<PAGE>
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 March 31, 1998
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.)
100 Tri-State International, Suite 300, Lincolnshire, IL 60069
-------------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(847) 317-1000
(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:
15,923,922 shares of Common Stock outstanding as of May 1, 1998.
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PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 971 $ 15,330
Short-term investments 7,673 ---
Trade accounts receivable, net of allowance for
doubtful accounts 83,124 76,974
Prepaid expenses 780 1,270
Other receivables 3,281 2,852
------- ---------
Total current assets 95,829 96,426
------- ---------
Property and equipment:
Office equipment 7,783 8,852
Furniture and fixtures 2,440 2,563
Software 4,835 6,101
Leasehold improvements 730 735
------- ---------
15,788 18,251
Less accumulated depreciation and amortization (6,562) (7,201)
------- ---------
Net property and equipment 9,226 11,050
------- ---------
Other assets:
Long-term investments 502 ---
Goodwill, net of amortization 47,624 51,409
Restricted cash held in escrow 20,000 20,000
Other assets 1,269 1,337
------- ---------
Total other assets 69,395 72,746
------- ---------
Total assets $ 174,450 $ 180,222
------- ---------
------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,261 $ 4,179
Payroll and related expenses 11,843 22,027
Accrued expenses 9,357 3,155
Income taxes payable 573 932
------- ---------
Total current liabilities 30,034 30,293
Long term debt 73,500 75,000
Deferred rent payable 271 265
------- ---------
Total liabilities 103,805 105,558
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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, 15,777,564 and 15,915,410
Shares issued and outstanding at December 31,
1997 and March 31, 1998, respectively 158 159
Additional paid-in capital 23,886 25,604
Retained earnings 46,581 49,275
Unrealized gain on available-for-sale securities 399 ---
Accumulated other comprehensive income 40 45
------- ---------
71,064 75,083
Less: Treasury shares, at cost, 19,000 shares at
December 31, 1997 and March 31, 1998,
respectively 419 419
------- ---------
Total stockholders' equity 70,645 74,664
------- ---------
Total liabilities and stockholders' equity $ 174,450 $ 180,222
------- ---------
------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------
1997 1998
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(Unaudited)
<S> <C> <C>
Revenue $ 57,758 $ 82,829
Cost of services 38,348 55,167
-------- --------
Gross profit 19,410 27,662
Selling, general and administrative expenses 15,204 22,769
-------- --------
Income from operations 4,206 4,893
Other income (expense), net 417 (401)
-------- --------
Income before income taxes 4,623 4,492
Income taxes 1,849 1,798
-------- --------
Net income $ 2,774 $ 2,694
-------- --------
-------- --------
Net earnings per share amounts:
Basic $0.18 $0.17
-------- --------
-------- --------
Diluted $0.18 $0.17
-------- --------
-------- --------
Shares used to compute net
earnings per share:
Basic 15,656 15,795
-------- --------
-------- --------
Diluted 15,827 16,308
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF
COMPRESHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
1997 1998
---- ----
(Unaudited)
<S> <C> <C>
Net income (loss) $2,774 $2,694
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (7) 5
Unrealized holding gains (losses) on marketable securities:
Unrealized holding gains (losses) arising during (28) 70
the period
Less: reclassification adjustment for gains included in (2) (469)
net income
------- -------
Comprehensive income $2,737 $2,300
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</TABLE>
See accompanying Notes to Consolidated Financial Statements
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ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1998
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $2,774 $2,694
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 362 1,053
Deferred income taxes -- (160)
Allowance for doubtful accounts, net 30 71
Change in assets and liabilities:
Trade accounts receivable (6,011) 6,079
Prepaid expenses (325) (490)
Other receivables 1,437 589
Other assets (17) 544
Accounts payable (2) (4,082)
Payroll and related expenses 3,502 10,184
Accrued expenses (14) (8,008)
Income taxes payable 94 359
Deferred rent payable (87) (6)
-------- ------
Net cash provided by operating activities 1,743 8,827
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Cash flows from investing activities:
Purchases of property and equipment (793) (2,463)
Acquisitions -- (3,000)
Purchases of available-for-sale securities (3,072) (327)
Redemption of available-for-sale securities 3,945 8,103
Redemption of held-to-maturity securities 863 --
-------- ------
Net cash provided by investing activities 993 2,313
-------- ------
-------- ------
Cash flows from financing activities:
Payments received on stock options exercised 71 1,771
Proceeds from long-term debt -- 1,500
Repurchase of common stock (350) (346)
Issuance of common stock under employee stock
purchase plan 297 294
-------- ------
Net cash provided by financing activities 18 3,219
-------- ------
Net increase in cash and cash equivalents 2,754 14,359
Cash and cash equivalents at beginning of period $ 2,310 971
-------- ------
Cash and cash equivalents at end of period $ 5,604 $15,330
-------- ------
-------- ------
Supplemental disclosures:
Cash paid for interest $ -- $ 452
Cash paid for income taxes $ 246 $1,199
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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ALTERNATIVE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
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, 1998. The
interim consolidated financial statements should be read in connection with
the audited consolidated financial statements for the year ended December 31,
1997, included in the December 31, 1997 Form 10-K of Alternative Resources
Corporation (the "Company").
The Company adopted Statement of Financial Accounting Standards No.130,
"Reporting Comprehensive Income," in the first quarter of 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The accompanying financial statements of
Alternative Resources Corporation include the consolidated financial position
and results of operations of the Company and its subsidiaries with all
inter-company transactions eliminated in their entirety.
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.
INVESTMENT SECURITIES. The Company classifies all investment securities
as available-for-sale. 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 1997 amounts have been reclassified to
conform with the 1998 presentation.
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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.
On November 7, 1997, the Company acquired CGI Systems, Inc. (CGI). The
acquisition represented a strategic expansion of the Company's service
offerings in the Information Technology (IT) staffing and managed services
area that will allow for a broader base of solutions to an increasingly
sophisticated information technology marketplace. Additional services, which
the Company now provides as a result of the acquisition, include applications
support; network solutions, including network implementation and Lotus Notes
practices; applications development practices; and application consulting
practices for SAP, data warehousing and other applications.
The acquired business has been assimilated into the Company's core
business. The applications support components of the business include both
the base of business that was acquired and the incremental business
associated with the rollout of applications support services to the Company's
branch network. While the management's discussion and analysis will include
a comparison of the results of operations for the first quarter of 1998 vs.
1997, it is not possible to identify what portion of the changes relate
specifically to the base of business that was acquired, due to the
aforementioned assimilation. On a go-forward basis, the Company's service
lines will continue to be time and material staffing services,
Smartsourcing-Registered Trademark- Solutions and project-related work.
These service lines will contain the Company's traditional operations support
business as well as the newly added applications support business.
During the first quarter of 1998, the Company began the rollout of its
new applications support service offering to its branch network. This
initiative required the addition of recruiting resources in order to increase
the database of programmers as well as training and orientation expenses for
field personnel. As with past initiatives, these
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types of costs, which are included in selling, general and administrative
expenses, are incurred in advance of the revenue that is generated.
The Company continues to adapt its business to a more solutions-based
model. This is being accomplished through the Company's
Smartsourcing-Registered Trademark- Solutions service offering. Under a
Smartsourcing-Registered Trademark- arrangement, wherein the Company may take
over an entire portion of a client's 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.
As of March 31, 1998, the Company had 59 offices in the United States
and Canada, as compared to 56 offices at March 31, 1997.
FIRST QUARTER FISCAL 1998 COMPARED TO FIRST QUARTER FISCAL 1997
REVENUE. Revenue increased by 43.4% from $57.8 million in the first
quarter of 1997 to $82.8 million in the first quarter of 1998, 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, hours of service provided by new branch offices, the
addition of the CGI business, and the rollout of application support services
to the Company's branch network. The increase in average revenue per project
hour reflects demand for technical employees with higher skill levels as well
as the addition of applications support business, which carries a higher
hourly bill rate.
GROSS PROFIT. Gross profit increased by 42.5% from $19.4 million in the
first quarter of 1997 to $27.7 million in the first quarter of 1998, again
primarily as a result of an increase in hours of service provided to clients.
Gross margin decreased slightly from 33.6% of revenue in the first quarter of
1997 to 33.4% in the first quarter of 1998. The slight decrease in gross
margin was primarily due to higher benefit costs in the first quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $15.2 million in the first quarter of
1997 to $22.8 million in the first quarter of 1998. This increase in
selling, general and administration is primarily due to increased
commissions, bonuses and staffing expenses associated with revenue and
profitability growth, and an increased number of offices and their related
operating costs, the addition of the CGI business along with the related
selling, general and administrative
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expenses and the amortization of goodwill. In addition, the first quarter of
1998 was impacted by additional recruiting and training costs associated with
the aforementioned rollout of applications support services to ARC's branch
network. As a result of these rollout costs, selling, general and
administrative expenses increased as a percentage of revenue from 26.3% in
the first quarter of 1997 to 27.5% in the first quarter of 1998.
INCOME FROM OPERATIONS. Income from operations increased from $4.2
million in the first quarter of 1997, or 7.3% of total revenue, to $4.9
million in the first quarter of 1998, or 5.9% of total revenue.
OTHER INCOME (EXPENSE). Other income (expense) for the first quarter
of 1997 consisted of interest income earned on the Company's outstanding cash
and investment positions. For the first quarter of 1998, other income
(expense) consisted of interest expense related to the 3 year revolving line
of credit used to finance the acquisition of CGI. (see "Liquidity and Capital
Resources" below). Interest expense was offset by gains on the liquidation
of investments during the quarter as the Company converted its investment
positions into cash.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes was
unchanged at $1.8 million, or an effective tax rate of 40.0% for the first
quarter of 1997 and the first quarter of 1998.
NET INCOME. The Company's net income decreased from $2.8 million in the
first quarter of 1997, or 4.8% of total revenue, to $2.7 million in the first
quarter of 1998, or 3.3% of total revenue.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of 1998, cash flow generated from
operations was $8.8 million resulting primarily from earnings, increased
accrued payroll expenses, and decreases in trade accounts receivable
partially offset by decreases in accounts payable and accrued expenses.
Working capital increased from $65.8 million at December 31, 1997, to $66.1
million at March 31, 1998.
In connection with the acquisition of CGI, the Company established a $75
million, 3-year revolving line of credit that was used to finance the
acquisition. Total borrowings under the line at March 31, 1998 were $75
million. The Company believes its 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 for at least the
next twelve months.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
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In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information',
which is effective for fiscal years beginning after December 15, 1997. SFAS
No. 131 establishes standards for reporting information about operating
segments in annual financial statements and requires selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers, SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of Business Enterprise," but
retains the requirement to report information about major customers.
The Company is currently evaluating the impact this statement will have
on its financial statements.
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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
27 Financial Data Schedule
(b) Form 8-K/A dated November 7, 1997 was filed January 21, 1998, to
provide required financial statements of CGI Systems, Inc. and provide
related financial information.
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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: May 15, 1998 /s/ Bradley K. Lamers
-------------------------------
Bradley K. Lamers
Vice President, Chief Financial Officer,
Secretary, and Treasurer
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S 10-Q FOR THE THREE
MONTH PERIOD ENDED MARCH 31,1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 15,530
<SECURITIES> 0
<RECEIVABLES> 76,974
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 96,426
<PP&E> 18,251
<DEPRECIATION> 7,201
<TOTAL-ASSETS> 180,222
<CURRENT-LIABILITIES> 30,293
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 74,505
<TOTAL-LIABILITY-AND-EQUITY> 180,222
<SALES> 0
<TOTAL-REVENUES> 82,829
<CGS> 0
<TOTAL-COSTS> 55,167
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,280
<INCOME-PRETAX> 4,492
<INCOME-TAX> 1,798
<INCOME-CONTINUING> 2,694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,694
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,064
<SECURITIES> 19,370
<RECEIVABLES> 39,188
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 66,278
<PP&E> 6,000
<DEPRECIATION> 2,738
<TOTAL-ASSETS> 70,651
<CURRENT-LIABILITIES> 11,971
<BONDS> 0
0
0
<COMMON> 157
<OTHER-SE> 58,265
<TOTAL-LIABILITY-AND-EQUITY> 70,651
<SALES> 0
<TOTAL-REVENUES> 57,758
<CGS> 0
<TOTAL-COSTS> 38,348
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,623
<INCOME-TAX> 1,849
<INCOME-CONTINUING> 2,774
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,774
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
