SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission file number 0-23940
ALTERNATIVE RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 38-2791069
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 HART ROAD, SUITE 300, BARRINGTON, IL 60010
(Address of principal executive offices) (Zip code)
(847) 381-6701
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
16,015,942 shares of Common Stock outstanding as of November 5, 1999.
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
December 31, September 30,
1998 1999
Current assets: (Unaudited)
Cash and cash equivalents $ 2 $ 576
Trade accounts receivable, net of allowance for doubtful accounts 69,347 73,335
Prepaid expenses 512 1,596
Income taxes receivable 6,373 5,654
Other receivables 128 220
Deferred income taxes 2,327 2,327
--------- ---------
Total current assets 78,689 83,708
--------- ---------
Property and equipment:
Office equipment 13,009 11,527
Furniture and fixtures 2,814 1,596
Software 11,011 15,995
Leasehold improvements 831 503
--------- ---------
27,665 29,621
Less accumulated depreciation and amortization 9,595 8,329
--------- ---------
Net property and equipment 18,070 21,292
--------- ---------
Other assets:
Goodwill, net of amortization 39,792 38,686
Other assets 1,404 1,339
--------- ---------
Total other assets 41,196 40,025
--------- ---------
Total assets $ 137,955 $ 145,025
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ -- $ 3,616
Accounts payable 12,513 10,680
Payroll and related expenses 13,179 13,292
Accrued expenses 7,562 4,477
--------- ---------
Total current liabilities 33,254 32,065
Long-term debt 47,000 52,000
Other liabilities 1,698 228
Deferred income taxes 3,474 3,474
--------- ---------
Total liabilities 85,426 87,767
--------- ---------
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000,000 shares authorized, -- --
none issued and outstanding
Common Stock, $.01 par value, 50,000,000 shares authorized, 15,957,498 and
16,015,942 shares issued at December 31, 1998
and September 30, 1999, respectively 160 160
Additional paid-in capital 26,647 26,991
Accumulated other comprehensive income (loss) (11) 28
Retained earnings 28,826 34,782
--------- ---------
55,622 61,961
Less: Treasury stock, at cost, 266,500 and 500,000 shares at
December 31, 1998 and September 30, 1999, respectively 3,093 4,703
--------- ---------
Total stockholders' equity 52,529 57,258
--------- ---------
Total liabilities and stockholders' equity $ 137,955 $ 145,025
--------- ---------
--------- ---------
See accompanying Notes to Consolidated Financial Statements
Page 2
ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Revenue $ 85,116 $ 84,171 $ 252,328 $ 252,032
Cost of services 56,697 58,902 168,267 170,439
--------- --------- --------- ---------
Gross profit 28,419 25,269 84,061 81,593
Selling, general and administrative expenses 24,441 23,480 69,405 68,926
Restructuring and one-time charges 29,610 -- 29,610 --
--------- --------- --------- ---------
Operating expenses 54,051 23,480 99,015 68,926
--------- --------- --------- ---------
Income (loss) from operations (25,632) 1,789 (14,954) 12,667
Interest expense, net (1,014) (941) (2,555) (2,335)
Other expense, net -- (119) -- (119)
--------- --------- --------- ---------
Income (loss) before income taxes (26,646) 729 (17,509) 10,213
Income taxes (298) 387 3,420 4,257
--------- --------- --------- ---------
Net income (loss) $ (26,348) $ 342 $ (20,929) $ 5,956
--------- --------- --------- ---------
--------- --------- --------- ---------
Net earnings (loss) per share:
Basic $ (1.67) $ 0.02 $ (1.33) $ 0.38
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted $ (1.67) $ 0.02 $ (1.33) $ 0.38
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used to compute earnings per share:
Basic 15,817 15,599 15,694 15,685
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted 15,817 15,636 15,694 15,745
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying Notes to Consolidated Financial Statements
Page 3
ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(In thousands)
Three Months Nine Months
Ended September 30, Ended June 30,
------------------------- -------------------------
1998 1999 1998 1999
(Unaudited) (Unaudited)
-------- -------- -------- --------
Net income (loss) $(26,348) $ 342 $(20,929) $ 5,956
Other comprehensive income, net of tax:
Foreign currency translation adjustment (45) 4 (77) 39
Unrealized holding gains on marketable securities:
Unrealized holding gains arising
during the period -- -- 382 --
Less reclassification adjustment for
gains included in net income -- -- (781) --
-------- -------- -------- --------
Comprehensive income $(26,393) $ 346 $(21,405) $ 5,995
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying Notes to Consolidated Financial Statements
Page 4
ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
-------------------------
1998 1999
(Unaudited)
-------- --------
Cash flows from operating activities:
Net income (loss) $(20,929) $ 5,956
Adjustments to reconcile net income (loss)to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,937 4,735
Realized net gain on sale of securities (781) --
Gain on sale of software business -- (436)
Loss on leased assets -- 555
Provision for doubtful accounts 341 20
Impairment of goodwill 25,700 --
Change in assets and liabilities:
Trade accounts receivable 16,216 (4,008)
Prepaid expenses 741 (1,084)
Other receivables (3,281) 8
Other assets 66 6
Accounts payable (4,252) (1,833)
Payroll and related expenses 9,871 113
Accrued expenses and other liabilities (4,527) (4,757)
Income taxes (505) 719
-------- --------
Net cash provided by (used in) operating activities 21,597 (6)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (8,617) (7,809)
Payments for acquisitions (5,619) --
Proceeds from sale of software business -- 1,600
Purchases of available-for-sale securities and notes receivable (327) (600)
Redemption of available-for-sale securities 8,884 --
-------- --------
Net cash used in investing activities (5,679) (6,809)
-------- --------
Cash flows from financing activities:
Payments received on stock options exercised 2,519 490
Proceeds from long-term debt 1,500 19,000
Payments on long-term debt (18,000) (14,000)
Repurchase of Common Stock (2,673) (1,610)
Payments to employee stock purchase plan (155) (146)
Cash overdraft -- 3,616
-------- --------
Net cash provided by (used in) financing activities (16,809) 7,350
-------- --------
Effect of exchange rate changes on cash and cash equivalents (77) 39
-------- --------
Net increase (decrease) in cash and cash equivalents (968) 574
Cash and cash equivalents at beginning of period 971 2
-------- --------
Cash and cash equivalents at end of period $ 3 $ 576
-------- --------
-------- --------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,840 $ 2,445
Cash paid for income taxes 5,586 5,559
See accompanying Notes to Consolidated Financial Statements
Page 5
ALTERNATIVE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim consolidated financial statements presented are unaudited, but
in the opinion of management, have been prepared in conformity with generally
accepted accounting principles applied on a basis consistent with those of the
annual financial statements. Such interim consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of the financial position and the results of operations for
the interim periods presented. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
year ending December 31, 1999. The interim consolidated financial statements
should be read in connection with the audited consolidated financial statements
for the year ended December 31, 1998, included in the December 31, 1998 Form
10-K of Alternative Resources Corporation (the "Company").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPUTATION OF EARNINGS PER SHARE. Basic earnings per share is based on
the weighted average number of common shares outstanding for the period. Diluted
earnings per share is based on the weighted average number of common shares
outstanding and includes the dilutive effect of unexercised stock options using
the treasury stock method.
RECLASSIFICATIONS. Certain 1998 amounts have been reclassified to conform
with the 1999 presentation.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998 and pursuant to the deferral of the
effective date by the Financial Accounting Standards Board is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133
establishes a comprehensive standard for the recognition and measurement of
derivative instruments and hedging activities. The Company is currently
evaluating the impact of SFAS No. 133 on its financial statements.
Page 6
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.
As of September 30, 1999, the Company had 52 offices in the United States
and Canada, as compared to 54 offices at September 30, 1998. The decrease in the
number of offices is the result of a consolidation of branches.
THIRD QUARTER FISCAL 1999 COMPARED TO THIRD QUARTER FISCAL 1998
REVENUE. Revenue decreased by 1.1% from $85.1 million in the third
quarter of 1998 to $84.2 million in the third quarter of 1999, primarily as a
result of a 6% decrease in time and material revenue, partially offset by an
11% increase in Solutions revenue. The Company was also impacted by an
industry wide decline in demand for IT services due to a reduction in
expenditures in anticipation of the Year 2000. Included in the decrease in
revenue for the third quarter was the impact of phasing out of unprofitable
business inherited from the acquisition of CGI Systems, Inc. (CGI) and
business associated with the acquisition of Writers, Inc. that was not
pursued for strategic reasons. The low margin business from CGI was
identified in the first quarter of 1998 and eliminated during the second and
third quarters of 1998. The combination of revenue from such businesses that
was phased out for profitability or strategic reasons amounted to $2.4
million in the third quarter of 1998.
GROSS PROFIT. Gross profit decreased by 11.1% from $28.4 million in the
third quarter of 1998 to $25.3 million in the third quarter of 1999. Gross
margin decreased from 33.4% of revenue in the third quarter of 1998 to 30.0%
in the third quarter of 1999. The decrease in gross margin was primarily due
to the added wages and training expenses for several new contracts with a
major client. These agreements required us to hire and train technicians
prior to having the service calls turned over to the Company. The process of
turning over the service calls has been taking place as the Company
demonstrates its ability to deliver the required service levels. The
front-end investment in wages and training expenses totaled $1.8 million for
the third quarter of 1999.
OPERATING EXPENSES. Operating expenses decreased from $54.1 million in
the third quarter of 1998 to $23.5 million in the third quarter of 1999. A
significant portion of the decrease is due to a charge of $29.6 million taken
during the third quarter of 1998 for restructuring and other one-time charges
(as discussed below under "Restructuring and Other One-time Charges").
Excluding the restructuring and other one-time charges, selling, general and
administrative expenses decreased from $24.4 million or 28.7% of revenue in
the third quarter of 1998 to $23.5 million or 27.9% of revenue in the third
quarter of 1999. The decrease in selling, general and administrative expenses
resulted primarily from the savings realized from the restructuring of
operations, which included branch consolidations and staff reductions, that
were implemented in the third quarter of 1998. The decrease in selling,
general and administrative expenses was partially offset by increased
expenditures for marketing programs and the amortization of the capitalized
new IT systems that have been implemented in the first and second quarters of
1999. The restructuring included modifications to the Company's operating
model that were designed to eliminate unnecessary costs and create a more
efficient sales and delivery system for the Company's services. The full
benefit of the restructuring and one-time charges were not realized in the
third quarter of 1998. Marketing expenditures were approximately $700,000
higher in the third quarter of 1999 versus the third quarter of 1998 due to
costs associated with the Company's efforts to productize its various service
lines.
RESTRUCTURING AND OTHER ONE-TIME CHARGES. The Company incurred a
one-time charge totaling $29.6 million during the third quarter of 1998. The
charge, which is reflected in operating expenses, consisted primarily of a
write-off of goodwill which was the result of an impairment review that was
performed in accordance with the guidelines set forth under Statement of
Financial Accounting Standards SFAS No. 121. The goodwill was originally
generated in conjunction with the acquisitions of CGI and Writers Inc. The
writedown of goodwill represented $25.7 million of the $29.6 million charge.
The balance of the one-time charge represented costs of $1.9 million
related to the recent management changes and expenses totaling $2.0 million
associated with staff reductions and optimizing the Company's operating
model. The costs associated with the recent management changes consisted of
severance pay, relocation and other related expenses. The expenses associated
with staff reductions and optimization of the Company's operating model
consisted of severance pay and occupancy costs in connection with a
consolidation of branches.
INCOME (LOSS) FROM OPERATIONS. Income from operations increased from a
loss of $25.6 million or (30.1%) of revenue in the third quarter of 1998 to
$1.8 million or 2.1% of revenue in the third quarter of 1999. Excluding the
restructuring and one-time charges, income from
Page 7
operations decreased from $4.0 million or 4.7% of revenue in the third
quarter of 1998 to $1.8 million or 2.1% of revenue in the third quarter of
1999. The decrease in operating margin resulted from the decrease in gross
margin partially offset by the decrease in selling, general and
administrative expenses detailed above.
INTEREST EXPENSE. Interest expense, net, decreased from $1.0 million in
the third quarter of 1998 to $941,000 in the third quarter of 1999. The
decrease in interest expense from the third quarter of 1998 to the third
quarter of 1999 is the result of the Company reducing its outstanding debt.
Long-term debt decreased from $57.0 million at September 30, 1998 to $52.0
million at September 30, 1999.
OTHER EXPENSE. During the quarter, the Company moved its corporate office
to consolidate several locations and to provide additional space to establish an
off-site helpdesk function for its customers. A non-cash charge of
$555,000 was recorded in connection with the sublease of its former corporate
office space which represented the difference between the Company's lease
payment and the sublease income over the life of the agreements. The new
corporate lease provides additional space at a lower cost per square foot than
the former lease. In addition, the Company sold a small software-related
component of the business that was acquired as a part of the CGI acquisition for
a gain of $436,000.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
increased from a benefit of $298,000 in the third quarter of 1998 to $387,000 in
the third quarter of 1999. Excluding the tax effect associated with the
restructuring and one-time charges taken in 1998, the provision for income taxes
decreased from $1.2 million, or an effective tax rate of 40.1%, in the third
quarter of 1998 to $387,000, or an effective tax rate of 53.0%, in the third
quarter of 1999. The increase in the effective tax rate in the third quarter of
1999 was due to effect of the nondeductible goodwill amortization expense.
Excluding the impact of goodwill, the third quarter of 1999 effective tax rate
was 39.1%.
NET INCOME (LOSS). The Company's net income increased from a loss of $26.3
million in the third quarter of 1998, or (31.0%) of total revenue, to $342,000
in the third quarter of 1999, or 0.4% of total revenue. Excluding the
restructuring and other one-time charges, net income decreased from $1.8 million
in the third quarter of 1998, or 2.1% of revenue, to $342,000 in the third
quarter of 1999, or 0.4% of total revenue.
FIRST NINE MONTHS FISCAL 1999 COMPARED TO FIRST NINE MONTHS FISCAL 1998
REVENUE. Revenue decreased by 0.1% from $252.3 million in the first
nine months of 1998 to $252.0 million in the first nine months of 1999,
primarily as a result of 2% decrease in time and material revenue, offset by
a 5% increase in Solutions revenue. The Company was also impacted by an
industry wide decline in demand for IT services due to a reduction in
expenditures in anticipation of the Year 2000. Included in the decrease in
revenue for the first nine months was the impact of phasing out of
unprofitable business inherited from the acquisition of CGI Systems, Inc.
(CGI) and business associated with the acquisition of Writers, Inc. that was
not pursued. The low margin business from CGI was identified in the first
quarter of 1998 and eliminated during the second and third quarters of 1998.
The combination of revenue from such businesses that was phased out for
profitability or strategic reasons amounted to $12.2 million during the first
nine months of 1999.
GROSS PROFIT. Gross profit decreased by 2.9% from $84.1 million in the
first nine months of 1998 to $81.6 million in the first nine months of 1999.
Gross margin decreased from 33.3% of revenue in the first nine months of 1998
to 32.4% in the first nine months of 1999. The decrease in gross margin was
primarily due to the added wages and training expenses for several new
contracts with a major client that began during the third quarter of 1999.
These agreements required us to hire and train technicians prior to having
the services calls turned over to the Company. The process of turning over
the service calls has been taking place as the Company demonstrates its
ability to deliver the required service levels. The front-end investment in
wages and training expenses totaled $1.8 million for the third quarter of
1999.
OPERATING EXPENSES. Operating expenses decreased from $99.0 million in the
first nine months of 1998 to $68.9 million in the first nine months of 1999. A
significant portion of the decrease is due to a charge of $29.6 million taken
during the third quarter of 1998 for restructuring and other one-time charges
(as discussed below under "Restructuring and Other One-time Charges"). Excluding
the restructuring and other one-time charges, selling, general and
administrative expenses decreased from $69.4 million or 27.5% of revenue in the
first nine months of 1998 to $68.9 million or 27.3% of revenue in the first nine
months of 1999. The decrease in selling, general and administrative expenses
resulted primarily the savings realized from the restructuring of operations,
which included branch consolidations and staff reductions, that were implemented
in the third quarter of 1998. The decrease in selling, general and
administrative expenses was partially offset by increased expenditures for
marketing programs and the amortization of the capitalized new IT systems that
have been implemented in the first and second quarters of 1999. The
restructuring included modifications to the Company's operating model that were
designed to eliminate unnecessary costs and create a more efficient sales and
delivery system for the Company's services. The full benefit of the
restructuring and one-time charges
Page 8
were not realized in the third quarter of 1998. Marketing expenditures were
higher in the first nine months of 1999 versus the first nine months of 1998
due to costs associated with the Company's efforts to productize its various
service lines. The costs included expenses associated with designing and
printing sales collateral as well as costs related to changing the Company's
logo.
RESTRUCTURING AND OTHER ONE-TIME CHARGES. The Company incurred a
one-time charge totaling $29.6 million during the third quarter of 1998. The
charge, which is reflected in operating expenses, consisted primarily of a
write-off of goodwill which was the result of an impairment review that was
performed in accordance with the guidelines set forth under Statement of
Financial Accounting Standards SFAS No. 121. The goodwill was originally
generated in conjunction with the acquisitions of CGI and Writers Inc. The
writedown of goodwill represented $25.7 million of the $29.6 million charge.
The balance of the one-time charge represented costs of $1.9 million
related to the recent management changes and expenses totaling $2.0 million
associated with staff reductions and optimizing the Company's operating
model. The costs associated with the recent management changes consisted of
severance pay, relocation and other related expenses. The expenses associated
with staff reductions and optimization of the Company's operating model
consisted of severance pay and occupancy costs in connection with a
consolidation of branches.
INCOME (LOSS) FROM OPERATIONS. Income from operations increased from a
loss of $15.0 million or (5.9%) of revenue in the first nine months of 1998
to $12.7 million or 5.0% of revenue in the first nine months of 1999.
Excluding the restructuring and one-time charges, income from operations
decreased from $14.7 million or 5.8% of revenue in the first nine months of
1998 to $12.7 million or 5.0% of revenue in the first nine months of 1999.
The decrease in operating margin resulted from the decrease in gross margin
partially offset by the decrease in selling, general and administrative
expenses detailed above under Operating Expenses.
INTEREST EXPENSE. Interest expense, net, decreased from $2.6 million in
the first nine months of 1998 to $2.3 million in the first nine months of
1999. The decrease in interest expense from the first nine months of 1998 to
the first nine months of 1999 is the result of the Company reducing its
outstanding debt. Long-term debt decreased from $57.0 million at September
30, 1998 to $52.0 million at September 30, 1999.
OTHER EXPENSE. During the third quarter, the Company moved its
corporate office to consolidate several locations and to provide additional
space to establish an off-site helpdesk function for its customers. A
non-cash charge of $555,000 was recorded in connection with the sublease of
its former corporate office space which represented the difference between
the Company's lease payment and the sublease income over the life of the
agreements. The new corporate lease provides additional space at a lower cost
per square foot than the former lease. In addition, the Company sold a small
software-related component of the business that was acquired as a part of the
CGI acquisition for a gain of $436,000.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
increased from $3.4 million, on a pre-tax loss of $17.5 million in the first
nine months of 1998 to $4.3 million, or an effective rate of 41.7% in the
first nine months of 1999. The amortization of goodwill and write-off of
goodwill, which is not tax deductible, caused the effective tax rate to
change.
NET INCOME (LOSS). The Company's net income increased from a loss of
$20.9 million in the first nine months of 1998, or (8.3)% of total revenue,
to $6.0 million in the first nine months of 1999, or 2.4% of total revenue.
Excluding the restructuring and other one-time charges, net income decreased
from $7.2 million in the first nine months of 1998, or 2.9% of revenue, to
$6.0 million in the first nine months of 1999, or 2.4% of total revenue.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1999, cash flows used by operations
were $6,000 resulting primarily from decreased accounts payable and accrued
expenses and increases in accounts receivable and prepaid expenses, partially
offset by earnings, depreciation and amortization. Cash flows were used to
make improvements to the Company's information systems infrastructure and for
other fixed asset purchases aggregating approximately $7.8 million and to
purchase treasury shares of $1.6 million. The Company's long-term debt
increased $5.0 million during the first nine months of 1999. On September 30,
1999, the Company borrowed $5.0 million to fund two payrolls on that date.
Working capital increased from $45.4 million at December 31, 1998, to $51.6
million at September 30, 1999.
On April 27, 1999, the Company's Board of Directors authorized the
repurchase of up to one million shares of its outstanding stock. Purchases
may be made at the Company's option from time to time, subject to market
conditions, in open market transactions at prevailing prices or through
privately negotiated transactions. As of September 30, 1999, the Company had
repurchased 200,000 shares under this program. In addition, the Company holds
300,000 shares of treasury stock purchased under a previous repurchase
program.
Page 9
In connection with the acquisition of CGI, the Company established a
$75.0 million, 3-year revolving line of credit that was used to finance the
acquisition. Total borrowings outstanding under the line at September 30,
1999 were $52.0 million.
The Company believes its cash balances, available credit facility and
funds from operations will be sufficient to meet all of its anticipated cash
requirements for at least the next 12 months.
YEAR 2000 CONSIDERATIONS
INTERNAL ACCOUNTING AND FINANCIAL SYSTEMS
During the recently completed process of replacing its information
systems, the Company has addressed the Year 2000 compliance issue. One of the
criteria used in selecting the hardware and software, which replaced the
Company's existing systems, was that it had to be Year 2000 compliant. These
systems support the Company's entire business processing needs as well as all
financial reporting needs. Although the replacement of the Company's
enterprise wide systems was done for business purposes, it simultaneously
addressed the Year 2000 compliance issues. As such, management believes that
the Company will not incur significant additional expenditures, over and
above the cost of installing the new systems, to address Year 2000 issues
associated with the Company's internal systems. The Company believes that its
internal accounting and financial systems are Year 2000 compliant.
VENDORS, SUPPLIERS AND BUSINESS PARTNERS
The Company's main "supplier" is its technical employees. As long as
the Company has adequate internal resources in the form of systems
infrastructure to staff and manage projects (See "Internal Accounting and
Financial Systems" section above), management believes that there are no
material Year 2000 issues associated with this group.
The Company also purchases products and services from third parties and
has received written assurances from its material vendors and suppliers that
in their opinion there will be no interruption of service or acceptable
product as a result of the Year 2000 issue for the products and services they
supply. Based in part on the assurances received or not received, the Company
has devised and is documenting contingency plans to mitigate the negative
effects on the Company in the event the Year 2000 issue results in the
unavailability of products or services. The Company cannot assure that any
contingency plan will prevent product or service interruption by one or more
of the Company's third party vendors or suppliers from having a material
adverse effect on the Company. It is planned that these relationships will be
evaluated through all of 1999, and changes to the supply chain as are deemed
by management to be appropriate and feasible will be made.
The Company will be at risk from external infrastructure failures,
including electrical power, telephone, and transportation, among others.
Investigation and assessment of infrastructure is beyond the scope and
resources of the Company. Among the risks arising from these sources are the
Company's inability to conduct business in its offices or at client sites
that lose electrical power or experience failure of elevator, security, HVAC
or other building systems; downtime for billable personnel who are unable to
travel to or from engagement locations if airline or other transportation
providers cannot provide service; and disruption to the Company's business if
telephone or cellular communication is unavailable. As part of its
contingency planning effort, the Company has prepared plans to support its
critical business activities at other of its offices that may not be affected
by an infrastructure failure.
CLIENTS
In many instances the services that the Company provides to its clients
are performed at the client's site, and require the use of the client's
information systems. In the event that the Company's clients experience Year
2000 problems that impair or prevent access to clients' systems, the Company
may be impaired in its ability to perform services at those client sites that
experience such problems. The Company's technical employees might, therefore,
generate less revenue during that period.
At this time, the Company is not able to assess the ultimate risk to
the Company with respect to potential Year 2000 issues of its clients.
However, aside from its three largest clients, which account for an aggregate
of approximately 40 percent of the Company's revenue, the Company is not
heavily dependent on any other single client. The Company has been
monitoring, and will continue to monitor, all available public disclosures of
its three largest clients in order to assess their progress in addressing
their respective Year 2000 issues.
The Company's efforts to assess and address Year 2000 issues associated
with vendors, suppliers, business partners and clients are being accomplished
using the Company's internal resources. At this time, management does not
believe that the Company will incur material incremental costs in connection
with this initiative. This cost assessment is dependent in large
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part upon the information received from these third parties.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instrument subject
to such risks is the potential market value loss associated with derivative
financial instruments and additional interest expense associated with
floating-rate debt resulting from adverse changes in interest rates.
The Company uses an interest rate swap agreement to reduce exposure to
interest rate fluctuations on its debt. At September 30, 1999, the Company
had an interest rate swap agreement that effectively converted a majority of
its outstanding bank debt from floating interest rates to a fixed interest
rate of 6.3%. This interest rate swap agreement covers $35.0 million notional
amount of debt. At September 30, 1999, $52.0 million of debt was outstanding
under its bank line of credit. Since the interest rate for the portion of the
debt that is covered by the interest rate swap agreement is effectively
fixed, changes in interest rates would have no impact on future interest
expense for that portion of the debt. Therefore, there is no earnings or
liquidity risk associated with either the interest rate swap agreement or
that portion of the debt to which the swap agreement relates. The fair market
value of the interest rate swap is the estimated amount, based upon
discounted cash flows, the Company would pay or receive to terminate the swap
agreement. At September 30, 1999, a 50 basis point decrease in interest rates
would result in an approximate $600,000 increase in the cost to terminate the
swap agreement which currently can be terminated at no cost.
A portion of the Company's outstanding floating-rate debt, which totaled
$17.0 million as of September 30, 1999, is not covered by an interest rate
swap agreement. An adverse change in interest rates during the time that this
portion of the loan is outstanding would cause an increase in the amount of
interest paid. Although the Company may pay down the loan prior to the
expiration of the line of credit in November 2000, if this portion of the
Company's borrowings were to remain outstanding for the remaining term of the
borrowing agreement, a 100 basis point increase in LIBOR as of September 30,
1999, would increase by $170,000 the amount of annual interest paid on this
portion of the debt and annualized interest expense recognized in the
financial statements.
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PART II - OTHER INFORMATION
ITEM 5. - OTHER INFORMATION
Subsequent Events: As part of its October 26, 1999, earnings announcement and
related teleconference, the Company announced that it will be reengineering
its existing sales and delivery model during the fourth quarter of 1999. The
sales model will be realigned to focus on driving revenue growth from the
sales team. The delivery model will take advantage of streamlining our
operations and obtaining economies of scale with our newly implemented
enterprise wide IT systems. The efficiencies are expected to reduce the costs
required to provide our services. The reengineering plan was not finalized as
of the date of this filing. The announcement of the final plan will be
provided in a subsequent 8-K filing.
David Nolan joined the Company on July 1, 1999 in the newly created position
of President of Field Operations. Mr. Nolan brings to the Company extensive
sales, marketing and business development experience from IBM, Comdisco and,
most recently, Lucent Technologies.
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:
EXHIBIT NUMBER DESCRIPTION
10.1 Executive Employment Agreement
Between Alternative
Resources Corporation and David Nolan
Dated July 1, 1999.
10.2 Stock Option Agreement Between Alternative
Resources Corporation and David Nolan
Dated July 23, 1999.
27 Financial Data Schedule
(b) The registrant was not required to file any reports on Form 8-K for
the quarter.
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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: November 14, 1999 /s/ Steven Purcell
----------------------
Steven Purcell
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
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EXHIBIT INDEX
Exhibit
Number Description
10.1 Executive Employment Agreement Between
Alternative Resources Corporation and
David Nolan Dated July 1, 1999.
10.2 Stock Option Agreement Between Alternative
Resources Corporation and David Nolan
Dated July 23, 1999.
27 Financial Data Schedule
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