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, 1997
Commission file number 0-23940
ALTERNATIVE RESOURCES CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 38-2791069
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Tri-State International, Suite 300, Lincolnshire, IL 60069
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(Address of principal executive offices) (Zip code)
(847) 317-1000
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(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:
15,748,627 shares of Common Stock outstanding as of November 7, 1997.
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
December 31, September 30,
1996 1997
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(Unaudited)
Current assets:
Cash and cash equivalents $ 2,310 $ 1,906
Short-term investments 20,868 16,718
Trade accounts receivable, net of allowance for doubtful accounts 33,207 47,570
Prepaid expenses 455 663
Other receivables 3,363 1,742
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Total current assets 60,203 68,599
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Property and equipment:
Office equipment 3,103 4,583
Furniture and fixtures 1,427 1,760
Software 420 2,470
Leasehold improvements 307 358
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5,257 9,171
Less accumulated depreciation and amortization (2,377) (3,562)
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Net property and equipment 2,880 5,609
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Other assets:
Long-term investments 1,026 3,493
Other assets 294 300
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Total other assets 1,320 3,793
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Total assets $ 64,403 $ 78,001
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 324 $ 288
Payroll and related expenses 5,969 9,615
Accrued expenses 1,632 1,136
Income taxes payable 466 367
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Total current liabilities 8,391 11,406
Deferred rent payable 345 280
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Total liabilities 8,736 11,686
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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, 15,651,391 and 15,748,995
shares issued and outstanding at December 31, 1996 and September 30, 1997, respectively 157 157
Additional paid-in capital 23,003 23,397
Retained earnings 32,492 43,060
Unrealized gain (loss) on available-for-sale securities (28) 57
Cumulative translation adjustment 43 63
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55,667 66,734
Less: Treasury shares, at cost, none and 19,000 shares at December 31, 1996 and
September 30, 1997, respectively -- (419)
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Total stockholders' equity 55,667 66,315
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Total liabilities and stockholders' equity $ 64,403 $ 78,001
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See accompanying Notes to Consolidated Financial Statements
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ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
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1996 1997 1996 1997
------- -------- -------- -------
(Unaudited) (Unaudited)
Revenue $49,790 $66,586 $144,298 $187,147
Cost of services 30,889 43,233 90,007 122,520
------- ------- -------- --------
Gross profit 18,901 23,353 54,291 64,627
Selling, general and administrative expenses 13,096 16,786 38,520 48,267
------- ------- -------- --------
Income from operations 5,805 6,567 15,771 16,360
Other income, net 276 206 778 930
------- ------- -------- --------
Income before income taxes 6,081 6,773 16,549 17,290
Income taxes 2,542 2,574 6,917 6,722
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Net income $3,539 $4,199 $9,632 $10,568
------- ------- -------- --------
------- ------- -------- --------
Primary $0.22 $0.26 $0.60 $0.67
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------- ------- -------- --------
Fully diluted $0.22 $0.26 $0.60 $0.67
------- ------- -------- --------
------- ------- -------- --------
Weighted average common and common
equivalent shares outstanding:
Primary 16,104 16,326 16,115 15,849
------- ------- -------- --------
------- ------- -------- --------
Fully diluted 16,107 16,388 16,128 15,869
------- ------- -------- --------
------- ------- -------- --------
See accompanying Notes to Consolidated Financial Statements
Page 3
ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
----------------------
1996 1997
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(Unaudited)
Cash flows from operating activities:
Net income $ 9,632 $ 10,568
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 623 1,186
Allowance for doubtful accounts, net (226) 90
Change in assets and liabilities:
Trade accounts receivable (4,271) (14,453)
Prepaid expenses 384 (208)
Other receivables (836) 1,621
Other assets 39 13
Accounts payable (161) (36)
Payroll and related expenses 2,351 3,646
Accrued expenses 501 (496)
Income taxes payable (383) (99)
Deferred rent payable 42 (65)
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Net cash provided by operating activities 7,695 1,767
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Cash flows from investing activities:
Purchases of property and equipment (1,137) (3,914)
Purchases of available-for-sale securities (18,758) (16,280)
Redemption of available-for-sale securities -- 15,613
Redemption of held-to-maturity securities 11,611 2,435
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Net cash used in investing activities (8,284) (2,146)
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Cash flows from financing activities:
Payments received on stock options exercised 2,923 548
Repurchase of common stock (1,131) (1,445)
Issuance of common stock under employee stock
purchase plan 961 872
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Net cash provided by (used in) financing activities 2,753 (25)
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Net increase (decrease) in cash and cash equivalents 2,164 (404)
Cash and cash equivalents at beginning of period 4,639 2,310
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Cash and cash equivalents at end of period $ 6,803 $ 1,906
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Supplemental disclosures:
Cash paid for income taxes $ 7,718 $ 5,298
See accompanying Notes to Consolidated Financial Statements
Page 4
ALTERNATIVE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
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, 1997. The
interim consolidated financial statements should be read in connection with
the audited consolidated financial statements for the year ended December 31,
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The operations of Alternative Resources
Corporation (the "Company") are conducted through a parent holding company
and two operating subsidiaries. The accompanying financial statements
include the consolidated financial position and results of operations of the
Company and its subsidiaries with all intercompany transactions eliminated in
their entirety.
COMPUTATION OF EARNINGS PER SHARE. Earnings per common and common
equivalent share is based on the average number of common shares and dilutive
common share equivalents outstanding for the three month and nine month
periods ended September 30, 1996 and 1997. The amount of dilution is
computed using the treasury stock method.
INVESTMENT SECURITIES. The Company classifies all investment securities
held as of December 31, 1995 as held-to-maturity securities. As
held-to-maturity securities mature, the proceeds of such securities are
reinvested in available-for-sale securities. The Company reports
available-for-sale securities at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity.
RECLASSIFICATION. Certain 1996 amounts have been reclassified to conform
with the 1997 presentation.
Page 5
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The Company has experienced substantial growth in revenue driven by
industry trends toward component-based outsourcing of Information Services
operations, increased penetration of existing clients, expansion into new
markets, increased productivity of existing branch offices, the opening of
new branch offices and the introduction of new services. Essentially all of
the Company's revenue is generated from technical resource services that
offer the benefits of outsourcing, while allowing Information Services
operations managers to retain strategic control of their operations.
The Company continues to adapt its business to a more solution-based
model. This is being accomplished through the Company's
Smartsourcing-Registered Trademark- Solutions service offering and to a
lesser extent, through recently formed alliances with leading technology
providers.
Smartsourcing-Registered Trademark- Solutions are becoming a more
significant part of the Company's revenue base. Under a
Smartsourcing-Registered Trademark- arrangement, wherein the Company may take
over an entire portion of a client's Information Technology (IT) operations,
the Company may provide for flexibility in invoicing arrangements other than
more traditional hourly billing. Such arrangements may include fixed price
or per unit billing, as well as commitments made by the Company to meet
specific service levels. Management believes that Smartsourcing-Registered
Trademark-revenue is an important measure of clients' confidence and
willingness to engage the Company to provide more comprehensive IT staffing
solutions.
During 1996, the Company embarked upon two significant initiatives, the
aforementioned Smartsourcing-Registered Trademark- Solutions service offering
and its General Business program. The General Business program, formerly
known as the Company's Middle Market program, is a sales initiative which
targets midsize customers in the $50 to $500 million revenue range. During
the first nine months of 1997, the Company continued to invest in these key
initiatives to drive future growth.
As of September 30, 1997, the Company had 57 offices in the United States
and Canada, as compared to 49 offices at September 30, 1996.
Page 6
THIRD QUARTER FISCAL 1997 COMPARED TO THIRD QUARTER FISCAL 1996
REVENUE. Revenue increased by 33.7% from $49.8 million in the third
quarter of 1996 to $66.6 million in the third quarter of 1997, primarily as a
result of an increase in the hours of service provided and, to a lesser
extent, from an increase in the average revenue per project hour. The
increase in hours of service was primarily due to increased productivity of
existing branch offices and hours of service provided by new branch offices.
The increase in average revenue per project hour reflects demand for
technical employees with higher skill levels as well as the impact of a price
increase in 1997.
GROSS PROFIT. Gross profit increased by 23.6% from $18.9 million in the
third quarter of 1996 to $23.4 million in the third quarter of 1997, again
primarily as a result of an increase in hours of service provided to clients.
Gross margin decreased from 38.0% of revenue in the third quarter of 1996 to
35.1% in the third quarter of 1997. During the third quarter of 1997, the
Company's gross margin was impacted primarily by more favorable pricing to
some of its larger accounts. The Company offers its largest clients volume
discounts from list prices in order to encourage increased and continued
usage of Company services. The Company believes these discounts have
contributed significantly to its revenue growth. In addition, the Company
believes its larger account relationships remain integral to its effort to
sell value-added services and develop new customer relationships.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $13.1 million in the third quarter of
1996 to $16.8 million in the third quarter of 1997, primarily due to
increased commissions, bonuses and staffing expenses associated with revenue
and profitability growth, expenses associated with the General Business
initiative, investment in the infrastructure to support sales and delivery
components of the Smartsourcing-Registered Trademark- Solutions program and
an increased number of offices and their related operating costs. Selling,
general and administrative expenses decreased as a percentage of revenue from
26.3% in the third quarter of 1996 to 25.2% in the third quarter of 1997, as
these expenses are leveraged over an expanding revenue base.
INCOME FROM OPERATIONS. Income from operations increased from $5.8
million in the third quarter of 1996, or 11.7% of total revenue, to $6.6
million in the third quarter of 1997, or 9.9% of total revenue.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
increased from $2.5 million, or an effective tax rate of 41.8%, in the third
quarter of 1996 to $2.6 million, an effective tax rate of 38.0%, in the third
quarter of 1997. The decrease in the effective tax rate is the result of a
tax planning initiative implemented in 1996.
Page 7
NET INCOME. The Company's net income increased from $3.5 million in the
third quarter of 1996, or 7.1% of total revenue, to $4.2 million in the third
quarter of 1997, or 6.3% of total revenue.
FIRST NINE MONTHS FISCAL 1997 COMPARED TO FIRST NINE MONTHS FISCAL 1996
REVENUE. Revenue increased by 29.7% from $144.3 million in the first
nine months of 1996 to $187.1 million in the first nine months of 1997,
primarily as a result of an increase in the hours of service provided and, to
a lesser extent, from an increase in the average revenue per project hour.
The increase in hours of service was primarily due to increased productivity
of existing branch offices and hours of service provided by new branch
offices. The increase in average revenue per project hour reflects demand
for technical employees with higher skill levels as well as the impact of a
price increase in 1997.
GROSS PROFIT. Gross profit increased by 19.0% from $54.3 million in the
first nine months of 1996 to $64.6 million in the first nine months of 1997,
again primarily as a result of an increase in hours of service provided to
clients. Gross margin decreased from 37.6% of revenue in the first nine
months of 1996 to 34.5% in the first nine months of 1997. During the first
nine months of 1997, the Company's gross margin was impacted primarily by
more favorable pricing to some of its larger accounts. The Company offers
its largest clients volume discounts from list prices in order to encourage
increased and continued usage of Company services. The Company believes
these discounts have contributed significantly to its revenue growth. In
addition, the Company believes its larger account relationships remain
integral to its effort to sell value-added services and develop new customer
relationships.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $38.5 million in the first nine months
of 1996 to $48.3 million in the first nine months of 1997, primarily due to
increased commissions, bonuses and staffing expenses associated with revenue
and profitability growth, expenses associated with the General Business
initiative, investment in the infrastructure to support sales and delivery
components of the Smartsourcing-Registered Trademark- Solutions program and
an increased number of offices and their related operating costs. Selling,
general and administrative expenses decreased as a percentage of revenue from
26.7% in the first nine months of 1996 to 25.8% in the first nine months of
1997, as these expenses are leveraged over an expanding revenue base.
INCOME FROM OPERATIONS. Income from operations increased from $15.8
million in the first nine months of 1996, or 10.9% of total revenue, to $16.4
million in the first nine months of 1997, or 8.7% of total revenue.
Page 8
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
decreased from $6.9 million, or an effective tax rate of 41.8%, in the first
nine months of 1996 to $6.7 million, an effective tax rate of 38.9%, in the
first nine months of 1997. The decrease in the effective tax rate is the
result of a tax planning initiative implemented in 1996.
NET INCOME. The Company's net income increased from $9.6 million in the
first nine months of 1996, or 6.7% of total revenue, to $10.6 million in the
first nine months of 1997, or 5.6% of total revenue.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997, cash flow generated from operations
was $1.8 million resulting primarily from earnings, increased accrued payroll
expenses, and decreases in other receivables partially offset by a
significant increase in accounts receivable. The increase in accounts
receivable reflects the increased volume of business and the increased number
of clients requesting monthly instead of weekly billing during 1997. Working
capital increased from $51.8 million at December 31, 1996, to $57.2 million
at September 30, 1997.
Subsequent to September 30, 1997, the Company acquired CGI Systems, Inc.,
a majority-owned subsidiary of IBM Corporation, in a cash for stock
transaction. CGI Systems, Inc. provides a range of information technology
services including IT supplemental staffing; network solutions, including
network implementation and Lotus Notes practices; applications development
practices; and applications consulting practices for SAP, data warehousing
and other applications. In order to fund this acquisition, the Company
opened a 3 year revolving line of credit in the amount of $75 million. A
substantial portion of the line of credit will be used to pay for the initial
purchase price. Management believes that the post-acquisition cash balances
and funds provided by operations will be sufficient to finance continued
expansion of its office network and to meet all of its anticipated cash
requirements, including interest payments, for the next twelve months.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," was issued in February 1997. The Company is required to adopt the
new standard for periods ending after December 15, 1997. All prior period
earnings per share data presented must be restated after adoption. The
standard establishes new methods for computing and presenting earnings per
share and replaces the presentation of primary and fully-diluted earnings per
share with basic and diluted earnings per share. The new method for
calculating diluted earnings per share under SFAS No. 128 does not have an
Page 9
impact on the fully-diluted earnings per share presented for the 3 and 9
month periods ended September 30, 1996 and 1997.
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997.
The Company is required to adopt the new standard for periods beginning after
December 15, 1997. This statement establishes standards for reporting
comprehensive income and its components in a full set of general purpose
financial statements. The standard requires all items that are required to
be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed in equal
prominence with the other financial statements. The standard is not expected
to have a material impact on the Company's current presentation of income.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. The Company is required to adopt the
disclosures of SFAS No. 131 in the December 31, 1998 annual financial
statements. This statement establishes standards for the way companies are
to report information about operating segments. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Company is currently evaluating the impact
of this standard on its financial statements.
Page 10
PART II - OTHER INFORMATION
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
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27 Financial Data Schedule
(b) The registrant was not required to file any reports on Form 8-K for
the quarter.
Page 11
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, 1997 /s/ Bradley K. Lamers
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Bradley K. Lamers
Vice President, Chief Financial Officer,
Secretary, and Treasurer
Page 12
EXHIBIT INDEX
Exhibit
Number Description
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27 Financial Data Schedule
Page 13