998 Deferred Compensation Plan are commenced within 60 days after the
participant’s retirement, death or termination of employment, in a lump sum, or
over five, ten or fifteen years, except that payments made upon termination
(other than due to death or retirement), are paid in a lump sum if the
participant’s account balance at the time of termination is less than
$25,000. Furthermore, if the Company determines in good faith prior
to a change in control that there is a reasonable likelihood that any
compensation paid to a participant for a taxable year of the Company would not
be deductible by the Company solely by reason of the limitation under IRS Code
Section 162(m), (Section 162(m)) then the Company may defer all or any portion
of a distribution until the earliest possible date, as determined by the Company
in good faith, on which the deductibility of compensation paid or payable to the
participant for the taxable year of the Company during which the distribution is
made will not be limited by Section 162(m), or if earlier, the effective date of
a change in control.
Distributions
from the 2008 Deferred Compensation Plan are commenced within 60 days following
the participant’s termination of employment, in a lump sum or in annual
installments of up to fifteen years, except that if the participant’s account
balance is less than the applicable dollar amount specified in IRS Code Section
402(g)(1)(B), in effect for the year in which the distribution is to occur,
payment shall be made in a lump sum. Notwithstanding the foregoing,
in compliance with certain requirements of IRS Code Section 409A, plan
distributions to “specified employees” will commence the first day after the end
of the six month period immediately following the date on which the participant
experiences a termination of employment. Furthermore, if the Company
reasonably anticipates that the Company’s deduction with respect to any
distribution from the 2008 Deferred Compensation Plan would be limited or
eliminated by application of Section 162(m), then to the extent permitted by
applicable treasury regulations, payment shall be delayed until the earliest
date the Company reasonably anticipates that the deduction of the payment will
not be limited or eliminated by application of Section 162(m).
The
deferred compensation liability under the deferred compensation plan were
approximately $2.1 million and $1.4 million at December 31, 2009 and 2008,
respectively. Life insurance policies are maintained as a funding source to the
plans, under which the Company is the sole owner and beneficiary of such
insurance. The cash surrender value of these life insurance policies, which is
reflected in other assets in the accompanying Consolidated Balance Sheets, was
approximately $2.1 million and $1.6 million at December 31, 2009 and 2008,
respectively.
54
The
Company adopted the On Assignment, Inc. Change in Control Severance Plan
(the CIC Plan) to provide severance benefits for officers and certain other
employees who are terminated following an acquisition of the Company. This CIC
Plan was adopted on February 12, 1998 and amended on
August 8, 2004, January 23, 2007, May 21, 2009 and December 10,
2009. Under the CIC Plan, if an eligible employee is involuntarily
terminated within eighteen months after a change in control, as defined in the
CIC Plan, then the employee will be entitled to
(i) a payment equal to the employee’s annual salary plus the employee’s
target bonus, payable in a lump sum, and (ii) a lump sum payment representing
the cost of continuation of health and welfare benefits, under the Consolidated
Omnibus Budget Reconciliation Act of 1985 (COBRA) for periods of time ranging
from nine months to eighteen months, for employees with titles of vice president
or higher. Severance benefits under the plan range from one month to eighteen
months of salary and target bonus, depending on the employee’s length of service
and position with the Company.
The
Company entered into an Amended and Restated Executive Change of Control
Agreements with the Chief Executive Officer and the Chief Financial Officer on
December 11, 2008, primarily for the purpose of causing their existing
agreements to meet the requirements of Code Section 409A. These
agreements supersede the CIC Plan with respect to these officers and provide, in
the event of an involuntary termination occurring within six months and ten days
following a change of control of the Company, for the following benefits (i) a
lump-sum payment equal to three times (for the Chief Executive Officer’s salary
plus target bonus) or two and a half times (for the Chief Financial Officer) the
sum of the officer’s base salary plus target bonus, (ii) eighteen months
continuation of the officer’s health and welfare benefits and car allowance,
(subject to limitations in connection with subsequent employment), (iii) cash
payments equal to insurance premiums and retirement and deferred compensation
contributions that the Company would have paid (in each case, if any), over a
period of eighteen months following termination, and (iv) payment of up to
$15,000 of the cost of outplacement services. Additionally, under the
arrangements, immediately prior to a change of control, all outstanding Company
stock options, restricted stock and stock units held by the officer will become
fully vested (and, in the case of options, remain exercisable for an extended
period), subject, in the case of certain performance-vesting awards, to any
express limitations contained in the officer’s employment or other governing
agreement. In addition, the agreements entitle the executives to tax
gross-up payments in the event that any payments to the executives are subject
to “golden parachute” excise taxes under IRS Code Section 280G.
7.
Commitments and Contingencies.
The
Company leases its facilities and certain office equipment under operating
leases, which expire at various dates through 2016. Certain leases contain rent
escalations and/or renewal options. Rent expense for all significant leases is
recognized on a straight-line basis. At
December 31, 2009 and 2008, the balance of the deferred rent liability
reflected in other current liabilities in the accompanying Consolidated Balance
Sheets was $0.3 million and the balance reflected in long-term liabilities was
$0.5 million and $0.7 million, respectively.
The
following is a summary of specified contractual cash obligation payments by the
Company as of December 31, 2009 (in thousands):
|
Long-Term
Debt
|
Operating
Leases
|
Total
|
|||||||||
|
2010
|
$ | ― | $ | 6,196 | $ | 6,196 | |||||
|
2011
|
― | 3,939 | 3,939 | ||||||||
|
2012
|
― | 2,492 | 2,492 | ||||||||
|
2013
|
77,913 | 1,936 | 79,849 | ||||||||
|
2014
|
― | 1,733 | 1,733 | ||||||||
|
Thereafter
|
― | 2,317 | 2,317 | ||||||||
|
Total
|
$ | 77,913 | $ | 18,613 | $ | 96,526 | |||||
Rent
expense, which is included in SG&A expenses, was $8.2 million for 2009, $9.5
million for 2008 and $8.8 million for 2007.
As
discussed in Note 1, the Company is partially self-insured for its workers’
compensation liability and its medical malpractice liability. The Company
accounts for claims incurred but not yet reported based on estimates derived
from historical claims experience and current trends of industry data. Changes
in estimates, differences in estimates and actual payments for claims are
recognized in the period that the estimates changed or the payments were made.
The self-insurance claim liability was approximately $10.3 million and $9.8
million at December 31, 2009 and 2008,
respectively. Additionally, the Company has letters of
credit outstanding to secure obligations for workers’
compensation claims with various insurance carriers. The letters
of credit outstanding at December 31, 2009 were $3.8 million and at December 31,
2008 were $3.5 million.
As of
December 31, 2009 and 2008, the Company has an income tax reserve in other
long-term liabilities related to uncertain tax positions of $0.3
million.
55
Legal
Proceedings
The
Company is involved in various legal proceedings, claims and litigation arising
in the ordinary course of business. However, based on the facts currently
available, we do not believe that the disposition of matters that are pending or
asserted will have a material adverse effect on our financial position, results
of operations or cash flows.
8.
Income Taxes.
|
Year
Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
United
States
|
$ | 7,602 | $ | 32,085 | $ | 14,435 | |||||
|
Foreign
|
1,183 | 2,146 | 2,380 | ||||||||
| $ | 8,785 | $ | 34,231 | $ | 16,815 | ||||||
The
provision (benefit) for income taxes consists of the following (in
thousands):
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (736 | ) | $ | 13,319 | $ | 9,804 | |||||
|
State
|
75 | 2,314 | 1,125 | |||||||||
|
Foreign
|
452 | 691 | 727 | |||||||||
| (209 | ) | 16,324 | 11,656 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
3,852 | (1,292 | ) | (4,536 | ) | |||||||
|
State
|
427 | 232 | 365 | |||||||||
|
Foreign
|
(98 | ) | (3 | ) | 8 | |||||||
| 4,181 | (1,063 | ) | (4,163 | ) | ||||||||
|
Change
in Valuation Allowance
|
106 | ― | ― | |||||||||
|
Total
|
$ | 4,078 | $ | 15,261 | $ | 7,493 | ||||||
As of
December 31, 2009, the Company had no federal net operating losses and
total combined state net operating losses of $7.5 million. The state net
operating losses can be carried forward for up to 20 years and begin expiring in
2013.
At
December 31, 2009, the Company had accumulated net foreign earnings of $8.1
million. The Company intends to reinvest the undistributed earnings of its
foreign subsidiaries and, therefore, no U.S. income tax has been provided on the
foreign earnings.
The
Company had gross deferred tax assets of $10.3 million and $12.3 million and
gross deferred tax liabilities of $8.5 million and $5.0 million at
December 31, 2009 and 2008, respectively. Foreign deferred tax assets
and liabilities were not material as of December 31, 2009 and
2008.
56
The
components of deferred tax assets (liabilities) are as follows (in
thousands):
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
|
Federal
|
State
|
Federal
|
State
|
|||||||||||||
|
Deferred
income tax assets (liabilities):
|
||||||||||||||||
|
Current:
|
||||||||||||||||
|
Allowance for doubtful
accounts
|
$ | 653 | $ | 79 | $ | 836 | $ | 103 | ||||||||
|
Employee related
accruals
|
1,750 | 212 | 2,321 | 299 | ||||||||||||
|
State taxes
|
225 | — | 776 | — | ||||||||||||
|
Workers’ compensation loss
reserve
|
695 | 89 | 991 | 139 | ||||||||||||
|
Medical malpractice loss
reserve
|
3,008 | 314 | 2,648 | 116 | ||||||||||||
|
Net operating loss
carry-forwards
|
— | 86 | — | 138 | ||||||||||||
|
Prepaid
insurance
|
(356 | ) | (37 | ) | — | — | ||||||||||
|
Other
|
775 | 14 | 850 | 130 | ||||||||||||
|
Total
current deferred income tax assets
|
6,750 | 757 | 8,422 | 925 | ||||||||||||
|
Non-current:
|
||||||||||||||||
|
Net operating loss
carry-forwards
|
— | 292 | — | 453 | ||||||||||||
|
Stock-based
compensation
|
1,841 | 123 | 2,259 | 147 | ||||||||||||
|
Purchased
intangibles
|
(5,218 | ) | (490 | ) | (2,584 | ) | (164 | ) | ||||||||
|
Depreciation and amortization
expense
|
(1,663 | ) | (203 | ) | (1,833 | ) | (152 | ) | ||||||||
|
Employee related
accruals
|
(460 | ) | (50 | ) | — | — | ||||||||||
|
Other
|
112 | 19 | 112 | (235 | ) | |||||||||||
|
Total
non-current deferred income tax (liabilities) assets
|
(5,388 | ) | (309 | ) | (2,046 | ) | 49 | |||||||||
|
Total
deferred income tax assets
|
$ | 1,362 | $ | 448 | $ | 6,376 | $ | 974 | ||||||||
57
The
reconciliation between the amount computed by applying the U.S. federal
statutory tax rate of 35 percent to income before income taxes and the income
tax provision is as follows (in thousands):
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Income
tax provision at the statutory rate
|
$ | 3,075 | $ | 11,981 | $ | 5,885 | ||||||
|
State
income taxes, net of federal benefit
|
471 | 1,569 | 892 | |||||||||
|
Permanent
difference – (gain)/loss on cash surrender value of life
insurance
|
(178 | ) | 309 | (58 | ) | |||||||
|
Permanent
difference – non deductible items
|
614 | 1,035 | 520 | |||||||||
|
Valuation
allowance
|
106 | — | — | |||||||||
|
Income
tax contingency
|
(232 | ) | 32 | (53 | ) | |||||||
|
Return
to provision adjustment
|
280 | — | — | |||||||||
|
Foreign
tax rate differential
|
46 | (61 | ) | (105 | ) | |||||||
|
Other
|
(104 | ) | 396 | 412 | ||||||||
|
Total
|
$ | 4,078 | $ | 15,261 | $ | 7,493 | ||||||
The
Company receives a tax deduction for stock-based awards upon exercise of a
non-qualified stock option or as the result of disqualifying dispositions made
by directors, officers and employees. A disqualifying disposition occurs when
stock acquired through the exercise of incentive stock options or the Employee
Stock Purchase Plan is disposed of prior to the required holding period. The
Company also receives a tax deduction upon the vesting of restricted stock units
or restricted stock awards. The Company received tax deductions of $2.9 million
and $2.0 million, respectively, from stock-based awards in 2009 and
2008.
On
January 1, 2007, the Company adopted certain provisions related to uncertainty
in income taxes of ASC Topic 740, Income Taxes (ASC 740), which
provides interpretative guidance for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. As
a result, the Company made a comprehensive review of its portfolio of uncertain
tax positions in accordance with recognition standards. In this regard, an
uncertain tax position represents the Company’s expected tax treatment of a tax
position taken in a filed tax return, or planned to be taken in a future return,
that has not been reflected in measuring income tax expense for financial
reporting purposes. As a result of this review, the Company adjusted the
estimated value of its uncertain tax positions by recognizing additional
liabilities totaling $0.2 million, including an accrual for interest and
penalties of $21,000, through a charge to retained earnings. Upon the adoption
of these new provisions in ASC 740, the estimated value of the Company’s
uncertain tax positions was a liability of $0.6 million, which includes
penalties and interest, of which $0.2 million was carried in other long-term
liabilities and $0.4 million was carried as a reduction to non-current deferred
tax assets in the consolidated condensed statement of financial position as of
March 31, 2007. As of December 31, 2009, the estimated value of the Company’s
uncertain tax positions is a liability of $0.3 million, which includes penalties
and interest, all of which was carried in other long-term
liabilities. If the Company’s positions are sustained by the taxing
authority in favor of the Company, the entire $0.3 million would reduce the
Company’s effective tax rate. The Company recognizes accrued interest and
penalties related to uncertain tax positions in income tax
expense.
58
The
following is a reconciliation of the total amounts of unrecognized tax (in
thousands):
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Unrecognized
Tax Benefit beginning of year
|
$ | 812 | $ | 832 | $ | 841 | ||||||
|
Gross
Decreases - tax positions in prior year
|
— | (109 | ) | (122 | ) | |||||||
|
Gross
Increases - tax positions in prior year
|
— | — | (46 | ) | ||||||||
|
Gross
Increases - tax positions in current year
|
— | 89 | 159 | |||||||||
|
Reductions
for tax positions as a result of a lapse of the applicable statute of
limitations
|
(415 | ) | — | — | ||||||||
|
Unrecognized
Tax Benefit end of year
|
$ | 397 | $ | 812 | $ | 832 | ||||||
During
2009, 2008 and 2007, the Company recognized $8,000, ($7,000) and $14,000,
respectively, in interest on unrecognized tax benefits. Accruals for interest
and penalties totaled $56,000 at December 31, 2009 and $19,000 at December 31,
2008.
The
Company believes that there will be no significant increases or decreases to
unrecognized tax benefits within the next twelve months.
The
Company is subject to taxation in the United States and various states and
foreign jurisdictions. The IRS has examined and concluded all tax matters for
years through 2006. Open tax years related to federal, state and foreign
jurisdictions remain subject to examination but are not considered
material.
9.
Earnings per Share.
Basic
earnings per share are computed based upon the weighted average number of shares
outstanding and diluted earnings per share are computed based upon the weighted
average number of shares and dilutive share equivalents (consisting of incentive
stock options, non-qualified stock options, restricted stock units and
restricted stock awards) outstanding during the periods using the treasury stock
method.
The
following is a reconciliation of the shares used to compute basic and diluted
earnings per share (in thousands):
|
Year
Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
Weighted
average number of shares outstanding used to compute basic earnings per
share
|
36,011 | 35,487 | 35,138 | ||||||||
|
Dilutive
effect of stock-based awards
|
324 | 371 | 633 | ||||||||
|
Number
of shares used to compute diluted earnings per share
|
36,335 | 35,858 | 35,771 | ||||||||
The
following table outlines the weighted average share equivalents outstanding
during each period that were excluded from the computation of diluted earnings
per share because the exercise price for these options was greater than the
average market price of the Company’s shares of common stock during the
respective periods. Also excluded from the computation of diluted earnings per
share were other share equivalents that became anti-dilutive when applying the
treasury stock method.
|
Year
Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
Anti-dilutive
common share equivalents outstanding (in thousands):
|
2,660 | 2,645 | 1,974 | ||||||||
59
10.
Stock Option Plan and Employee Stock Purchase Plan.
As of
December 31, 2009, the Company maintained its Restated 1987 Stock Option Plan
(as amended and restated through December 11, 2008) that was most recently
approved by shareholders on June 1, 2007 (the Plan). The Company
issues stock options, restricted stock units (RSUs) and restricted stock awards
(RSAs) in accordance with the Plan and records compensation expense in
accordance with the guidance in ASC Topic 718, Stock Compensation (ASC 718).
Compensation expense charged against income related to stock-based compensation
was $5.0 million, $6.3 million and $6.4 million for the years ended December 31,
2009, 2008 and 2007, respectively, and is included in the Consolidated
Statements of Operations and Comprehensive Income in selling, general and
administrative expenses (SG&A). The Company has recognized an income tax
benefit of $1.9 million for the year ended December 31, 2009, $2.2 million for
the year ended December 31, 2008 and $2.0 million for the year ended December
31, 2007 in the income statement for stock-based compensation
arrangements.
The Plan,
which is shareholder-approved, permits the grant of awards, including cash,
stock options, RSUs, RSAs, stock appreciation rights, stock units and dividend
equivalent rights to its employees, officers, members of its Board of Directors,
consultants and advisors covering up to 13.9 million shares of common stock,
subject to per-recipient, annual and other periodic caps. The Company believes
that stock-based compensation better aligns the interests of its employees and
directors with those of its shareholders versus exclusively providing cash-based
compensation. Stock options are granted with an exercise price equal to the
closing market price of the Company’s stock at the date of grant. Stock option
awards generally vest over four years of continuous service with the Company and
generally have 10-year contractual terms while RSUs and RSAs generally vest over
a three year continuous service period, however individual vesting and other
terms may vary with respect to all types of awards. Certain awards also provide
for accelerated vesting in the event of a change in control and/or upon certain
qualifying terminations of service (see Note 6).
The
preceding paragraph describes the general terms of most stock-based incentives
awarded by the Company. However, the Company has granted a discrete set of
stock-based awards to its Chief Executive Officer that differ from those
generally stated terms. On November 4, 2009, we entered into a new employment
agreement with our Chief Executive Officer that provides for three annual stock
award grants with grant-date values at $0.8 million each (to be awarded in 2010,
2011 and 2012) that vest and become payable, subject to continued employment, on
February 1, 2011, 2012, and 2013, respectively, contingent upon achieving
positive adjusted earnings before interest, taxes, depreciation and amortization
(EBITDA) during the thirteen month period ending on February 1 the year
following the grant. On January 2, 2009, the Chief
Executive Officer was granted 1) 90,252 RSUs valued at $0.5 million which vest
on the third anniversary of the date of the grant, (2) 90,252 RSAs valued at
$0.5 million, which were to vest on December 31, 2009 but did not vest because
the performance objectives approved by the Compensation Committee (based on
adjusted EBITDA) were not met, and (3) 90,252 RSUs valued at $0.5 million, which
vest December 31, 2011 contingent upon the Company meeting certain stock price
performance objectives relative to its peers over three years from the date of
grant. On January 2, 2008, the Chief Executive Officer was granted
(1) 78,369 RSUs valued at $0.5 million which vest on the third anniversary of
the date of the grant, (2) 78,369 RSAs valued at $0.5 million, which vested
December 31, 2009 when the Company met the performance objectives approved by
the Compensation Committee (based on adjusted EBITDA), and (3) 78,369 RSUs
valued at $0.5 million, which vest December 31, 2010 contingent upon the Company
meeting certain stock price performance objectives relative to its peers over
three years from the date of grant. On January 2, 2007, the Chief Executive
Officer was granted (1) 42,553 RSUs valued at $0.5 million, which vested on the
third anniversary of the date of the grant, (2) 42,553 shares of RSAs valued at
$0.5 million, which vested on December 31, 2009 when the Company met the
performance objectives approved by the Compensation Committee (based on adjusted
EBITDA), and (3) 42,553 RSUs valued at $0.5 million, which vested December 31,
2009 when the Company met certain stock price performance objectives relative to
its peers over three years from the date of grant. All awards are subject to the
executive’s continued employment through such vesting dates, however, the
vesting of certain awards will accelerate upon the occurrence of a change in
control of the Company and/or upon certain qualifying terminations of
employment. The grant-date fair-value of these awards, which was determined by
applying certain provisions of the Stock Compensation guidance relative to
performance-based and market-based awards, is generally being expensed over the
vesting term. The impact of these awards is reflected in the Restricted Stock
Units and Restricted Stock Awards section below.
On
September 6, 2007, the Company issued RSUs to certain officers. Sixty percent of
the total RSU award will vest in three annual increments subject to continued
employment. Forty percent of the awards will vest in three
consecutive annual installments contingent upon the officer attaining certain
performance objectives approved by the Compensation Committee.
60
The fair
value of each option award is estimated on the date of grant using a
Black-Scholes option valuation model that incorporates assumptions disclosed in
the table below. Expected volatility is based on historical volatility of the
underlying stock for a period consistent with the expected lives of the stock
options as the Company believes this is a reasonable representation of future
volatility. Additionally, the stock option valuation model selected by the
Company uses historical data and management judgment to estimate stock option
exercise behavior and employee turnover rates to estimate the number of stock
option awards that will eventually vest. The expected life, or term, of options
granted is derived from historical
exercise behavior and represents the period of time that stock option awards are
expected to be outstanding. The Company has selected a risk-free rate based on
the implied yield available on U.S. Treasury Securities with a
maturity equivalent to the options’ expected term. For RSUs and RSAs, the
Company records compensation expense based on the fair market value of the
awards on the grant date.
Stock
Options
The
following table displays the weighted average assumptions that have been applied
to estimate the fair value of stock option awards on the date of grant for the
years ended December 31, 2009, 2008 and 2007:
|
Year
Ended
December
31,
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
Dividend
yield
|
— | — | — | ||||||||
|
Risk-free
interest rate
|
1.6% | 1.7% | 4.6% | ||||||||
|
Expected
volatility
|
73.1% | 51.5% | 47.1% | ||||||||
|
Expected
lives
|
3.5
years
|
3.4
years
|
3.4
years
|
||||||||
The
following summarizes pricing and term information for options outstanding as of
December 31, 2009:
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||||||||
|
Range
of Exercise Prices
|
Number
Outstanding at December 31, 2009
|
Weighted
Average Remaining Contractual Life
|
Weighted
Average Exercise Price
|
Number
Exercisable at December 31, 2009
|
Weighted
Average Exercise Price
|
||||||||||||||||||
| $ | 2.82 |
─
|
$ | 4.97 | 439,477 |
6.4 years
|
$ | 4.59 | 297,705 | $ | 4.75 | ||||||||||||
| 4.98 |
─
|
5.17 | 426,967 |
5.4 years
|
5.12 | 354,173 | 5.11 | ||||||||||||||||
| 5.20 |
─
|
7.00 | 408,096 |
5.2 years
|
5.78 | 362,986 | 5.77 | ||||||||||||||||
| 7.01 |
─
|
11.39 | 436,261 |
8.0 years
|
9.29 | 177,703 | 10.52 | ||||||||||||||||
| 11.45 |
─
|
13.31 | 625,169 |
7.0 years
|
12.75 | 442,391 | 12.75 | ||||||||||||||||
| 14.28 |
─
|
29.75 | 100,971 |
1.4 years
|
21.94 | 100,971 | 21.94 | ||||||||||||||||
| $ | 2.82 |
─
|
$ | 29.75 | 2,436,941 |
6.3 years
|
$ | 8.54 | 1,735,929 | $ | 8.67 | ||||||||||||
61
The
following table is a summary of stock option activity under the Plan as of
December 31, 2009 and changes for the year then ended:
|
Incentive
Stock Options
|
Non-
Qualified Stock Options
|
Weighted
Average Exercise Price Per Share
|
Weighted
Average Remaining Contractual
Term
(Years)
|
Aggregate
Intrinsic Value
|
|||||||||||||||
|
Outstanding
at January 1, 2009
|
682,308 | 2,900,365 | $ | 10.07 | 6.9 | $ | 782,000 | ||||||||||||
|
Granted
|
― | 236,600 | $ | 6.57 | |||||||||||||||
|
Exercised
|
(11,120 | ) | (6,805 | ) | $ | 4.96 | |||||||||||||
|
Canceled
|
(246,356 | ) | (1,118,051 | ) | $ | 12.27 | |||||||||||||
|
Outstanding
at December 31, 2009
|
424,832 | 2,012,109 | $ | 8.54 | 6.3 | $ | 2,549,000 | ||||||||||||
|
Vested
or Expected to Vest at December 31, 2009
|
424,610 | 1,883,815 | $ | 8.64 | 6.1 | $ | 2,420,000 | ||||||||||||
|
Exercisable
at December 31, 2009
|
423,587 | 1,312,342 | $ | 8.67 | 5.4 | $ | 1,938,000 | ||||||||||||
In
January 2009, the Company implemented a stock option exchange program that gave
eligible employees the opportunity to exchange options with an exercise price
greater than $8.00 per share that were granted on or after December 31, 2000,
for a reduced number of restricted stock units at an exchange price with a fair
value approximately equivalent to the fair value of the cancelled
options. Certain executive officers and the Board of Directors were
not eligible to participate in the stock option exchange program. As
a result of this stock option exchange program, 603,700 stock options were
cancelled (included in the table above) and exchanged for 87,375 RSU awards
(included in the Unvested RSUs and RSAs table in the Restricted Stock Units and
Restricted Stock Awards disclosure that follows), which will vest 50 percent on
January 22, 2011, 25 percent on January 22, 2012 and 25 percent on January 22,
2013 subject to the employee’s continued employment through such vesting
dates. Incremental compensation cost related to the Option Exchange
was not significant to the Company’s financial statements.
The table
above includes 90,000 non-employee director stock options outstanding as of
December 31, 2009 and 144,000 as of January 1, 2009.
The
weighted-average grant-date fair value of options granted during the years ended
December 31, 2009, 2008 and 2007 was $3.45, $2.08, and $4.05 per option,
respectively. The total intrinsic value of options exercised during
the years ended December 31, 2009, 2008 and 2007 was $27,000, $0.2 million, and
$2.4 million, respectively.
As of
December 31, 2009 there was unrecognized compensation expense of $1.3 million
related to unvested stock options based on options that are expected to vest.
The unrecognized compensation expense is expected to be recognized over a
weighted-average period of 2.5 years.
62
Restricted
Stock Units and Restricted Stock Awards
A summary
of the status of the Company’s unvested RSUs and RSAs as of December 31, 2009
and changes during the year then ended are presented below:
|
Restricted
Stock Units / Awards
|
Weighted
Average Grant-Date Fair Value Per Unit / Award
|
||||||
|
Unvested
RSUs and RSAs outstanding at January 1, 2009
|
759,717 | $ | 8.54 | ||||
|
Granted
|
1,022,059 | 5.62 | |||||
|
RSUs granted for Stock Exchange Program
|
87,375 | 4.55 | |||||
|
Vested
|
(478,226 | ) | 6.11 | ||||
|
Forfeited
|
(168,336 | ) | 5.43 | ||||
|
Unvested
RSUs and RSAs outstanding at December 31, 2009
|
1,222,589 | $ | 7.19 | ||||
|
Unvested
and expected to vest RSUs and RSAs outstanding at December 31,
2009
|
1,050,271 | $ | 6.31 | ||||
In the
table above, the number of shares vested includes 337,030 shares surrendered by
the employees to the Company for payment of minimum tax withholding
obligations. Shares of stock withheld for purposes of satisfying
minimum tax withholding obligations are again available for issuance under the
Plan.
The table
above includes 50,252 RSUs that were awarded to non-employee directors on August
6, 2009, of which 25,128 shares vested immediately upon issuance and the
remaining shares will vest on August 6, 2010. The weighted average
grant-date fair value of these awards was $3.98. The Company records
compensation expense based on the fair market value of the awards on the grant
date. There was unrecognized compensation of $51,000 as of December 31, 2009
related to these RSUs that will be recorded over the remaining term of
approximately seven months.
The
Company has approved certain awards in which a variable number of shares are to
be granted to the employees based on a fixed monetary amount. As such, certain
provisions of ASC 718 and ASC Topic 480, Distinguishing Liabilities from
Equity (ASC 480), require the Company to classify and account for these
awards as liability awards until the number of shares is determined. The expense
related to these awards for the years ended December 31, 2009 and 2008 was $0.2
million, and is included in SG&A in the Consolidated Statements of
Operations and Comprehensive Income. The associated liability
included in the Consolidated Balance Sheets in other long-term liabilities as of
December 31, 2009 and 2008 was $0.2 million.
The
weighted-average grant-date fair value of RSUs and RSAs granted during the years
ended December 31, 2009, 2008 and 2007 was $5.62, $6.77 and $11.98 per award,
respectively. The total intrinsic value of RSUs and RSAs vested
during years ended December 31, 2009, 2008 and 2007 was $2.9 million, $1.3
million and $1.7 million, respectively.
As of
December 31, 2009, there was unrecognized compensation expense of $5.2 million
related to unvested RSUs and RSAs based on awards that are expected to vest. The
unrecognized compensation expense is expected to be recognized over a
weighted-average period of 1.9 years.
On
November 4, 2009, the Chief Executive Officer entered into an employment
agreement that provides for the following equity incentive award
grants: (i) three annual $0.8 million stock award grants (in each of
2010, 2011 and 2012) that vest and become payable (if applicable), subject to
continued employment, on February 1 of the year following grant if the company’s
adjusted EBITDA during the vesting period is positive, (ii) three annual
$0.5 million stock award grants (in each of 2010, 2011, and 2012) that vest and
become payable (if applicable), subject to continued employment, as to 50% of
the earned portion of the award on February 1 of each of the first two years
following grant with the earned portion determined by reference to the Company’s
adjusted EBITDA , contingent upon meeting certain performance objectives, which
are yet to be determined, approved by the Compensation Committee during the
thirteen months ending on the first February 1 following grant, and (iii) three
annual awards, each providing an opportunity to earn up to $1.5 million (and
each denominated in three $500,000 annual grant increments) during overlapping
37-month measurement periods beginning on January 1, 2010, 2011, and 2012,
payable at the end of each 37-month period in shares of Company stock based on
attainment, during three distinct but overlapping 13-month performance
periods running each January 1-January 31 of each 37-
63
month measurement
period, of performance criteria to be determined. These awards will
vest in full and become payable upon a change of control of the Company and the
Chief Executive Officer will be eligible for pro-rated vesting and payouts under
these awards upon certain terminations of employment. The
equity incentive award grants described in (ii) and (iii) above are not included
in the disclosures above and there is no related expense in the current period
as the performance targets have not yet been set.
Employee
Stock Purchase Plan
The
Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase common
stock of the Company, through payroll deductions, at eighty-five percent of the
lower of the market price on the first day or the last day of semi-annual
purchase periods. The ESPP is intended to qualify as an “employee stock purchase
plan” under IRS Code Section 423. Eligible employees may contribute multiples of
one percent of their eligible earnings toward the purchase of the stock (subject
to certain IRS limitations). Under this plan, 227,784, 315,827 and 126,484
shares of common stock were issued to employees for the years ended December 31,
2009, 2008 and 2007, respectively.
In
accordance with the ESPP, shares of common stock are transferred to
participating employees at the conclusion of each six month enrollment period,
which end on the last business day of the month in February and August each
year. The weighted average fair value of stock purchased under the
Company’s ESPP was $2.67 per share for the year ended December 31, 2009, $2.21
per share for the year ended December 31, 2008 and $3.02 per share for the year
ended December 31, 2007. Compensation expense of shares purchased under the ESPP
is measured based on a Black-Scholes option-pricing model. The model accounts
for the discount from market value and applies an expected life in line with
each six month purchase period. All shares authorized and available for issuance
under the Company’s ESPP were allocated and purchased as of February 27, 2009
and, at this time, there is no authorization from the shareholders to replenish
shares for the ESPP program going forward. As a result, the Company
has suspended the ESPP program. The amount recognized as stock-based
compensation expense related to the ESPP for 2009 was not
significant. The amounts recognized as stock-based compensation
expense related to the ESPP for 2008 and 2007 were $0.6 million and $0.5 million
for the years ended December 31, 2008 and 2007, respectively.
11.
Business Segments.
The
Company has four reportable segments: Life Sciences, Healthcare, Physician and
IT and Engineering. The Life Sciences segment provides contract,
contract-to-permanent and direct placement services of laboratory and scientific
professionals to the biotechnology, pharmaceutical, food and beverage, medical
device, personal care, chemical and environmental industries. These contract
staffing specialties include chemists, clinical research associates, clinical
lab assistants, engineers, biologists, biochemists, microbiologists, molecular
biologists, food scientists, regulatory affairs specialists, lab assistants and
other skilled scientific professionals.
The
Healthcare segment includes the combined results of the Nurse Travel and Allied
Healthcare (formerly Medical Financial and Allied, or MF&A) lines of
business. The lines of business have been aggregated into the Healthcare segment
based on similar economic characteristics, end-market customers and management
personnel. The Healthcare segment provides contract, contract-to-permanent and
direct placement of professionals from more than ten healthcare, medical
financial and allied occupations. These contract staffing specialties include
nurses, specialty nurses, respiratory therapists, surgical technicians, imaging
technicians, x-ray technicians, medical technologists, phlebotomists, coders,
billers, claims processors and collections staff.
The
Physician segment, comprised of VISTA Staffing Solutions, Inc., provides
contract and direct placement physicians to healthcare organizations. The
Physician segment works with nearly all medical specialties, placing locum
tenens physicians in hospitals, community-based practices, and federal, state
and local facilities.
The IT
and Engineering segment, comprised of Oxford Global Resources, Inc., provides
high-end contract placement services of information technology and engineering
professionals with expertise in specialized information technology; software and
hardware engineering; and mechanical, electrical, validation and
telecommunications engineering fields.
The
Company’s management evaluates the performance of each segment primarily based
on revenues, gross profit and operating income. The information in the following
table is derived directly from the segments’ internal financial reporting used
for corporate management purposes.
All
revenues, gross profit and operating income disclosed in the tables below
include activity for the Physician and IT and Engineering segments from January
3, 2007 and January 31, 2007, respectively.
64
The
following table represents revenues, gross profit and operating income by
reportable segment (in thousands):
|
Year
Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
Revenues:
|
|||||||||||
|
Life Sciences
|
$ | 93,664 | $ | 129,483 | $ | 134,622 | |||||
|
Healthcare
|
97,137 | 180,671 | 175,079 | ||||||||
|
Physician
|
87,719 | 89,217 | 74,599 | ||||||||
|
IT and Engineering
|
138,093 | 218,687 | 182,880 | ||||||||
|
Total Revenues
|
$ | 416,613 | $ | 618,058 | $ | 567,180 | |||||
|
Gross
Profit:
|
|||||||||||
|
Life Sciences
|
$ | 30,470 | $ | 43,502 | $ | 45,024 | |||||
|
Healthcare
|
27,329 | 46,265 | 44,269 | ||||||||
|
Physician
|
28,545 | 27,369 | 21,808 | ||||||||
|
IT and Engineering
|
50,024 | 82,320 | 68,436 | ||||||||
|
Total Gross
Profit
|
$ | 136,368 | $ | 199,456 | $ | 179,537 | |||||
|
Operating
Income (Loss):
|
|||||||||||
|
Life Sciences
|
$ | 6,176 | $ | 13,048 | $ | 14,731 | |||||
|
Healthcare
|
(3,074 | ) | 6,285 | 3,099 | |||||||
|
Physician
|
8,214 | 5,869 | 1,447 | ||||||||
|
IT and Engineering
|
3,911 | 18,312 | 8,318 | ||||||||
|
Total Operating
Income
|
$ | 15,227 | $ | 43,514 | $ | 27,595 | |||||
The
Company does not report Life Sciences and Healthcare segments’ total assets
separately as the operations are largely centralized. The following table
represents total assets as allocated by reportable segment (in
thousands):
|
Year
Ended December 31,
|
|||||||||
|
2009
|
2008
|
||||||||
| . | |||||||||
|
Total
Assets:
|
|||||||||
|
Life
Sciences and Healthcare
|
$ | 78,645 | $ | 115,458 | |||||
|
Physician
|
69,912 | 72,940 | |||||||
|
IT
and Engineering
|
194,905 | 213,452 | |||||||
|
Total Assets
|
$ | 343,462 | $ | 401,850 | |||||
The
Company does not report all assets by segment for all reportable segments. The
following table represents identifiable assets by reportable segment (in
thousands):
|
Year
Ended December 31,
|
|||||||||
|
2009
|
2008
|
||||||||
| . | |||||||||
|
Gross
Accounts Receivable:
|
|||||||||
|
Life
Sciences
|
$ | 10,548 | $ | 15,418 | |||||
|
Healthcare
|
9,722 | 25,108 | |||||||
|
Physician
|
12,453 | 14,978 | |||||||
|
IT
and Engineering
|
19,399 | 25,309 | |||||||
|
Total Gross Accounts
Receivable
|
$ | 52,122 | $ | 80,813 | |||||
65
The Company operates internationally,
with operations in the United States, Europe, Canada, Australia, New Zealand and
Bermuda. The following table represents revenues by geographic location (in
thousands):
|
Year
Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
Revenues:
|
|||||||||||
|
Domestic
|
$ | 393,846 | $ | 584,316 | $ | 539,776 | |||||
|
Foreign
|
22,767 | 33,742 | 27,404 | ||||||||
|
Total Revenues
|
$ | 416,613 | $ | 618,058 | $ | 567,180 | |||||
The
following table represents long-lived assets by geographic location (in
thousands):
|
Year
Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
Long-Lived
Assets:
|
|||||||||||
|
Domestic
|
$ | 20,364 | $ | 22,300 | $ | 19,479 | |||||
|
Foreign
|
569 | 622 | 833 | ||||||||
|
Total Long-Lived
Assets
|
$ | 20,933 | $ | 22,922 | $ | 20,312 | |||||
The
valuation techniques utilized are based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect internal market assumptions. These two types of
inputs create the following fair value hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2:
Observable market based inputs or unobservable inputs that are corroborated by
market data.
Level 3:
Unobservable inputs that are not corroborated by market data.
The
recorded values of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate their fair value based on their
short-term nature.
The
interest rate cap was the only financial instrument carried at fair value on a
recurring basis at December 31, 2009. The Company’s fair value
measurement as of December 31, 2009 using significant other observable inputs
(Level 2) for the interest rate cap was not significant. The interest rate swap
expired on June 30, 2009, thus there was no related fair value measurement as of
December 31, 2009. The Company’s fair value measurement as of December 31, 2008
using significant other observable inputs (Level 2) for the interest rate swap
was $1.3 million. The interest rate swap was a pay-fixed, receive-variable
interest rate swap based on a LIBOR swap rate. The LIBOR swap rate was
observable at commonly quoted intervals for the full term of the swap and,
therefore, was considered a Level 2 item.
The
following table presents the carrying amounts and the related estimated fair
values of the financial assets and liabilities not measured at fair value on a
recurring basis at December 31, 2009 and 2008 (in thousands):
|
December
31, 2009
|
December
31, 2008
|
||||||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||||
|
Assets
|
|||||||||||||||
|
Life
Insurance Policies
|
$ | 2,114 | $ | 2,114 | $ | 1,610 | $ | 1,610 | |||||||
|
Liabilities
|
|||||||||||||||
|
Long-Term
Debt
|
$ | 77,913 | $ | 75,576 | $ | 125,913 | $ | 107,026 | |||||||
The
Company maintains life insurance policies for use as a funding source for its
deferred compensation arrangements. These life insurance policies are recorded
at their cash surrender value as determined by the insurance broker. Amounts
associated with these policies are recorded in other assets in the condensed
consolidated balance sheets. The fair value of the long-term debt is
based on the yields of comparable companies with similar credit
characteristics.
66
Certain
assets and liabilities, such as goodwill, are not measured at fair value on an
ongoing basis but are subject to fair value adjustments in certain circumstances
(e.g., when there is evidence of impairment). At December 31, 2009,
no fair value adjustments were required for non-financial assets or
liabilities.
13. Derivative
Instruments.
The
Company utilizes derivative financial instruments to manage interest rate risk.
The Company does not use derivative financial instruments for trading or
speculative purposes, nor does it use leveraged financial
instruments.
On May 2,
2007, the Company entered into a transaction with a financial institution to fix
the underlying interest rate on $73.0 million of its outstanding bank loan for a
period of two years beginning June 30, 2007. This transaction, commonly known as
an interest rate swap, essentially fixed the Company’s base borrowing rate at
4.9425 percent as opposed to a floating rate, which reset at selected periods.
The current base rate on the loan balance in excess of $73.0 million was 3.75
percent plus LIBOR (subject to a 3.00 percent LIBOR floor). On June
30, 2009, the swap expired in accordance with the terms of the
agreement. The Company recorded a gain of $1.3 million for the year
ended December 31, 2009, and a loss of $0.1 million for the year ended December
31, 2008 for the change in fair value of the interest rate swap. The
change in the fair value of the swap is included in interest expense in the
consolidated statements of operations and comprehensive income.
The
interest rate swap was not designated as a hedging instrument for accounting
purposes. The fair value of the interest rate swap was the estimated
amount the Company would have received to terminate the swap agreement at the
reporting date, taking into account current interest rates and the
creditworthiness of the Company and the swap counterparty depending on whether
the swap was in an asset or liability position, referred to as a credit
valuation adjustment. The interest rate swap expired on June 30,
2009, thus there was no related fair value measurement as of December 31, 2009.
The Company’s fair value measurement as of December 31, 2008 using significant
other observable inputs (Level 2) for the interest rate swap was $1.3 million,
and was included in the condensed consolidated balance sheets in other current
liabilities. The interest rate swap was a pay-fixed, receive-variable interest
rate swap based on a LIBOR swap rate. The LIBOR swap rate was observable at
commonly quoted intervals for the full term of the swap and, therefore, was
considered a Level 2 item. Credit risk related to the swap was
considered minimal and was managed by requiring high credit standards for the
counterparty and periodic settlements of the underlying
transactions.
Effective
July 1, 2009, pursuant to terms of the amended credit agreement, the Company
entered into an interest rate cap contract, in order to mitigate the interest
rate risk. The interest rate cap contract is for a notional amount of
$51.0 million with a one-month LIBOR cap of 3.0 percent for a term of one
year. As this agreement has not been designated as a hedging
instrument, changes in the fair value of this agreement will increase or
decrease interest expense. The Company’s fair value measurement as of
December 31, 2009 using significant other observable inputs (Level 2) for the
interest rate cap was not significant. The LIBOR rate is observable at commonly
quoted intervals for the full term of the interest rate cap contract and,
therefore, is considered a Level 2 item. Credit risk related to the
contract is considered minimal and will be managed by requiring high credit
standards for the counterparty.
The
following table reflects the effect of derivative instruments on the
Consolidated Statements of Operations and Comprehensive Income (in
thousands):
|
Derivative
not Designated
as
Hedging Instruments
|
Location
of Gain/Loss
Recognized
in Income on Derivative
|
Amount of Gain(Loss)
Recognized in Income
on Derivative
|
|||||||
|
Year
ended December 31,
|
|||||||||
|
2009
|
2008
|
||||||||
|
Interest
rate swap
|
Interest
expense
|
$ | 1,345 | $ | (139 | ) | |||
67
14.
Unaudited Quarterly Results.
The
following table presents unaudited quarterly financial information for each of
the four quarters ended December 31, 2009 and December 31, 2008. In
the opinion of the Company’s management, the quarterly information contains all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation thereof. The operating results for any quarter are not necessarily
indicative of the results for any future period.
|
(In
thousands, except per share data)
Quarter
Ended
|
||||||||||||||||||||||||||||||||
|
Dec.
31, 2009
|
Sep.
30, 2009
|
June
30, 2009
|
Mar.
31, 2009
|
Dec.
31, 2008
|
Sep.
30, 2008
|
June
30, 2008
|
Mar.
31, 2008
|
|||||||||||||||||||||||||
|
Revenues
|
$ | 99,924 | $ | 98,053 | $ | 101,834 | $ | 116,802 | $ | 147,616 | $ | 161,947 | $ | 156,082 | $ | 152,413 | ||||||||||||||||
|
Cost of services
|
66,710 | 65,280 | 68,437 | 79,818 | 99,061 | 109,138 | 105,418 | 104,985 | ||||||||||||||||||||||||
|
Gross
profit
|
33,214 | 32,773 | 33,397 | 36,984 | 48,555 | 52,809 | 50,664 | 47,428 | ||||||||||||||||||||||||
|
Selling,
general and
administrative
expenses
|
29,576 | 28,451 | 29,985 | 33,129 | 38,229 | 39,190 | 38,826 | 39,697 | ||||||||||||||||||||||||
|
Operating
income
|
3,638 | 4,322 | 3,412 | 3,855 | 10,326 | 13,619 | 11,838 | 7,731 | ||||||||||||||||||||||||
|
Interest expense
|
(1,689 | ) | (1,777 | ) | (2,744 | ) | (1,747 | ) | (2,999 | ) | (1,863 | ) | (1,252 | ) | (3,884 | ) | ||||||||||||||||
|
Interest income
|
33 | 34 | 732 | 716 | 126 | 158 | 158 | 273 | ||||||||||||||||||||||||
|
Earnings
before income taxes
|
1,982 | 2,579 | 1,400 | 2,824 | 7,453 | 11,914 | 10,744 | 4,120 | ||||||||||||||||||||||||
|
Provision for income
taxes
|
947 | 1,125 | 830 | 1,176 | 3,915 | 4,977 | 4,652 | 1,717 | ||||||||||||||||||||||||
|
Net
income
|
$ | 1,035 | $ | 1,454 | $ | 570 | $ | 1,648 | $ | 3,538 | $ | 6,937 | $ | 6,092 | $ | 2,403 | ||||||||||||||||
|
Earnings
per share:
|
||||||||||||||||||||||||||||||||
|
Basic
|
$ | 0.03 | $ | 0.04 | $ | 0.02 | $ | 0.05 | $ | 0.10 | $ | 0.20 | $ | 0.17 | $ | 0.07 | ||||||||||||||||
|
Diluted
|
$ | 0.03 | $ | 0.04 | $ | 0.02 | $ | 0.05 | $ | 0.10 | $ | 0.19 | $ | 0.17 | $ | 0.07 | ||||||||||||||||
|
Number
of shares and share equivalents used to calculate earnings per
share:
|
||||||||||||||||||||||||||||||||
|
Basic
|
36,110 | 36,068 | 36,181 | 35,840 | 35,707 | 35,546 | 35,426 | 35,266 | ||||||||||||||||||||||||
|
Dilutive
|
36,760 | 36,578 | 36,385 | 35,982 | 35,985 | 36,071 | 35,838 | 35,375 | ||||||||||||||||||||||||
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable.
68
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this report, the Company’s management carried out
an evaluation, under the supervision and with the participation of our Principal
Executive Officer and Principal Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934). Based on this evaluation, our Principal
Executive Officer and Principal Financial Officer have concluded that our
disclosure controls and procedures are effective as of the end of the period
covered by this report. The term “disclosure controls and procedures”
means controls and other procedures of the Company that are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms. “Disclosure
controls and procedures” include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934
is accumulated and communicated to the Company’s management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act
of 1934) for the Company. The term “internal control over financial reporting”
is defined as a process designed by, or under the supervision of, the Company’s
principal executive and principal financial officers, or persons performing
similar functions, and effected by the Company’s board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
·
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
·
|
Provide
reasonable assurance that the transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and director of the Company;
and
|
|
·
|
Provide
reasonable assurance regarding prevention of timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
Management,
under the supervision and with the participation of our Principal Executive
Officer and Principal Financial Officer, assessed the effectiveness of the
Company’s internal control over financial reporting as of December 31,
2009. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework. Based on our assessment and those criteria, management
believes that the Company maintained effective internal control over financial
reporting as of December 31, 2009. Our independent registered public
accounting firm, Deloitte & Touche LLP, has included an attestation
report on our internal control over financial reporting, which is included
below.
69
Changes
in Internal Controls
There
were no changes in the Company’s internal control over financial reporting that
occurred during the Company’s fourth quarter that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Item
9B. Other Information
None.
70
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of On Assignment, Inc.
Calabasas,
California
We have
audited the internal control over financial reporting of On Assignment, Inc. and
subsidiaries (the "Company") as of December 31, 2009, based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended December 31, 2009 of
the Company and our report dated March 16, 2010 expressed an unqualified opinion
on those financial statements and financial statement schedule.
/s/ Deloitte & Touche
LLP
Los
Angeles, California
March 16,
2010
71
Item
10. Directors and Executive Officers of the Registrant
Information
responsive to this item will be set forth in the Company’s proxy statement for
use in connection with its 2010 Annual Meeting of Stockholders (the “2010 Proxy
Statement”) and is incorporated herein by reference. The 2010 Proxy Statement
will be filed with the SEC within 120 days after the end of the Company’s fiscal
year. The information under the heading “Executive Officers of the Registrant”
in Item 1 of this Form 10-K is also incorporated by reference in this
section.
Item
11. Executive Compensation
Information
responsive to this item will be set forth in the 2010 Proxy Statement to be
filed with the SEC within 120 days after the end of the Company’s fiscal year
and is incorporated herein by reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information
responsive to this item will be set forth in the 2010 Proxy Statement to be
filed with the SEC within 120 days after the end of the Company’s fiscal year
and is incorporated herein by reference.
Item
13. Certain Relationships and Related Transactions
Information
responsive to this Item will be set forth in the 2010 Proxy Statement to be
filed with the SEC within 120 days after the end of the Company’s fiscal year
and is incorporated herein by reference.
Item
14. Principal Accountant Fees and Services
Information
responsive to this Item will be set forth in the 2010 Proxy Statement, to be
filed with the SEC within 120 days after the end of the Company’s fiscal year
and is incorporated herein by reference.
72
Item
15. Exhibits and Financial Statement Schedule
(a)
List of documents filed as part of this report
1.
Financial Statements:
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets at December 31, 2009 and 2008
Consolidated
Statements of Operations and Comprehensive Income (Loss) for the Years Ended
December 31, 2009, 2008 and 2007
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2009,
2008 and 2007
Consolidated Statements of Cash Flows for the Years Ended December 31,
2009, 2008 and 2007
Notes to
Consolidated Financial Statements
2. Financial
Statement Schedule:
Schedule
II—Valuation and Qualifying Accounts
Schedules
other than those referred to above have been omitted because they are not
applicable or not required under the instructions contained in Regulation S-X or
because the information is included elsewhere in the financial statements or
notes thereto.
(b)
Exhibits
See
Index to Exhibits.
73
Pursuant
to the requirements of the Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this to report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 16th day of
March 2010.
|
ON
ASSIGNMENT, INC.
|
|
 |
|
|
Peter
T. Dameris
|
|
|
Chief
Executive Officer and President
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
|
Chief
Executive Officer, President and Director
|
March
16, 2010
|
||
|
Peter
T. Dameris
|
(Principal
Executive Officer)
|
|||
 |
Senior
Vice President, Finance and Chief Financial Officer
|
March
16, 2010
|
||
|
James
L. Brill
|
(Principal
Financial and Accounting Officer)
|
|||
|
/s/
William E. Brock
|
Director
|
March
16, 2010
|
||
|
William
E. Brock
|
||||
|
/s/
Jonathan S. Holman
|
Director
|
March
16, 2010
|
||
|
Jonathan
S. Holman
|
||||
|
/s/
Edward L. Pierce
|
Director
|
March
16, 2010
|
||
|
Edward
L. Pierce
|
||||
|
/s/
Jeremy M. Jones
|
Director
|
March
16, 2010
|
||
|
Jeremy
M. Jones
|
74
SCHEDULE
II—VALUATION AND QUALIFYING ACCOUNTS
Year
Ended December 31, 2009, 2008 and 2007
(In
thousands)
|
Description
|
Balance
at beginning of year
|
Acquired
balances
|
Provisions
|
Deductions
from reserves
|
Balance
at end of year
|
||||||||||||||
|
Year
ended December 31, 2009
|
|||||||||||||||||||
|
Allowance
for doubtful accounts and billing adjustments
|
$ | 2,443 | — | 296 | (790 | ) | $ | 1,949 | |||||||||||
|
Workers’
compensation and medical malpractice loss reserves
|
$ | 9,754 | — | 4,283 | (3,688 | ) | $ | 10,349 | |||||||||||
|
Year
ended December 31, 2008
|
|||||||||||||||||||
|
Allowance
for doubtful accounts and billing adjustments
|
$ | 2,254 | — | 641 | (452 | ) | $ | 2,443 | |||||||||||
|
Workers’
compensation and medical malpractice loss reserves
|
$ | 8,921 | — | 5,384 | (4,551 | ) | $ | 9,754 | |||||||||||
|
Year
ended December 31, 2007
|
|||||||||||||||||||
|
Allowance
for doubtful accounts and billing adjustments
|
$ | 1,380 | 805 | 680 | (611 | ) | $ | 2,254 | |||||||||||
|
Workers’
compensation and medical malpractice loss reserves
|
$ | 3,551 | 4,596 | 4,095 | (3,321 | ) | $ | 8,921 | |||||||||||
75
INDEX
TO EXHIBITS
|
Number
|
Footnote
|
Description
|
||
|
2.1
|
(14)
|
Agreement
and Plan of Merger, dated as of January 3, 2007, by and among On
Assignment, Inc., On Assignment 2007 Acquisition Corp. and Oxford Global
Resources, Inc. and Thomas F. Ryan, as Indemnification
Representative.
|
||
|
2.2
|
(15)
|
Stock
Purchase Agreement, dated as of December 20, 2006, by and among On
Assignment, Inc., VSS Holding, Inc., the stockholders of VSS Holding, Inc.
and the optionholders of VSS Holding, Inc.
|
||
|
3.1
|
(1)
|
Certificate
of Amendment of Restated Certificate of Incorporation of On Assignment,
Inc.
|
||
|
3.2
|
(2)
|
Restated
Certificate of Incorporation of On Assignment, Inc., as
amended.
|
||
|
3.3
|
(3)
|
Amended
and Restated Bylaws of On Assignment, Inc.
|
||
|
4.1
|
(4)
|
Specimen
Common Stock Certificate.
|
||
|
4.2
|
(9)
|
Rights
Agreement, dated June 4, 2003, between On Assignment, Inc. and U.S. Stock
Transfer Corporation as Rights Agent, which includes the Certificate of
Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock as Exhibit A, the Summary of Rights to Purchase Series A
Junior Participating Preferred Stock as Exhibit B and the Form of Rights
Certificate as Exhibit C.
|
||
|
10.1
|
(13)
|
Form
of Indemnification Agreements.
†
|
||
|
10.2
|
(12)
|
Restated
1987 Stock Option Plan, as amended and restated April 7, 2006.
†
|
||
|
10.3
|
(13)
|
First
Amendment to Restated 1987 Stock Option Plan, dated January 23, 2007.
†
|
||
|
10.4
|
(12)
|
Second
Amendment to the Restated 1987 Stock Option Plan, dated April 17,
2007.
†
|
||
|
10.5
|
(17)
|
Third
Amendment to the Restated 1987 Stock Option Plan, dated December 11,
2008.
†
|
||
|
10.6
|
(12)
|
Employee
Stock Purchase Plan, as amended and restated June 18, 2002.
†
|
||
|
10.7
|
(12)
|
First
Amendment to the Employee Stock Purchase Plan, dated January 23,
2007.
†
|
||
|
10.8
|
(5)
|
Office
Lease, dated December 7, 1993, by and between On Assignment, Inc. and
Malibu Canyon Office Partners, LP.
|
||
|
10.9
|
(6)
|
Seventh
Amendment to Office Lease, dated August 20, 2002.
|
||
|
10.10*
|
On
Assignment, Inc. Amended and Restated Change in Control Severance Plan and
Summary Plan Description.
†
|
|||
|
10.11
|
(8)
|
On
Assignment, Inc. Amended and Restated Deferred Compensation Plan,
effective January 1, 1998.
†
|
||
|
10.12
|
(16)
|
Amendment
No. 1 to the On Assignment, Inc. Amended and Restated Deferred
Compensation Plan, dated September 4, 2008. †
|
||
|
10.13
|
(8)
|
Master
Trust Agreement for On Assignment, Inc. Amended and Restated Deferred
Compensation Plan.
|
||
|
10.14
|
(16)
|
On
Assignment, Inc. Deferred Compensation Plan, effective January 1, 2008.
†
|
||
|
10.15
|
(19)
|
Amended
and Restated Senior Executive Agreement between On Assignment, Inc. and
Peter Dameris, dated December 11, 2008.
†
|
||
|
10.16
|
(20)
|
First
Amendment to Amended and Restated Senior Executive Agreement between On
Assignment, Inc. and Peter Dameris, dated March 19, 2009.
†
|
||
|
10.17*
|
Senior
Executive Agreement between On Assignment, Inc. and Peter Dameris, dated
November 4, 2009.
†
|
|||
|
10.18
|
(19)
|
Amended
and Restated Employment Agreement between Oxford Global Resources, Inc.,
On Assignment, Inc. and Michael J. McGowan dated December 30, 2008.
†
|
||
|
10.19
|
(19)
|
Amended
and Restated Employment Agreement between On Assignment, Inc. and James
Brill, dated December 11, 2008.
†
|
76
|
10.20
|
(19)
|
Amended
and Restated Employment Agreement between VISTA Staffing Solutions, Inc.,
On Assignment, Inc. and Mark S. Brouse, dated December 11, 2008.
†
|
|||||||||||||
|
10.21
|
(19)
|
Amended
and Restated Senior Executive Agreement between On Assignment, Inc. and
Emmett McGrath, dated December 11, 2008.
†
|
|||||||||||||
|
10.22
|
(19)
|
Amended
and Restated Executive Change in Control Agreement between On Assignment
and Peter T. Dameris, dated December 11, 2008.
†
|
|||||||||||||
|
10.23
|
(19)
|
Amended
and Restated Executive Change in Control Agreement between On Assignment,
Inc. and James L. Brill, dated December 11, 2008.
†
|
|||||||||||||
|
10.24
|
(7)
|
Form
of Option Agreements.
|
|||||||||||||
|
10.25
|
(10)
|
Executive
Incentive Compensation Plan.
†
|
|||||||||||||
|
10.26
|
(11)
|
Form
of Restricted Stock Unit Agreements.
|
|||||||||||||
|
10.27
|
(13)
|
Credit
Agreement among On Assignment, Inc., UBS Securities, LLC, UBS AG, Stamford
Branch, UBS Loan Finance, LLC and other parties thereto, dated January 31,
2007.
|
|||||||||||||
|
10.28
|
(18)
|
Amendment
No. 1 to Credit Agreement, dated as of March 27, 2009.
|
|||||||||||||
|
21.1*
|
Subsidiaries
of the Registrant.
|
||||||||||||||
|
23.1*
|
Consent
of Independent Registered Public Accounting Firm.
|
||||||||||||||
|
31.1*
|
Certification
of Peter T. Dameris, Chief Executive Officer and President pursuant to
Rule 13a-14(a) or 15d-14(a).
|
||||||||||||||
|
31.2*
|
Certification
of James L. Brill, Senior Vice President, Finance and Chief Financial
Officer pursuant to Rule 13a-14(a) or 15d-14(a).
|
||||||||||||||
|
32.1*
|
Certification
of Peter T. Dameris, Chief Executive Officer and President, and James L.
Brill, Senior Vice President, Finance and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350.
|
||||||||||||||
|
|
|
|
|||||||||||||
|
*
|
Filed
herewith.
|
† These
exhibits relate to management contracts or compensatory plans, contracts or
arrangements in which directors and/or executive officers of the Registrant may
participate.
77
|
(1)
|
Incorporated
by reference from an exhibit filed with our Current Report on Form 8-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
October 5, 2000.
|
|
(2)
|
Incorporated
by reference from an exhibit filed with our Annual Report on Form 10-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
March 30, 1993.
|
|
(3)
|
Incorporated
by reference from an exhibit filed with our Current Report on Form 8-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
May 3, 2002.
|
|
(4)
|
Incorporated
by reference from an exhibit filed with our Registration Statement on Form
S-1 (File No. 33-50646) declared effective by the Securities and Exchange
Commission on September 21, 1992.
|
|
(5)
|
Incorporated
by reference from an exhibit filed with our Annual Report on Form 10-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
March 24, 1994.
|
|
(6)
|
Incorporated
by reference from an exhibit filed with our Quarterly Report on Form 10-Q
(File No. 0-20540) filed with the Securities and Exchange Commission on
November 14, 2002.
|
|
(7)
|
Incorporated
by reference from an exhibit filed with our Annual Report on Form 10-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
March 16, 2005.
|
|
(8)
|
Incorporated
by reference from an exhibit filed with our Quarterly Report on Form 10-Q
(File No. 0-20540) filed with the Securities and Exchange Commission on
May 15, 1998.
|
|
(9)
|
Incorporated
by reference from an exhibit filed with our Current Report on Form 8-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
June 5, 2003.
|
|
(10)
|
Incorporated
by reference from an exhibit filed with our Current Report on Form 8-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
April 1, 2005.
|
|
(11)
|
Incorporated
by reference from an exhibit filed with our Current Report on Form 8-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
August 8, 2005.
|
|
(12)
|
Incorporated
by reference from an exhibit filed with our Registration Statement on Form
S−8 (File No. 333−143907) filed with the Securities and
Exchange
Commission on
June 20, 2007.
|
|
(13)
|
Incorporated
by reference from an exhibit filed with our Annual Report on Form 10-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
March 16, 2007.
|
|
(14)
|
Incorporated
by reference from an exhibit filed with our Current Report on Form 8-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
January 9, 2007.
|
|
(15)
|
Incorporated
by reference from an exhibit filed with our Current Report on Form 8-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
December 22, 2006.
|
|
(16)
|
Incorporated
by reference from an exhibit filed with our Current Report on Form 8-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
September 9, 2008.
|
|
(17)
|
Incorporated
by reference from an exhibit filed with our Current Report on Form 8-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
December 16, 2008.
|
|
(18)
|
Incorporated
by reference from an exhibit filed with our Current Report on Form 8-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
March 30, 2009.
|
|
(19)
|
Incorporated
by reference from an exhibit filed with our Annual Report on Form 10-K
(File No. 0-20540) filed with the Securities and Exchange Commission on
March 16, 2009.
|
(20) Incorporated
by reference from an exhibit filed with our Current Report on Form 8-K (File No.
0-20540) filed with the Securities and Exchange Commission on
May 11, 2009.
78