-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WJ+8tLNOb4dljceIts/gDMB5wTOAjCzr6z6TlIBRLsSlbboe2CK3xPq3Gsm8wvIw yz5u86igY/cBxT3SJW/r4g== 0000950148-01-500266.txt : 20010330 0000950148-01-500266.hdr.sgml : 20010330 ACCESSION NUMBER: 0000950148-01-500266 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ON ASSIGNMENT INC CENTRAL INDEX KEY: 0000890564 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 954023433 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20540 FILM NUMBER: 1584340 BUSINESS ADDRESS: STREET 1: 26651 WEST AGOURA ROAD CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8188787900 10-K 1 v70910e10-k.txt FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 Commission File Number 0-20540 ------------------------ ON ASSIGNMENT, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4023433 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
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: Name of each exchange Title of each class on which registered ------------------- --------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value (Title of Class) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the 22,463,630 shares of voting stock (based on the closing price reported by the Nasdaq Stock Market on January 31, 2001) held by non-affiliates of the registrant as of January 31, 2001 was approximately $603,710,000. For purposes of this disclosure, shares of common stock held by persons who own 5% or more of the shares of outstanding common stock and shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be "affiliates" as that term is defined under the Rules and Regulations of the Act. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of January 31, 2001, the registrant had outstanding 22,486,162 shares of Common Stock, $0.01 par value. DOCUMENT INCORPORATED BY REFERENCE Portions of the On Assignment, Inc. Proxy Statement for the registrant's Annual Meeting of Stockholders scheduled to be held on June 7, 2001 are incorporated by reference into part III of this Report on Form 10-K. ================================================================================ 2 PART I ITEM 1. BUSINESS This Annual Report on Form 10-K contains forward-looking statements regarding the future financial condition and results of operations and the Company's business operations. The words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. Such statements involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors that May Affect Future Results" in item 1 of this report, as well as those discussed elsewhere in this report and the registrant's other filings with the Securities and Exchange Commission. GENERAL On Assignment, Inc. (the "Company"), through its first temporary service, Lab Support, is a leading nationwide provider of temporary scientific professionals to laboratories in the biotechnology, pharmaceutical, food and beverage, chemical and environmental industries. In July 1998, the Company acquired substantially all of the assets, offices and operations of LabStaffers, Inc., which were added to the Lab Support temporary service. On May 12, 1997, the Company formed Assignment Ready Inc., a Canadian corporation and wholly owned subsidiary of the Company, and commenced operations in Toronto as Lab Support Canada, during the third quarter of 1997. On February 2, 1999, the Company formed On Assignment UK Limited, a UK corporation and wholly owned subsidiary of the Company. On February 16, 1999, On Assignment UK Limited formed Lab Support (UK) Limited, a UK corporation and wholly owned subsidiary of On Assignment UK Limited, and commenced operations as Lab Support UK during the first quarter of 1999. On June 5, 2000, the Company formed On Assignment Lab Support B.V., a Netherlands corporation and wholly owned subsidiary of the Company, and commenced operations during the second quarter of 2000. On August 25, 2000, the Company formed On Assignment Lab Support N.V., a Belgium corporation and wholly owned subsidiary of the Company, and commenced operations during the third quarter of 2000. On November 15, 2000, the Company formed On Assignment Lab Support A.G., a Switzerland corporation and wholly owned subsidiary of the Company, and commenced operations during the fourth quarter of 2000. In January 1994, the Company established its second temporary service, Finance Support, with the acquisition of 1st Choice Personnel, Inc. Finance Support was expanded in December 1994, with the acquisition of substantially all of the assets, offices and operations of Sklar Resource Group, Inc. With a shift in Finance Support's business development focus to medical billing and collections, in January 1997 the name of Finance Support was changed to Healthcare Financial Staffing. In March 1996, the Company established its third temporary service with the acquisition of EnviroStaff, Inc., which specializes in providing temporary environmental professionals to the environmental services industry. In the third quarter of 1999, the Company established its fourth temporary service, Clinical Lab Staff, which provides scientific and medical professionals to hospitals, physicians' offices, clinics, reference laboratories and HMOs. The Company has two operating segments: Lab Support and Healthcare Staffing. The Lab Support operating segment includes the combined results of Lab Support and EnviroStaff. The Healthcare Staffing segment includes the combined results of Healthcare Financial Staffing and Clinical Lab Staff. The different temporary services were grouped under these two operating segments as they have similar economic characteristics and they meet the aggregation criteria of SFAS No. 131. As of December 31, 2000, the Company served 82 operational markets through a network of 176 branch offices. The Company's principal executive offices are located at 26651 West Agoura Road, Calabasas, California 91302 and its telephone number is (818) 878-7900. The Company was incorporated on December 30, 1985. ON ASSIGNMENT'S APPROACH The Company's strategy is to serve the needs of targeted industries for quality assignments of temporary professionals. In contrast to the mass market approach used for temporary office/clerical and light industrial personnel, the Company believes effective assignments of temporary professionals require the person making assignments to have significant knowledge of the client's industry and be able to assess the specific needs of the client as well as the temporary professionals' qualifications. As a result, the Company has developed a tailored approach to the assignment process - the Account Manager System. Unlike traditional approaches, the Account Manager System is based on the use of experienced professionals, Account Managers, to manage the assignment process. Account Managers meet with clients' managers to understand position descriptions and workplace environments, and with temporary employee candidates to assess their qualifications and interests. With this information, Account Managers can make quality assignments of temporary professionals to clients, typically within 24 to 48 hours of client requests. The Company's corporate office performs many functions that allow Account Managers to focus more effectively on the 2 3 assignment of temporary professionals. These functions include recruiting, ongoing training and coaching, appointment making, business development and administrative support. The corporate office also selects, opens and maintains branch offices according to a standardized model. Temporary personnel assigned to clients are employees of the Company, though clients provide on-the-job supervisors for temporary personnel. Therefore, clients control and direct the work of temporary personnel and approve hours worked, while the Company is responsible for many of the activities typically handled by the client's personnel department. BRANCH OFFICE NETWORK At December 31, 2000, the Company had 104 Lab Support segment branch offices and 72 Healthcare Staffing segment branch offices. Of this total of 176 branch offices, 137 branch offices involve shared office space among divisions. Through this network of branch offices, the Company served the following operational markets: - --------------------------------------------------------------------------------------------------------------------------- Allentown, PA Dallas, TX Las Vegas, NV Phoenix, AZ Seattle, WA Ann Arbor, MI Dayton, OH Leeds, United Kingdom Piscataway, NJ St. Petersburg, FL Antwerp, Belgium Denver, CO London, United Kingdom Pittsburgh, PA St. Louis, MO Atlanta, GA Des Moines, IA Los Angeles, CA Pleasanton, CA Tampa, FL Austin, TX Detroit, MI Louisville, KY Portland, OR Toronto, ON, Canada Baltimore, MD Edmonton, AB, Canada Madison, WI Princeton, NJ Tulsa, OK Birmingham, United Kingdom Ft. Lauderdale, FL Manchester, United Kingdom Providence, RI Utrecht, Netherlands Boston, MA Ft. Worth, TX Memphis, TN Raleigh-Durham, NC Vancouver, BC, Canada Buffalo, NY Glasgow, Scotland Miami, FL Richmond, VA Ventura, CA Cambridge, United Kingdom Grand Rapids, MI Milwaukee, WI Riverside, CA Washington, DC Charlotte, NC Greensboro, NC Minneapolis, MN Rotterdam, Netherlands Westport, CT Chicago, IL Greenville, SC Montreal, QC, Canada Sacramento, CA White Plains, NY Cincinnati, OH Harrisburg, PA Nashville, TN Salt Lake City, UT Worcester, MA Cleveland, OH Houston, TX New Orleans, LA San Antonio, TX Zurich, Switzerland Columbus, OH Indianapolis, IN Oklahoma City, OK San Diego, CA Concord, CA Jacksonville, FL Orlando, FL San Francisco, CA Costa Mesa, CA Kansas City, MO Philadelphia, PA San Jose, CA - ---------------------------------------------------------------------------------------------------------------------------
------------------------ CLIENTS The Lab Support operating segment includes the combined results of Lab Support and EnviroStaff. The Lab Support segment's clients primarily include biotechnology, pharmaceutical, food and beverage, chemical and environmental companies. The Healthcare Staffing operating segment includes the combined results of Healthcare Financial Staffing and Clinical Lab Staff. The Healthcare Staffing segment's clients include companies engaged in the healthcare industry. During the year ended December 31, 2000, the Company provided assignment professionals to approximately 6,000 clients. All temporary assignments, regardless of their planned length, may be terminated without prior notice by the client or the temporary employee. THE TEMPORARY PROFESSIONAL The skill and experience levels of the Lab Support segment's temporary professional employees range from scientists, engineers, geologists, industrial hygienists and safety professionals with bachelor and/or masters degrees and considerable experience to technicians with limited chemistry or biology background and lab experience and environmental field technicians with some applicable experience. The skill and experience levels of the Healthcare Staffing segment's temporary professional employee range from medical and laboratory clinical technologists to phlebotomists and medical assistants or they typically have two or more years of medical billing and collection experience. Hourly wage rates are established according to local market conditions. The Company pays the related costs of employment including social security taxes, federal and state unemployment taxes, workers' compensation insurance and other similar costs. After minimum service periods and hours worked, the Company also provides paid holidays, allows participation in the Company's 401(k) Retirement Savings Plan and Employee Stock Purchase Plan, creates eligibility for an annual bonus, and facilitates access to and supplements the cost of health insurance for its temporary employees. EXPANSION IN EXISTING PROFESSIONS AND INTO OTHER PROFESSIONS The Company intends to expand its services internationally in the laboratory and scientific field and domestically in the laboratory and scientific, clinical laboratory, medical staffing 3 4 and medical billing and collections fields it currently serves and to apply its approach to the assignment of temporary professionals in other fields. The Company believes that its experience with the Account Manager System and centralized operational support will enable it to enter new markets effectively. The Company continually reviews opportunities in various industries, evaluating the current volume and profitability of temporary assignments, the length of assignments, the degree of specialization necessary to be successful, the competitive environment and the applicability of its Account Manager approach. If attractive markets are identified, the Company may enter these markets through acquisition or internal growth. The Company's January 1994 acquisition of 1st Choice Personnel, Inc., December 1994 acquisition of substantially all of the assets of Sklar Resource Group, Inc., March 1996 acquisition of EnviroStaff, Inc., and July 1998 acquisition of substantially all of the assets of LabStaffers, Inc. were consistent with this ongoing activity, and the Company periodically engages in discussions with possible acquisition candidates. COMPETITION The temporary services industry is highly competitive and fragmented and has low barriers to entry. The Company believes Lab Support is one of the few nationwide temporary service providers that specialize exclusively in scientific laboratory personnel. Although other nationwide temporary personnel companies compete with the Company with respect to scientific, clinical laboratory and medical technologist, environmental services and medical billing and collecting personnel, many of these companies focus on office/clerical and light and heavy industrial personnel, which account for approximately 80% of the overall temporary personnel services market. These companies include Manpower, Inc., Kelly Services, Inc., Adecco, and Aerotech, Inc., each of which is larger and has substantially greater financial and marketing resources than the Company. The Company also competes with temporary personnel agencies on a regional and local basis. Frequently, the strongest competition in a particular market is a local company with established relationships. The Company also competes with its clients that directly advertise or seek referrals of qualified candidates on their own behalf. The principal competitive factors in attracting qualified candidates for temporary employment are salaries and benefits, speed, quality and duration of assignments and responsiveness to the needs of employees. The Company believes that many persons seeking temporary employment through the Company are also pursuing employment through other means, including other temporary employment service firms. Therefore, the speed and availability of appropriate assignments is an important factor in the Company's ability to complete assignments of qualified candidates. In addition to having high quality temporary personnel to assign in a timely manner, the principal competitive factors in obtaining and retaining clients in the temporary services industry are correctly understanding the client's specific job requirements, the appropriateness of the temporary personnel assigned to the client, the price of services and the monitoring of client satisfaction. Although the Company believes it competes favorably with respect to these factors, it expects competition to increase. EMPLOYEES At December 31, 2000, the Company employed approximately 295 regular employees, including Account Managers and corporate office employees. During the year ended December 31, 2000, the Company employed approximately 18,000 temporary employees. None of the Company's employees, including its temporary employees, are represented by a collective bargaining agreement. The Company believes its employee relations are good. REGULATION The Company's operations are subject to applicable state and local regulations, both domestically and internationally, governing the provision of personnel placement services which require personnel companies to be licensed or separately registered. To date, the Company has not experienced any material difficulties in complying with such regulations. State mandated workers' compensation and unemployment insurance premiums, which the Company pays for its temporary and regular employees, can have a direct effect on the Company's cost of services and thereby, profitability. PROPRIETARY RIGHTS The Company has registered its Lab Support and EnviroStaff service marks with the United States Patent and Trademark Office and applied for registration of its Healthcare Financial Staffing and Clinical Lab Staff service marks. The Company has also registered "The Quality Assignment" mark with the United States Patent and Trademark Office. The Company has also registered its Lab Support service mark in Canada, the UK and Switzerland and has applied for the use of the Lab Support service mark in the Netherlands and Belgium. The Company has also obtained European Community registration for its "On Assignment Employer of Knowledge Workers" logo and for "On Assignment Lab Support Science Professionals On Assignment" logo. The 4 5 Company has rights in other trademarks used in connection with its business and has other applications pending for the international use of its service marks. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS The Company operates in a highly competitive environment that involves a number of risks, many of which are beyond the Company's control. The following discussion highlights some of the risks that may affect the Company's future results. Uncertainty of Future Operating Results, Quarterly Fluctuations and Seasonality. Future operating results will depend on many factors, including demand for the Company's services, the market's acceptance of price changes, the productivity, recruitment and retention of Account Managers, the results of the Company's expansion into new geographic markets, the degree and nature of competition, the effectiveness of the Company's expansion into other professions, and the Company's ability to control costs and manage its accounts receivable. The Company and the temporary services industry as a whole typically experience seasonal declines in demand from the year-end holiday season through early February and during June, July and August. The Company has experienced variability in the duration and depth of these seasonal declines, which in turn have materially affected period-to-period and current period-to-prior period comparisons of its financial and operating performance. As a result of these and other factors, there can be no assurance that the Company will be able to grow in future periods, sustain its past rate of revenue growth or maintain profitability on a quarterly or annual basis. If in some future quarter or quarters the Company's operating results are below the expectations of public market analysts or investors, the market price of its common stock may decline significantly. Reliance on and Ability to Attract, Develop and Retain Account Managers. The Company relies significantly on the performance of its Account Managers, who have primary responsibility for all aspects of the process of assigning the Company's temporary employees to clients. The Company is highly dependent on its ability to hire, develop and retain qualified Account Managers, as well as on the productivity of its Account Managers. The available pool of qualified Account Manager candidates is limited. In addition, prior to joining the Company, the typical Account Manager has no prior experience in the temporary employment industry. The Company commits substantial resources to the recruitment, training, development and operational support of its Account Managers. There can be no assurance that the Company will be able to continue to recruit, train and retain sufficient numbers of qualified Account Managers or that Account Managers will achieve desired productivity levels. Failure to achieve planned numbers of Account Managers or productivity of Account Managers could result in a material adverse effect on the Company's financial condition, results of operations and business. Expansion in Existing Professions and into Other Professions. The Company plans to expand its services domestically and internationally within the laboratory and scientific, clinical laboratory and medical staffing, and medical billing and collections fields it currently serves and to other professional fields. The success of the Company's expansion efforts will depend on a number of factors, including the Company's ability to adapt the Account Manager system used in its divisions to other industries and professions, recruit and train new Account Managers with the particular industry or professional experience, establish client relationships in new industries and successfully recruit, qualify and orient new temporary professionals. The ability to manage these factors may be more difficult or take more resources than the Company anticipates, particularly since they may involve industries, clients and professionals that the Company has no experience with. The Company may decide to pursue future expansion by internal growth or acquisition. The rate at which the Company establishes new services may significantly affect the Company's operating and financial results, especially in the quarters of and immediately following expansion into new domestic and international professional markets or the integration of acquired operations. There can be no assurance that the Company will be able to successfully expand its services in the fields it currently serves, identify new professional fields suitable for expansion or continue to grow. Furthermore, in the event the Company pursues an acquisition, there can be no assurance that the Company will identify suitable acquisition candidates on reasonable terms, that the Company will be able to successfully integrate acquisitions, that anticipated benefits of the acquisition will be achieved, or that diversion of management attention to the acquisition and integration process will not have an adverse effect on the Company's existing businesses. Planned International Operations Face Special Risks. In the first quarter of 1999, the Company expanded its operations to the UK and during 2000, the Company expanded into the Netherlands, Belgium and Switzerland. The Company intends to expand its operations to other countries in Europe in the future. The Company has limited experience in marketing, selling, and particularly, supporting its services outside of North America. Development of such skills may be more difficult or take longer than the Company anticipates, especially due to the fact that its centralized support functions in Calabasas, California will not be able to provide the same level of 5 6 support to operations outside of North America as it does to its current North American operations. In addition to establishing operations support functions outside North America, the Company will have to address language barriers and different regulations of temporary employment. Moreover, international operations are subject to a variety of additional risks associated with conducting business internationally that could seriously harm the Company's financial condition and results of operations. These risks may include the following: problems in collecting accounts receivable; the impact of recessions in economies outside the United States; unexpected changes in regulatory requirements; fluctuations in currency exchange rates; seasonal reductions in business activity during the summer months in Europe; and potentially adverse tax consequences. Dependence on Availability of Qualified Temporary Professional Employees. The Company is dependent upon continuing to attract qualified laboratory and scientific, clinical laboratory and medical technologist, environmental services and medical billing and collecting personnel with a broad range of skills and experience in order to meet client needs. The Company competes for such personnel with other temporary personnel companies, as well as actual and potential clients, some of which seek to fill positions with either regular or temporary employees. In addition, the Company's temporary employees sometimes become regular employees of the Company's clients. There can be no assurance that qualified laboratory and scientific, clinical laboratory and medical technologist, environmental services, and medical billing and collections personnel will be available to the Company in adequate numbers. Highly Competitive Market. The temporary services industry is highly competitive and fragmented, with limited barriers to entry. The Company competes in national, regional and local markets with full-service agencies and in regional and local markets with specialized temporary services agencies. Several of these companies have significantly greater marketing and financial resources than those of the Company. As the Company expands into new geographic markets, its success will depend in part on its ability to gain market share from competitors. The Company expects that competition will increase in the future and there can be no assurance that the Company will remain competitive. Effect of Fluctuations in the General Economy. Demand for temporary services is significantly affected by the general level of economic activity. As economic activity slows, many companies reduce their usage of temporary employees before undertaking layoffs of their regular employees. As economic activity increases, many clients convert their temporary employees to regular employees which, depending on the Company's agreement with the client and when such conversion occurs, may not result in any conversion fee revenue for the Company. The Company is unable to predict the level of economic activity at any particular time and its effect on the Company's operating and financial results. Terminability of Client Arrangements. The Company's arrangements with clients are terminable at will and do not require clients to use the Company's services. All temporary assignments, regardless of their planned length, may be terminated without advance notice. There can be no assurance that existing clients will continue to use the Company's services at historical levels, if at all. Employment Liability Risks. The Company employs and assigns temporary employees to the workplaces of other businesses. Inherent risks of such activity include possible claims of errors and omissions, misuse of customers' proprietary information, discrimination and harassment, theft of client property, and other criminal activity or torts by temporary employees. The Company seeks to reduce its liability for the acts of its temporary employees by providing in its arrangements with most clients that temporary personnel work under the client's supervision, control and direction. There can be no assurance that such arrangements will be enforceable or that, if enforceable, would be sufficient to preclude liability as a result of the actions of the Company's temporary personnel. In addition, there can be no assurance that current liability insurance coverage will be adequate or will continue to be available in sufficient amounts. Workers' Compensation Expense. The Company maintains a partially self-insured workers' compensation program. In connection with this program, the Company pays a base premium plus actual losses incurred up to certain levels, and is insured for losses greater than certain levels per occurrence and in the aggregate. The Company seeks to minimize the impact of workers' compensation losses through a proactive claims management and accident reduction program. While the Company believes that current loss reserves are reasonable based on claims filed and an estimate of claims incurred but not yet reported, there can be no assurance that loss reserves and insurance coverage will be adequate in amount to cover all workers' compensation claims. Dependence on Key Officers. The Company's future success depends in significant part upon the continued service of its key officers. Competition for such personnel is intense and there can be no assurance that the Company will retain its key officers or that it can attract or retain other highly qualified managerial 6 7 personnel in the future. The loss of any of its key officers could have a material adverse effect upon the Company's business, operating results and financial condition. On February 14, 2001 the Company announced that H. Tom Buelter, its Chief Executive Officer and Chairman of the Board intends to retire during 2001 as Chief Executive Officer once a successor to his position has been hired. Mr. Buelter will continue as Chairman of the Board for up to one year to ensure a smooth transition of leadership. Government Regulations. In many states and foreign countries, the temporary services industry is regulated, and firms such as the Company must be registered or qualify for an exemption from registration. While these regulations have not materially affected the conduct of the Company's business to date, there can be no assurance that future domestic or foreign regulations will not have such effect. Mandated workers' compensation and unemployment insurance premiums, which the Company pays for its temporary as well as its regular employees in both its domestic and international operations, can have a direct effect on cost of services and thereby, profitability. In the past, federal legislative proposals for national health insurance have included provisions extending health insurance benefits to temporary employees and some states could impose sales taxes or raise sales tax rates on temporary services. Further increases in such premiums or rates or the introduction of new regulatory provisions could substantially raise the costs associated with hiring temporary employees and there is no assurance that these increased costs could be passed on to clients without a significant decrease in the demand for temporary employees. ITEM 2. PROPERTIES The Company has leased approximately 30,500 square feet of office space through March 2004, for its corporate headquarters in Calabasas, California. In addition, the Company leases office space in 94 branch office locations in the metropolitan areas listed under the caption "Branch Office Network" in Item 1 hereof. A branch office typically occupies space ranging from approximately 1,500 to 2,500 square feet with lease terms that typically range from six months to five years. ITEM 3. LEGAL PROCEEDINGS (a) There is no material legal proceeding to which the Company is a party or to which its properties are subject. (b) No material legal proceedings were terminated in the fourth quarter of 2000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 8 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company and their ages as of January 31, 2001 were:
- ------------------------------------------------------------------------------------------- Name Age Position - ------------------------------------------------------------------------------------------- H. Tom Buelter 59 Chairman of the Board and Chief Executive Officer (1) Kathy J. West 49 President and Chief Operating Officer Ronald W. Rudolph 57 Executive Vice President, Finance and Chief Financial Officer Dr. Volkmar G. Hable 34 Executive Vice President, Operations (2) - -------------------------------------------------------------------------------------------
(1) On February 14, 2001, Mr. Buelter announced his intention to retire during 2001 as Chief Executive Officer once a search to hire his successor is completed. (2) Hired effective March 5, 2001 H. TOM BUELTER has served as Chief Executive Officer and a director of the Company since he joined the Company in March 1989. Mr. Buelter was elected Chairman of the Company's Board of Directors in December 1992. Mr. Buelter also held the title of President from March 1989 to September 1997. From 1983 to 1989, he was Senior Vice President of Kelly Services, Inc. ("Kelly Services"), a temporary personnel firm, and Chief Operating Officer of Kelly Assisted Living, a division of Kelly Services which provides temporary home-care personnel. KATHY J. WEST has served as President and Chief Operating Officer since September 1997. From March 1995 to September 1997, Ms. West served as the Company's Senior Vice President, Chief Operating Officer. From October 1993 to March 1995, Ms. West served as the Company's Senior Vice President, Operations. From April 1993 to October 1993, Ms. West served as the Company's Senior Vice President, Employee and Business Services and, from January 1992 to April 1993, as the Company's Vice President, Employee and Business Services. Ms. West joined the Company in 1990, as Director of Branch Operations. From 1987 to 1990, she served as the founding principal of Performance Training Systems, a training services firm. From 1973 to 1987, she was employed by Kelly Services, where she held a variety of field operating and corporate positions. Her responsibilities included field sales, corporate branch operations, training and developing international sales and service schools. RONALD W. RUDOLPH has served as Executive Vice President, Finance and Chief Financial Officer since March 13, 2000. From January 1, 1999 through March 12, 2000, Mr. Rudolph served as Senior Vice President, Finance and Chief Financial Officer. From October 1996 through December 1998, Mr. Rudolph served as Senior Vice President, Finance and Operations Support, and Chief Financial Officer. From January 1996 through October 1996, Mr. Rudolph served as Senior Vice President, Finance and Administration, and Chief Financial Officer. Mr. Rudolph joined the Company in April 1995, as Vice President, Finance and Administration, and Chief Financial Officer. From April 1987 to September 1994, Mr. Rudolph was Vice President, Finance and Administration, and Chief Financial Officer of Retix, a manufacturer of enterprise networking devices, and from June 1993 to September 1994, Mr. Rudolph was a director of Retix. DR. VOLKMAR G. HABLE was hired March 5, 2001 to serve as Executive Vice President, Operations. From 1997 to 2000, Dr. Hable was Senior Executive of Adecco S.A., responsible for operations in ten European countries, as well as a Senior Project Manager for Adecco's European IT projects. Dr. Hable's prior industry experience includes chemical, pharmaceutical, geophysics, geology and medicine. Dr. Hable has a doctorate in geosciences from the University of Innsbruck, Austria, and he is fluent in five languages. 8 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the Nasdaq Stock Market under the symbol ASGN. The following table sets forth the range of high and low sales prices, as reported on the Nasdaq Stock Market for the period from January 1, 1999 to December 31, 2000. At January 31, 2001, the Company had approximately 78 holders of record of its Common Stock (although the Company has been informed there are in excess of approximately 3,000 beneficial owners) and 22,486,162 shares outstanding.
-------------------------------------------------------------------------------------------- Price Range of Common Stock High Low -------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 1999 First Quarter 19-1/4 11-31/32 Second Quarter 15-15/16 10-25/32 Third Quarter 16-3/4 22 Fourth Quarter 14-15/16 11-1/2 Fiscal Year Ended December 31, 2000 First Quarter 22-1/2 13-3/4 Second Quarter 34-5/16 22-1/4 Third Quarter 33 25-1/16 Fourth Quarter 32-1/4 21-3/4 --------------------------------------------------------------------------------------------
On March 7, 2000, the Board of Directors authorized a two-for-one stock split, effected as a 100 percent common stock dividend, to be distributed on April 3, 2000 to shareholders of record as of March 27, 2000. All references to number of shares, sales prices and per share amounts of the Company's common stock have been retroactively restated to reflect the increased number of common shares outstanding. Since inception, the Company has not declared or paid any cash dividends on its Common Stock and currently plans to retain all earnings to support the development and expansion of its business. The Company has no present intention of paying any dividends on its Common Stock in the foreseeable future. However, the Board of Directors of the Company periodically reviews the Company's dividend policy to determine whether the declaration of dividends is appropriate. 9 10 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial data of the Company. This historical data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.
- ------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, (in thousands, except per share data) 1996 1997 1998 1999 2000 - ------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Revenues $ 88,188 $107,849 $132,741 $159,473 $195,080 Cost of services 61,231 74,748 90,705 107,652 131,351 ---------------------------------------------------------------------------- Gross profit 26,957 33,101 42,036 51,821 63,729 Selling, general and administrative expenses 17,699 20,714 25,308 30,428 35,532 ---------------------------------------------------------------------------- Operating income 9,258 12,387 16,728 21,393 28,197 Acquisition costs 401 -- -- -- -- ---------------------------------------------------------------------------- Income before interest and income taxes 8,857 12,387 16,728 21,393 28,197 Interest income, net 549 833 1,336 1,635 2,442 ---------------------------------------------------------------------------- Income before income taxes 9,406 13,220 18,064 23,028 30,639 Provision for income taxes 3,800 4,954 6,748 8,566 11,392 ---------------------------------------------------------------------------- Net income $ 5,606 $ 8,266 $ 11,316 $ 14,462 $ 19,247 ---------------------------------------------------------------------------- Basic earnings per share $ 0.27 $ 0.39 $ 0.52 $ 0.66 $ 0.87 ---------------------------------------------------------------------------- Weighted average number of common shares outstanding 20,413 21,123 21,721 21,907 22,193 ---------------------------------------------------------------------------- Diluted earnings per share $ 0.26 $ 0.37 $ 0.50 $ 0.65 $ 0.83 ---------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding 21,793 22,063 22,604 22,372 23,080 ---------------------------------------------------------------------------- BALANCE SHEET DATA Cash, cash equivalents and current portion of marketable securities $ 14,102 $ 23,709 $ 30,466 $ 35,271 $ 63,122 Working capital 23,709 35,225 43,987 54,769 84,717 Total assets 31,874 44,864 62,028 71,740 105,556 Long-term liabilities -- -- -- -- -- Stockholders' equity 27,635 39,272 54,226 63,447 95,291 - -------------------------------------------------------------------------------------------------------------------------------
10 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion in this Report contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, management of growth, particularly in international markets, risks inherent in expansion into new international markets and new professions, the integration of acquired operations, the Company's ability to attract, train and retain qualified Account Managers and temporary employees in the laboratory, science, financial and environmental fields, and other risks discussed in "Risk Factors That May Affect Future Results" in Item 1 of this Annual Report, beginning on page 5, as well as those discussed elsewhere in this Report and from time to time in the Company's other reports filed with the Securities and Exchange Commission. SEASONALITY The Company's results have historically been subject to seasonal fluctuations. Demand for the Company's temporary employees typically declines from the year-end holiday season through February, resulting in a corresponding decrease in revenues, operating income and net income. Demand for the Company's temporary employees also often declines in June, July and August due to decreases in clients' activity during vacation periods and the availability of students to perform temporary work. As a result, the Company has experienced slower growth or declines in revenues, operating income and net income during the first quarter and from the second quarter to third quarter of prior years. YEARS ENDED DECEMBER 31, 1999 AND 2000 REVENUES. Revenues increased by 22.3% from $159,473,000 in the year ended December 31, 1999, to $195,080,000 in the year ended December 31, 2000, as a result of the increased revenues of the Lab Support and the Healthcare Staffing segments. The Lab Support segment's revenues increased by 17.0% from $119,668,000 in the year ended December 31, 1999, to $139,986,000 in the year ended December 31, 2000. The increase in revenue was primarily attributable to a 10.6% increase in the number of temporary employees on assignment from December 31, 1999 to December 31, 2000 and to a lesser extent to a 5.2% increase in average hourly billing rates during 2000. The increase in the number of temporary employees on assignment was primarily attributable to the strong performance in most of the markets in which the Lab Support segment has older, better established branches and to a lesser extent the contribution of new offices opened in the past year. The Healthcare Staffing segment's revenues increased by 38.4% from $39,805,000 in the year ended December 31, 1999 to $55,094,000 in the year ended December 31, 2000. The increase in revenue was primarily attributable to a 36% increase in the number of temporary employees on assignment and to a lesser extent to a 5.2% increase in average hourly billing rates during 2000. The increase in the number of temporary employees on assignment was primarily attributable to the strong performance in most of the markets in which the Healthcare Staffing segment has older, better established branches and to a lesser extent the contribution of new offices opened in the past year. COST OF SERVICES. Cost of services consists solely of compensation for temporary employees and payroll taxes, benefits and employment related expenses paid by the Company in connection with such compensation. Cost of services increased 22.0% from $107,652,000 in 1999 to $131,351,000 in 2000. The Lab Support segment's cost of services as a percentage of revenues decreased by 0.4% from 67.5% in 1999 to 67.1% in 2000. This decrease was primarily attributable to a 0.9% decrease in temporary employee compensation and payroll taxes, partially offset by a 0.4% increase in workers' compensation and a 0.1% increase in employer paid benefits in 2000. The Healthcare Staffing segment's cost of service as a percentage of revenues increased by 0.4% from 67.5% in 1999 to 67.9% in 2000. This increase was attributable to an increase in workers' compensation expense. The increase in workers' compensation expense in both segments resulted from an increase in actual workers' compensation claims reported and estimated incurred but not yet reported claims in 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses include the costs associated with the Company's network of Account Managers and branch offices, including Account Manager compensation, rent, other office expenses and advertising for temporary employees, and corporate office expenses, such as the salaries of corporate operations and support personnel, management compensation, Account Manager recruiting and training expenses, corporate advertising and promotion, rent and other general and administrative expenses. Selling, general and administrative expenses increased 16.8% from $30,428,000 in 1999 to 11 12 $35,532,000 in 2000. Selling, general and administrative expenses as a percentage of revenues decreased from 19.1% in the 1999 period to 18.2% in the 2000 period. This result was primarily attributable to leveraging a centralized support system over a larger revenue base, offset by investments in Account Manager training and recruiting, expenses for international expansion into Europe, and an increase in the hiring of new Account Managers for the opening of new offices and the expansion of existing offices. INTEREST INCOME. Interest income increased 49.4% from $1,635,000 in 1999 to $2,442,000 in 2000, primarily as a result of interest earned on higher interest-bearing cash, cash equivalent and marketable security account balances in 2000. PROVISION FOR INCOME TAXES. Provision for income taxes increased 33.0% from $8,566,000 in 1999 to $11,392,000 in 2000. The Company's effective tax rate remained unchanged at 37.2% in 1999 and 2000. YEARS ENDED DECEMBER 31, 1998 AND 1999 REVENUES. Revenues increased by 20.1% from $132,741,000 in the year ended December 31, 1998, to $159,473,000 in the year ended December 31, 1999, as a result of the increased revenues of the Lab Support and the Healthcare Staffing segments. The Lab Support segment's revenues increased by 8.2% from $110,644,000 in the year ended December 31, 1998, to $119,668,000 in the year ended December 31, 1999. The increase in revenue was primarily attributable to a 4.4% increase in the number of temporary employees on assignment from December 31, 1998 to December 31, 1999 and to a lesser extent to a 3.5% increase in average hourly billing rates during 1999. The increase in the number of temporary employees on assignment was primarily attributable to the strong performance in most of the markets in which the Lab Support segment has older, better established branches and to a lesser extent the contribution of new offices opened in the past year. The Healthcare Staffing segment's revenues increased by 80.1% from $22,097,000 in the year ended December 31, 1998 to $39,805,000 in the year ended December 31, 1999. The increase in revenue was primarily attributable to a 79.1% increase in the number of temporary employees on assignment and to a lesser extent to a 3.8% increase in average hourly billing rates during 1999. The increase in the number of temporary employees on assignment was primarily attributable to the strong performance in most of the markets in which the Healthcare Staffing segment has older, better established branches and to a lesser extent the contribution of new offices opened in the past year. COST OF SERVICES. Cost of services consists solely of compensation for temporary employees and payroll taxes, benefits and employment related expenses paid by the Company in connection with such compensation. Cost of services increased 18.7% from $90,705,000 in 1998 to $107,652,000 in 1999. The Lab Support segment's cost of services as a percentage of revenues decreased by 1.1% from 68.6% in 1998 to 67.5% in 1999. This decrease was primarily attributable to a 0.8% decrease in temporary employee compensation and payroll taxes and a 0.5% decrease in workers' compensation in 1999, partially offset by a 0.2% increase in employer paid benefits. The Healthcare Staffing segment's cost of service as a percentage of revenues increased by 0.5% from 67.0% in 1998 to 67.5% in 1999. This increase was primarily attributable to a 0.6% increase in temporary employee compensation and payroll taxes, and a 0.2% increase in employer paid benefits in 1999, partially offset by a 0.4% decrease in workers' compensation expense. The decrease in workers' compensation expense in both segments resulted from a decline in actual workers' compensation claims reported and estimated incurred but not yet reported claims in 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses include the costs associated with the Company's network of Account Managers and branch offices, including Account Manager compensation, rent, other office expenses and advertising for temporary employees, and corporate office expenses, such as the salaries of corporate operations and support personnel, management compensation, Account Manager recruiting and training expenses, corporate advertising and promotion, rent and other general and administrative expenses. Selling, general and administrative expenses increased 20.2% from $25,308,000 in 1998 to $30,428,000 in 1999. Selling, general and administrative expenses as a percentage of revenues remained consistent at 19.1% in the 1998 and 1999 periods. This result was primarily attributable to leveraging a centralized support system over a larger revenue base, offset by investments in Account Manager training and recruiting, expenses for international expansion into Canada and the UK, and an increase in the hiring of new Account Managers for the opening of new offices and the expansion of existing offices. INTEREST INCOME. Interest income increased 22.4% from $1,336,000 in 1998 to $1,635,000 in 1999, primarily as a result of interest earned on higher interest-bearing cash, cash equivalent and marketable security account balances in 1999. 12 13 PROVISION FOR INCOME TAXES. Provision for income taxes increased 26.9% from $6,748,000 in 1998 to $8,566,000 in 1999. The Company's effective tax rate remained relatively unchanged from 37.4% in 1998 compared to 37.2% in 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash in 1999 and 2000 were funds provided by operating activities. In 1999, operating activities provided $10,110,000 of cash compared to $21,406,000 in 2000. This increase was primarily attributable to a higher net income, an increase in income taxes payable and a larger increase in accounts payable and accrued expenses. This increase was partially offset by a larger increase in accounts receivable. Cash used for investing activities totaled $7,934,000 in 1999 compared to $3,155,000 in 2000. This decrease was primarily attributable to lower purchases of marketable securities, lower purchases of furniture, equipment, and leasehold improvements and a repayment of an officer loan receivable in 2000 compared to a disbursement in 1999. Cash used for financing activities was $5,770,000 in 1999 compared to cash provided by financing activities of $8,820,000 in 2000. The increase was primarily attributable to higher proceeds from the exercise of common stock options in 2000 and repurchases of common stock in 1999. The Company believes that its cash balances, together with the funds from operations will be sufficient to meet its cash requirements through at least the next twelve months. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks arising from transactions in the normal course of business, principally risks associated with interest rate and foreign currency fluctuations. The Company is exposed to interest rate risk from its held to maturity investments. The interest rate risk is immaterial due to the short maturity of those investments. The Company is exposed to foreign currency risk from the translation of foreign operations into U.S. dollars. Based on the relative size and nature of its foreign operations, the Company does not believe that a ten percent change in foreign currencies would have a material impact on its financial statements. 13 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS To the Board of Directors 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, 1999 and 2000, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed at Item 14. 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 auditing standards generally accepted in the United States of America. 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, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 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, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP - -------------------------- Deloitte & Touche LLP Los Angeles, California January 24, 2001 14 15 ON ASSIGNMENT, INC. CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------- December 31, 1999 2000 - ----------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 24,120,000 $ 51,202,000 Marketable securities 11,151,000 11,920,000 Accounts receivable, net of allowance for doubtful accounts of $1,216,000 (1999) and $1,460,000 (2000) 22,780,000 27,679,000 Advances and deposits 74,000 232,000 Prepaid expenses 1,800,000 1,626,000 Officer loan receivable (Note 3) 400,000 -- Income taxes receivable 681,000 -- Deferred income taxes (Note 7) 2,056,000 2,323,000 ------------------------------------ Total current assets 63,062,000 94,982,000 ------------------------------------ Office Furniture, Equipment and Leasehold Improvements, net (Note 2) 3,510,000 3,338,000 Marketable securities 2,256,000 3,413,000 Deferred income taxes (Note 7) 274,000 375,000 Workers' compensation restricted deposits (Note 6) 169,000 237,000 Goodwill, net (Note 4) 1,468,000 1,693,000 Other assets (Note 5) 1,001,000 1,518,000 ------------------------------------ Total Assets $ 71,740,000 $ 105,556,000 ------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 1,067,000 $ 701,000 Accrued payroll 4,203,000 4,854,000 Income taxes payable -- 430,000 Deferred compensation (Note 5) 807,000 1,423,000 Accrued workers' compensation (Note 6) 1,447,000 1,753,000 Other accrued expenses 769,000 1,104,000 ------------------------------------ Total current liabilities 8,293,000 10,265,000 ------------------------------------ Commitments and Contingencies (Notes 5 and 6) -- -- Stockholders' Equity (Note 8): Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding in 1999 and 2000 -- -- Common Stock, $0.01 par value, 25,000,000 shares authorized, 22,325,050 issued and outstanding in 1999 and 75,000,000 shares authorized, 23,136,618 issued and outstanding in 2000 223,000 231,000 Paid-in capital 17,903,000 30,466,000 Deferred compensation liability (Note 5) 294,000 294,000 Retained earnings 52,850,000 72,097,000 Accumulated other comprehensive (loss) income (11,000) 15,000 ------------------------------------ 71,259,000 103,103,000 Less: Treasury Stock at cost, 660,000 shares in 1999 and 2000 7,812,000 7,812,000 ------------------------------------ Total stockholders' equity 63,447,000 95,291,000 ------------------------------------ Total Liabilities and Stockholders' Equity $ 71,740,000 $ 105,556,000 ------------------------------------ - -----------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements 15 16 ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------ Years Ended December 31, 1998 1999 2000 - ------------------------------------------------------------------------------------------------------ Revenues $132,741,000 $159,473,000 $195,080,000 Cost of services 90,705,000 107,652,000 131,351,000 ------------------------------------------------------ Gross profit 42,036,000 51,821,000 63,729,000 Selling, general and administrative expenses 25,308,000 30,428,000 35,532,000 ------------------------------------------------------ Operating income 16,728,000 21,393,000 28,197,000 Interest income, net 1,336,000 1,635,000 2,442,000 ------------------------------------------------------ Income before income taxes 18,064,000 23,028,000 30,639,000 Provision for income taxes (Note 7) 6,748,000 8,566,000 11,392,000 ------------------------------------------------------ Net income $ 11,316,000 $ 14,462,000 $ 19,247,000 ------------------------------------------------------ Basic earnings per share $ 0.52 $ 0.66 $ 0.87 ------------------------------------------------------ Weighted average number of Common Shares Outstanding 21,721,000 21,907,000 22,193,000 ------------------------------------------------------ Diluted earnings per share $ 0.50 $ 0.65 $ 0.83 ------------------------------------------------------ Weighted average number of Common and Common Equivalent Shares Outstanding 22,604,000 22,372,000 23,080,000 ------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- ----------------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1999 2000 - ----------------------------------------------------------------------------------------------------------- Net income $ 11,316,000 $ 14,462,000 $ 19,247,000 Other comprehensive (loss) income: Foreign currency translation adjustment (17,000) 12,000 26,000 ------------------------------------------------------- Comprehensive income $ 11,299,000 $ 14,474,000 $ 19,273,000 ------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements 16 17 ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock Deferred Paid-in Compensation Retained Shares Amount Shares Amount Capital Liability Earnings - -------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1998 -- $ -- 21,454,470 $215,000 $ 11,991,000 $ -- $27,072,000 Exercise of common stock options -- -- 414,582 4,000 2,263,000 -- -- Common stock issued-- Employee Stock Purchase Plan -- -- 19,028 -- 205,000 -- -- Disqualifying dispositions -- -- -- -- 1,183,000 -- -- Other comprehensive income-- Translation adjustments -- -- -- -- -- -- -- Net income -- -- -- -- -- -- 11,316,000 ------------------------------------------------------------------------------------- Balance, December 31, 1998 -- -- 21,888,080 219,000 15,642,000 -- 38,388,000 Exercise of common stock options -- -- 436,886 4,000 1,774,000 -- -- Repurchases of Common Stock -- -- -- -- -- -- -- Deferred Compensation Liability -- -- (19,764) -- (294,000) 294,000 -- Common stock issued-- Employee Stock Purchase Plan -- -- 19,848 -- 264,000 -- -- Disqualifying dispositions -- -- -- -- 517,000 -- -- Other comprehensive income-- Translation adjustments -- -- -- -- -- -- -- Net income -- -- -- -- -- -- 14,462,000 ------------------------------------------------------------------------------------- Balance, December 31, 1999 -- -- 22,325,050 223,000 17,903,000 294,000 52,850,000 Exercise of common stock options -- -- 793,261 8,000 8,551,000 -- -- Common stock issued-- Employee Stock Purchase Plan -- -- 18,307 -- 261,000 -- -- Disqualifying dispositions -- -- -- -- 3,751,000 -- -- Other comprehensive income-- Translation adjustments -- -- -- -- -- -- -- Net income -- -- -- -- -- -- 19,247,000 Balance December 31, 2000 -- $ -- 23,136,618 $231,000 $ 30,466,000 $294,000 $72,097,000 ------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------- Accumulated Other Treasury Stock Comprehensive (Loss) Income Shares Amount Total - --------------------------------------------------------------------------------------------- Balance, January 1, 1998 $ (6,000) -- $ -- $ 39,272,000 Exercise of common stock options -- -- -- 2,267,000 Common stock issued-- Employee Stock Purchase Plan -- -- -- 205,000 Disqualifying dispositions -- -- -- 1,183,000 Other comprehensive income-- Translation adjustments (17,000) -- -- (17,000) Net income -- -- -- 11,316,000 ---------------------------------------------------------- Balance, December 31, 1998 (23,000) -- -- 54,226,000 Exercise of common stock options -- -- -- 1,778,000 Repurchases of Common Stock -- (660,000) (7,812,000) (7,812,000) Deferred Compensation Liability -- -- -- -- Common stock issued-- Employee Stock Purchase Plan -- -- -- 264,000 Disqualifying dispositions -- -- -- 517,000 Other comprehensive income-- Translation adjustments 12,000 -- -- 12,000 Net income -- -- -- 14,462,000 ---------------------------------------------------------- Balance, December 31, 1999 (11,000) (660,000) (7,812,000) 63,447,000 Exercise of common stock options -- -- -- 8,559,000 Common stock issued-- Employee Stock Purchase Plan -- -- -- 261,000 Disqualifying dispositions -- -- -- 3,751,000 Other comprehensive income-- Translation adjustments 26,000 -- -- 26,000 Net income -- -- -- 19,247,000 Balance December 31, 2000 $ 15,000 (660,000) $(7,812,000) $ 95,291,000 ---------------------------------------------------------- - ---------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements 17 18 ON ASSIGNMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1999 2000 - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 11,316,000 $ 14,462,000 $ 19,247,000 Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions: Depreciation and amortization 948,000 1,158,000 1,392,000 Tax benefit of disqualifying dispositions 1,183,000 517,000 3,751,000 Increase in allowance for doubtful accounts 593,000 738,000 699,000 Increase in deferred income taxes (327,000) (785,000) (339,000) Loss on disposal of furniture and equipment 215,000 7,000 28,000 Increase in accounts receivable (3,934,000) (4,927,000) (5,644,000) Decrease (Increase) in income taxes receivable (143,000) (431,000) 681,000 Increase in accounts payable and accrued expenses 2,215,000 484,000 1,579,000 Increase in income taxes payable -- -- 425,000 Decrease (Increase) in workers' compensation restricted deposits 428,000 (1,000) (68,000) Decrease (Increase) in prepaid expenses (470,000) (651,000) 174,000 Increase in other assets (402,000) (461,000) (519,000) ---------------------------------------------- Net cash provided by operating activities 11,622,000 10,110,000 21,406,000 ---------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (10,345,000) (10,777,000) (7,121,000) Proceeds from the maturity of marketable securities 7,630,000 5,455,000 5,195,000 Acquisition of furniture, equipment and leasehold improvements (1,193,000) (1,849,000) (1,111,000) Proceeds from sale of furniture and equipment 2,000 1,000 -- Increase in advances and deposits (2,000) (4,000) (158,000) Acquisition (Note 11) (808,000) (360,000) (360,000) (Disbursements for) Repayments of officer loan receivable (Note 3) -- (400,000) 400,000 ---------------------------------------------- Net cash used for investing activities (4,716,000) (7,934,000) (3,155,000) ---------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of common stock options 2,267,000 1,778,000 8,559,000 Proceeds from issuance of common stock -- Employee Stock Purchase Plan 205,000 264,000 261,000 Repurchases of common stock -- (7,812,000) -- ---------------------------------------------- Net cash provided by (used for) financing activities 2,472,000 (5,770,000) 8,820,000 ---------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (Note 1) (11,000) 8,000 11,000 ---------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 9,367,000 (3,586,000) 27,082,000 Cash and Cash Equivalents at Beginning of Period 18,339,000 27,706,000 24,120,000 ---------------------------------------------- Cash and Cash Equivalents at End of Period $ 27,706,000 $ 24,120,000 51,202,000 ---------------------------------------------- Acquisition (Note 11): Fair value of assets acquired $ 58,000 $ -- $ -- Goodwill 750,000 360,000 360,000 ---------------------------------------------- Cash paid $ 808,000 $ 360,000 $ 360,000 ---------------------------------------------- SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: Tax benefit of disqualifying dispositions (Note 7) $ 1,183,000 $ 517,000 $ 3,751,000 ----------------------------------------------
See accompanying Notes to Consolidated Financial Statements 18 19 ON ASSIGNMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. On Assignment, Inc. (the "Company"), has two operating segments: Lab Support and Healthcare Staffing. The Lab Support operating segment includes the combined results of Lab Support and EnviroStaff. The Lab Support segment provides temporary and permanent placement of scientific personnel with laboratories and other institutions, and environmental professionals to the environmental health and safety fields. The Healthcare Staffing segment includes the combined results of Healthcare Financial Staffing and Clinical Lab Staff. The Healthcare Staffing segment provides temporary and permanent placement of medical billing and collection professionals and laboratory and medical staffing personnel to the healthcare industry. Significant accounting policies are as follows: Principles of Consolidation. The Consolidated Financial Statements include the accounts of the Company and its wholly owned domestic and foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated. On January 1, 1997, the Company effected a corporate reorganization resulting in a consolidation of the Company's divisional field operations into Assignment Ready, Inc. ("ARI"), a Delaware corporation and wholly owned subsidiary of the Company, in order to centralize management functions into one entity, to optimize regional activities and achieve economies of scale. On May 12, 1997, the Company formed Assignment Ready Inc., a Canadian corporation and wholly owned subsidiary of the Company, and commenced operations in Toronto as Lab Support Canada during the third quarter of 1997. On February 2, 1999, the Company formed On Assignment UK Limited, a UK corporation and wholly owned subsidiary of the Company. On February 16, 1999, On Assignment UK Limited formed Lab Support (UK) Limited, a UK corporation and wholly owned subsidiary of On Assignment UK Limited, and commenced operations as Lab Support UK during the first quarter of 1999. On June 5, 2000, the Company formed On Assignment Lab Support B.V., a Netherlands corporation and wholly owned subsidiary of the Company, and commenced operations during the second quarter of 2000. On August 25, 2000, the Company formed On Assignment Lab Support N.V., a Belgium corporation and wholly owned subsidiary of the Company, and commenced operations during the third quarter of 2000. On November 15, 2000, the Company formed On Assignment Lab Support A.G., a Switzerland corporation and wholly owned subsidiary of the Company, and commenced operations during the fourth quarter of 2000. Cash and Cash Equivalents and Marketable Securities. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Investments having a maturity of more than three months and less than twelve months are classified under current assets as marketable securities. Investments having a maturity of more than twelve months are classified under non-current assets as marketable securities. Marketable securities consist principally of Tax Exempt Municipal Bonds and Debt Securities issued by U.S. Government Agencies with maturity dates greater than three months when purchased. All marketable securities are classified as held to maturity and are recorded at amortized cost which approximated market at December 31, 1999 and 2000. Non-current marketable securities are expected to mature during 2002. 19 20 The amortized cost and estimated fair value of marketable securities at December 31, 1999 and 2000 are as follows:
- ----------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value - ----------------------------------------------------------------------------------------- 1999: Current marketable securities $11,151,000 $ 9,000 $(159,000) $11,001,000 Non-current marketable securities 2,256,000 8,000 (19,000) 2,245,000 ---------------------------------------------------- Total $13,407,000 $ 17,000 $(178,000) $13,246,000 ---------------------------------------------------- 2000: Current marketable securities $11,920,000 $ 41,000 $ (66,000) 11,895,000 Non-current marketable securities 3,413,000 59,000 (7,000) 3,465,000 ---------------------------------------------------- Total $15,333,000 $100,000 $ (73,000) $15,360,000 ---------------------------------------------------- - -----------------------------------------------------------------------------------------
Cash paid for income taxes (net of refunds) for the years ended December 31, 1998, 1999, and 2000 was $6,035,000, $9,262,000 and $6,906,000, respectively. Accounts Receivable. Accounts receivable are stated net of allowance for doubtful accounts of approximately $1,216,000 and $1,460,000 at December 31, 1999 and 2000, respectively. Allowance for doubtful accounts is established and maintained based on estimates made by management through its review of specific accounts and historical collection activity. The Company recorded bad debt expense of approximately $593,000, $738,000 and $699,000 for the years ended December 31, 1998, 1999 and 2000, respectively. Office Furniture, Equipment and Leasehold Improvements and Depreciation. Office furniture, equipment and leasehold improvements 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. Impairment of Long-Lived Assets. The Company evaluates long-lived assets and certain identifiable intangibles 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. No such impairment losses have been recognized as of December 31, 2000. Income Taxes. Deferred taxes result from temporary differences between the bases of assets and liabilities for financial and tax reporting purposes. Deferred tax assets and liabilities represent future tax consequences of these differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Revenue Recognition. Revenue from temporary assignments, net of credits and discounts, is recognized when earned, based on hours worked by the Company's temporary employees on a weekly basis. Permanent placement fees are recognized when earned, upon conversion of a temporary employee to a client's regular employee. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which provides additional guidance in applying generally accepted accounting principles to revenue recognition in the financial statements. The Company has implemented the provisions of SAB 101 and its impact on their revenue recognition policy is immaterial. Cost of Services. Cost of services consist of compensation for temporary employees and the related payroll taxes and benefits incurred with respect to such compensation. Cost of services are recognized when incurred based on hours worked by the Company's temporary employees. 20 21 Foreign Currency Translation. Assets and liabilities of foreign operations, where the functional currency is the local currency, are translated into U.S. dollars at the rate of exchange in effect on the balance sheet date. Income and expenses are translated at the average rates of exchange prevailing during the 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. Earnings per Share. Basic earnings per share are computed based upon the weighted average number of common shares outstanding and diluted earnings per share are computed based upon the weighted average number of common shares outstanding and dilutive common share equivalents (consisting of incentive stock options and non-qualified stock options) outstanding during the periods using the treasury stock method. Following is a reconciliation of the shares used to compute basic and diluted earnings per share:
- ------------------------------------------------------------------------------------------ Years Ended December 31, 1998 1999 2000 - ------------------------------------------------------------------------------------------ Weighted average number of shares outstanding used to compute basic earnings per share 21,721,000 21,907,000 22,193,000 Dilutive effect of stock options 883,000 465,000 887,000 ------------------------------------- Number of shares used to compute diluted earnings per share 22,604,000 22,372,000 23,080,000 ------------------------------------- - ------------------------------------------------------------------------------------------
On April 1, 1999, the Board of Directors authorized the Company to repurchase up to $15,000,000 of its common stock. The Company plans to make such purchases primarily in the open market, from time-to-time, at prevailing prices pursuant to rules and regulations of the Securities and Exchange Commission. At December 31, 2000, the Company had repurchased 660,000 shares of its common stock at a total cost of $7,812,000. On March 7, 2000, the Board of Directors authorized a two-for-one stock split, effected as a 100 percent common stock dividend, to be distributed on April 3, 2000 to shareholders of record as of March 27, 2000. All references to number of shares, sales prices and per share amounts of the Company's common stock have been retroactively restated to reflect the increased number of common shares outstanding. On August 24, 2000, the Company filed a Certificate of Amendment of Restated Certificate of Incorporation (The "Certificate of Amendment") with the Secretary of the State of Delaware. The Certificate of Amendment increased the authorized number of shares of common stock from 25,000,000 to 75,000,000 and increased the combined authorized number of shares of preferred and common stock from 26,000,000 to 76,000,000. The Certificate of Amendment was approved by the Company's stockholders on June 13, 2000. Stock-Based Compensation. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The Company has adopted only the disclosure portion of the statement (see Note 8). 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 and cash equivalents, marketable securities, and trade receivables. The Company places its cash and cash equivalents and marketable securities with quality credit institutions, and limits the amount of credit exposure with any one institution. Concentration of credit risk with respect to accounts receivable are 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 recorded values of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses approximate their fair value based on their short-term nature. The fair values of marketable securities were estimated using quoted market prices. 21 22 Derivative Instruments and Hedging Activities. Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company has adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 does not have a significant impact on the financial position, results of operations, or cash flows of the Company. Reclassifications. Certain reclassifications have been made to the prior year consolidated financial statements to conform with the current year consolidated financial statement presentation. 2. OFFICE FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Office furniture, equipment and leasehold improvements at December 31, 1999 and 2000, consisted of the following:
- ----------------------------------------------------------------------------- 1999 2000 - ----------------------------------------------------------------------------- Furniture and fixtures $ 1,674,000 $ 1,296,000 Computers and related equipment 3,276,000 3,158,000 Machinery and equipment 1,368,000 1,192,000 Leasehold improvements 1,041,000 1,055,000 Construction in progress 419,000 26,000 --------------------------- 7,778,000 6,727,000 Less accumulated depreciation and amortization (4,268,000) (3,389,000) --------------------------- Total $ 3,510,000 $ 3,338,000 --------------------------- - -----------------------------------------------------------------------------
Depreciation and amortization expense for the years ended December 31, 1998, 1999 and 2000 was $860,000, $1,035,000 and $1,254,000, respectively. 3. OFFICER LOANS RECEIVABLE. In June 1999, the Company loaned an officer of the Company $400,000, bearing interest at 4.92%, compounded semi-annually. Principal and interest were payable on December 10, 2000. The note was paid in full on December 7, 2000. 4. GOODWILL. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired (see Note 11). Goodwill is stated net of accumulated amortization of $352,000 at December 31, 1999 and $486,000 at December 31, 2000. Goodwill is being amortized on a straight-line basis over fifteen years. The Company periodically reviews the value of its goodwill to determine if an impairment has occurred. The Company measures the potential impairment of recorded goodwill by the undiscounted value of expected future cash flows in relation to its net capital investment of the net assets acquired. Based on its review, the Company does not believe that an impairment of its goodwill had occurred as of December 31, 1999 and 2000. 5. 401(k) RETIREMENT SAVINGS PLAN, DEFERRED COMPENSATION PLAN AND CHANGE IN CONTROL SEVERANCE PLAN. Effective January 1, 1995, the Company adopted the On Assignment, Inc. 401(k) Retirement Savings Plan under Section 401(k) of the Internal Revenue Code, under which eligible employees may elect to have a portion of their salary deferred and contributed to the plan. The amount of salary deferred is not subject to Federal and State income tax at the time of deferral. The Plan covers all eligible employees and provides for matching or discretionary contributions at the discretion of the Board of Directors. The Company made no matching or discretionary contributions to the plan during the years ended December 31, 1998, 1999 and 2000. 22 23 Effective January 1, 1998, the Company implemented the On Assignment, Inc. Deferred Compensation Plan. The plan permits a select group of management or highly compensated employees or directors 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 interest on these amounts. Distributions from the plan are made at retirement, death or termination of employment, in a lump sum, or over five, ten or fifteen years. At December 31, 1999 and 2000, the liability under the plan was approximately $807,000 and $1,423,000, respectively. A life insurance policy is maintained on the participants relating to the plan, whereby the Company is the sole owner and beneficiary of such insurance. The cash surrender value of this life insurance policy, which is reflected in other assets, was approximately $754,000 and $1,201,000 at December 31, 1999 and 2000, respectively. During 1999, a participant in the Deferred Compensation Plan performed a stock-for-stock exercise resulting in a gain to the participant of approximately $294,000. A stock certificate for 19,764 shares was issued into a rabbi trust in the Company's name. The employer stock held by the rabbi trust has been classified in equity in the same manner as treasury stock, with a reduction in shares outstanding and a corresponding reduction to Additional Paid-in Capital. The corresponding deferred compensation liability is also shown as a separate component in equity. There is no effect on the Consolidated Statements of Income as a result of this transaction. On February 12, 1998, the Company adopted the On Assignment, Inc. Change in Control Severance Plan ("the Plan") to provide severance benefits for officers and other eligible employees who are terminated following an acquisition of the Company. Under the Plan, if an eligible employee is involuntarily terminated within 18 months of a change in control, as defined in the Plan, then the employee will be entitled to salary plus target bonus payable in a lump sum. The amounts payable would range from one month to 18 months of salary and target bonus depending on the employee's length of service and position with the Company. 6. COMMITMENTS AND CONTINGENCIES. The Company leases its facilities and certain office equipment under operating leases which expire at various dates through 2006. Certain leases contain rent escalations and/or renewal options. The following is a summary of future minimum lease payments by year:
Operating Leases ----------- 2001 $1,901,000 2002 1,620,000 2003 1,438,000 2004 923,000 2005 545,000 Thereafter 56,000 ---------- Total Minimum Lease Payments $6,483,000 ----------
Rent expense for the years ended December 31, 1998, 1999 and 2000 was $1,593,000, $2,342,000 and $2,995,000, respectively. The Company and its subsidiaries are involved in various legal proceedings, claims and litigation arising in the ordinary course of business. However, based on the facts currently available, management believes that the disposition of matters that are pending or asserted will not have a materially adverse effect on the financial position of the Company. The Company is partially self-insured for workers' compensation expense. In connection with this program, the Company pays a base premium plus actual losses incurred up to certain levels, and is insured for losses greater than certain levels per occurrence and in the aggregate. The Company is required to maintain cash deposits for the payment of losses and as collateral amounting to $169,000 and $237,000 at December 31, 1999 and 2000, respectively. These workers' compensation deposits are restricted as to withdrawal and have therefore been classified as non-current assets in the accompanying Consolidated Balance Sheets. These funds are invested primarily in three-month treasury bills and are recorded at amortized cost which approximated market at December 31, 1999 and 2000. The self-insurance claim liability is determined based on claims filed and claims incurred but not yet reported. The Company accounts for claims incurred but not yet reported based on actuarial reports prepared by an independent third party who reviews historical experience and current trends of industry data. Changes in estimates and differences in estimates and actual payments for claims are recognized in 23 24 the period which the estimates changed or payments were made. The self-insurance claim liability amounted to approximately $1,447,000 and $1,753,000 at December 31, 1999 and 2000, respectively. 7. INCOME TAXES. The provision for income taxes consists of the following:
- ----------------------------------------------------------------------------------- Years Ended December 31, 1998 1999 2000 - ----------------------------------------------------------------------------------- Federal: Current $ 6,164,000 $ 8,196,000 $ 10,328,000 Deferred (290,000) (707,000) (429,000) ------------------------------------------------------ 5,874,000 7,489,000 9,899,000 ------------------------------------------------------ State: Current 911,000 1,155,000 1,432,000 Deferred (37,000) (78,000) 61,000 ------------------------------------------------------ 874,000 1,077,000 1,493,000 ------------------------------------------------------ Total $ 6,748,000 $ 8,566,000 $ 11,392,000 ------------------------------------------------------ - -----------------------------------------------------------------------------------
Deferred income taxes arise from the recognition of certain assets and liabilities for tax purposes in periods different from those in which they are recognized in the financial statements. These differences relate primarily to workers' compensation, state taxes, bad debt, deferred compensation, and depreciation and amortization expenses. Deferred assets and liabilities are classified as current and non-current according to the nature of the assets or liabilities from which they arose. The components of deferred tax assets (liabilities) are as follows:
- -------------------------------------------------------------------------------------------------------------- December 31, 1999 December 31, 2000 Federal State Federal State - -------------------------------------------------------------------------------------------------------------- Deferred tax assets: Current: Allowance for doubtful accounts $ 416,000 $ 62,000 $ 483,000 $ 42,000 Employee related accruals 515,000 76,000 632,000 56,000 State taxes 385,000 -- 507,000 -- Workers' compensation loss reserve 524,000 78,000 512,000 45,000 Other -- -- 46,000 -- --------------------------------------------------------------- Total current deferred tax assets 1,840,000 216,000 2,180,000 143,000 --------------------------------------------------------------- Non-current: Depreciation and amortization expense 139,000 21,000 239,000 21,000 Other 114,000 -- 103,000 12,000 --------------------------------------------------------------- Total deferred tax assets $2,093,000 $237,000 $2,522,000 $176,000 --------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
The net operating loss carryforwards included in other non-current deferred tax assets at December 31, 1999 and 2000, were acquired through the 1994 acquisition of 1st Choice Personnel, Inc. These carryforwards are available to offset future taxable income, subject to annual limitations, through the year 2007. 24 25 The reconciliation between the amount computed by applying the U.S. federal statutory tax rate of 35% in 1998, 1999 and 2000 to income before income taxes and the actual income taxes is as follows:
- ------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1999 2000 - ------------------------------------------------------------------------------------------------------------- Income tax expenses at the statutory rate $ 6,322,000 $ 8,060,000 $ 10,724,000 State income taxes, net of federal income tax benefit 575,000 1,119,000 1,449,000 Tax-free interest and other (149,000) (613,000) (781,000) ------------------------------------------------------ Total $ 6,748,000 $ 8,566,000 $ 11,392,000 ------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
The Company receives a tax deduction 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 or upon exercise of a non-qualified stock option. At December 31, 1998, 1999 and 2000, net income taxes payable and additional paid-in capital include tax benefits amounting to $1,183,000, $517,000 and $3,751,000, respectively, resulting from disqualifying dispositions by directors, officers and employees. 8. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLAN. Under its Stock Option Plan, the Company may grant employees, contractors, and non-employee members of the Board of Directors incentive or non-qualified stock options to purchase shares of its common stock. On June 13, 2000, the Company's stockholders approved an amendment to the Stock Option Plan that increased the number of shares of common stock reserved for issuance under the Stock Option Plan from 8,000,000 shares to 10,000,000 shares. Optionees, option prices, option amounts, grant dates and vesting are established by the Compensation Committee of the Board of Directors. The option prices may not be less than 85% of the fair market value of the stock at the time the option is granted. Stock options granted to date generally become exercisable over a pro rata period of four years and have a maximum term of ten years measured from the grant date. The following summarizes stock option activity for the years ended December 31, 1998, 1999 and 2000:
- ---------------------------------------------------------------------------------------- Weighted Non- Average Incentive Qualified Exercise Stock Stock Price Options Options Per Share - ---------------------------------------------------------------------------------------- Outstanding at January 1, 1998 1,591,614 772,298 $ 7.52 Granted 680,384 285,916 $16.19 Exercised (273,686) (140,896) $ 5.47 Canceled (399,568) (3,000) $10.77 ------------------------------ Outstanding at December 31, 1998 1,598,744 914,318 $10.67 Granted 837,822 337,078 $13.43 Exercised (420,884) (29,526) $ 4.50 Canceled (396,060) (20,894) $13.99 ------------------------------ Outstanding at December 31, 1999 1,619,622 1,200,976 $12.32 Granted 536,906 199,294 $25.11 Exercised (406,886) (390,483) $10.82 Canceled (366,988) (22,348) $15.99 ------------------------------ Outstanding at December 31, 2000 1,382,654 987,439 $16.19 ------------------------------ - ---------------------------------------------------------------------------------------
25 26 The following summarizes pricing and term information for options outstanding as of December 31, 2000:
- ------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable -------------------------------------------- ----------------------------- Weighted Number Average Weighted Weighted Outstanding at Remaining Average Exercisable at Average Range of December 31, Contractual Exercise December 31, Exercise Exercise Prices 2000 Life Price 2000 Price - ------------------------------------------------------------------------------------------------------- $ 2.50 to $ 11.375 594,595 6.1 years $ 9.51 483,743 $ 9.11 11.50 to 13.6875 535,682 8.8 years 13.09 193,058 12.82 13.8125 to 16.219 558,210 8.1 years 15.58 228,910 15.70 16.3125 to 26.625 476,606 9.6 years 23.17 40,385 19.11 26.875 to 33.00 205,000 9.6 years 29.05 10,582 28.64 ------------------------------------------------------------------------ $ 2.50 to 33.00 2,370,093 8.2 years $ 16.19 956,678 $ 12.07 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
The Employee Stock Purchase Plan allows eligible employees to purchase common stock of the Company, through payroll deductions, at 85% of the lower of the market price on the first day or the last day of the semi-annual purchase period. Eligible employees may contribute up to 10% of their base earnings toward the purchase of the stock. During 1998, 1999 and 2000 shares issued under the plan were 19,028, 19,848 and 18,307, respectively. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its Stock Option Plan and Employee Stock Purchase Plan and accordingly, no compensation cost has been recognized for its stock option and purchase plans. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). The estimated fair value of options granted during 1998, 1999 and 2000 pursuant to SFAS No. 123 was approximately $7,342,000, $7,693,000 and $9,443,000, respectively, and the estimated fair value of stock purchased under the Company's Employee Stock Purchase Plan was approximately $72,000, $93,000 and $94,000, respectively. Had compensation cost for the Company's Stock Option Plan and its Employee Stock Purchase Plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's pro forma net income would have been $9,771,000, $11,993,000 and $16,784,000 and pro forma earnings per share would have been $0.44, $0.54 and $0.74 for 1998, 1999 and 2000, respectively. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of options granted under the Company's Stock Option Plan during 1998, 1999 and 2000 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: (i) no dividend yield in 1998, 1999 or 2000, (ii) expected volatility of approximately 49% in 1998, 50% in 1999 and 54% in 2000, (iii) risk-free interest rate of approximately 5.0% in 1998, 5.8% in 1999 and 5.9% in 2000, and (iv) expected lives of the options of approximately 5 years in 1998, 1999 and 2000. Pro forma compensation cost of shares purchased under the Employee Stock Purchase Plan is measured based on the discount from market value. 9. BUSINESS SEGMENTS. Indicated below is the information required to comply with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company has two reportable operating segments: Lab Support and Healthcare Staffing. The Lab Support operating segment includes the combined results of Lab Support and EnviroStaff, as they have similar economic characteristics and they meet the aggregation criteria of SFAS No. 131. The Lab Support segment provides temporary and permanent placement services of laboratory and scientific professionals to the biotechnology, pharmaceutical, food and beverage, chemical and environmental industries. The Healthcare Staffing segment includes the combined results of Healthcare Financial Staffing and Clinical Lab Staff. The Healthcare Staffing segment provides temporary and permanent placement services of medical billing and collection professionals, and laboratory and medical staffing personnel to the healthcare industry. 26 27 The Company's management evaluates performance of each segment primarily based on revenues and operating income (before acquisition costs, interest and income taxes). The Company's management does not evaluate, manage or measure performance of segments using asset information, accordingly, asset information by segment is not disclosed. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note 1). The information in the following table is derived directly from the segments' internal financial reporting used for corporate management purposes. Certain corporate expenses are not allocated to and/or among the operating segments.
- ------------------------------------------------------------------------------------------ Years Ended December 31, 1998 1999 2000 - ------------------------------------------------------------------------------------------ Revenues: Lab Support $110,644,000 $119,668,000 $139,986,000 Healthcare Staffing 22,097,000 39,805,000 55,094,000 ------------------------------------------------------ $132,741,000 $159,473,000 $195,080,000 ------------------------------------------------------ Gross Profit: Lab Support $ 34,750,000 $ 38,866,000 $ 46,021,000 Healthcare Staffing 7,286,000 12,955,000 17,708,000 ------------------------------------------------------ $ 42,036,000 $ 51,821,000 $ 63,729,000 ------------------------------------------------------ Operating Income: Lab Support $ 13,532,000 $ 14,830,000 $ 19,353,000 Healthcare Staffing 3,196,000 6,563,000 8,844,000 ------------------------------------------------------ $ 16,728,000 $ 21,393,000 $ 28,197,000 ------------------------------------------------------ - ------------------------------------------------------------------------------------------
27 28 10. UNAUDITED QUARTERLY RESULTS. The following table presents unaudited quarterly financial information for each of the eight quarters ended December 31, 2000. In the opinion of 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.
- ----------------------------------------------------------------------------------------------------------------------------- (Unaudited) (in thousands, except per share data) Quarter Ended Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, 1999 1999 1999 1999 2000 2000 2000 2000 - ----------------------------------------------------------------------------------------------------------------------------- Revenues $34,789 $39,272 $42,227 $43,185 $44,345 $47,817 $51,109 $51,808 Cost of services 23,569 26,524 28,450 29,109 29,899 32,163 34,328 34,961 ------------------------------------------------------------------------------------------- Gross profit 11,220 12,748 13,777 14,076 14,446 15,654 16,781 16,847 Selling, general and administrative expenses 6,791 7,613 8,177 7,847 8,190 9,035 9,347 8,959 ------------------------------------------------------------------------------------------- Operating income 4,429 5,135 5,600 6,229 6,256 6,619 7,434 7,888 Interest income 395 411 414 415 446 571 679 746 ------------------------------------------------------------------------------------------- Income before income taxes 4,824 5,546 6,014 6,644 6,702 7,190 8,113 8,634 Provision for income taxes 1,794 2,063 2,231 2,478 2,496 2,666 3,018 3,212 ------------------------------------------------------------------------------------------- Net income $ 3,030 $ 3,483 $ 3,783 $ 4,166 $ 4,206 $ 4,524 $ 5,095 $ 5,422 ------------------------------------------------------------------------------------------- Basic earnings per share $ 0.14 $ 0.16 $ 0.17 $ 0.19 $ 0.19 $ 0.20 $ 0.23 $ 0.24 ------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding 22,026 22,108 21,839 21,678 21,846 22,177 22,312 22,434 ------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.13 $ 0.15 $ 0.17 $ 0.19 $ 0.19 $ 0.20 $ 0.22 $ 0.23 ------------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding 22,679 22,490 22,274 22,050 22,476 23,182 23,233 23,217 ------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
11. ACQUISITIONS. On July 20, 1998, the Company acquired substantially all of the assets of LabStaffers, Inc., a provider of temporary science and medical laboratory professionals through its branches in Greensboro and Charlotte, N.C. The LabStaffers, Inc. offices and operations acquired have been added to the Company's Lab Support division. This acquisition has been accounted for using the purchase method of accounting. The results of operations of the acquired company are included in the Consolidated Statements of Income from the date of acquisition. Pro Forma information is not presented as the impact on revenues, net income and earnings per share are not significant. Consideration for the purchase consisted of $808,000 in cash paid on the purchase date. The excess of the purchase price over the fair value of the net assets acquired has been allocated to goodwill. In addition, in July 1999 and July 2000 the Company paid an additional $360,000 in cash in accordance with the agreement, bringing the total consideration for the purchase to $1,168,000 and $1,528,000 at December 31, 1999 and December 31, 2000. This contingent consideration has been added to goodwill in the accompanying Consolidated Balance Sheets. No additional contingent consideration is required in accordance with the agreement. 28 29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT Information regarding the Company's directors will be set forth under the caption "Proposal One -- Election of Directors" in the Company's proxy statement for use in connection with its Annual Meeting of Stockholders scheduled to be held on June 7, 2001 (the "2001 Proxy Statement") and is incorporated herein by reference. The 2001 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year. Information regarding the Company's executive officers is set forth in Part I of this Annual Report on Form 10-K and is incorporated herein by reference. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Information regarding compliance with Section 16(a) of the Exchange Act will be set forth under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's 2001 Proxy Statement to be filed within 120 days after the end of the Company's fiscal year and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding remuneration of the Company's directors and officers will be set forth under the captions "Proposal One -- Election of Directors," and "Executive Compensation and Related Information" in the Company's 2001 Proxy Statement to be filed 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 Information regarding security ownership of certain beneficial owners and management will be set forth under the captions "General Information for Stockholders -- Record Date, Voting and Share Ownership" in the Company's 2001 Proxy Statement to be filed 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 regarding certain relationships and related transactions will be set forth under the caption "Executive Compensation and Related Information -- Certain Relationships and Related Transactions" in the Company's 2001 Proxy Statement to be filed within 120 days after the end of the Company's fiscal year and is incorporated herein by reference. 29 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
PAGE 1. Financial Statements: Report of Independent Auditors 14 Consolidated Balance Sheets at December 31, 1999 and 2000 15 Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 1998, 1999 and 2000 16 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1999 and 2000 17 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000 18 Notes to Consolidated Financial Statements 19 2. Financial Statement Schedule: Schedule II -- Valuation and Qualifying Accounts 32
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) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the three months ended December 31, 2000. 30 31 (c) EXHIBITS
- -------------------------------------------------------------------------------------------- NUMBER FOOTNOTE DESCRIPTION - -------------------------------------------------------------------------------------------- 3.1 (1) Amended and Restated Certificate of Incorporation of the Company. 3.2 (2) Amended and Restated Bylaws of the Company. 4.2 (3) Specimen Common Stock Certificate. 10.1 (3) Form of Indemnification Agreement. 10.2 Restated 1987 Stock Option Plan, as amended. 10.3 (4) 1992 Employee Stock Purchase Plan. 10.9 (5) Office lease dated December 7, 1993, by and between the Company and Malibu Canyon Office Partners, LP. 21.1 Subsidiaries of the Registrant. 24.1 Consent of Deloitte & Touche LLP. 25.1 Power of Attorney. - --------------------------------------------------------------------------------------------
(1) Incorporated by reference from an exhibit filed with the Company's 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 the Company's Current Report on Form 8-K (File No. 0-20540) filed with the Securities and Exchange Commission on February 4, 1998. (3) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-1 (File No. 33-50646) declared effective by the Securities and Exchange Commission on September 21, 1992. (4) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 (File No. 33-57078) filed with the Securities and Exchange Commission on January 19, 1993. (5) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K (File No. 0-20540) filed with the Securities and Exchange Commission on March 24, 1994. 31 32 ON ASSIGNMENT, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
- ------------------------------------------------------------------------------------------------------------- Balance at beginning Charged to Charged to Balance at of costs and other end of Description period expenses accounts Deductions period - ------------------------------------------------------------------------------------------------------------- Year ended December 31, 1998 Allowance for doubtful accounts $734,000 593,000 -- (318,000) $1,009,000 Year ended December 31, 1999 Allowance for doubtful accounts $1,009,000 738,000 -- (531,000) $1,216,000 Year ended December 31, 2000 Allowance for doubtful accounts $1,216,000 699,000 -- (455,000) $1,460,000 - -------------------------------------------------------------------------------------------------------------
32 33 SIGNATURES 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, in Calabasas, California on this 29th day of March 2001. ON ASSIGNMENT, INC. By: /s/ H. Tom Buelter ------------------------------------- H. Tom Buelter Chairman of the Board and Chief Executive Officer 33 34 INDEX TO EXHIBITS
- ------------------------------------------------------------------------------------------------------ Exhibit Page Number Footnote Description Number - ------------------------------------------------------------------------------------------------------ 3.1 (1) Amended and Restated Certificate of Incorporation of the Company. 3.2 (2) Amended and Restated Bylaws of the Company. 4.2 (3) Specimen Common Stock Certificate. 10.1 (3) Form of Indemnification Agreement. 10.2 Restated 1987 Stock Option Plan, as amended. 35 10.3 (4) 1992 Employee Stock Purchase Plan. 10.9 (5) Office lease dated December 7, 1993, by and between the Company and Malibu Canyon Office Partners, LP. 21.1 Subsidiaries of the Registrant. 54 24.1 Consent of Deloitte & Touche LLP. 55 25.1 Power of Attorney. 56 - ------------------------------------------------------------------------------------------------------
(1) Incorporated by reference from an exhibit filed with the Company's 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 the Company's Current Report on Form 8-K (File No. 0-20540) filed with the Securities and Exchange Commission on February 4, 1998. (3) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-1 (File No. 33-50646) declared effective by the Securities and Exchange Commission on September 21, 1992. (4) Incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 (File No. 33-57078) filed with the Securities and Exchange Commission on January 19, 1993. (5) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K (File No. 0-20540) filed with the Securities and Exchange Commission on March 24, 1994. 34 EX-10.2 2 v70910ex10-2.txt EXHIBIT 10.2 1 EXHIBIT 10.2 ON ASSIGNMENT, INC. RESTATED 1987 STOCK OPTION PLAN (As amended and restated July 11, 2000) ARTICLE ONE GENERAL I. PURPOSES OF THE PLAN A. This Restated 1987 Stock Option Plan (the "Plan") is intended to promote the interests of On Assignment, Inc., a Delaware corporation (the "Corporation"), by providing a method whereby eligible individuals may be offered incentives and rewards which will encourage them to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation and continue to render services to the Corporation (or its Parent or Subsidiary corporations). This restatement of the Plan shall become effective on the date on which the restatement is adopted by the Board, subject to the approval of the stockholders ("Effective Date"). B. For purposes of the Plan, the following provisions shall be applicable in determining the Parent and Subsidiary corporations of the Corporation: (i) Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a PARENT corporation of the Corporation ("Parent"), provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (ii) Each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation shall be considered to be a SUBSIDIARY of the Corporation ("Subsidiary"), provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. II. STRUCTURE OF THE PLAN A. Option Programs. The Plan shall be divided into two separate components: the Discretionary Option Grant Program described in Article Two and the Automatic Option Grant Program described in Article Three. Under the Discretionary Option Grant Program, eligible individuals may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock in accordance with the provisions of Article Two. Under the Automatic Option Grant Program, each eligible member of the Corporation's Board of 35 2 Directors (the "Board") will automatically receive an option grant to purchase shares of Common Stock in accordance with the provisions of Article Three. B. General Provisions. Unless the context clearly indicates otherwise, the provisions of Articles One and Four of the Plan shall apply to the Discretionary Option Grant Program and the Automatic Option Grant Program and shall accordingly govern the interests of all individuals under the Plan. III. ADMINISTRATION OF THE PLAN A. The Discretionary Option Grant Program shall be administered by one or more committees comprised of Board members. The primary committee (the "Primary Committee") shall be comprised of two or more non-employee Board members and shall have sole and exclusive authority to grant stock options and stock appreciation rights under the Discretionary Option Grant Program to officers and employee-directors of the Corporation subject to the short-swing profit restrictions of the Federal securities laws. Stock options may be granted under the Discretionary Option Grant Program to all other eligible employees and consultants by either the Primary Committee or a second committee comprised of one or more Board members (the "Secondary Committee"). The members of the Primary Committee and the Secondary Committee shall each serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. B. No Board member shall be eligible to serve on the Primary Committee if such individual has, within the twelve (12)-month period immediately preceding the date he or she is to be appointed to the Committee, received an option grant or stock award under this Plan or any other stock plan of the Corporation, its Parent or Subsidiary corporation, other than pursuant to the Automatic Option Grant Program in effect under Article Three. C. Subject to the limited authority provided the Secondary Committee to effect option grants in accordance with the provisions of Section III.A of this Article One, the Primary Committee shall serve as the Plan Administrator and shall have full power and authority (subject to the express provisions of the Discretionary Option Grant Program) to establish such rules and regulations as it may deem appropriate for the proper administration of such program and to make such determinations under the program and any outstanding option as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties with an interest in the Plan or any outstanding option under this Discretionary Option Grant Program. Service on the Primary or Secondary Committee shall constitute service as a Board member, and members of either Committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on either Committee. No member of the Primary or Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option granted under the Plan. D. Administration of the Automatic Option Grant Program shall be self-executing in accordance with the express terms and conditions of Article Three. IV. ELIGIBILITY FOR OPTION GRANTS 36 3 A. The persons eligible to receive option grants under Article Two shall be limited to the following: (i) key employees (including officers and directors) of the Corporation (or its Parent or Subsidiary corporations) who render services which contribute to the success and growth of the Corporation (or its Parent or Subsidiary corporations) or which may reasonably be anticipated to contribute to the future success and growth of the Corporation (or its Parent or Subsidiary corporations); and (ii) those consultants or independent contractors who provide valuable services to the Corporation (or its Parent or Subsidiary corporations). (iii) From and after the first date on which the shares of the Corporation's common stock are registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "IPO Effective Date"), non-employee members of the Board or the non-employee members of the board of directors of any Parent corporation shall not be eligible to participate in the Discretionary Option Grant Program or in any other stock option, stock purchase, stock bonus or other stock plan of the Corporation (or its Parent or Subsidiary corporations). However, non-employee members of the Board shall be eligible to receive automatic option grants pursuant to the provisions of Article Three. B. The Plan Administrator shall have full authority to determine which eligible individuals are to receive option grants under the Discretionary Option Grant Program, the number of shares to be covered by each such grant, whether the granted option is to be an incentive stock option ("Incentive Option") which satisfies the requirements of Section 422 of the Internal Revenue Code or a Non-qualified option not intended to meet such requirements, the time or times at which each such option is to become exercisable, and the maximum term for which the option is to be outstanding. V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of the Corporation's authorized but unissued or reacquired Common Stock. The aggregate number of shares which may be issued under the Plan shall not exceed 10,000,000 shares, which includes an increase of 1,000,000 shares authorized by the Board on February 13, 1997 and approved by the Corporation's stockholders at the 1997 Annual Stockholders Meeting and an increase of 2,000,000 shares authorized by the Board on April 7, 2000 and approved by the Corporation's stockholders at the 2000 Annual Stockholders Meeting. All share numbers in this Plan reflect a stock dividend that occurred on October 20, 1997 and April 3, 2000 and resulted in a distribution of one share of Common Stock for each share of Common Stock. The total number of shares issuable under the Plan shall be subject to adjustment from time to time in accordance with the provisions of this Section V. In no event may any one individual participating in the Plan be granted stock options for more than 1,000,000 shares of Common Stock over the remaining term 37 4 of the Plan. For purposes of this limitation, any option grants made prior to December 31, 1993 will not be taken into account. B. Should an option expire or terminate for any reason prior to exercise or surrender in full the shares subject to the portion of the option not so exercised or surrendered shall be available for subsequent option grants under the Plan. Shares subject to any option or portion thereof canceled in accordance with Section IV of Article Two or Section III of Article Three and shares repurchased by the Corporation pursuant to its repurchase rights under the Plan shall not be available for subsequent option grants under the Plan. In addition, should the exercise price of an outstanding option under the Plan be paid with shares of Common Stock, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised, and not by the net number of shares of Common Stock actually issued to the option holder. C. In the event any change is made to the Common Stock issuable under the Plan by reason of (a) any Corporate Transaction (as defined in Section III of Article Two) or (b) any stock split, stock dividend, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without receipt of consideration, then unless such change results in the termination of all outstanding options under the Plan as a result of the Corporate Transaction, appropriate adjustments shall be made to (i) the aggregate class and/or number of shares issuable under the Plan, (ii) the class and/or number of shares and price per share of the Common Stock subject to each outstanding option under the Discretionary Option Grant Program, (iii) the number and/or class of shares per non-employee Board member for which automatic option grants are subsequently to be made under the Automatic Option Grant Program, and (iv) the number and/or class of shares and price per share of the Common Stock in effect under each automatic grant outstanding under the Automatic Option Grant Program. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM I. TERMS AND CONDITIONS OF OPTIONS Options granted pursuant to this Article Two shall be authorized by action of the Plan Administrator and may, at the Plan Administrator's discretion, be either Incentive Options or Non-qualified options. Individuals who are not Employees may only be granted Non-qualified options. The Secondary Committee shall be authorized by the Plan Administrator to approve Incentive Options only. Each granted option shall be evidenced by one or more instruments in the form approved by the Plan Administrator; provided, however, that each such instrument shall comply with and incorporate the terms and conditions specified below. Each instrument evidencing an Incentive Option shall, in addition, be subject to the applicable provisions of Section II of this Article Two. A. Option Price. 38 5 1. The option price per share shall be fixed by the Plan Administrator, provided, however, that in no event shall the option price per share be less than eighty-five percent (85%) of the fair market value of a share of Common Stock on the date of the option grant. 2. The option price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section VI of this Article Two and the instrument evidencing the grant, be payable in one of the alternative forms specified below: (i) cash or check made payable to the Corporation's order; (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date (as such terms are defined below); or (iii) through a broker-dealer sale and remittance procedure pursuant to which the optionee shall provide irrevocable written instructions (I) to the designated broker-dealer to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds an amount equal to the aggregate option price payable for the purchased shares plus all applicable Federal and state income and employment taxes required to be withheld by the Corporation by reason of such purchase and (II) to the Corporation to deliver the certificates for the purchased shares directly to such broker-dealer. For purposes of this subparagraph 2, the Exercise Date shall be the first date on which the Corporation shall have received written notice of the exercise of the option. Except to the extent the sale and remittance procedure is utilized in connection with the exercise of the option, payment of the option price for the purchased shares must accompany such notice. 3. The Fair Market Value of a share of Common Stock on any relevant date under subparagraph 1 or 2 above (and for all other valuation purposes under the Plan) shall be determined in accordance with the following provisions: - If the Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded on the Nasdaq National Market System, the fair market value shall be the closing price of one share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers through its Nasdaq system or any successor system. If there is no closing price for the Common Stock on the date in question, then the closing price on the last preceding date for which such quotation exists shall be determinative of fair market value. - If the Common Stock is at the time listed or admitted to trading on any national stock exchange, then the Fair Market Value shall be the 39 6 closing selling price per share of Common Stock on the date in question on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date in question, then the Fair Market Value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. - If the Common Stock is at the time neither listed nor admitted to trading on any stock exchange nor traded on the Nasdaq National Market System, or if the Plan Administrator determines that the value determined pursuant to the preceding paragraphs does not reflect Fair Market Value, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. B. Term and Exercise of Options. Each option granted under this Article Two shall be exercisable at such time or times, during such period, and for such number of shares as shall be determined by the Plan Administrator and set forth in the stock option agreement evidencing such option; provided, however, that no such option shall have a term in excess of ten (10) years from the grant date. During the lifetime of the optionee, the option shall be exercisable only by the optionee and shall not be assignable or transferable by the optionee otherwise than by will or by the laws of descent and distribution. C. Termination of Service. 1. Except to the extent otherwise provided pursuant to Section VII of this Article Two, the following provisions shall govern the exercise period applicable to any options held by the optionee at the time of cessation of Service or death. - Should the optionee cease to remain in Service for any reason other than death or permanent disability, then the period for which each outstanding option held by such optionee is to remain exercisable shall be limited to the three (3)-month period following the date of such cessation of Service. - In the event such Service terminates by reason of permanent disability (as defined in Section 22(e)(3) of the Internal Revenue Code), then the period for which each outstanding option held by the optionee is to remain exercisable shall be limited to the twelve (12)-month period following the date of such cessation of Service. - Should the optionee die while in Service or during the three (3)-month period following his or her cessation of Service, then the period for which each of his or her outstanding options is to remain exercisable shall be limited to the three (3)-year period following the date of the optionee's cessation of Service. During such limited period, the option may be exercised by the personal representative of the optionee's estate or by the person or persons to whom the 40 7 option is transferred pursuant to the optionee's will or in accordance with the laws of descent and distribution. - Under no circumstances, however, shall any such option be exercisable after the specified expiration date of the option term. - Each such option shall, during such limited exercise period, be exercisable for any or all of the shares for which the option is exercisable on the date of the optionee's cessation of Service. Upon the expiration of such limited exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be exercisable. 2. The Plan Administrator shall have complete discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to permit one or more options held by the optionee under this Article Two to be exercised, during the limited period of exercisability provided under subparagraph 1 above, not only with respect to the number of shares for which each such option is exercisable at the time of the optionee's cessation of Service but also with respect to one or more subsequent installments of purchasable shares for which the option would otherwise have become exercisable had such cessation of Service not occurred. 3. For purposes of the foregoing provisions of this paragraph I.C (and all other provisions of the Plan), unless it is evidenced otherwise in the specific option agreement evidencing the option grant and/or the purchase agreement evidencing the purchased optioned shares, the optionee shall be deemed to remain in SERVICE for so long as such individual renders services on a periodic basis to the Corporation or any Parent or Subsidiary corporation in the capacity of an Employee, a non-employee member of the Board or an independent consultant or advisor. The optionee shall be considered to be an EMPLOYEE for so long as such individual remains in the employ of the Corporation or one or more of its Parent or Subsidiary corporations subject to the control and direction of the employer entity not only as to the work to be performed but also as to the manner and method of performance. D. Stockholder Rights. An optionee shall have none of the rights of a stockholder with respect to any shares covered by the option until such individual shall have exercised the option, paid the exercise price for the purchased shares and been issued a stock certificate for such shares. E. Repurchase Rights. The shares of Common Stock acquired upon the exercise of options granted under this Article Two may be subject to one or more repurchase rights of the Corporation in accordance with the following provisions: 1. The Plan Administrator may in its discretion determine that it shall be a term and condition of one or more options exercised under this Article Two that the Corporation (or its assignees) shall have the right, exercisable upon the optionee's cessation of Service, to repurchase at the option price all or (at the discretion of the Corporation and with the consent of the optionee) any portion of the shares of Common Stock previously acquired by the optionee upon the exercise of such option. Any such repurchase right shall be exercisable by the 41 8 Corporation (or its assignees) upon such terms and conditions (including the establishment of the appropriate vesting schedule and other provision for the expiration of such right in one or more installments over the optionee's period of Service) as the Plan Administrator may specify in the instrument evidencing such right. 2. All of the Corporation's outstanding repurchase rights shall automatically terminate, and all shares subject to such terminated rights shall immediately vest in full, upon the occurrence of any Corporate Transaction under Section III of this Article Two; provided, however, that no such termination of the repurchase rights or immediate vesting of the shares shall occur if (and to the extent): (i) the Corporation's outstanding repurchase rights are to be assigned to the successor corporation (or Parent thereof) in connection with the Corporate Transaction or (ii) such termination of repurchase rights and acceleration of vesting are precluded by other limitations imposed by the Plan Administrator at the time of the option grant. II. INCENTIVE OPTIONS The terms and conditions specified below shall be applicable to all Incentive Options granted under this Article Two. Incentive Options may only be granted to individuals who are Employees. Options which are specifically designated as "Non-qualified" options when issued under the Plan shall not be subject to such terms and conditions. A. Option Price. The option price per share of the Common Stock subject to an Incentive Option shall in no event be less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the date of grant. B. Dollar Limitation. The aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which one or more options granted to any Employee under this Plan (or any other option plan of the Corporation or its Parent or Subsidiary corporations) may for the first time become exercisable as Incentive Options under the Federal tax laws during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability thereof as Incentive Options under the Federal tax laws shall be applied on the basis of the order in which such options are granted. C. 10% Stockholder. If any individual to whom an Incentive Option is to be granted pursuant to the provisions of the Plan is on the date of grant the owner of stock (as determined under Section 424(d) of the Internal Revenue Code) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or any one of its Parent or Subsidiary corporations (such person to be herein referred to as a 10% Stockholder), then the option price per share shall not be less than one hundred and ten percent (110%) of the Fair Market Value per share of Common Stock on the date of grant and the option term shall not exceed five (5) years measured from the grant date. Except as modified by the preceding provisions of this Section II, all the provisions of the Plan shall be applicable to the Incentive Options granted hereunder. 42 9 III. CORPORATE TRANSACTIONS A. In the event of any of the following stockholder-approved transactions (a "Corporate Transaction"): (i) a merger or consolidation in which the Corporation is not the surviving entity, except for a transaction the principal purpose of which is to change the state of the Corporation's incorporation; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation; or (iii) any reverse merger in which the Corporation is the surviving entity but in which fifty percent (50%) or more of the Corporation's outstanding voting stock is transferred to holders different from those who held the stock immediately prior to such merger, then each option outstanding under this Article Two shall be automatically accelerated so that each such option shall, immediately prior to the specified effective date for such Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock purchasable under such option and may be exercised for all or any portion of such shares. However, no option shall be so accelerated if and to the extent (i) such option is to be assumed by the successor corporation or Parent thereof or to be replaced with a comparable option to purchase shares of the capital stock of such successor corporation or Parent thereof or (ii) such acceleration is subject to other applicable limitations imposed by the Plan Administrator in the relevant option agreement. B. In connection with any such Corporate Transaction, the exercisability as an incentive stock option under the Federal tax laws of any accelerated options under this Article Two shall remain subject to the applicable dollar limitation of paragraph II.B of this Article Two. C. The grant of options under this Article Two shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. D. Upon the consummation of the Corporate Transaction, all outstanding options under this Article Two shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation or its Parent company. IV. SURRENDER OF OPTIONS FOR CASH OR STOCK A. Provided and only if the Plan Administrator determines in its discretion to implement the stock appreciation right provisions of this Section V, one or more optionees may be granted the right, exercisable upon such terms and conditions as the Plan Administrator may establish at the time of the option grant or at any time thereafter, to surrender all or part of an unexercised option under this Article Two in exchange for a distribution from the Corporation, payable in cash or in shares of Common Stock, equal in amount to the excess of (i) the Fair 43 10 Market Value (at date of surrender) of the number of shares in which the optionee is at the time vested under the surrendered option or portion thereof over (ii) the aggregate option price payable for such vested shares. B. No surrender of an option shall be effective hereunder unless it is approved by the Plan Administrator. If the surrender is so approved, then the distribution to which the optionee shall accordingly become entitled under this Section V may be made in shares of Common Stock valued at Fair Market Value at date of surrender, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. C. If the surrender of an option is rejected by the Plan Administrator, then the optionee shall retain whatever rights the optionee had under the surrendered option (or surrendered portion thereof) on the date of surrender and may exercise such rights at any time prior to the later of (i) five (5) business days after the receipt of the rejection notice or (ii) the last day on which the option is otherwise exercisable in accordance with the terms of the instrument evidencing such option, but in no event may such rights be exercised at any time after ten (10) years (or five (5) years in the case of a 10% Stockholder) after the date of the option grant. D. One or more officers of the Corporation subject to the short-swing profit restrictions of the Federal securities laws may, in the Plan Administrator's sole discretion, be granted limited stock appreciation rights in tandem with their outstanding options under this Article Two. Each outstanding option with such a limited stock appreciation right in effect for at least six (6) months shall automatically be canceled, to the extent exercisable for vested shares of Common Stock, upon the occurrence of a Hostile Take-Over, and the optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the number of shares in which the optionee is at the time vested under the canceled option or canceled portion over (ii) the aggregate option price payable for such vested shares. Such cash distribution shall be made within five (5) days following the consummation of the Hostile Take-Over. Neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option cancellation and cash distribution. The balance (if any) of each such option shall continue in full force and effect in accordance with the terms and conditions of the instrument evidencing such grant. E. For purposes of paragraph IV.D, the following definitions shall be in effect: A Hostile Take-Over shall be deemed to occur in the event (i) any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Act of 1934, as amended (the "1934 Act")) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept and (ii) more than fifty percent (50%) of the securities so acquired in such tender or exchange offer are 44 11 accepted from holders other than Corporation officers and directors participating in the Plan. The Take-Over Price per share shall be deemed to be equal to the greater of (a) the Fair Market Value per share on the date of cancellation, as determined pursuant to the valuation provisions of paragraph I.A.3 of this Article Two, or (b) the highest reported price per share paid in effecting such Hostile Take-Over. However, if the canceled option is an Incentive Option, the Take-Over Price shall not exceed the clause (a) price per share. F. The shares of Common Stock subject to any option surrendered or canceled for an appreciation distribution pursuant to this Section IV shall NOT be available for subsequent option grants under the Plan. V. LOANS OR INSTALLMENT PAYMENTS A. The Plan Administrator may assist any optionee (including any officer or director) in the exercise of one or more options under this Article Two by (a) authorizing the extension of a loan to such optionee from the Corporation or (b) permitting the optionee to pay the option price for the purchased Common Stock in installments over a period of years. The terms of any loan or installment method of payment (including the interest rate and terms of repayment) will be established by the Plan Administrator in its sole discretion. Loans and installment payments may be granted without security or collateral (other than loans to optionees who are consultants or independent contractors, which must be adequately secured by collateral other than the purchased shares), but the maximum credit available to the optionee shall not exceed the sum of (i) the aggregate option price payable for the purchased shares (less the par value) plus (ii) any Federal and state income and employment tax liability incurred by the optionee in connection with the exercise of the option. B. The Plan Administrator may, in its absolute discretion, determine that one or more loans extended under Section V.A above shall be subject to forgiveness by the Corporation in whole or in part upon such terms and conditions as the Plan Administrator in its discretion deems appropriate. VI. EXTENSION OF EXERCISE PERIOD The Plan Administrator shall have full power and authority, exercisable in its sole discretion to extend, either at the time when the option is granted or at any time while the option remains outstanding, the period of time for which any option granted under this Article Two is to remain exercisable following the optionee's cessation of Service from the period set forth in the option agreement to such greater period of time as the Plan Administrator shall deem appropriate; provided, however, that in no event shall such option be exercisable after the specified expiration date of the option term. 45 12 ARTICLE THREE AUTOMATIC OPTION GRANT PROGRAM I. ELIGIBILITY The individuals eligible to receive automatic option grants pursuant to the provisions of this Article Three shall be limited to the following: (1) each individual who is serving as a non-employee member of the Board on the IPO Effective Date; and (2) each individual who is first appointed or elected as a non-employee Board member at any time after the IPO Effective Date. II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS A. Grant Dates. Option grants will be made under this Article Three on the dates specified below: (i) Each individual who has not previously been an Employee, and who first becomes a non-employee Board member at any time after the IPO Effective Date, whether through election at an Annual Stockholders Meeting or through appointment by the Board, shall automatically be granted, at the time of such initial election or appointment, a Non-qualified stock option to purchase 18,000 shares of Common Stock. (ii) Commencing with the 1993 Annual Stockholders Meeting and each subsequent Annual Stockholders Meeting until 1996, each individual who is at the time serving as a non-employee member of the Board shall receive a grant of a Non-qualified option to purchase 3,000 shares of Common Stock, provided such individual has been a member of the Board for at least six (6) months. (iii) Commencing with the 1996 Annual Stockholders Meeting and each subsequent Annual Stockholders Meeting until 1999, each individual who is at the time serving as a non-employee member of the Board shall receive a grant of a Non-qualified option to purchase 6,000 shares of Common Stock, instead of the 3,000 shares under Section II.A(ii) above. (iv) Commencing with the 1999 Annual Stockholders Meeting, each individual who is at the time serving as a non-employee member of the Board shall receive a grant of a Non-qualified option to purchase 12,000 shares of Common Stock, instead of the 6,000 shares under Section II.A(iii) above; provided, however, that a non-employee member of the Board shall only receive this 12,000-share option grant at the 1999 Annual Stockholders Meeting and will receive no grant at the 2000 Annual Stockholders Meeting. 46 13 (v) Commencing with the 2000 Annual Stockholders Meeting, each individual who is at the time serving as a non-employee member of the Board shall receive a grant of a Non-qualified option to purchase 9,000 shares of Common Stock, instead of the 6,000 shares under Section II.A(iii) above The 18,000-share limitation, 3,000-share limitation, 6,000-share limitation and 12,000-share limitation on the automatic option grant to be made to each non-employee Board member shall be subject to periodic adjustment pursuant to the applicable provisions of Section V.C of Article One. B. Exercise Price. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the automatic grant date. C. Payment. The exercise price shall be payable in one of the alternative forms specified below: (i) cash or check made payable to the Corporation's order; (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date (as such terms are defined in paragraph I.A of Article Two); or (iii) through a broker-dealer sale and remittance procedure pursuant to which the optionee shall provide irrevocable written instructions (I) to the designated broker-dealer to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds an amount equal to the aggregate option price payable for the purchased shares plus all applicable Federal and state income and employment taxes required to be withheld by the Corporation by reason of such purchase and (II) to the Corporation to deliver the certificates for the purchased shares directly to such broker-dealer. Except to the extent the sale and remittance procedure specified above is utilized for the exercise of the option, payment of the exercise price for the purchased shares must accompany the written notice of option exercise. D. Option Term. Each automatic grant under this Article Three shall have a maximum term of ten (10) years measured from the automatic grant date. E. Exercisability. Each annual automatic grant for 3,000 shares shall be immediately exercisable in full for the option shares. Each annual automatic grant for 6,000 shares shall be immediately exercisable in full for the option shares, provided that the optionee 47 14 has been a member of the Board for six (6) months on the annual automatic grant date; if the optionee has not been a member of the Board for six (6) months on the annual automatic grant date, such automatic option grant shall become exercisable in full for the option shares on the date six (6) months following the annual automatic grant date. Each annual automatic grant for 12,000 shares shall be immediately exercisable in full for the option shares. Each initial automatic grant for 18,000 shares shall become exercisable for the option shares in three (3) installments as follows: (i) The option shall become exercisable for one-third (1/3) of the option shares upon completion of twelve (12) months of Board service measured from the automatic grant date. (ii) The option shall become exercisable for an additional one-third (1/3) of the option shares upon the completion of twenty-four (24) months of Board service measured from the automatic grant date. (iii) The option shall become exercisable for the final one-third (1/3) of the option shares upon the completion of thirty-six (36) months of Board service measured from the automatic grant date. As the option becomes exercisable for one or more installments of the option shares, the installments shall accumulate, and the option shall remain exercisable for the accumulated installments until the expiration or sooner termination of the option term. The option, however, shall not become exercisable for any additional option shares following the optionee's cessation of Board service, except to the extent the option is otherwise to become exercisable in accordance with the provisions of Section III of this Article Three. F. Non-Transferability. During the lifetime of the optionee, the option shall be exercisable only by the optionee and shall not be assignable or transferable by the optionee otherwise than by will or by the laws of descent and distribution following the optionee's death. G. Effect of Termination of Board Membership. 1. Should the optionee cease to be a Board member for any reason (other than death) while holding an automatic option grant under this Article Three, then such optionee shall have a six (6)-month period following the date of such cessation of Board membership in which to exercise such option for any or all of the shares of Common Stock for which the option is exercisable at the time the optionee ceases service as a Board member. 2. Should the optionee die while serving as a Board member or during the six (6)-month period following his or her cessation of Board service, then the option may subsequently be exercised, for any or all of the shares of Common Stock for which the option is exercisable at the time of the optionee's cessation of Board membership, by the personal representative of the optionee's estate or by the person or persons to whom the option is transferred pursuant to the optionee's will or in accordance with the laws of descent and distribution. Any such exercise must, however, occur within three (3) years after the date of the optionee's cessation of Board service. 48 15 3. In no event shall any automatic grant under this Article Three remain exercisable after the specified expiration date of the ten (10)-year option term. Upon the expiration of the applicable exercise period in accordance with subparagraphs 1 and 2 above or (if earlier) upon the expiration of the ten (10)-year option term, the automatic grant shall terminate and cease to be exercisable. H. Stockholder Rights. The holder of an automatic option grant under this Article Three shall have no stockholder rights with respect to any shares covered by such option until such individual shall have exercised the option, paid the exercise price for the purchased shares and been issued a stock certificate for such shares. I. Remaining Terms. The remaining terms and conditions of each automatic option grant shall be as set forth in the prototype Non-Employee Director Automatic Grant Agreement. III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction (as such term is defined in Section III of Article Two), then the exercisability of each automatic option grant outstanding under this Article Three shall automatically accelerate so that each such option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares. Upon the consummation of the Corporate Transaction, all automatic option grants under this Article Three shall terminate and cease to be outstanding. B. In connection with any Change in Control of the Corporation, the exercisability of each automatic option grant at the time outstanding under this Article Three shall automatically accelerate so that each such option shall, immediately prior to the specified effective date for the Change in Control, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares. For purposes of this Article Three, a Change in Control shall be deemed to occur in the event: (i) any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept; or (ii) there is a change in the composition of the Board over a period of twenty-four (24) consecutive months or less such that a majority of the Board members (rounded up to the next whole number) cease, by reason of 49 16 one or more proxy contests for the election of Board members, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least two-thirds of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board. C. Upon the occurrence of a Hostile Take-Over, each automatic option grant which has been outstanding under this Article Three for a period of at least six (6) months shall automatically be canceled in return for a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the canceled option (whether or not the option is otherwise at the time exercisable for such shares) over (ii) the aggregate exercise price payable for such shares. The cash distribution payable upon such cancellation shall be made within five (5) days following the consummation of the Hostile Take-Over. Neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option cancellation and cash distribution. D. For purposes of this Article Three, Hostile Take-Over shall have the meaning assigned to such term in paragraph V.E of Article Two. The Take-Over Price per share shall be deemed to be equal to the greater of (a) the Fair Market Value per share on the date of cancellation, as determined pursuant to the valuation provisions of paragraph I.A.3 of Article Two, or (b) the highest reported price per share paid in effecting such Hostile Take-Over. E. The shares of Common Stock subject to each option canceled in connection with the Hostile Take-Over shall NOT be available for subsequent issuance under this Plan. F. The automatic option grants outstanding under this Article Three shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. AMENDMENT OF THE AUTOMATIC GRANT PROVISIONS The provisions of this Automatic Option Grant Program, including any automatic option grants outstanding under this Article Three, may not be amended at intervals more frequently than once every six (6) months, other than to the extent necessary to comply with applicable Federal income tax laws and regulations. ARTICLE FOUR MISCELLANEOUS I. AMENDMENT OF THE PLAN The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects whatsoever; provided, however, that (i) no such amendment or modification shall, without the consent of the holders, adversely affect rights and obligations 50 17 with respect to options at the time outstanding under the Plan and (ii) any amendment to the Automatic Option Grant Program (or any options outstanding thereunder) shall be in compliance with the limitation of Section IV of Article Three. In addition, the Board shall not, without the approval of the stockholders of the Corporation (i) increase the maximum number of shares issuable under the Plan, except for permissible adjustments under Section V.C of Article One, (ii) materially modify the eligibility requirements for the grant of options under the Plan or (iii) otherwise materially increase the benefits accruing to participants under the Plan. II. EFFECTIVE DATE AND TERM OF PLAN A. The Plan was restated on June 22, 1992 to be effective on the IPO Effective Date, and the Corporation's stockholders approved the restatement on September 4, 1992. Article One, Section III of the Plan was subsequently amended to permit the establishment of a secondary committee to administer the Plan. Such amendment became effective on the September 30, 1992 date of its approval by the Board. The Plan was restated on October 13, 1993 to (i) amend the automatic grant program under the Option Plan to increase to 18,000 from 6,000 the number of shares awarded to non-employee directors upon initial election or appointment and to delete vesting restrictions for the annual 3,000-share automatic option grants and (ii) limit the maximum number of shares for which any individual participant may be granted stock options over the remaining term of the Option Plan. The Plan was restated on December 7, 1995 to (i) amend the automatic grant program under the Option Plan to increase to 6,000 from 3,000 the number of shares awarded to each non-employee director upon each annual meeting of the Corporation's stockholders and (ii) eliminate the six-month service requirement for receiving such automatic annual grants, provided that the annual option grants to non-employee directors who have not served as Board members for at least six (6) months prior to the date of such annual grant shall become exercisable six (6) months after the date of such grant. The Plan was restated on February 13, 1997 to increase by 1,000,000 the number of shares of the Corporation's Common Stock reserved for issuance under the Plan from 3,000,000 shares to 4,000,000 shares. The Corporation's stockholders approved of the share increase at the 1997 Annual Stockholders Meeting. The Plan was restated on June 8, 1999 to (i) reflect the stock dividend that occurred on October 20, 1997 and resulted in a distribution of one share of Common stock for each share of Common Stock; and (ii) increase to 12,000 from 6,000 the number of shares awarded to each non-employee director upon each annual meeting of the Corporation's stockholders, provided that each such grant shall only be made to a non-employee member of the Board at every other annual meeting of the Corporation's stockholders. The Plan was restated on July 11, 2000 to increase by 2,000,000 the number of shares of the Corporation's Common Stock reserved for issuance under the Plan from 8,000,000 shares to 10,000,000 shares. The Corporation's stockholders approved of the share increase at the 2000 Annual Stockholders Meeting. B. The provisions of this 2000 restatement shall apply only to options granted under the Plan from and after the Effective Date. Each option issued and outstanding under the Plan immediately prior to the Effective Date shall continue to be governed by the terms and conditions of the Plan (and the instrument evidencing such grant) as in effect on the date each such option was previously granted, and nothing in this restatement shall be deemed to affect or 51 18 otherwise modify the rights or obligations of the holders of such prior options with respect to the acquisition of shares of Common Stock thereunder. C. The option acceleration provisions of Section III of Article Two relating to Corporate Transactions may, in the Plan Administrator's discretion, be extended to one or more outstanding stock options under the Plan which were granted prior to the IPO Effective Date and which do not otherwise provide for such acceleration. D. The sale and remittance procedure authorized for the exercise of outstanding options under this Plan shall be available for all options granted under this Plan on or after the IPO Effective Date and all Non-qualified options outstanding under the Plan. E. The Plan shall terminate upon the earlier of (i) June 21, 2002 or (ii) the date on which all shares available for issuance under the Plan shall have been issued or canceled pursuant to the exercise or surrender of options granted hereunder. If the date of termination is determined under clause (i) above, then options outstanding on such date shall thereafter continue to have force and effect in accordance with the provisions of the instruments evidencing such options. F. Options may be granted under this Plan to purchase shares of Common Stock in excess of the number of shares then available for issuance under the Plan, provided (i) an amendment to increase the maximum number of shares issuable under the Plan is adopted by the Board prior to the initial grant of any such option and within one year thereafter such amendment is approved by the stockholders of the Corporation and (ii) each option granted is not to become exercisable, in whole or in part, at any time prior to the obtaining of such stockholder approval. III. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares pursuant to options granted under the Plan shall be used for general corporate purposes. IV. WITHHOLDING The Corporation's obligation to deliver shares upon the exercise or surrender of any options granted under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. V. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any option or surrender right hereunder, and the issuance of stock upon the exercise or surrender of any such option shall be subject to the procurement by the Corporation of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan, unless and until, in the opinion of counsel for the Corporation (or its successor in 52 19 the event of any Corporate Transaction), there shall have been compliance with all applicable requirements of the Federal and state securities exchange on which stock of the same class is then listed, and all other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. VI. NO EMPLOYMENT/SERVICE RIGHTS Neither the action of the Corporation in establishing this Plan, nor any action taken by the Board or the Plan Administrator hereunder, nor any provision of this Plan shall be construed so as to grant any individual the right to remain in the employ or Service of the Corporation (or any Parent or Subsidiary corporation) for any period of specific duration, and the Corporation (or any Parent or Subsidiary corporation retaining the services of such individual) may terminate such individual's employment or Service at any time and for any reason, with or without cause. 53 EX-21.1 3 v70910ex21-1.txt EXHIBIT 21.1 1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Assignment Ready, Inc., a Delaware corporation, is a wholly owned subsidiary of EnviroStaff, Inc., a Minnesota corporation, which in turn is a wholly owned subsidiary of the Registrant. Assignment Ready, Inc. does business under the names "Lab Support," "Healthcare Financial Staffing," "Clinical Lab Staff," and "EnviroStaff." OTHER SUBSIDIARIES OF THE REGISTRANT ARE OMITTED FROM THIS EXHIBIT PURSUANT TO REGULATION S-K 601(b)(21)(ii). 54 EX-24.1 4 v70910ex24-1.txt EXHIBIT 24.1 1 Exhibit 24.1 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statements No. 33-57078 and No. 333-38849 of On Assignment, Inc. and subsidiaries on Form S-8 of our report dated January 24, 2001, with respect to the consolidated financial statements and financial statement schedule of On Assignment, Inc. appearing in this Annual Report on Form 10-K of On Assignment, Inc. for the year ended December 31, 2000. /s/ Deloitte & Touche LLP - ------------------------- Deloitte & Touche LLP March 29, 2001 Los Angeles, California 55 EX-25.1 5 v70910ex25-1.txt EXHIBIT 25.1 1 Exhibit 25.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints H. Tom Buelter and Ronald W. Rudolph and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date - ----------------------------------------------------------------------------------------------------- /s/ H. Tom Buelter Chairman of the Board and March 29, 2001 - --------------------------------- Chief Executive Officer H. Tom Buelter (Principal Executive Officer) /s/ Ronald W. Rudolph Executive Vice President, Finance March 29, 2001 - --------------------------------- and Chief Financial Officer Ronald W. Rudolph (Principal Financial and Accounting Officer) /s/ Karen Brenner Director March 29, 2001 - --------------------------------- Karen Brenner /s/ Jonathan S. Holman Director March 29, 2001 - --------------------------------- Jonathan S. Holman /s/ Jeremy M. Jones Director March 29, 2001 - --------------------------------- Jeremy M. Jones /s/ William E. Brock Director March 29, 2001 - --------------------------------- William E. Brock
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