The portion of the charge related to real estate costs, which totaled $3.5 million, relates to lease costs associated with vacating offices as the Company downsizes its office space requirements. Through a combination of adopting a more virtual office model and eliminating administrative functions that had been performed in the field offices, the Company relocated from most of its existing leased office space to smaller office space that will require 60% less square footage than what was in use. The costs associated with this charge related primarily to the present value of ongoing lease obligations for vacated offices net of anticipated sublease income. A portion of the charge also related to broker commissions and estimated leasehold improvement costs necessary to sublease vacated offices. The majority of the unpaid restructuring reserve as of June 30, 2001 relates to future lease obligations that will be paid over the next 4 years.
During the second quarter of 2001, ARC and the lending syndicate executed amendments to the revolving credit agreement. The impact of these amendments was to extend the maturity date to January 1, 2002 and reduce the borrowing limit subject to pledged accounts receivable as collateral in consideration for waiver of existing financial loan covenants and modification of certain loan covenants. Additionally, the Company has two irrevocable standby letters of credit for $1,268,000, which expire on December 31, 2001.
Item 2. - - Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Essentially all of the Company’s revenue is generated from information technology services that offer the benefits of outsourcing, while allowing information services operations managers to retain strategic control of their operations.
RESTRUCTURING AND OTHER CHARGES
During the fourth quarter of 2000, the Company recorded a $36.6 million charge. This charge was comprised of an impairment charge of $34.9 million related to goodwill, $1.2 million related to the write-off of excess assets, and $0.5 million related to severance costs.
During the fourth quarter of 1999, the Company recorded a $5.2 million charge. This charge was comprised of $3.5 million related to lease costs, $0.6 million related to severance costs, and $1.1 million related to the write-down of fixed asset values.
The results of the above mentioned restructuring and other charges is evidenced by the improvement of EBITDA noted below.
Second Quarter Fiscal 2001 Compared to Second Quarter Fiscal 2000
Revenue. Revenues consist of fees earned from ARC Staffing Management Services and ARC Technology Management Solutions. Revenue decreased $13.0 million or 19.7% from $65.9 million in 2000 to $52.9 million in 2001, primarily from the overall slowdown in IT spending as companies curtailed spending on IT investments in reaction to a soft economy. ARC Technology Management Solutions revenue decreased by $5.5 million or 27.2% from $20.3 million in 2000 to $14.8 million in 2001. The Company’s traditional staffing business decreased by $7.5 million or 16.3% from $45.6 million in 2000 to $38.1 million in 2001.
Gross profit. Gross profit decreased by $5.1 million or 25.0% from $20.3 million in 2000 to $15.2 million in 2001. The decrease was primarily attributable to the reduction in revenue. As a percentage of revenues, gross profit decreased 2.1 percentage points from 30.9% in 2000 to 28.8% in 2001 due to an under utilization of technical resources on a major project with one customer. The major project situation was rectified early in the third quarter of 2001 with a contract renewal that includes minimum business levels or price increases. We believe the new agreement should restore the margins to historical levels.
Operating expenses. Operating expenses consist of sales and marketing costs, recruiting, retention and training costs, management and administrative costs, and depreciation and amortization. Operating expenses decreased by $6.1 million or 28.0% from $21.9 million in 2000 to $15.7 million in 2001. The operating expense decrease was attributable to the restructuring actions taken in 2000, which is reflected in reduced office space and lower headcount. As a percentage of revenues, operating expenses decreased by 3.4 percentage points from 33.2% in 2000 to 29.8% in 2001, primarily as a result of the actions described above.
Loss from operations. Loss from operations decreased by $1.0 million from a loss of $1.5 million in 2000 to loss of $0.5 million in 2001. The decrease in loss from operations was the result of reduced operating expenses partially offset by the lower revenue levels.
Other (income) expense, net. Other expense, net consists principally of interest expense on the Company’s revolving credit facility. Other expense, net increased by $0.9 million from an expense of $0.2 million in 2000 to an expense of $1.1 million in 2001. The increase in other expense is primarily the result of a gain of $1.1 million on the sale of an interest rate swap agreement that was recognized in the second quarter of 2000, thereby reducing other expense for that period.
Earnings before interest, income taxes, depreciation and amortization. Earnings before interest, income taxes, depreciation and amortization (EBITDA) was $0.9 million for the quarter, which is comprised of loss before taxes of $(1.6) million plus depreciation and amortization of $1.4 million and net interest of $1.1 million. This compares to EBITDA of $0.3 million for the same three-month period in 2000. The increase is primarily due to the increase in income from operations.
First Six Months Fiscal 2001 Compared to First Six Months Fiscal 2000
Revenue. Revenue decreased $25.8 million or 18.9% from $136.4 million in 2000 to $110.6 million in 2001, primarily from the overall slowdown in IT spending as companies curtailed spending on IT investments in reaction to a soft economy. ARC Technology Management Solutions revenue decreased by $10.4 million or 25.4% from $41.0 million in 2000 to $30.6 million in 2001. The Company’s traditional staffing business decreased by $15.3 million or 16.1% from $95.3 million in 2000 to $80.0 million in 2001.
Gross profit. Gross profit decreased by $7.0 million or 17.8% from $39.1 million in 2000 to $32.1 million in 2001. The decrease was primarily attributable to the reduction in revenue. As a percentage of revenues, gross profit increased slightly from 28.7% in 2000 to 29.0% in 2001.
Operating expenses. Operating expenses consist of sales and marketing costs, recruiting, retention and training costs, management and administrative costs, and depreciation and amortization. Operating expenses decreased by $11.7 million or 26.8% from $43.6 million in 2000 to $31.9 million in 2001. The operating expense decrease was attributable to the restructuring actions taken in 2000, which is reflected in reduced office space and lower headcount. As a percentage of revenues, operating expenses decreased by 3.2 percentage points from 32.0% in 2000 to 28.8% in 2001, primarily as a result of the actions described above.
Income (loss) from operations. Income (loss) from operations decreased by $4.8 million from a loss of $4.6 million in 2000 to income of $0.2 million in 2001. The shift from loss from operations to income from operations was the result of reduced operating expenses partially offset by the lower revenue levels.
Other (income) expense, net, Other expense, net consists of interest expense of $2.6 million on the Company’s revolving credit facility offset by $0.3 million interest income on the Company’s tax refund and a $0.4 million gain on the sale of stock that was distributed to ARC from its Health care provider, MetLife, as it transitioned from a mutual company to a public company. Other expense, net increased by $0.7 million from an expense of $1.2 million in 2000 to an expense of $1.9 million in 2001. The increase in other expense is primarily the result of a gain of $1.1 million on the sale of an interest rate swap agreement that was recognized in the second quarter of 2000 thereby reducing other expense for that period.
Earnings before interest, income taxes, depreciation and amortization. Earnings before interest, income taxes, depreciation and amortization (EBITDA) was $3.4 million year to date, which is comprised of loss before taxes of $(1.7) million plus depreciation and amortization of $2.8 million and net interest of $2.3 million. This compares to EBITDA of a loss of $0.8 million for the same six-month period in 2000. The increase is primarily due to having income from operations as compared to a loss from operations in the prior period.
Liquidity and Capital Resources
ARC has historically financed its operations and capital expenditures through sales of equity securities, a bank line of credit and cash generated from operations. Net cash provided by operations was $10.1 million during the first six months of 2001. Net cash provided by operations in 2001 was favorably impacted by the reduction in accounts receivable of $11.6 million and the receipt of income tax refunds of $2.2 million.
Current liabilities exceeded current assets by $12.2 million at June 30, 2001. Current liabilities include $37.1 million of outstanding borrowings against its line of credit that was recently amended to extend the maturity date through January 1, 2002. During the first six months of 2001, the Company used the cash provided by operations to reduce its debt by $6.8 million and for capital purchases of $1.2 million. In addition, the Company is currently in discussion with several financial institutions to obtain a new line of credit, which would extend the maturity date to 2004. There can be no guarantee that the refinancing will be completed. Should this not be completed, the Company will pursue other financing alternatives.
Assuming the successful negotiation of a new credit facility, or the continued extension of its current banking arrangement, the Company believes its cash balances, available line of credit and funds from operations will be sufficient to meet all of its anticipated cash requirements for at least the next 12 months.
Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") which supersedes APB Opinion No. 17, "Intangible Assets". SFAS 142 addressses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of SFAS 142 are required to be applied starting with fiscal years beginning after
December 15, 2001. SFAS 142 is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. Management is currently evaluating the impact that adoption of SFAS 142 will have on its consolidated financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" (SFAS 141") which supersedes APB Opinion No. 16, "Business Combinations", and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". SFAS 141 addresses financial accounting and reporting for business combinations and requires that all business combinations within the scope of the SFAS 141 be accounted for using only the purchase method. SFAS 141 is required to be adopted for all business combinations initiated after June 30, 2001. Management has assessed the impact of the adoption of SFAS 141 on its consolidated financial statements and believes the impact will not be material.
FORWARD-LOOKING STATEMENTS
The Company makes forward-looking statements from time to time and desires to take advantage of the "safe harbor," which is afforded such statements under the Private Securities Litigation Reform Act of 1995, when they are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements. The statements contained in this Form 10-Q, including those under "Management's Discussion and Analysis of Financial Condition and Results of Operations," statements contained in future filings with the Securities and Exchange Commission and publicly disseminated press releases, and statements which may be made from time to time in the future by management of the Company in presentations to shareholders, prospective investors, and others interested in the business and financial affairs of the Company, which are not historical facts, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Any projections of financial performance or statements concerning expectations as to future developments should not be construed in any manner as a guarantee that such results or developments will, in fact, occur. There can be no assurance any forward-looking statement will be realized or that actual results will not be significantly different from that set forth in such forward-looking statement.
Item 3. – Quantitative and Qualitative Disclosures About Market Risk
The market risk that the Company is exposed to primarily relates to changes in interest rates on its borrowings. At June 30, 2001 the Company had $37.1 million in floating-rate debt. An adverse charge in interest rates during any period that the loan is outstanding would cause an increase in interest expense. A 100 basis point increase in the bank’s base rate would increase the annual amount of interest expense by approximately $0.4 million.
PART II - OTHER INFORMATION
Item 4. – Submission of Matters to a Vote of Security Holders
| | (a) | The annual meeting of stockholders of Alternatives Resources Corporation was held on June 14, 2001. |
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| | (b) | The individuals specified in (c) below were elected as directors at the meeting and the terms of office of Syd N. Heaton, Steve Purcell, Bruce R. Smith, Raymond Hipp, and Charles W. Sweet as directors continued after the meeting. |
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| | (c) | Set forth below is the tabulation of the votes with respect to the election of JoAnne Brandes and A. Donald Rully as Class I Directors. |
| Director | For | Withhold
Authority |
|
|
|
| JoAnne Brandes | 13,182,197 | 1,811,851 |
| A. Donald Rully | 13,264,762 | 1,729,286 |
| | * (d) | To approve an amendment to the Company's Certificate of Incorporation to effect a reverse stock split of the Company's issued and Outstanding Common Stock. |
| For | Against | Withhold
Authority |
|
|
|
| 14,447,302 | 481,364 | 65,382 |
* Although the amendment was approved, the Board of Directors decided that it was in the best interest of the shareholders to not proceed with the reverse split.
Item 6. - Exhibits and Reports on Form 8-K
| | (a) | The following documents are furnished as an exhibit and numbered pursuant to Item 601 of Regulation S-K: |
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| Exhibit Number | | Description |
| |
|
| | 4.1 | | Eleventh Amendment to Credit Agreement |
| | 4.2 | | Twelfth Amendment to Credit Agreement |
| | 4.3 | | Thirteenth Amendment to Credit Agreement |
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| | | |
| | (b) | The registrant was not required to file and did not voluntarily file any reports on Form 8-K for the quarter ended June 30, 2001. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | ALTERNATIVE RESOURCES CORPORATION |
| | |
| | |
| Date: August 14, 2001 | /s/ Steven Purcell |
| |
|
| | Steven Purcell |
| | Senior Vice President, Chief Financial Officer, Treasurer and Secretary |
