UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

x        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2007

OR

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to
Commission file number: 000-20540

 

ON ASSIGNMENT, INC.

(Exact name of registrant as specified in its charter)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x.

At April 30, 2007, the total number of outstanding shares of the Company’s Common Stock ($0.01 par value) was 35,135,474.

ON ASSIGNMENT, INC.
Index

 

 

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PART I - FINANCIAL INFORMATION

Item 1 — Condensed Consolidated Financial Statements (unaudited)

ON ASSIGNMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

		March 31, 2007			December 31, 2006
ASSETS
Current Assets:
Cash and cash equivalents		$	22,577,000		$	105,483,000
Restricted cash		—			4,678,000
Accounts receivable, net		76,753,000			39,107,000
Advances and deposits		328,000			343,000
Prepaid expenses		3,994,000			2,630,000
Income taxes receivable		501,000			19,000
Deferred income taxes		5,364,000			3,624,000
Other current assets		1,182,000			41,000
Total Current Assets		110,699,000			155,925,000
Property and equipment, net		14,601,000			9,116,000
Goodwill		187,238,000			17,109,000
Identifiable intangible assets, net		52,442,000			667,000
Deferred income taxes, long-term		494,000			865,000
Other assets		6,101,000			3,313,000
Total Assets		$	371,575,000		$	186,995,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	6,655,000		$	2,867,000
Accrued payroll		20,362,000			8,426,000
Notes payable — current portion		2,076,000			—
Deferred compensation		1,547,000			1,360,000
Income taxes payable		134,000			876,000
Accrued workers’ compensation and medical malpractice insurance		8,230,000			3,551,000
Other accrued expenses		4,151,000			3,250,000
Other current liabilities		290,000			94,000
Total Current Liabilities		43,445,000			20,424,000
Deferred income taxes — long term		3,769,000			—
Notes payable — less current portion		143,744,000			—
Other long-term liabilities		1,101,000			627,000
Total Liabilities		192,059,000			21,051,000
Stockholders’ Equity:
Preferred stock		—			—
Common stock		377,000			367,000
Paid-in capital		212,294,000			199,355,000
Accumulated deficit		(11,166,000		)	(11,860,000		)
Accumulated other comprehensive income		1,653,000			1,562,000
		203,158,000			189,424,000
Less: Treasury shares, at cost		23,642,000			23,480,000
Total Stockholders’ Equity		179,516,000			165,944,000
Total Liabilities and Stockholders’ Equity		$	371,575,000		$	186,995,000

 

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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ON ASSIGNMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

		Three Months Ended March 31,
		2007			2006
Revenues		$	122,629,000		$	66,723,000
Cost of services		85,169,000			49,739,000
Gross profit		37,460,000			16,984,000
Selling, general and administrative expenses		34,261,000			16,786,000
Operating income		3,199,000			198,000
Interest income		418,000			237,000
Interest expense		(2,136,000		)	(3,000		)
Income before income taxes		1,481,000			432,000
Provision for income taxes		570,000			130,000
Net income		$	911,000		$	302,000
Earnings per share:
Basic earnings per share		$	0.03		$	0.01
Weighted average number of shares outstanding		34,667,000			25,986,000
Diluted earnings per share		$	0.03		$	0.01
Weighted average number of shares and dilutive shares outstanding		35,629,000			26,827,000

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

		Three Months Ended March 31,
		2007			2006
Net income		$	911,000		$	302,000
Other comprehensive income:
Foreign currency translation adjustment		91,000			88,000
Comprehensive income		$	1,002,000		$	390,000

 

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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ON ASSIGNMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

		Three months Ended March 31,
		2007			2006
Cash Flows From Operating Activities:
Net income		$	911,000		$	302,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,341,000			1,453,000
Amortization of intangibles		4,165,000			235,000
Provision for doubtful accounts and billing adjustments		217,000			125,000
Stock-based compensation		1,106,000			459,000
Excess tax benefits from stock-based compensation		(524,000		)	—
Amortization of deferred loan costs		99,000			—
Loss on disposal of property and equipment		3,000			—
Changes in operating assets and liabilities:
Accounts receivable		(4,933,000		)	(1,988,000		)
Prepaid expenses		89,000			359,000
Income taxes receivable		238,000			(67,000		)
Income taxes payable		(744,000		)	220,000
Accounts payable		447,000			603,000
Accrued payroll		2,366,000			504,000
Deferred compensation		187,000			126,000
Accrued workers’ compensation and medical malpractice insurance		83,000			182,000
Other accrued expenses		(418,000		)	(43,000		)
Net cash provided by operating activities		4,633,000			2,470,000
Cash Flows From Investing Activities:
Acquisition of property and equipment		(1,490,000		)	(1,596,000		)
Proceeds from sale of property and equipment		—			1,000
Decrease in restricted cash		4,678,000			200,000
Decrease in advances and deposits		33,000			7,000
Increase in other assets		(512,000		)	(74,000		)
Cash paid for acquisitions		(231,727,000		)	—
Net cash used for investing activities		(229,018,000		)	(1,462,000		)
Cash Flows From Financing Activities:
Capital lease payments		(35,000		)	—
Net proceeds from stock transactions		1,161,000			1,209,000
Excess tax benefits from stock-based compensation		524,000			—
Accrued shelf offering costs		(300,000		)	—
Debt issuance costs		(4,153,000		)	—
Proceeds from issuance of long-term debt		145,000,000			—
Principal payments of long-term debt		(796,000		)	—
Net cash provided by financing activities		141,401,000			1,209,000
Effect of exchange rate changes on cash and cash equivalents		78,000			66,000
Net Increase (Decrease) in Cash and Cash Equivalents		(82,906,000		)	2,283,000
Cash and Cash Equivalents at Beginning of Period		105,483,000			20,487,000
Cash and Cash Equivalents at End of Period		$	22,577,000		$	22,770,000

 

 (continued)

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Income taxes, net of refunds		$	1,069,000		$	117,000
Acquisitions:
Goodwill		$	170,129,000		$	―
Intangible assets acquired		55,940,000			―
Net tangible assets acquired		17,196,000			―
Fair value of assets acquired		$	243,265,000		$	―
Supplemental Disclosure of Non-Cash Transactions:
Issuance of common stock for acquisition		$	10,000,000		$	—
Acquisition costs in accounts payable and other accrued expenses		$	1,380,000		$	—
Acquisition of property and equipment through accounts payable		$	236,000		$	94,000

 

 

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ON ASSIGNMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

1. Financial Statement Presentation. The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). This Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to SEC rules and regulations. The information reflects all normal and recurring adjustments which, in the opinion of the Company’s management, are necessary for a fair presentation of the financial position of the Company and its results of operations for the interim periods set forth herein. The results for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for the full year or any other period.

2. 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.

3. Cash and Cash Equivalents. The Company considers all highly liquid investments with a maturity of three months or less on the date of purchase to be cash equivalents.

4. Accrued Workers’ Compensation and Medical Malpractice Insurance. The Company is partially self-insured for its workers’ compensation liability related to the Life Sciences and Healthcare segments as well as its medical malpractice liability in relation to the Physician segment. In connection with these programs, the Company pays a base premium plus actual losses incurred, not to exceed certain stop-loss limits. The Company is insured for losses above these limits, both per occurrence and in the aggregate. The self-insurance claim liability is determined based on claims filed and claims incurred but not reported. In conjunction with the $165,000,000 senior secured credit facility entered into by the Company on January 31, 2007, the restricted cash and cash equivalents of $4,678,000 previously collateralized in association with three letters of credit related to the Company’s workers’ compensation program was released.

5. Accounts Receivable. Accounts receivable are stated net of an allowance for doubtful accounts and billing adjustments of $2,332,000 and $1,380,000 at March 31, 2007 and December 31, 2006, respectively.

6. Acquisitions. On January 3, 2007, the Company acquired VSS Holding, Inc. and its subsidiaries, which includes VISTA Staffing Solutions Inc., (VISTA), a privately-owned leading provider of physician staffing, known as locum tenens, and permanent physician search services. VISTA is headquartered in Salt Lake City, Utah and works with more than 1,300 physicians covering approximately thirty medical specialties. On a daily basis, VISTA has over 200 physicians on assignment. VISTA provides its staffing solutions in all fifty states and international markets for organizations ranging from large urban hospitals to small practice groups in rural areas. VISTA’s CEO and management team have remained a part of On Assignment after the acquisition. The primary reasons for the VISTA acquisition were to diversify our existing healthcare offerings, to compliment our existing Nurse Travel business line with cross-selling opportunities and to leverage our selling, general and administrative (SG&A) expenses, including housing, travel and credentialing costs.

The total purchase price of $41,990,000 consisted of (i) an initial price of $41,141,000, paid in cash, excluding a $4,100,000 holdback for potential claims indemnifiable by the VISTA shareholders and (ii) $849,000 in direct acquisition costs. There is potential for additional consideration of $8,000,000 that is contingent upon the 2007 and 2008 financial performance of VISTA. This earn-out will be recorded as additional purchase price in the future at such time when the targets are met and the consideration is earned. The holdback, net of the amount of certain claims made against the selling shareholders, will be released to the selling shareholders on January 3, 2009.

The Company recorded the acquisition using the purchase method of accounting and thus the results of operations from VISTA are included in the Company’s consolidated financial statements (Physician segment) from the acquisition date. Pursuant to FAS No. 141, “Business Combinations” (FAS 141), the purchase price was allocated to the assets acquired and liabilities assumed based on their fair values as of the date of the acquisition. The Company is currently reviewing preliminary fair value adjustments associated with purchased intangibles, fixed assets and lease obligations, as well as related income tax impacts. The ultimate allocation of the purchase price may differ from the amounts included in these financial statements. Adjustments to the purchase price allocations, if any, are expected to be finalized by the second quarter of 2007, and will be reflected in future filings. The purchase price was allocated as follows: $396,000 to net tangible assets acquired, $3,140,000 to identified intangible assets with definite lives, $6,500,000 to identified intangible assets with indefinite lives and $31,954,000 to goodwill. The weighted average amortization period for the identifiable intangible assets with definite lives is estimated to be 1.1 years. Goodwill is not expected to be deductible for tax purposes.

On January 31, 2007, the Company acquired Oxford Global Resources, Inc. (Oxford), a leading provider of high-end information technology and engineering staffing services. The primary reasons for the Oxford acquisition were to enter the markets for information technology and engineering staffing services and to leverage our existing SG&A infrastructure.

The total purchase price of $201,275,000 consisted of (i) an initial price of $200,072,000, approximately $190,072,000 paid in cash, excluding a $20,000,000 holdback for potential claims indemnifiable by the Oxford shareholders, (ii) 795,292 unregistered shares of the Company’s common stock valued at approximately $10,000,000 and (iii) $1,203,000 in direct acquisition costs. There is potential for additional consideration of $12,000,000 that is contingent upon the 2007 and 2008 financial performance of Oxford. This earn-out will be recorded as additional purchase price in the future at such time when the targets are met and the consideration is earned. The holdback, net of the amount of certain claims made against the selling shareholders, will be released to the selling shareholders by August 3, 2008.

The Company recorded the acquisition using the purchase method of accounting and thus the results of operations from Oxford are included in the Company’s consolidated financial statements (IT and Engineering segment) from the acquisition date. Pursuant to FAS No. 141, “Business Combinations” (FAS 141), the purchase price was allocated to the assets acquired and liabilities assumed based on their fair values as of the date of the acquisition. The Company is currently reviewing preliminary fair value adjustments associated with purchased intangibles, fixed assets and lease obligations, as

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well as related income tax impacts. The ultimate allocation of the purchase price may differ from the amounts included in these financial statements. Adjustments to the purchase price allocations, if any, are expected to be finalized by the second quarter of 2007, and will be reflected in future filings. The purchase price was allocated as follows: $16,800,000 to net tangible assets acquired, $30,600,000 to identified intangible assets with definite lives, $15,700,000 to identified intangible assets with indefinite lives and $138,175,000 to goodwill. The weighted average amortization period for the identifiable intangible assets with definite lives is estimated to be 2.1 years. The Company expects to reduce its federal and state income tax liability by approximately $5,000,000 per year over fifteen years as a result of an election to classify the Oxford acquisition as an asset sale for tax purposes under section 338(h)(10) of the Internal Revenue Code of 1986, as amended.

On Assignment utilized its existing cash and proceeds from a new $165,000,000 senior secured credit facility to finance the acquisitions. The new facility includes a 5-year $20,000,000 revolving credit facility, which was undrawn at closing, and a 7-year $145,000,000 funded term loan facility. The term loan is repayable at the rate of $363,000 per quarter. In addition, within ninety days of each of the Company’s fiscal year ends, On Assignment is required to reduce the term loan by up to 50% of its excess cash flow, as defined under the credit facility. The Company is required to maintain certain financial covenants, including a minimum total leverage ratio, a minimum interest coverage ratio and a limitation on capital expenditures. As of March 31, 2007, the Company was in compliance with all such covenants. The facility is secured by the assets of the Company. The Company entered into a transaction with a financial institution to fix the underlying rate on $73,000,000 of its outstanding bank loan for a period of two years beginning June 30, 2007. This transaction, commonly known as a swap, essentially fixes the Company’s base borrowing rate at 4.9425% as opposed to a floating rate, which resets at selected periods. The current base rate, which will be reset on June 30, 2007, is 5.35%. The new base rate for the amount of the loan outstanding in excess of $73,000,000 will depend on the tenor the Company chooses at the time. The borrowing rate consists of the base rate plus an incremental rate, currently 2.25%, which is dependent on several factors, including the amount the Company borrowed and the amount of earnings before interest, taxes, depreciation and amortization (EBITDA) it is generating.

The summary below presents the amounts assigned to each major asset and liability caption of VISTA and Oxford as of the acquisition dates and presents pro-forma consolidated results of operations for the three months ended March 31, 2007 and 2006 as if the acquisition of VISTA and Oxford described above had occurred at the beginning of that period. The unaudited pro-forma financial information presented below gives effect to certain adjustments, the amortization of intangible assets and interest expense on acquisition related debt and other non-recurring expenses related to the Company’s former owner. The pro-forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as of the date indicated, nor are they necessarily indicative of future operating results.

 

 

 

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7. Goodwill and Identifiable Intangible Assets. Pursuant to FAS No. 142, “Goodwill and Other Intangible Assets,” (FAS 142) goodwill and indefinite-lived intangible assets are tested for impairment at least annually and more frequently if an event occurs that indicates the assets may be impaired. The test for impairment is performed at one level below the operating segment level, which is defined in FAS 142 as the reporting unit.

Pursuant to FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Asset,” and FAS 142, the Company determined there were no events or changes in circumstances that indicated that carrying values of goodwill or other intangible assets subject to amortization may not be recoverable as of March 31, 2007.

Goodwill was $187,238,000 at March 31, 2007 and $17,109,000 at December 31, 2006. As of March 31, 2007, the Goodwill balance was allocated $15,912,000, $1,197,000, $31,954,000 and $138,175,000 to the Healthcare, Life Sciences, Physician and IT and Engineering segments, respectively. As of December 31, 2006, the Goodwill balance was allocated $15,912,000 and $1,197,000 to the Healthcare and Life Sciences segments, respectively.

As of March 31, 2007 and December 31, 2006, the Company had the following acquired identifiable intangible assets:

				March 31, 2007									December 31, 2006
		Estimated Useful Life		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Intangible assets subject to amortization:
Customer relations		3 months - 7 years		$	17,615,000		$	9,009,000		$	8,606,000		$	7,515,000		$	7,082,000		$	433,000
Contractor relations		3-5 years		3,596,000			3,562,000			34,000			3,596,000			3,397,000			199,000
Non-compete agreements		2-3 years		690,000			58,000			632,000			50,000			15,000			35,000
Staffing databases		7 years		22,500,000			1,988,000			20,512,000			—			—			—
In-use software		2 years		500,000			42,000			458,000			—			—			—
Subtotal				44,901,000			14,659,000			30,242,000			11,161,000			10,494,000			667,000
Intangible assets not subject to amortization:
Trademarks				22,200,000			—			22,200,000			—			—			—
Goodwill				187,238,000			—			187,238,000			17,109,000			—			17,109,000
Total				$	254,339,000		$	14,659,000		$	239,680,000		$	28,270,000		$	10,494,000		$	17,776,000

 

Amortization expense for intangible assets with definite lives was $4,165,000 and $235,000 for the three months ended March 31, 2007 and 2006, respectively. Estimated amortization for the remainder of 2007 and each of the years ended December 31, 2008 through December 31, 2013 is $11,269,000, $9,609,000, $6,196,000, $1,715,000, $730,000, $363,000 and $360,000, respectively.

8. Information Systems, Property and Equipment. Property and equipment are stated net of accumulated depreciation and amortization of $17,080,000 and $15,737,000 at March 31, 2007 and December 31, 2006, respectively.

The Company capitalizes costs associated with customized internal-use software systems that have reached the application stage and meet recoverability tests under the provisions of Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” (SOP 98-1). All software costs capitalized under SOP 98-1 are depreciated over an estimated useful life of three to five years.

During 2005, the Company began implementing an enhanced front-office software application. Phase I of the new front office enhancement was completed in the second quarter of 2006. Subsequent phases of this software implementation were substantially competed in the first quarter of 2007. The new application interfaces with the existing enterprise-wide information system, PeopleSoft, used in the Life Sciences and IT and Engineering segments and Allied Healthcare line of business and provides additional functionality, including applicant tracking and search tools, customer and candidate contact management and sales management tools.

The Company has capitalized costs related to its various technology initiatives, including the implementation of PeopleSoft and Vurv Technology in accordance with SOP 98-1. The net book value of the property and equipment related to software development was $3,404,000 as of March 31, 2007, which includes development-in-progress of $975,000, primarily related to the implementation of PeopleSoft finance and payroll modules for our Nurse Travel line of business and certain foreign operations. In addition, the Company has capitalized website development costs in accordance with Emerging Issues Task Force Issue No. 00-02, “Accounting for Web Site Development Costs.” The net book value of capitalized website development costs was $693,000 as of March 31, 2007, which includes development-in-progress of $101,000.

During the second quarter of 2005, the Company successfully relocated the information system and hosting environment from several third-party vendors to a self-managed hosting center in Burbank, California. The Company expects to realize improved quality of service in supporting business operations and substantial cost reductions by centralizing its computing environments. In conjunction with this migration, the Company has capitalized $2,230,000 for external direct costs including labor, hardware and software purchases as well as internal development costs. The net book value of the fixed assets related to the hosting environment was $1,102,000 as of March 31, 2007, which includes development-in-progress of $6,000.

During 2006, Oxford began a complete upgrade and enhancement of its front-office software application. The estimated cost of this project is approximately $2.2 million. It is anticipated that the new software will be put in production during the second and third quarters of 2008. As of March 31, 2007, approximately $192,000 has been capitalized for this new software as development-in- progress.

9. Revenues. Revenues from contract assignments, net of sales adjustments and discounts, are recognized when earned, based on hours worked by the Company’s contract professionals on a weekly basis. Conversion and direct hire fees are recognized when earned, upon conversion or direct hire of a contract professional to a client’s regular employment. In addition, the Company records a sales allowance against consolidated revenues, which is estimated based on historical billing adjustment experience. The sales allowance is recorded as a reduction to revenues and an increase to the allowance for billing adjustments. The billing adjustment reserve includes an allowance for fallouts. Fallouts are direct hire fees that do not complete the contingency period. The contingency period is typically ninety days or less. Reimbursed expenses, including those related to travel and out-of-pocket expenses, are included in revenues and the associated amounts of reimbursable expenses are included in cost of services.

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10. Stock Option Plan and Employee Stock Purchase Plan.

As of March 31, 2007, the Company had a single Restated 1987 Stock Option Plan as amended and restated on April 7, 2006 and approved by shareholders on May 22, 2006, and as further amended on January 23, 2007 (the Plan). The Company issues stock options, restricted stock units (RSU’s) and restricted stock awards (RSA’s) in accordance with the Plan and records compensation expense in accordance with FAS 123R. Compensation expense charged against income related to stock-based compensation was $1,106,000 for the three months ended March 31, 2007 and $459,000 for the three months ended March 31, 2006. For the three months ended March 31, 2007, the Company recognized an income tax benefit of $360,000 in the income statement for stock-based compensation arrangements. No benefit was recorded in the 2006 period.

The Plan, which is shareholder-approved, permits the grant of stock options, RSU’s and RSA’s to its employees for up to 11,000,000 shares of common stock, as well as certain other awards. The Company believes that stock-based compensation better aligns the interests of its employees and directors with those of its shareholders. Stock option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Stock option awards and RSU’s generally vest over 4 years of continuous service with the Company, and stock options have generally 10-year contractual terms. Certain stock option awards and RSU’s provide for accelerated vesting in the event of a change in control.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that incorporates assumptions disclosed in the following table. Expected volatility is based on historical volatility of the underlying stock for a period consistent with the expected lives of the stock options because the Company believes this is a reasonable representation of future volatility. Additionally, the stock option valuation model selected by the Company uses historical data and management judgment to estimate stock option exercise behavior and employee turnover rates to estimate the number of stock option awards that will eventually vest. The Company evaluated the impact of grouping employees with similar historical exercise behavior and determined that there were no notable differences in exercise behavior across various employee groups and, as a result, all employees are included in a single group for valuation purposes. The expected life, or term, of options granted is derived from historical exercise behavior and represents the period of time that stock option awards are expected to be outstanding. The Company has selected a risk-free rate based on the implied yield available on U.S. Treasury Securities with an equivalent expected term.

Stock Options

The following table displays the assumptions that have been applied to estimate the fair value of stock option awards on the date of grant for the three months ended March 31, 2007 and 2006:

 

The following summarizes pricing and term information for options outstanding as of March 31, 2007:

								Options Outstanding							Options Exercisable
Range of Exercise Prices								Number Outstanding at March 31, 2007		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price			Exercisable at March 31, 2007		Weighted Average Exercise Price
$	3.97		—		$	5.10		521,467		6.9 years		$	4.74		279,810		$	4.71
5.11			—		5.26			525,218		6.4 years		5.17			399,834		5.17
5.28			—		10.60			550,628		7.0 years		6.80			339,812		6.56
10.69			—		12.90			614,585		9.4 years		11.84			198,561		11.63
12.91			—		33.00			562,384		5.3 years		17.89			428,464		19.32
$	3.97		—		$	33.00		2,774,282		7.1 years		$	9.47		1,646,481		$	9.84

 

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The following table is a summary of stock option activity under the Plan as of March 31, 2007 and changes for the period then ended:

		Incentive Stock Options		Non- Qualified Stock Options		Weighted Average Exercise Price Per Share			Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2006		1,102,251		1,486,748		$	8.66
Granted		—		411,074		$	12.67
Exercised		(44,193	)	(147,803	)	$	5.29
Canceled		(23,839	)	(9,956	)	$	10.09
Outstanding at March 31, 2007		1,034,219		1,740,063		$	9.47		7.1		$	11,313,000
Vested or Expected to Vest at March 31, 2007		907,386		1,403,165		$	9.33		6.7		$	10,165,000
Exercisable at March 31, 2007		624,923		1,021,558		$	9.84		6.1		$	7,201,000

 

The table above includes 273,000 of non-employee director stock options outstanding as of both March 31, 2007 and December 31, 2006.

The weighted-average grant-date fair value of options granted during the three months ended March 31, 2007 and 2006 was $5.40 and $5.06 per option, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $1,480,000 and $506,000, respectively.

As of March 31, 2007, there was unrecognized compensation expense of $3,158,000 related to unvested stock options based on options that are expected to vest. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.6 years.

In December 2006, Mr. Dameris, the Company’s Chief Executive Officer, was granted an option to purchase 500,000 shares of common stock, of which 400,000 shares are subject to shareholder approval of a proposed amendment to the Plan to increase the total number of common shares issuable under the Plan from 11,000,000 to 13,900,000. In January 2007, Mr. Dameris was granted an option to purchase 188,000 shares of common stock, which is subject to shareholder approval of the proposed amendment to the Plan.

Restricted Stock Units and Restricted Stock Awards

A summary of the status of the Company’s unvested RSU’s as of March 31, 2007 and changes during the three months then ended are presented below:

		Restricted Stock Units		Weighted Average Grant-Date Fair Value Per Unit
Unvested RSU’s outstanding at December 31, 2006		380,662		$	9.40
Granted		120,000		12.33
Vested and issued		(33,223	)	9.45
Forfeited		—		—
Unvested RSU’s outstanding at March 31, 2007		467,439		$	10.15

 

The table above excludes 11,695 RSA’s that were awarded to non-employee directors. On August 1, 2006, 23,390 RSA’s were awarded to non-employee directors, of which 50%, or 11,695 shares, of the director RSA’s vested immediately upon issuance, and the remaining 50% will vest on August 1, 2007. The weighted average grant-date fair value of these awards was $8.55. In accordance with SFAS 123R, the Company recorded compensation expense based on the fair market value of the awards on the grant date. There was unrecognized compensation of $33,000 as of March 31, 2007 related to these RSA’s that will be recorded over the remaining term of four months.

As of March 31, 2007, there was unrecognized compensation expense of $4,544,000 related to unvested RSU’s and RSA’s

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based on awards that are expected to vest. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.9 years.

In January 2007, Mr. Dameris was granted, subject to shareholder approval of a proposed amendment to the Plan, the following: (1) 42,533 restricted stock units valued at $500,000, which vest on the third anniversary of the date of the grant, (2) 42,533 restricted stock units valued at $500,000 which vest based on the Company’s stock price performance relative to its peers over three years from the date of grant and (3) 42,533 shares of restricted stock valued at $500,000, which vest three years from the date of grant based on the Company’s financial performance (based on adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA) relative to its plan in 2007, in each case subject to Mr. Dameris’ continued employment through such vesting dates.

Employee Stock Purchase Plan

The Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase common stock of the Company, through payroll deductions, at eighty-five percent of the lower of the market price on the first day or the last day of semi-annual purchase periods. Eligible employees may contribute multiples of one percent of their eligible earnings toward the purchase of the stock (subject to certain IRS limitations). Under this plan, 37,696 and 43,337 shares of common stock were issued to employees for the three months ended March 31, 2007 and 2006, respectively.

In accordance with the ESPP, shares of common stock are transferred to participating employees at the conclusion of each six month enrollment period, which end on the last business day of the month in February and August each year. The estimated fair value of stock purchased under the Company’s ESPP was approximately $308,000 and $258,000 for the three months ended March 31, 2007 and 2006, respectively. Compensation expense of shares purchased under the ESPP is measured based on a fair-value option-pricing model. The model accounts for the discount from market value and applies an expected life in line with each six month purchase period. The amounts recognized as stock-based compensation expense related to the ESPP for the three months ended March 31, 2007 and 2006 were $60,000 and $39,000, respectively.

11. Recent Accounting Pronouncements. In September 2006, the Financial Accounting Standards Board issued FAS No. 157 ”Fair Value Measurements” (FAS 157), which defines fair value, establishes a framework for consistently measuring fair value under GAAP, and expands disclosures about fair value measurements. FAS 157 is effective for the company beginning January 1, 2008, and the provisions of FAS 157 will be applied prospectively as of that date. Management is currently evaluating the effect that adoption of this statement will have on the Company’s consolidated financial position and results of operations when it becomes effective in 2008.

In February 2007, the Financial Accounting Standards Board issued FAS No. 159 “The Fair Value Option for Financial Assets and Liabilities — Including an amendment of FASB Statement No. 115” (FAS 159), which permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective beginning January 1, 2008, and the provisions of FAS 159 will be applied prospectively as of that date. Management is currently evaluating the effect that adoption of this statement will have on the Company’s consolidated financial position and results of operations when it becomes effective in 2008.

The disclosure requirements and cumulative effect of adoption of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” are presented in Note 13.

12. 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, non-qualified stock options and restricted stock awards) outstanding during the periods using the treasury stock method.

The following is a reconciliation of the shares used to compute basic and diluted earnings per share:

		Three Months Ended March 31,
		2007		2006
Weighted average number of shares outstanding used to compute basic earnings per share		34,667,000		25,986,000
Dilutive effect of restricted stock awards		252,000		119,000
Dilutive effect of stock options		710,000		722,000
Number of shares used to compute diluted earnings per share		35,629,000		26,827,000

 

 

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The following table outlines the weighted average common share equivalents outstanding as of March 31, that were excluded from the computation of diluted earnings per share because they were anti-dilutive during the respective periods:

 

13. Income Taxes. In the fourth quarter of 2004, the Company established a valuation allowance against its net deferred income tax assets. The valuation allowance was estimated pursuant to FAS No. 109, “Accounting for Income Taxes” (FAS 109), which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. Such evidence includes the Company’s past and projected future performance, the market environment in which the Company operates, the utilization of past tax credits and the length of the carryback and carryforward periods. At the end of 2006, the Company evaluated the need for the valuation allowance in accordance with our valuation allowance reversal methodology and in conjunction with FAS 109. At the end of 2006, the Company concluded that as a result of sustained profitability, which was evidenced by consecutive quarters of pre-tax net income along with projections of pre-tax net income in future years, that the criteria had been met for the full reversal of the valuation allowance. Due to the full reversal of the valuation allowance as of December 31, 2006, the Company is providing interim income tax expense at an estimated effective tax rate of 38.5 percent for 2007.

Adoption of a new standard. The Company adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48) on January 1, 2007. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48. In this regard, an uncertain tax position represents the Company’s expected tax treatment of a tax position taken in a filed tax return, or planned to be taken in a future return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, the Company adjusted the estimated value of its uncertain tax positions by recognizing additional liabilities totaling $217,000, including an accrual for interest and penalties of $21,000, through a charge to retained earnings. Upon the adoption of FIN 48, the estimated value of the Company’s uncertain tax positions is a liability of $567,000, of which $196,000 is carried in other long term liabilities and $370,000 is carried as a reduction to non-current deferred tax assets in the consolidated condensed statement of financial position as of March 31, 2007. If the Company’s positions are sustained by the taxing authority in favor of the Company, the entire $567,000 would reduce the Company’s effective tax rate. The Company does not expect any reasonably possible material changes to the estimated amount of liability associated with its uncertain tax positions through January 1, 2008.

The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense.

The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Internal Revenue Service (IRS) has examined and substantially concluded all tax matters for years through 2004. In addition, open tax years related to state and foreign jurisdictions remain subject to examination but are not considered material.

As of March 31, 2007, there have been no material changes to the liability for uncertain tax positions.

14. Segment Reporting. Indicated below is the information required to comply with FAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

The Company has four reportable operating segments: Healthcare, Life Sciences, IT and Engineering, and Physician. The Healthcare segment includes the combined results of the Nurse Travel and Allied Healthcare lines of business. The Healthcare segment provides contract, contract-to-permanent and direct placement of professionals from more than ten healthcare, medical financial and allied occupations. These contract staffing specialties include nurses, specialty nurses, respiratory therapists, surgical technicians, imaging technicians, x-ray technicians, medical technologists, phlebotomists, coders, billers, claims processors and collections staff. The Life Sciences (formerly Lab Support) segment provides contract, contract-to-permanent and direct placement services of laboratory and scientific professionals to the biotechnology, pharmaceutical, food and beverage, medical device, personal care, chemical and environmental industries. These contract staffing specialties include chemists, clinical research associates, clinical lab assistants, engineers, biologists, biochemists, microbiologists, molecular biologists, food scientists, regulatory affairs specialists, lab assistants and other skilled scientific professionals. The IT and Engineering segment, comprised of Oxford Global Resources, Inc., provides high-end contract placement services of information technology and engineering professionals with expertise in

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specialized information technology; software and hardware engineering; and mechanical, electrical, validation and telecommunications engineering fields. The Physician segment, comprised of VISTA Staffing Solutions, Inc., provides contract and direct placement physicians to healthcare organizations. The Physician segment works with nearly all medical specialties, placing them in hospitals, community-based practices, and federal, state and local facilities.

The Company’s management evaluates the performance of each segment primarily based on revenues, gross profit and operating income. The information in the following table is derived directly from the segments’ internal financial reporting used for corporate management purposes.

All revenues, gross profit and operating income (loss) disclosed in the tables below include activity for the Physician and IT and Engineering segments from January 3, 2007 and January 31, 2007, respectively.

The following table represents revenues, gross profit and operating income (loss) by operating segment: 

 

The Company does not report Life Sciences and Healthcare segments’ total assets separately as the operations are largely centralized. The following table represents total assets as allocated by segment:

 

The Company does not report total assets by segment for all reportable segments. The following table represents certain identifiable assets by operating segment:

 

The Company operates internationally, with operations in the United States, Europe, Australia and New Zealand. The

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following table represents revenues by geographic location:

 

The following table represents long-lived and indefinite-lived assets by geographic location:

 

 

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” and similar expressions are intended to identify forward-looking statements. 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, the following: (1) actual demand for our services, (2) our ability to attract, train and retain qualified staffing consultants, (3) our ability to remain competitive in obtaining and retaining temporary staffing clients, (4) the availability of qualified contract nurses and other qualified contract professionals, (5) our ability to manage our growth efficiently and effectively, (6) continued performance of our information systems, (7) our ability to successfully make or integrate new acquisitions, and (8) other risks detailed from time to time in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K, under the Section ”Risk Factors” for the year ended December 31, 2006, as filed with the SEC on March 16, 2007. Other factors also may contribute to the differences between our forward-looking statements and our actual results. All forward-looking statements in this document are based on information available to us as of the date we file this 10-Q, and we assume no obligation to update any forward-looking statement or the reasons why our actual results may differ.

OVERVIEW

On Assignment, Inc. is a diversified professional staffing firm providing flexible and permanent staffing solutions in specialty skills including Laboratory/Scientific, Healthcare/Nursing/Physicians, Medical Financial, Information Technology and Engineering. We provide clients in these markets with short-term or long-term assignments of contract professionals, contract-to-permanent placement and direct placement of these professionals. Our business currently consists of four operating segments: Life Sciences, Healthcare, Physician and IT and Engineering.

The Life Sciences (formerly Lab Support) segment includes our domestic and international life science staffing lines of business. We provide locally-based, contract life science professionals to clients in the biotechnology, pharmaceutical, food and beverage, medical device, personal care, chemical, nutraceutical, materials science, consumer products, environmental petrochemical and contract manufacturing industries. Our contract professionals include chemists, clinical research associates, clinical lab assistants, engineers, biologists, biochemists, microbiologists, molecular biologists, food scientists, regulatory affairs specialists, lab assistants and other skilled scientific professionals.

The Healthcare segment includes our Nurse Travel and Allied Healthcare (formerly Medical Financial and Allied, or MF&A) lines of business. We offer our healthcare clients contract professionals, both locally-based and traveling, from more than ten healthcare and allied healthcare occupations. Our contract professionals include nurses, specialty nurses, health information management professionals, dialysis technicians, surgical technicians, imaging technicians, x-ray technicians, medical technologists, phlebotomists, coders, billers, claims processors and collections staff.

Our Physician segment consists of VISTA Staffing Solutions, Inc. (VISTA) which we acquired on January 3, 2007. VISTA is a leading provider of physician staffing, known as locum tenens, and permanent physician search services based in Salt Lake City. We provide short and long term locum tenens and coverage and full-service physician search and consulting in the United States with capabilities in Australia and New Zealand. We work with physicians from nearly all medical specialties, placing them in hospitals, community-based practices, and federal, state and local facilities.

Our IT and Engineering segment consists of Oxford Global Resources, Inc. (Oxford) which we acquired on January 31, 2007. Oxford, based in Beverly, Massachusetts, delivers high-end consultants with expertise in specialized information technology; software and hardware engineering; and mechanical, electrical, validation and telecommunications engineering fields. We combine international reach with local depth, serving clients through a network of Oxford International recruiting centers in the United States and Europe, and Oxford & Associates branch offices in major metropolitan markets across the United States.

First Quarter 2007 Update

As a part of our growth strategy, we completed two acquisitions in the first quarter. On January 3, 2007 we acquired VISTA Staffing Solutions, Inc., a privately-owned leading provider of physician staffing or locum tenens and permanent physician search services. The purchase price of $41,990,000 consisted of an initial purchase price of $41,141,000 and $849,000 in direct acquisition costs with up to an additional $8,000,000 in an earn-out based on VISTA’s operating performance in 2007 and 2008. VISTA is headquartered in Salt Lake City and works with more than 1,300 physicians covering approximately thirty medical specialties. On a daily basis, VISTA has over 200 physicians on assignment. VISTA provides its staffing solutions in all fifty states as well as Australia and New Zealand for organizations ranging from large

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urban hospitals to small practice groups in rural areas. VISTA’s CEO and management team have remained a part of On Assignment after the acquisition. The primary reason for the acquisition was to diversify our existing healthcare offerings while at the same time complementing our existing product line of nurse travelers to offer cross-selling opportunities as well as the potential to leverage our existing selling, general and administrative expenses (SG&A), including housing, travel and credentialing costs. In addition we felt offering more services would be more attractive to our existing customer base.

On January 31, 2007, we acquired Oxford Global Resources, Inc., a leading provider of high-end information technology and engineering staffing services. The purchase price of $201,275,000 included $190,072,000 in cash, 795,292 shares of common stock valued at approximately $10,000,000 and $1,203,000 in direct acquisition costs. In addition, the former shareholders of Oxford have an opportunity to achieve an earn-out of up to $12,000,000 based on Oxford’s 2007 and 2008 financial performance. Oxford’s President and management team have remained a part of On Assignment after the acquisition. The Oxford acquisition provides us with entry into the large and expanding market for information technology and engineering staffing services. The acquisition will diversify our income stream, result in higher bill rates and gross margins and allow us to continue to benefit from greater scale and size to leverage our existing SG&A infrastructure.

To finance these two transactions, we entered into a $165,000,000 credit facility on January 31, 2007. The facility includes a 5-year $20,000,000 revolving credit facility, which has remained un-drawn, and a 7-year $145,000,000 funded term loan.

The internal revenue growth we experienced in our first quarter, from our historical segments (19.7% in Life Sciences and 5.9% in Healthcare) remained strong particularly in light of the significant reduction in utilization by one of our largest Nurse Travel customers due to their issues meeting government regulatory requirements. The end markets we serve continue to remain strong and assuming a fairly stable economy we are encouraged by the future. We will continue to concentrate on increasing revenues while expanding our customer base, improving gross margins and leveraging our fixed expenses. We will also continue to consider acquisitions to improve our growth and performance.

Seasonality

Historically, demand for our staffing services has been lower during the first and fourth quarters due to fewer business days as a result of client shutdowns as well as the fall off of the number of contract professionals willing to work during the holidays. As is common in the staffing industry, we run special incentive programs to keep our contract professionals, particularly nurses, working through the holidays. Demand for our staffing services usually increases in the second and third quarters of the year. In addition, our cost of services typically increases in the first quarter primarily due to the reset of payroll taxes.

RESULTS OF OPERATIONS

The following table summarizes selected statements of income data expressed as a percentage of revenues:

 

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CHANGES IN RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

Revenues

		Three Months Ended March 31,						Change
		2007			2006			$			%
		(Unaudited)
Revenues by segment:
Life Sciences		$	31,669,000		$	26,458,000		$	5,211,000		19.7%
Healthcare		42,633,000			40,265,000			2,368,000			5.9%
Physician (from January 3, 2007)		17,979,000			—			17,979,000			N/A
IT and Engineering (from January 31, 2007)		30,348,000			—			30,348,000			N/A
Total Revenues		$	122,629,000		$	66,723,000		$	55,906,000		83.8%

 

Consolidated year-over-year revenue growth is primarily attributable to the acquisitions of VISTA and Oxford, completed on January 3, 2007 and January 31, 2007, respectively, and includes revenues from their respective date of acquisition. We also experienced organic growth in our Life Sciences and Healthcare segments. These organic results were due to both improved demand in our end markets as well as an expanded and more experienced sales and fulfillment team. We will continue to focus on the growth of our established product lines as well as our newer product lines, including Health Information Management (HIM), Clinical Research, Engineering and Local Nursing, and further development of our direct hire business. We believe the growth of these service offerings will help support further organic growth and diversify our client base.

Life Sciences segment revenues increased for the three months ended March 31, 2007, primarily due to a 9.0% increase in the average number of contract professionals on assignment, an 8.6% increase in the average bill rate and higher direct hire and conversion revenues. Our newer service line offerings, Clinical Research and Engineering, continued to grow by generating a larger number of higher-level placements during the first quarter of 2007 than in the first quarter of 2006.

The increase in Healthcare segment revenues, which include our Nurse Travel and Allied Healthcare lines of business, consisted of an increase in the Allied Healthcare line of business, offset slightly by a decrease in the Nurse Travel line of business. Allied Healthcare revenues increased $2,728,000, or 23.6%, from $11,583,000 for the three months ended March 31, 2006 to $14,311,000 for the three months ended March 31, 2007. The increase in revenues was primarily attributable to a 31.9% increase in the average number of contract professionals on assignment, partially offset by a 1.4% decrease in the average bill rate. Nurse Travel revenues decreased $360,000, or 1.3%, from $28,682,000 for the three months ended March 31, 2006 to $28,322,000 for the three months ended March 31, 2007. The decrease was due to the significant reduction in utilization by one of our largest nurse travel customers due to their issues meeting government regulatory requirements. Additionally, there was $211,000 in revenues derived from hospitals that experienced labor disruptions in the first quarter of 2006 versus $100,000 in the first quarter of 2007.

Physician segment revenues, which consist of the recently acquired VISTA Staffing Solutions, Inc., were $17,979,000 for the three months ended March 31, 2007. On a go-forward basis, we expect revenues to grow in the Physician segment as client demand for physician services increases while physician supply contracts.

IT and Engineering segment revenues, which consist of the recently acquired Oxford Global Resources, Inc., were $30,348,000 for the three months ended March 31, 2007. As Oxford was acquired on January 31, 2007, there were only two months of revenue activity included in the period for the IT and Engineering segment. We expect revenues to grow in the IT and Engineering segment as demand continues to exceed supply.

Gross profit and gross margin

		Three Months Ended March 31,
		2007					2006
		$			%		$			%
		(Unaudited)
Gross Profit by segment:
Life Sciences		$	10,407,000		32.9%		$	8,075,000		30.5%
Healthcare		10,500,000			24.6%		8,909,000			22.1%
Physician (from January 3, 2007)		5,285,000			29.4%		—			N/A
IT and Engineering (from January 31, 2007)		11,268,000			37.1%		—			N/A
Total Gross Profit		$	37,460,000		30.5%		$	16,984,000		25.5%

 

On a consolidated basis, gross profit and gross margins increased significantly due the acquisitions of VISTA and Oxford

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completed on January 3, 2007 and January 31, 2007, respectively, and includes gross profit from their respective date of acquisition. The 500 basis point increase in consolidated gross margin year over year is largely attributable to the 37.1% gross margin earned in the IT and Engineering segment, which consists entirely of the Oxford acquisition. Additionally, we experienced margin improvement in both of our historical segments, Life Sciences and Healthcare.

Life Sciences segment gross profit increased for the three months ended March 31, 2007 over the three months ended March 31, 2006 due to an increase in revenues and improved gross margin. Gross margin for the segment increased 240 basis points. The Life Sciences segment gross margin increase was primarily related to a favorable adjustment for workers’ compensation expense, increased direct hire and conversion revenues and an increased bill/pay spread offset by higher payroll taxes and increased medical expense. Direct hire and conversion revenues increased $655,000, or 72.1%, from $908,000 for the three months March 31, 2006 to $1,563,000 for the three months ended March 31, 2007. Increases in direct hire and conversion revenues have a positive impact on gross margin as there are no associated costs of services.

Healthcare segment gross profit increased for the three months ended March 31, 2007 over the three months ended March 31, 2006 due to an increase in revenues and improved gross margin. Gross margin for the segment increased 250 basis points due to bill/pay margin expansion, reduced travel and housing costs, a favorable adjustment to workers’ compensation expense and increased direct hire margin, which were partially offset by an increase in other temporary employee expenses. This segment includes gross profit from the Nurse Travel and Allied Healthcare lines of business. Nurse Travel gross margin increased 90 basis points over the year-ago period primarily due to higher bill/pay spreads and decreased workers’ compensation expense, offset by higher travel and housing costs for our nurses on assignment, including increased other temporary employee expenses. Allied Healthcare gross margin increased 470 basis points over the year-ago period due to higher bill/pay spreads and decreased workers’ compensation expense. Additionally, direct hire and conversion revenues in the Allied Healthcare line of business increased $429,000, or 354.5%, from $121,000 for the three months March 31, 2006 to $550,000 for the three months ended March 31, 2007, which had a favorable impact on gross margin for both the Allied Healthcare line of business and the Healthcare segment.

Gross margins in our Physician and IT and Engineering segments were 29.4% and 37.1%, respectively, and we do not expect significant fluctuations going forward.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses include field operating expenses, such as costs associated with our network of staffing consultants and branch offices for our Life Sciences and Allied Healthcare lines of business, including staffing consultant compensation, rent and other office expenses, as well as marketing and recruiting for our contract professionals. Nurse Travel SG&A expenses include compensation for regional sales directors, account managers and recruiters, as well as rent and other office expenses and marketing for traveling nurses. SG&A expenses from our Physician and IT and Engineering segments include compensation for sales personnel associated with the VISTA and Oxford acquisitions, as well as rent and other office expenses and marketing for these segments. SG&A expenses also include our corporate and branch office support expenses, such as the salaries of corporate operations and support personnel, recruiting and training expenses for field staff, marketing staff expenses, rent, expenses related to being a publicly-traded company and other general and administrative expenses.

SG&A expenses increased $17,475,000, or 104.1%, from $16,786,000 for the three months ended March 31, 2006 to $34,261,000 for the three months ended March 31, 2007. The primary factor for the increase was the acquisitions of VISTA and Oxford in the quarter. In addition to expenses related to increased sales headcount and corporate support personnel associated with the acquisitions, the amortization of intangible assets acquired caused an increase in amortization expense from $235,000 for the three months ended March 31, 2006 to $4,165,000 for the three months ended March 31, 2007. Included in the expense was $1,400,000 for the accelerated amortization of customer relations in the Physicians segment that have now been fully amortized. Additionally, expenses related to stock-based compensation expense were $459,000 for the three months ended March 31, 2006 versus $1,106,000 for the three months ended March 31, 2007. Our integration strategy, which in the near term is to minimize the disruption to the operations of VISTA and Oxford, is going as planned. Going forward, we will continue to maximize our SG&A synergies in areas such as infrastructure, field office support and marketing.

Interest expense/income

Net interest expense was $1,718,000 for the three months ended March 31, 2007, which included interest expense of $2,136,000 and interest income of $418,000, versus net interest income of $234,000 for the three months ended March 31, 2006, which included interest expense of $3,000 and interest income of $237,000. Interest expense during the quarter related to a $165,000,000 senior secured credit facility entered into on January 31, 2007 to finance the acquisition of Oxford. The new facility includes a 5-year $20,000,000 revolving credit facility and a 7-year $145,000,000 funded term loan facility. The increase in interest income in the current period was due to higher average cash balances for the three

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months ended March 31, 2007 versus the three months ended March 31, 2006 as the cash paid for the Oxford acquisition was not paid until January 31, 2007. Average interest rates were also slightly higher in the 2007 period.

Subsequent to March 31, 2007, we entered into a transaction with a financial institution that fixes the underlying rate on $73,000,000 of our outstanding bank loan for a period of two years beginning June 30, 2007. This transaction, commonly known as a swap, essentially fixes our base borrowing rate at 4.9425% as opposed to a floating rate, which resets at selected periods. The current base rate, which will be reset on June 30, 2007, is 5.35%. The new base rate for the amount of the loan outstanding in excess of $73,000,000 will depend on the tenor we choose at the time. The borrowing rate consists of the base rate plus an incremental rate, currently 2.25%, which is dependent on several factors, including the amount we borrowed and the amount of earnings before interest, taxes, depreciation and amortization (EBITDA) we are generating.

Provision for income taxes

The provision for income taxes increased from $130,000 for the three months ended March 31, 2006 to $570,000 for the three months ended March 31, 2007. For the three months ended March 31, 2006, we recorded a tax provision based on an estimated effective tax rate of 30%, which accounted for the expected utilization of the net operating loss carryforwards in 2006. For the three months ended March 31, 2007, we recorded a tax provision based on an estimated effective tax rate of 38.5%.

Liquidity and Capital Resources

Our working capital at March 31, 2007 was $67,254,000, including $22,577,000 in cash and cash equivalents. In the first quarter of 2007, we successfully completed two acquisitions. On January 3, 2007, we acquired VISTA Staffing Solutions, Inc., a privately-owned, leading provider of physician staffing and permanent physician search services. On January 31, 2007, we acquired Oxford Global Resources, Inc., a leading provider of high-end information technology and engineering staffing services. The Oxford acquisition was completed by utilizing our existing cash and the proceeds from a new $165,000,000 senior secured credit facility. The new facility includes a 5-year $20,000,000 revolving credit facility, which was undrawn at closing and as of March 31, 2007, and a 7-year $145,000,000 funded term loan facility. The term loan facility is repayable at the minimum rate of $363,000 per quarter. In addition, we are required to reduce the term loan by up to 50% of our excess cash flow, as defined by the agreement for each fiscal year end over the next seven years. We are required to maintain certain financial covenants, including a minimum total leverage ratio and a minimum interest coverage ratio. As of March 31, 2007, we were in compliance with all such covenants. Additionally, the agreement, which is secured by the assets of the Company, provides for certain limitations on capital expenditures.

While capital raised through our stock offering in 2006 and our debt financing in 2007 has enabled us to execute strategic growth objectives, our operating cash flows have been our primary source of liquidity and historically have been sufficient to fund our working capital and capital expenditure needs. Our working capital requirements consist primarily of the financing of accounts receivable and related payroll expenses and the repayment of the $145,000,000 term loan facility noted earlier. We do not currently pay cash dividends on our outstanding common stock and we do not intend to pay cash dividends for the foreseeable future.

Cash provided by operations of $4,633,000 was primarily comprised of net income of $911,000, adjusted for non-cash charges of $6,407,000 and changes in certain operating assets and liabilities. Non-cash charges primarily included depreciation and amortization of $5,506,000 and stock-based compensation of $1,106,000. The significant changes in assets and liabilities included an increase to accounts receivable of $4,933,000, partially offset by an increase in accrued payroll of $2,366,000.

Cash used for investing activities was $229,018,000 for the three months ended March 31, 2007, which primarily related to acquisition activity. Cash paid during the period for acquisitions was $231,727,000 and capital expenditures were $1,490,000. Additionally, restrictions on our cash balances were released during the quarter, which generated $4,678,000 in unrestricted cash and cash equivalents.

Cash provided by financing activities was $141,401,000 for the three months ended March 31, 2007, which consisted primarily of the proceeds from term loan facility of $145,000,000, partially offset by debt issuance costs of $4,153,000 paid during the period to acquire the loan. In addition, our cash balances benefited from the net proceeds of $1,161,000 resulting from stock transactions associated with our employee stock option and employee stock purchase plans. During the period, we paid $796,000 under long-term agreements, which included a principal payment of $363,000 on our term loan.

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Barring unexpected changes in U.S. labor markets and demand for our services, we believe that our working capital as of March 31, 2007, the financing arrangement entered into on January 31, 2007 and positive cash flow from future operating activities will be sufficient to fund future debt obligations, accounts receivable and related payroll expenses as well as capital expenditure initiatives for the foreseeable future.

We continue to make progress on enhancements to our front-office and back-office information systems. These enhancements include the consolidation of back-office systems across all corporate functions, primarily our Cincinnati and Europe operations, as well as enhancements to and broader application of our front-office software across all lines of business. We currently do not expect to undertake the full integration of information systems used by our recently acquired VISTA and Oxford subsidiaries in 2007, however, such integration will remain a consideration of management and timed appropriately. We expect to incur approximately $5.5 million to $6.1 million in capital expenditures in 2007 for certain technology initiatives aimed at increasing the productivity of our staffing consultants and streamlining corporate operations and other fixed asset purchases.

On June 15, 2001, our board of directors authorized the repurchase, from time to time, of up to 2,941,000 shares of On Assignment Inc.’s common stock. During the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2007, we did not repurchase any shares of our common stock on the open market. To date, we have repurchased 2,662,500 shares of our common stock at a total cost of $22,970,000. At December 31, 2006, we had a remaining authorization to repurchase 278,500 shares of our common stock.

During 2007, certain stock-based awards issued under our approved stock option plan vested. Under the provisions of this plan, a portion of the vested shares were withheld by us in order to satisfy minimum payroll tax obligations of the employee. The vested shares withheld have been recorded as treasury stock, a reduction to stockholder’s equity, at the fair market value on the date that the tax obligation was determined, which was also the vesting date of the awards. As of March 31, 2007, there were 61,331 shares withheld and included in treasury stock at a fair-market value of $672,000 related to stock-based awards.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board issued FAS No. 157 “Fair Value Measurements” (FAS 157), which defines fair value, establishes a framework for consistently measuring fair value under GAAP and expands disclosures about fair value measurements. FAS 157 is effective beginning January 1, 2008, and the provisions of FAS 157 will be applied prospectively as of that date. We are currently evaluating the effect that adoption of this statement will have on our consolidated financial position and results of operations when it becomes effective in 2008.

In February 2007, the Financial Accounting Standards Board issued FAS No. 159 “The Fair Value Option for Financial Assets and Liabilities — Including an amendment of FASB Statement No. 115” (FAS 159), which permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective beginning January 1, 2008, and the provisions of FAS 159 will be applied prospectively as of that date. We are currently evaluating the effect that adoption of this statement will have on our consolidated financial position and results of operations when it becomes effective in 2008.

Critical Accounting Policies

Our accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2006. This Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations. We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.

Allowance for Doubtful Accounts. We estimate an allowance for doubtful accounts as well as an allowance for billing adjustments related to trade receivables based on our analysis of historical collection and adjustment experience. We apply actual and estimated collection and adjustment percentages to the outstanding accounts receivable balances at the end of the period. If we experience a significant change in collections or billing adjustment experience, our estimates of the recoverability of accounts receivable could change by a material amount.

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Accrued Workers’ Compensation and Medical Malpractice Insurance. We are partially self-insured for our workers’ compensation liability related to the Life Sciences and Healthcare segments as well as our medical malpractice liability in relation to the Physician segment. In connection with these programs, we pay a base premium plus actual losses incurred, not to exceed certain stop-loss limits. We are insured for losses above these limits, both per occurrence and in the aggregate. The self-insurance claim liability is determined based on claims filed and claims incurred but not reported. In conjunction with the $165,000,000 senior secured credit facility entered into on January 31, 2007, the restricted cash and cash equivalents of $4,678,000 previously collateralized in association with three letters of credit related to our workers’ compensation program was released.

Contingencies. We account for contingencies in accordance with Statement of FAS No. 5, “Accounting for Contingencies” (FAS 5). FAS 5 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and the amount of the loss can be reasonably estimated. Accounting for contingencies, such as legal settlements and workers’ compensation and medical malpractice insurance matters, requires us to use our judgment. While we believe that our accruals for these matters are adequate, if the actual loss from a loss contingency is significantly different than the estimated loss, results of operations may be over or understated.

Income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposures in each jurisdiction including the impact, if any, of additional taxes resulting from tax examinations. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. If necessary, a valuation allowance is established to reduce deferred income tax assets in accordance with FAS No. 109, “Accounting for Income Taxes” (FAS 109). Tax exposures can involve complex issues and may require an extended period to resolve. The estimated effective tax rate is adjusted for the tax related to significant unusual items. Changes in the geographic mix or estimated level of annual pre-tax income can affect the overall effective tax rate. During the quarter and year ended December 31, 2004, the Company established a valuation allowance against its net deferred income tax assets. The valuation allowance was calculated pursuant to FAS 109, which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. Such evidence includes a company’s past and projected future performance, the market environment in which the company operates, the utilization of past tax credits and the length of carryback and carryforward periods of net operating losses. In determining that a valuation allowance was required, the Company considered the magnitude of the operating losses sustained in 2003 and 2004 and the projected operating losses for 2005. At the end of 2006, the Company concluded that as a result of sustained profitability, which was evidenced by consecutive quarters of pre-tax net income along with projections of pre-tax net income in future years, that the criteria had been met for the full reversal of the valuation allowance. Due to the full reversal of the valuation allowance as of December 31, 2006, the Company is providing interim income tax expense at an estimated effective tax rate of 38.5 percent for 2007.

Effective January 1, 2007, the company began to measure and record tax contingency accruals in accordance with FIN 48 — Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109. The expanded disclosure requirements of FIN 48 are presented in Note 13 to the consolidated condensed financial statements in Part I, Item I.

FIN 48 prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of this Interpretation. FIN 48 also provides guidance on accounting for derecognition, interest and penalties, and classification and disclosure of matters related to uncertainty in income taxes. As in the past, changes in accruals associated with uncertainties arising from pre-acquisition years for acquired businesses are charged or credited to goodwill. Adjustments to other tax accruals are generally recorded in earnings in the period they are determined.

Goodwill and Identifiable Intangible Assets. As discussed in Note 3 to our Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2006, FAS 142 requires that we review and test goodwill and indefinite lived intangible assets for impairment on at least an annual basis, rather than amortize them. We may be required to review and test for impairment more frequently if events or changes in circumstances indicate that the assets may be impaired. In testing for a potential impairment of goodwill, FAS 142 requires us to: (1) allocate goodwill to our various business units to which the acquired goodwill relates; (2) estimate the fair value of those businesses to which goodwill relates; and (3) determine the carrying value of the businesses. If the estimated fair value is less than the carrying value for a particular business unit, then we are required to estimate the fair value of all identifiable assets and liabilities of the business unit, in a manner similar to a purchase price allocation for an acquired business unit. This requires the identification of any previously unrecognized intangible assets. When this process is completed, the amount of goodwill impairment is determined.

FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (FAS 144) requires us to test the

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recoverability of long-lived assets, including identifiable intangible assets with definite lives, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In testing for potential impairment under FAS 144, if the carrying value of the asset group exceeds the expected undiscounted cash flows, we must then determine the amount by which the fair value of those assets exceeds the carrying value and determine the amount of impairment, if any.

FAS 141, “Business Combinations” (FAS 141) requires us to record acquisition transactions in accordance with the purchase method of accounting, and therefore requires us to use judgment and estimates related to the allocation of the purchase price to the intangibles assets of the acquisition and the remaining amount, net of assets and liabilities assumed, to goodwill. We are currently reviewing preliminary fair value adjustments associated with purchased intangibles, fixed assets and lease obligations, as well as related income tax impacts. The ultimate allocation of the purchase price may differ from the amounts included in these financial statements.

Stock-Based Compensation. We account for stock-based compensation in accordance with FAS No. 123 (revised 2004), “Share-Based Payment” (FAS 123R). FAS 123R requires that we estimate the fair value of share-based payments, primarily stock option awards, and record compensation expense as a charge against net income. The compensation expense is then amortized over the service period, generally four years from the grant date. To estimate the fair value of stock option awards we are required to analyze historical trends and observations and assess current circumstances to develop an expectation of certain future activities such as employee exercise behavior and employee turnover. While we believe that our assumptions and expectations of these activities are reasonable, a revision to these assumptions could materially impact our operating results but not our cash flows.

Commitments

We have not entered into any significant commitments that have not been previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.

 

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