**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q/A**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended June 30, 2003**

 

**Commissionfile number 0-23940**

 

**ALTERNATIVERESOURCES CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                     |   | **38-2791069**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  YES  ý  NO  o.

 

Indicate by check markwhether the registrant (1) is an accelerated filer (as defined in Rule 12b-2 ofthe Act). YES  o  NO  ý.

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

 

17,117,019 shares of the registrant’s commonstock were outstanding as of August 8, 2003.

 

 

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**EXPLANATORY****NOTE**

 

This Form 10-Q/A of Alternative Resources Corporation is being filedfor the purpose of amending and restating Items 1, 2 and 6 of our Form 10-Q forthe quarter ended June 30, 2003, filed August 14, 2003, to reflect therestatement of our Consolidated Financial Statements for the quarters endedJune 30, 2003 and 2002.  We restated ourConsolidated Financial Statements as of and for the quarters ended June 30,2003 and 2002 to properly classify our revolving line of credit with FleetCapital at June 30, 2003 and 2002 as a current liability.  Prior to the filing of our June 30, 2003Form 10-Q, the Company’s management believed that the classification of thisrevolving line of credit as long-term debt was appropriate.  However, the Company subsequently determinedthat Emerging Issues Task Force (EITF) Issue No. 95-22, “Balance SheetClassification of Borrowings Outstanding under Revolving Credit Agreements thatinclude both a Subjective Acceleration Clause and a Lock-Box Arrangement,”should be applied and that this revolving line of credit should be classifiedas a current liability because it meets the criteria of EITF No. 95-22.  The information in this Form 10-Q/A does notreflect any subsequent information or events or otherwise amend the Form 10-Qexcept as noted above.  Accordingly, theamendments set forth in this Form 10-Q/A relate solely to such restatement.  **This restatement had no impact on our results ofoperations or loss per share for the quarters ended June 30, 2003 and 2002.**

 

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**ALTERNATIVE RESOURCES CORPORATION**

**FORM 10-Q**

**INDEX**

 
| PART I. FINANCIAL  INFORMATION                                                                                                 |
|--------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                           |
| Item 1. Financial Statements.                                                                                                  |
|                                                                                                                           |
| Consolidated Balance Sheets  at June 30, 2003 (Restated) (Unaudited) and December 31, 2002 (Restated)                          |
|                                                                                                                           |
| Consolidated  Statements of Operations for the three and six months ended June 30, 2003 and  2002 (Unaudited)                  |
|                                                                                                                           |
| Consolidated Statements of  Comprehensive Income (Loss) for the three and six months ended June 30, 2003  and 2002 (Unaudited) |
|                                                                                                                           |
| Consolidated  Statements of Cash Flows for the six months ended June 30, 2003 and 2002  (Unaudited)                            |
|                                                                                                                           |
| Notes to  Consolidated Financial Statements (Unaudited)                                                                        |
|                                                                                                                           |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations.                          |
|                                                                                                                           |
| PART II. OTHER INFORMATION                                                                                                     |
|                                                                                                                           |
| Item 6.  Exhibits and Reports on Form 8-K.                                                                                     |
|                                                                                                                           |
| SIGNATURES.                                                                                                                    |

 

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##### **PARTI - FINANCIAL INFORMATION**

**Item1. - Financial Statements**

**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

(In thousands,except share data)

 
|                                                                                                                                                      |   | **December  31,  2002** |   | **June 30,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------------------|--------|
|                                                                                                                                                      |   |                    |   | **(Unaudited)**    |   |
|                                                                                                                                                      |   | **(Restated)**          |   | **(Restated)**     |   |
| **ASSETS**                                                                                                                                                |   |                    |   |               |   |
| **Current  Assets:**                                                                                                                                      |   |                    |   |               |   |
| Cash  and cash equivalents                                                                                                                                |   | $                       | 54     |               | $      | 64 |   |
| Trade  accounts receivable, net of allowance for doubtful accounts                                                                                        |   | 34,497                  |   | 24,627             |   |
| Prepaid  expenses                                                                                                                                         |   | 1,787                   |   | 1,614              |   |
| Other  receivables                                                                                                                                        |   | 272                     |   | 856                |   |
| Total  current assets                                                                                                                                     |   | 36,610                  |   | 27,161             |   |
| **Property  and Equipment:**                                                                                                                              |   |                    |   |               |   |
| Office  equipment                                                                                                                                         |   | 8,319                   |   | 8,407              |   |
| Furniture  and fixtures                                                                                                                                   |   | 2,389                   |   | 2,388              |   |
| Software                                                                                                                                                  |   | 19,726                  |   | 19,786             |   |
| Leasehold  improvements                                                                                                                                   |   | 2,012                   |   | 2,004              |   |
|                                                                                                                                                      |   | 32,446                  |   | 32,585             |   |
| Less  accumulated depreciation and amortization                                                                                                           |   | (21,448                 | )      | (23,301            | )      |
| Net  property and equipment                                                                                                                               |   | 10,998                  |   | 9,284              |   |
| **Other  Assets:**                                                                                                                                        |   |                    |   |               |   |
| Goodwill                                                                                                                                                  |   | 2,723                   |   | 2,723              |   |
| Other  assets                                                                                                                                             |   | 2,399                   |   | 2,088              |   |
| Total  other assets                                                                                                                                       |   | 5,122                   |   | 4,811              |   |
| Total  assets                                                                                                                                             |   | $                       | 52,730 |               | $      | 41,256 |   |
|                                                                                                                                                      |   |                    |   |               |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                           |   |                    |   |               |   |
|                                                                                                                                                      |   |                    |   |               |   |
| **Current  Liabilities:**                                                                                                                                 |   |                    |   |               |   |
| Cash  overdraft                                                                                                                                           |   | $                       | 3,202  |               | $      | 3,202 |   |
| Short-term  debt                                                                                                                                          |   | 18,501                  |   | 12,651             |   |
| Accounts  payable                                                                                                                                         |   | 12,236                  |   | 11,467             |   |
| Payroll  and related expenses                                                                                                                             |   | 5,920                   |   | 5,527              |   |
| Accrued  expenses                                                                                                                                         |   | 2,340                   |   | 2,822              |   |
| Accrued  restructuring and other charges                                                                                                                  |   | 4,922                   |   | 3,683              |   |
| Total  current liabilities                                                                                                                                |   | 47,121                  |   | 39,352             |   |
| Long-term  debt                                                                                                                                           |   | 8,606                   |   | 9,825              |   |
| Other  liabilities                                                                                                                                        |   | 384                     |   | 385                |   |
| Total  liabilities                                                                                                                                        |   | 56,111                  |   | 49,562             |   |
| **Stockholders’  Equity (Deficit):**                                                                                                                 |   |                    |   |               |   |
| Preferred  stock ($.01 par value, 1,000,000 shares authorized; none issued and  outstanding)                                                              |   | —                  |   | —             |   |
| Common  stock ($.01 par value, 50,000,000 shares authorized; 17,702,819 shares issued  and 17,117,019 outstanding at December 31, 2002 and June 30, 2003) |   | 178                     |   | 178                |   |
| Additional  paid-in capital                                                                                                                               |   | 30,695                  |   | 30,764             |   |
| Accumulated  other comprehensive loss                                                                                                                     |   | (64                     | )      | (150               | )      |
| Accumulated  deficit                                                                                                                                      |   | (29,393                 | )      | (34,301            | )      |
|                                                                                                                                                      |   | 1,416                   |   | (3,509             | )      |
| Less:  Treasury stock, at cost (585,800 shares)                                                                                                           |   | (4,797                  | )      | (4,797             | )      |
| Total  stockholders’ deficit                                                                                                                         |   | (3,381                  | )      | (8,306             | )      |
| Total  liabilities and stockholders’ deficit                                                                                                         |   | $                       | 52,730 |               | $      | 41,256 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands,except per share data)

 
|                                        |   | **Three  Months  Ended June 30,** |   | **Six Months**

**Ended June  30,** |   |
|---------------------------------------------|--------|-----------------------------------|--------|-------------------------------------|--------|
|                                        |   | **2002**                          |   | **2003**                            |   | **2002** |   | **2003** |   |
|                                        |   | **(Unaudited)**                   |   | **(Unaudited)**                     |   |
| Revenue                                     |   | $                                 | 38,403 |                                | $      | 33,887 |   | $ | 79,162 |   | $ | 70,732 |   |
| Cost  of services                           |   | 27,830                            |   | 26,287                              |   | 57,166 |   | 53,955 |   |
| Gross  profit                               |   | 10,573                            |   | 7,600                               |   | 21,996 |   | 16,777 |   |
| Operating  expenses                         |   |                              |   |                                |   |   |   |   |   |
| Selling,  general and administrative        |   | 10,452                            |   | 8,751                               |   | 21,362 |   | 17,671 |   |
| Depreciation  and amortization              |   | 1,058                             |   | 924                                 |   | 2,204 |   | 1,853 |   |
| Other  charges                              |   | 1,100                             |   | —                              |   | 1,100 |   | — |   |
| Total  operating expenses                   |   | 12,610                            |   | 9,675                               |   | 24,666 |   | 19,524 |   |
| Loss  from operations                       |   | (2,037                            | )      | (2,075                              | )      | (2,670 | ) | (2,747 | ) |
| Other  expense, net                         |   | (928                              | )      | (1,178                              | )      | (1,739 | ) | (2,160 | ) |
| Loss  before income taxes                   |   | (2,965                            | )      | (3,253                              | )      | (4,409 | ) | (4,907 | ) |
|                                        |   |                              |   |                                |   |   |   |   |   |
| Income  tax expense (benefit)               |   | (1,275                            | )      | 1                                   |   | (2,225 | ) | 1 |   |
|                                        |   |                              |   |                                |   |   |   |   |   |
| Net  loss                                   |   | $                                 | (1,690 | )                                   | $      | (3,254 | ) | $ | (2,184 | ) | $ | (4,908 | ) |
|                                        |   |                              |   |                                |   |   |   |   |   |
| Net  loss per share:                        |   |                              |   |                                |   |   |   |   |   |
| Basic  and diluted                          |   | $                                 | (0.10  | )                                   | $      | (0.19 | ) | $ | (0.13 | ) | $ | (0.29 | ) |
|                                        |   |                              |   |                                |   |   |   |   |   |
| Shares  used to compute net loss per share: |   |                              |   |                                |   |   |   |   |   |
| Basic  and diluted                          |   | 17,117                            |   | 17,117                              |   | 17,072 |   | 17,117 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**ALTERNATIVERESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF**

**COMPREHENSIVE INCOME (LOSS)**

(In thousands)

 
|                                                 |   | **Three  Months Ended June 30,** |       | **Six Months  Ended June 30,** |       |
|------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                                 |   | **2002**                         |       | **2003**                       |       | **2002** |   | **2003** |   |
|                                                 |   | **(Unaudited)**                  |       | **(Unaudited)**                |       |
| Net  loss                                            |   | $                                | (1,690     | )                              | $          | (3,254 | ) | $ | (2,184 | ) | $ | (4,908 | ) |
| Other  comprehensive income (loss):                  |   |                             |       |                           |       |   |   |   |   |
| Foreign  currency translation adjustment, net of tax |   | (18                              | )          | 51                             |       | (11 | ) | 86 |   |
| Other  comprehensive income (loss)                   |   | (18                              | )          | 51                             |       | (11 | ) | 86 |   |
|                                                 |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Comprehensive  loss                                  |   | $                                | (1,708     | )                              | $          | (3,203 | ) | $ | (2,195 | ) | $ | (4,822 | ) |

 

See accompanyingnotes to consolidated financial statements.

 

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**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In thousands)

 
|                                                                                       |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                       |   | **2002**                        |   | **2003** |   |
|                                                                                       |   | **(Unaudited)**                 |   |
| **Cash  flows from operating activities:**                                                 |   |                            |   |   |   |
| Net  loss                                                                                  |   | $                               | (2,184 | ) | $ | (4,908 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities: |   |                            |   |   |   |
| Depreciation  and amortization                                                             |   | 2,204                           |   | 1,853 |   |
| Provision  for doubtful accounts                                                           |   | 57                              |   | 290 |   |
| Deferred  compensation on restricted shares                                                |   | 97                              |   | — |   |
| Non-cash  interest expense from deferred financing costs                                   |   | 206                             |   | 293 |   |
| Non-cash  interest expense from accretion of warrants                                      |   | 173                             |   | 241 |   |
| Change  in assets and liabilities:                                                         |   |                            |   |   |   |
| Trade  accounts receivable                                                                 |   | 3,240                           |   | 9,580 |   |
| Prepaid  expenses                                                                          |   | 11                              |   | 173 |   |
| Other  receivables                                                                         |   | (692                            | )      | (584 | ) |
| Other  assets                                                                              |   | (1,148                          | )      | 87 |   |
| Accounts  payable                                                                          |   | (521                            | )      | (769 | ) |
| Payroll  and related expenses                                                              |   | (787                            | )      | (393 | ) |
| Accrued  expenses and other liabilities                                                    |   | 1,173                           |   | (757 | ) |
| Net  cash provided by operating activities                                                 |   | 1,829                           |   | 5,106 |   |
|                                                                                       |   |                            |   |   |   |
| **Cash  flows from investing activities:**                                                 |   |                            |   |   |   |
| Purchases  of property and equipment                                                       |   | (183                            | )      | (139 | ) |
| Net  cash used in investing activities                                                     |   | (183                            | )      | (139 | ) |
|                                                                                       |   |                            |   |   |   |
| **Cash  flows from financing activities:**                                                 |   |                            |   |   |   |
| Proceeds  from short-term debt                                                             |   | 118,150                         |   | 106,935 |   |
| Payments  on short-term debt                                                               |   | (126,501                        | )      | (111,806 | ) |
| Proceeds  from issuance of debt and warrants                                               |   | 10,000                          |   | — |   |
| Cash  paid for cancellation of stockholder rights plan                                     |   | (171                            | )      | — |   |
| Proceeds  from issuance of shares under the employee stock purchase plan                   |   | 55                              |   | — |   |
| Cash  overdraft                                                                            |   | (3,239                          | )      | — |   |
| Net  cash used in financing activities                                                     |   | (1,706                          | )      | (4,871 | ) |
| Effect  of exchange rate changes                                                           |   | (14                             | )      | (86 | ) |
|                                                                                       |   |                            |   |   |   |
| Net  (decrease) increase in cash and cash equivalents                                      |   | (74                             | )      | 10 |   |
| Cash  and cash equivalents at beginning of period                                          |   | 127                             |   | 54 |   |
| Cash  and cash equivalents at end of period                                                |   | $                               | 53     |   | $ | 64 |   |
|                                                                                       |   |                            |   |   |   |
| Supplemental  disclosures of cash flow information:                                        |   |                            |   |   |   |
| Cash  paid for interest                                                                    |   | $                               | 784    |   | $ | 574 |   |
| Cash  paid for income taxes                                                                |   | 30                              |   | 3 |   |
|                                                                                       |   |                            |   |   |   |
| Cash  refunds received for income taxes                                                    |   | 1,621                           |   | 65 |   |
| Revaluation  of warrants                                                                   |   | 3⁄4                          |   | 69 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**ALTERNATIVE RESOURCES CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

**1.****                    Basisof Presentation**

 

The interim consolidated financial statementspresented are unaudited, but in the opinion of management, have been preparedin conformity with accounting principles generally accepted in the UnitedStates of America applied on a basis consistent with those of the annualfinancial statements.  Such interimconsolidated financial statements reflect all adjustments (consistingprincipally of normal recurring accruals) necessary for a fair presentation ofthe financial position and the results of operations for the interim periodspresented.  The results of operationsfor the interim periods presented are not necessarily indicative of the resultsto be expected for any other interim period and the year ending December 31,2003.  The interim consolidated financialstatements should be read in connection with the audited consolidated financialstatements for the year ended December 31, 2002, included in the 2002 Form10-K/A of Alternative Resources Corporation (“ARC” or the “Company”).

 

**2.****                    Computationof Earnings (Loss) per Share**

 

Basic earnings (loss) per share is based on theweighted average number of common shares outstanding for the period.  Diluted earnings (loss) per share is basedon the weighted average number of common shares outstanding and includes thedilutive effect of unexercised stock options and warrants which arein-the-money using the treasury stock method. Dilutive securities have not been included in the weighted averageshares used for the calculation of earnings per share in periods of net lossbecause the effect of such securities would be anti-dilutive. At June 30, 2003and 2002, potentially dilutive securities consisted of options to purchase 4.0million and 2.5 million shares of common stock, respectively.  In addition, the Company issued 11.0 millionwarrants to purchase common stock in connection with its debt refinancingdescribed in note 4.  These warrants arealso potentially dilutive securities as of June 30, 2003 and 2002.

 

**3.****                    RecentlyAdopted Accounting Pronouncements**

 

In July 2002, the FASB issued SFAS No. 146, “Accountingfor Costs Associated with an Exit or Disposal Activities,” (“SFAS 146”) whichsupercedes EITF No. 94-3 “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (Including CertainCosts Incurred in a Restructuring),” which was effective for exit or disposalactivities initiated after December 31, 2002. SFAS 146 requires that a company record a liability when that liabilityis incurred and can be measured at fair value. Incurred is defined as when an event obligates the entity to transfer oruse assets.  The recognition oftermination benefits to employees will depend on whether additional service isrequired of the employee.  If theemployee must continue to provide service for a period of at least a minimum ofsixty days in order to be eligible for the benefits (called a “minimumretention period”), the fair value of the benefits should be accrued over thetime the employee renders the service. If future service beyond a minimum retention period is not required, theliability for the fair value of the benefits should be recognized at the timethe company communicates the arrangement to the employees.  The Company has adopted this statement inthe year beginning January 1, 2003 and it did not have a material effect on theCompany’s consolidated financial position or results of operations.

 

In November 2002, the FASBissued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Guarantees of Indebtedness toOthers.” This interpretation expands the disclosures to be made by a guarantorin its financial statements about its obligations under certain guarantees andrequires the guarantor to recognize a liability for the fair value of anobligation assumed under guarantee. In general, FIN 45 applies to contracts orindemnification agreements that contingently require that the guarantor makepayments to the guaranteed party. The disclosure requirements of FIN 45 areeffective as of December 31, 2002, and require disclosure of the nature ofthe guarantee, the maximum potential amount of future payments that theguarantor could be required to make under the guarantee, and the current amountof the liability, if any, for the guarantor’s obligations under the guarantee.The recognition requirements of FIN45 are to be applied prospectively to guarantees issued or modified afterDecember 31, 2002. The Company does not have any guarantees and thus therequirements of FIN 45 did not have an impact on its consolidated financialstatements.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation–Transition and Disclosure–an Amendment of FASBStatement No. 123.” (“SFAS 148”) This Statement amends FASB StatementNo. 123, “Accounting for Stock-Based Compensation”, to provide alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. In addition, thisstatement amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting

 

8

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for stock-based employee compensation and theeffect of the method used on reported results. The Company has elected not tochange to the fair value based method of accounting for stock-basedemployee compensation. The Company accounts for employee stock options underAccounting Principles Board (APB) Opinion No. 25, “Accounting for StockIssued to Employees,” under which no compensation cost was recognized by us andprovides the disclosures required by SFAS No. 123 and SFAS No. 148.

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidationof Variable Interest Entities” to provide new guidance with respect to theconsolidation of certain previously unconsolidated entities, including specialpurpose entities. The adoption of this interpretation in 2003 did not have animpact on the Company’s consolidated financial position or results of operations.

 

InApril 2003, the FASB issue SFAS No. 149, “Amendment of Statement No. 133 onDerivative Instruments and Hedging Activities.”  This Statement amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts and for hedging activities under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities.”  This Statement is primarily effective forcontracts and hedging relationships entered into or modified after June 30,2003, except for those provisions of this Statement that relate to SFAS No.133.  Implementation issues that havebeen effective for fiscal quarters that began prior to June 15, 2003, shouldcontinue to be applied in accordance with their respective effectivedates.  The Company does not believethat the adoption of SFAS No. 149 will have a material effect on theconsolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.”  This statementestablishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  This statement is effective for financialinstruments entered into or modified after May 31, 2003 and otherwise iseffective at the beginning of the first interim period beginning after June 15,2003.  The Company will assess theimpact of SFAS No. 150 on the consolidated financial statements in the thirdquarter of 2003.

 

##### **4.**                    Borrowings

** **

**4a.     Restatement**

** **

We have restated ourConsolidated Financial Statements for the quarters ended June 30, 2003 and 2002to properly classify our revolving credit facility with Fleet Capital as acurrent liability in accordance with EITF No. 95-22, “Balance SheetClassification of Borrowings Outstanding under Revolving Credit Agreements thatinclude both a Subjective Acceleration Clause and a Lock-Box Arrangement.”  This restatement had no impact on our resultsof operations or loss per share for the quarters ended June 30, 2003 and 2002.

 

The restatement had thefollowing impact to our consolidated balance sheets:

 
|                       |   | **As  reported** |   | **As  restated** |   |
|----------------------------|--------|------------------|--------|------------------|--------|
| **June  30, 2003**         |   |             |   |             |   |
| Short-term debt            |   | $                | — |             | $      | 12,651 |   |
| Total current  liabilities |   | 26,701           |   | 39,352           |   |
| Long-term debt             |   | 22,476           |   | 9,825            |   |
|                       |   |             |   |             |   |
| **December  31, 2002**     |   |             |   |             |   |
| Short-term debt            |   | $                | — |             | $      | 18,501 |   |
| Total current  liabilities |   | 28,620           |   | 47,121           |   |
| Long-term debt             |   | 27,107           |   | 8,606            |   |

 

**4b.     Borrowings**

 

On January 31, 2002, theCompany replaced its existing bank line with a $30.0 million senior securedrevolving credit facility with Fleet Capital Corporation, a subsidiary of theFleetBoston Financial Corporation. Additionally, $10.0 million principal amount of Senior SubordinatedConvertible Notes was sold to Wynnchurch Capital Partners, L.P., a privateequity investor.

 

The $30.0 millionrevolving credit facility is secured by the assets of the Company, principallyconsisting of accounts receivable.  Thecredit facility has a three-year term and bears interest at LIBOR plus 3.25% orthe bank’s base rate plus 1.00%. As of June 30, 2003, the applicable rate is5.00%, which represents the bank’s base rate plus 1.00%.

 

Throughout 2002, theCompany and Fleet Capital Corporation executed four amendments to the revolvingcredit agreement.  These amendments wererequired to waive events of default that occurred relative to the fixed chargeand tangible net worth covenants.  Bothcovenants were reset with tangible net worth reestablished at $2,750,000 andthe fixed charge covenant reestablished at an allowable shortfall of $650,000through October 1, 2002 and a ratio of 1:1, thereafter.  In addition, the borrowing limit subject topledged accounts receivable as collateral was reduced to $28.0 million andcertain restrictions were placed on the amount of capital spending inconsideration for the waiver of existing financial loan covenants.

 

In 2003, the Company andFleet Capital Corporation executed additional amendments to the revolvingcredit agreement. The Fifth amendment addressed the fact that the Company hadentered into litigation with a major customer, Bluecurrent.  This action eliminated that account from theCompany’s borrowing base creating a borrowing overadvance.  The amendment allows for an overadvance of$2,000,000 through December 31, 2003. In addition, the amendment waived the events of default relative to thefixed charge and tangible net worth covenants that occurred at December 31,2002.  The net worth covenant was resetat ($1,000,000) and the fixed charge shortfall was set to $1,000,000 throughMarch 31, 2003 and $1,400,000 up through June 30, 2003 and a ratio of 1:1,thereafter.  The Sixth amendmenteliminated the requirement that any amounts received as a result of thesettlement with Bluecurrent reduce the Wynnchurch Capital Partners, L.P.guarantee as discussed below.  TheSeventh amendment waived the events of default as of June 30, 2003 relating tothe tangible net worth and fixed charge covenants.  Additionally, the covenants were reset for the remainder of 2003as follows; the tangible net worth covenant was reset to ($5,000,000) with thefixed charge covenant reset to an allowable shortfall of $650,000 for the threemonths ended September 30, 2003, and $950,000 for the six months ended December31, 2003. The fixed charge covenant will be 1:1, thereafter. In addition, theinterest rate was changed effective August 1, 2003 from the bank’s base rateplus 1.00% to the base rate plus 2.00%. The Seventh Amendment also reduced the maximum revolving creditcommitment from $28 million to $23 million.

 

9

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The Senior SubordinatedConvertible Notes bear interest at 15% and are due January 31, 2009. Thesenotes were convertible into common stock anytime after January 31, 2002 at aconversion price of $2.50 per share. At the Company’s election, one-half of theinterest could be deferred during the first four years, subject to certainconditions. In conjunction with the sale of these notes, the Company issued10,000,000 warrants to purchase shares of the Company’s common stock at $0.55per share. An additional 1,000,000 warrants to purchase its common stock at$0.73 per share were not exercisable for one year contingent upon the Companymeeting certain performance measures, however, the warrants would expire ifsuch performance measures were met.  Asof December 31, 2002, the Company did not meet the specific performancemeasures related to the 1,000,000 contingent warrants and these warrants didnot expire.

 

Throughout 2002, theCompany and Wynnchurch Capital Partners, L.P. executed four amendments to thesecurities purchase agreement. These amendments were required to waive eventsof default that occurred relative to the fixed charge and tangible net worthcovenants.  Both covenants were resetwith tangible net worth reestablished at $2,612,500 and the fixed chargecovenant reestablished at an allowable shortfall of $650,000 through October 1,2002 and a ratio of .95:1, thereafter. In addition, the Company and Wynnchurch Capital, L.P. agreed to deferall quarterly cash interest payments until the Company satisfied the covenantswith the senior lender, Fleet Capital Corporation.

 

In 2003, in connectionwith the amendments to the Company’s credit agreement with Fleet CapitalCorporation, the Company’s senior lender, Wynnchurch Capital Partners, L.P.executed a guarantee with Fleet Capital Corporation to allow overadvances of upto $2,000,000 through December 31, 2003, reduced by any payments received fromBluecurrent.  In consideration,Wynnchurch Capital Partners, L.P. and the Company amended their agreements. The15% Senior Subordinated Convertible Notes conversion price was reduced from$2.50 to $1.50 per share of common stock. The exercise price of all outstanding warrants was reduced to $0.26 pershare.  Additionally, a provision wasmade that any draw on the guarantee by the Company could be satisfied with apurchase by Wynnchurch Capital Partners, L.P. of additional 15% Senior SubordinatedConvertible Notes having a principal amount equal to the Company’s draw andhaving terms equal to the outstanding 15% Senior Convertible Notes and providefor a $250,000 fee to Wynnchurch Capital Partners, L.P. in the event of a drawupon their guaranty.  The $250,000 feewould be payable through the issuance of additional 15% Senior SubordinatedConvertible Notes.  As of June 30, 2003,the Company has not been required to draw on the guarantee, and no additionalConvertible Notes have been issued. In July 2003, Wynnchurch Capital Partners,L.P. agreed to waive the agreed requirement that their guarantee be reduced byany amounts received from Bluecurrent. Consequently, Bluecurrent’s initialpayment of $850,000 did not reduce the $2,000,000 guarantee. However, allsubsequent payments will continue to reduce the outstanding guarantee. Inconsideration for this waiver, Wynnchurch Capital Partners, L.P. received a feeof $125,000 payable as interest and added to the outstanding balance of thenotes.  Under the Sixth Amendment to thesecurities purchase agreement Wynnchurch waived the events of default as ofJune 30, 2003, relating to the tangible net worth and fixed charge covenants.  Additionally the covenants were reset forthe remainder of 2003 as follows; the tangible networth covenant was reset to($5,250,000) with the fixed charge covenant reset to an allowable shortfall of$700,000 for the three months ended September 30, 2003 and $1,000,000 for thesix months ended December 31, 2003.  Thefixed charge covenant will be 0.95:1 thereafter.  In addition, the interest rate on the Senior SubordinatedConvertible Notes was changed effective July 1, 2003 from 15% to 16% per annum.

 

Due to the change in theunderlying terms of the Convertible Notes and Warrants, the original valuationof the warrants was reassessed during the second quarter of 2003.  The fair value ascribed to these warrantswas determined to be approximately $2.3 million prior to the price change and$2.4 million subsequent to the price change. This change in value ascribed to the price change of approximately$69,000 will be amortized over the seven-month life of the guarantee as anon-cash interest charge.  The valuationof the warrants was determined based on advice from a third-party valuationspecialist who utilized a valuation model with the following inputs:measurement date of April 14, 2003; fair value of $0.23; exercise price of$0.55 prior to the price change ($0.73 for contingent warrants) and $0.26subsequent to the price change; contractual term of 10 years from the originalissue date; dividend rate of zero; volatility rate of 123.5%; and risk-freeinterest rate of 3.76%.  A non-cashinterest charge of approximately $173,000 and $241,000 was recorded for the sixmonths ended June 30, 2002 and 2003, respectively, related to the originalvaluation of the warrants in January, 2002, plus the amortization of theguarantee value.

 

The Company concludedthat the change in conversion price of the convertible notes did not meet the criteriaof an extinguishment of debt per EITF 96-19 “Debtors Accounting for aModification or Exchange of Debt Instruments,” as the change in present valueof the cash flows did not exceed 10%.

 

At June 30, 2003, theCompany has debt of $22.5 million. This is comprised of $12.7 million of short-term debt in Senior SecuredRevolving Credit with Fleet Capital Corporation and $9.8 million oflong-term debt related to the Securities Purchase Agreement with WynnchurchCapital Partners, L.P.

 

10

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At June 30, 2003, the total contractual obligation toWynnchurch Capital Partners, L.P. is $12.3 million.  This is comprised of $10.0 million inoriginal principal and $2.3 million in accrued interest.  $6.9 million of the principal wasoriginally classified as long-term debt while the remaining $3.1 millionwas classified as equity, representing the value assigned to the warrants.  The $9.8 million of this obligationrecorded as long-term debt is comprised of the following:

 
|                  |   | **(in thousands)** |   |
|-----------------------|--------|--------------------|--------|
|                  |   |               |   |
| Original principal    |   | $                  | 6,865  |   |
| Accrued interest      |   | 2,326              |   |
| Accretion of warrants |   | 634                |   |
| Total long-term debt  |   | $                  | 9,825  |   |

 

As of June 30, 2003, the Company has two irrevocablestandby letters of credit for $1,625,000, which expire on December 31,2003.

 

##### **5.**                    Restructuringand Other Charges

 

The Company recorded restructuring and other chargesin the aggregate amount of $6.1 million during 2002. During the secondquarter of 2002, the Company recorded a charge of $1.1 million representingthe severance pay associated with the departure of the Company’s former ChiefExecutive Officer. During the third quarter of 2002, the Company recorded a$4.7 million restructuring charge due to excess office space and therestructuring of the service delivery function. An additional $0.3 millionrestructuring charge was recorded in the fourth quarter, which was also due tothe restructuring of the service delivery function. The primary components ofthe restructuring and other charges can be summarized as follows: 

 

| Restructuring  charge |   |   |   |
|-----------------------|--------|--------|--------|
| Real  estate costs    |   | $      | 4.4    |   |
| Severance             |   | 0.6    |   |
| Other  charges        |   | 1.1    |   |
|                  |   |   |   |
|                  |   | $      | 6.1    |   |

 

The primary activity in the restructuring reserve canbe summarized as follows:

 
|                         |   | **Total  Initial  Reserve** |   | **2002  Cash  Payments** |   | **Balance at  December 31,  2002** |   | **2003  Cash  Payments** |   | **Balance at  June 30,  2003** |   |
|------------------------------|--------|-----------------------------|--------|--------------------------|--------|------------------------------------|--------|--------------------------|--------|--------------------------------|--------|
|                         |   |                        |   |                     |   |                               |   |                     |   |                           |   |
| Real  estate costs           |   | $                           | 4,328  |                     | $      | (569                               | )      | $                        | 3,759  |                           | $      | (952 | ) | $ | 2,807 |   |
| Severance                    |   | 627                         |   | (362                     | )      | 265                                |   | (200                     | )      | 65                             |   |
| Other  charges               |   | 1,100                       |   | (202                     | )      | 898                                |   | (87                      | )      | 811                            |   |
|                         |   |                        |   |                     |   |                               |   |                     |   |                           |   |
| Total  restructuring reserve |   | $                           | 6,055  |                     | $      | (1,133                             | )      | $                        | 4,922  |                           | $      | (1,239 | ) | $ | 3,683 |   |

 

The portion of the charge related to real estatecosts, which totaled $4.3 million, relates to lease costs associated withdecreased requirements for office space as the Company restructured its servicedelivery organization. The costs associated with this charge related primarilyto ongoing lease obligations for vacated offices, net of anticipated subleaseincome. A portion of the charge also related to broker commissions andestimated leasehold improvement costs necessary to sublease vacated offices.

 

The $0.6 million severance charge related tohead-count reductions associated with centralizing the service deliveryorganization as part of a re-engineering exercise. A total of 60 positions wereeliminated with the largest group being the client staffing managers. Theremainder of positions eliminated was a mix of corporate staff and recruitingpersonnel. The remaining severance balance at June 30, 2003 relates toemployees with employment agreements. This amount will be paid out throughSeptember 2003.

 

The $1.1 million other charges related to theseverance pay associated with the departure of the Company’s former ChiefExecutive Officer.  The remainingbalance at June 30, 2003 is required to be paid in full by July 2004.

 

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##### **6.**                    StockOptions

 

The Company accounts for its stock options inaccordance with the provisions of Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (APB 25) andrelated interpretations. Under APB 25, no compensation cost has been recognizedfor the Company’s stock-based compensation plans. The Company continues toapply the provisions of APB 25 and provides the pro forma disclosures requiredby SFAS No. 123 and SFAS No. 148.

 

The following data reflect the pro forma effects ofthe stock-based compensation cost for the Company’s stock optiontransactions in accordance with SFAS No. 123 and SFAS No. 148:

 
|                            |   | **Three  Months Ended  June 30, 2003**      |   | **Six Months  Ended  June 30,**             |   |
|---------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|
|                            |   | **2002**                                    |   | **2003**                                    |   | **2002** |   | **2003** |   |
|                            |   | **(in  thousands, except per  share data)** |   | **(in  thousands, except per  share data)** |   |
|                            |   |                                        |   |                                        |   |   |   |   |   |
| Net  loss, as reported          |   | $                                           | (1,690 | )                                           | $      | (3,254 | ) | $ | (2,184 | ) | $ | (4,908 | ) |
| Pro  forma compensation expense |   | (707                                        | )      | (210                                        | )      | (1,411 | ) | (421 | ) |
|                            |   |                                        |   |                                        |   |   |   |   |   |
| Pro  forma net loss             |   | $                                           | (2,397 | )                                           | $      | (3,464 | ) | $ | (3,595 | ) | $ | (5,329 | ) |
| Diluted  loss per share:        |   |                                        |   |                                        |   |   |   |   |   |
| As  reported                    |   | $                                           | (0.10  | )                                           | $      | (0.19 | ) | $ | (0.13 | ) | $ | (0.29 | ) |
| Pro  forma                      |   | (0.14                                       | )      | (0.20                                       | )      | (0.21 | ) | (0.31 | ) |

 

The fair value of each option is estimated on the dateof grant using the Black-Scholes option-pricing model with thefollowing weighted average assumptions used for grants for the six months endedJune 30, 2002 and 2003, respectively: risk-free interest rates of 4.2% and3.6%; expected lives of 6 and 9 years; expected volatility of 131% and 147%;and no dividends expected to be paid.

 

##### **Item2. - Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

## **Results of Operations**

 

All of the Company’s revenue is generated frominformation technology services that offer the benefits of outsourcing, whileallowing information services operations managers to retain strategic controlof their operations. Revenues are recognized as services are performed,utilizing four different billing methodologies as follows:  (1) time and material billing, whereby theclient is billed by the hour on a weekly basis for past services performed; (2)project-based billing, for which fees are fixed and are based on specificcontracts; (3) per-incident billing, whereby the Company charges a fee for eachspecific task related to certain services; and (4) fee-based billing, which isused for candidate placement/recruiting fees and vendor management fees.  The Company typically provides discounts onstaffing services to its largest clients in exchange for the opportunity tosell more volume, as well as the opportunity to sell its higher-margin,value-added services.  All revenues arerecognized net of such discounts and after services have been completed.

 

# **Second Quarter Fiscal 2003 Compared to Second QuarterFiscal 2002**

 

**Revenue.**Revenues consist of fees earnedfrom ARC Staffing Management Solutions and ARC Technology ManagementSolutions.  Revenue decreased $4.5million or 11.8% from $38.4 million in the second quarter of 2002 to $33.9million in the second quarter of 2003. ARC Technology Management Solutions revenue decreased by $1.0 million or5.7% from $17.9 million in the second quarter of 2002 to $16.9 million in thesecond quarter of 2003.  The decline inTechnology Management Solutions revenue was driven by a $0.6 million write-offattributable to the settlement of the Bluecurrent litigation as discussed inPart II-Item 1. “Legal Proceedings.” Increases in the Company’s Technology Deployment Services were offset bydecreases in Managed Services and Field Services offerings. The Company’straditional Staffing Management Solutions revenue decreased by $3.5 million or17.1% from $20.4 million in the second quarter of 2002 to $16.9 million in thesecond

 

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quarter of 2003 primarily from the continued slowdown in IT spendingexperienced industry-wide.

 

**Gross profit.** Gross profit decreased by $3.0million or 28.1% from $10.6 million in the second quarter of 2002 to $7.6million in the second quarter of 2003. As a percentage of revenue, gross profit decreased from 27.5% in thesecond quarter of 2002 to 22.4% in the second quarter of 2003 due to the verycompetitive IT staffing environment, which is causing some margin pressures inall service offerings.

 

**Operating expenses. **Operating expenses consistof salaries and benefits, sales costs, recruiting, retention and trainingcosts, management and administrative costs, and depreciation andamortization.  Operating expensesdecreased by $1.8 million or 15.9% from $11.5 million in the second quarter of2002 to $9.7 million in the second quarter of 2003.  The operating expense decrease was attributable to therestructuring actions the Company has taken in the past, which is reflected inreduced office space and lower headcount. As a percentage of revenue, operatingexpenses decreased from 30.2% in the second quarter of 2002 to 28.6% in thesecond quarter of 2003.

 

**Other charges. **During the second quarterof 2002 the Company recorded a charge of $1.1 million which represents theseverance pay associated with the departure of the Company’s former ChiefExecutive Officer.  There was no similarcharge in the second quarter of 2003.

 

**Other expense, net. **Other expense, net,consists primarily of interest expense on the Company’s outstanding debt. Otherexpense, net, is $1.2 million in 2003 up from $0.9 million in the secondquarter of 2002 due to interest due to the IRS as a result of an IRS auditcovering the years 1996 through 2001.

 

**Income tax expense (benefit).**Duringthe second quarter of 2002, the Company recorded a tax benefit of $1.3million.  There was no similar benefitrecorded during the second quarter of 2003.

 

 

# **First Six Months Fiscal 2003 Compared to First SixMonths Fiscal 2002**

 

**Revenue.**Revenuesconsist of fees earned from ARC Staffing Management Solutions and ARCTechnology Management Solutions.  Totalrevenue decreased $8.4 million or 10.7% from $79.2 million in the six months of2002 to $70.7 million in the six months of 2003.  Technology Management Solutions revenue increased by $0.3 millionor 0.9% from $36.1 million in the six months of 2002 to $36.4 million in thesix months of 2003.  The increase inTechnology Management Solutions revenue was impacted by a $0.6 millionwrite-off attributable to the settlement of the Bluecurrent litigation asdiscussed in Part II-Item 1. “Legal Proceedings.”  Increases in the Company’s Technology Deployment Services andLifecycle Solutions Services were offset by decreases in its Managed Servicesand Field Services offerings.  TheCompany’s traditional Staffing Management Solutions revenue decreased by $8.7million or 20.3% from $43.0 million in the six months of 2002 to $34.3 millionin the six months of 2003 primarily from the continued slowdown in IT spendingexperienced industry-wide.

 

**Gross profit.** Grossprofit decreased by $5.2 million or 23.7% from $22.0 million in the six monthsof 2002 to $16.8 million in the six months of 2003.  As a percentage of revenue, gross profit decreased from 27.8% inthe six months of 2002 to 23.7% in the six months of 2003 due to the verycompetitive IT staffing environment, which is causing some margin pressures inall service offerings.

 

**Operating expenses. **Operating expenses consistof salaries and benefits, sales costs, recruiting, retention and trainingcosts, management and administrative costs, and depreciation andamortization.  Operating expensesdecreased by $4.0 million or 17.2% from $23.6 million in the six months of 2002to $19.5 million in the six months of 2003. The operating expense decrease was attributable to the restructuringactions the Company has taken in the past, which is reflected in reduced officespace and lower headcount. As a percentage of revenue, operating expensesdecreased from 29.8% in the six months of 2002 to 27.6% in the six months of2003.

 

**Other charges. **During the second quarterof 2002 the Company recorded a charge of $1.1 million which represents theseverance pay associated with the departure of the Company’s former ChiefExecutive Officer.  There was no similarcharge in the second quarter of 2003.

 

**Other expense, net. **Other expense, net,consists primarily of interest expense on the Company’s outstanding debt. Otherexpense, net, increased by $0.5 million or 24.2% from $1.7 million in the sixmonths of 2002 to $2.2 million in the six months of 2003. The increase in otherexpense, net, is primarily the result of interest due to the IRS as a result ofan IRS audit covering the years 1996 through 2001.

 

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**Income tax expense (benefit).**Incometax benefit for the six months of 2002 was $2.2 million.  During the first quarter of 2002, theCompany recorded a tax benefit of $1.0 million related to a refund obtained dueto a change in income tax law.  Duringthe second quarter of 2002, the Company recorded a tax benefit of $1.2 millionrelated to the 2002 operating loss. There was no similar benefit recorded during the six months of 2003. 

 

 

# **Liquidity and Capital Resources**

 

Current liabilitiesexceed current assets by $12.2 million at June 30, 2003.  Current liabilities include $12.7 million ofoutstanding borrowings against the revolving credit agreement that has amaturity date of January 31, 2005.  Theborrowings under the revolving credit agreement are classified as current inaccordance with EITF Issue No. 95-22. Net cash provided by operations was $5.0 million in the first six monthsof 2003.  Net cash provided byoperations was principally the result of a decrease in accounts receivable ofapproximately $9.6 million offset by decreases in long-term debt of $4.6million, accrued expenses and other liabilities of $0.8 million, and accountspayable of $0.8 million.  Thesignificant decrease in accounts receivable was due to a payment agentagreement entered into with IBM Credit, LLC in the first quarter of 2003.  This agreement provides for an expeditedreceipt of outstanding IBM receivables from 45 days to 15 days in exchange fora discount of 0.76%.

 

Capital spending wasapproximately $0.1 million and $0.2 million for the six months ended June 30,2003 and 2002, respectively. The Company does not anticipate that its capitalspending going forward will be significantly greater than $1.0 million to $2.0million per annum.

 

On January 31, 2002, theCompany replaced its existing bank line with a $30.0 million senior securedrevolving credit facility with Fleet Capital Corporation, a subsidiary of theFleetBoston Financial Corporation. Additionally, $10.0 million principal amount of Senior SubordinatedConvertible Notes was sold to Wynnchurch Capital Partners, L.P., a privateequity investor.

 

The $30.0 millionrevolving credit facility is secured by the assets of the Company, principallyconsisting of accounts receivable.  Thecredit facility has a three-year term and bears interest at LIBOR plus 3.25% orthe bank’s base rate plus 1.00%. As of June 30, 2003, the applicable rate is5.00%, which represents the bank’s base rate plus 1.00%.

 

Throughout 2002, theCompany and Fleet Capital Corporation executed four amendments to the revolvingcredit agreement.  These amendments wererequired to waive events of default that occurred relative to the fixed chargeand tangible net worth covenants.  Bothcovenants were reset with tangible net worth reestablished at $2,750,000 andthe fixed charge covenant reestablished at an allowable shortfall of $650,000through October 1, 2002 and a ratio of 1:1, thereafter.  In addition, the borrowing limit subject topledged accounts receivable as collateral was reduced to $28.0 million andcertain restrictions were placed on the amount of capital spending inconsideration for the waiver of existing financial loan covenants.

 

In 2003, the Company andFleet Capital Corporation executed additional amendments to the revolvingcredit agreement. The Fifth amendment addressed the fact that the Company hadentered into litigation with a major customer, Bluecurrent.  This action eliminated that account from theCompany’s borrowing base creating a borrowing overadvance.  The amendment allows for an overadvance of$2,000,000 through December 31, 2003.  Inaddition, the amendment waived the events of default relative to the fixed chargeand tangible net worth covenants that occurred at December 31, 2002.  The net worth covenant was reset at($1,000,000) and the fixed charge shortfall was set to $1,000,000 through March31, 2003 and $1,400,000 up through June 30, 2003 and a ratio of 1:1,thereafter.  The Sixth amendmenteliminated the requirement that any amounts received as a result of thesettlement with Bluecurrent reduce the Wynnchurch Capital Partners, L.P.guarantee as discussed below.  TheSeventh amendment waived the events of default as of June 30, 2003 relating tothe tangible net worth and fixed charge covenants.  Additionally, the covenants were reset for the remainder of 2003as follows; the tangible net worth covenant was reset to ($5,000,000) with thefixed charge covenant reset to an allowable shortfall of $650,000 for the threemonths ended September 30,2003, and $950,000 for the six months ended December31, 2003. The fixed charge covenant will be 1:1, thereafter. In addition, theinterest rate was changed effective August 1, 2003 from the bank’s base rateplus 1.00% to the base rate plus 2.00%. The Seventh Amendment also reduced the maximum revolving creditcommitment from $28 million to $23 million.

 

The Senior SubordinatedConvertible Notes bear interest at 15% and are due January 31, 2009. Thesenotes were convertible into common stock anytime after January 31, 2002 at aconversion price of $2.50 per share. At the Company’s election, one-half of theinterest could be deferred during the first four years, subject to certainconditions. In conjunction with the sale of these notes, the Company issued10,000,000 warrants to purchase shares of the Company’s common stock at $0.55per share. An additional 1,000,000 warrants to purchase its common stock at$0.73 per share were not exercisable for one year contingent upon the Companymeeting certain performance measures, however, the warrants would expire ifsuch performance measures were met.  Asof December 31, 2002, the Company did not meet the specific performancemeasures related to the 1,000,000 contingent warrants and these warrants didnot expire.

 

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Throughout 2002, theCompany and Wynnchurch Capital Partners, L.P. executed four amendments to thesecurities purchase agreement. These amendments were required to waive eventsof default that occurred relative to the fixed charge and tangible net worthcovenants.  Both covenants were resetwith tangible net worth reestablished at $2,612,500 and the fixed chargecovenant reestablished at an allowable shortfall of $650,000 through October 1,2002 and a ratio of .95:1, thereafter. In addition, the Company and Wynnchurch Capital, L.P. agreed to deferall quarterly cash interest payments until the Company satisfied the covenants withthe senior lender, Fleet Capital Corporation.

 

In 2003, in connectionwith the amendments to the Company’s credit agreement with Fleet CapitalCorporation, the Company’s senior lender, Wynnchurch Capital Partners, L.P.executed a guarantee with Fleet Capital Corporation to allow overadvances of upto $2,000,000 through December 31, 2003, reduced by any payments received fromBluecurrent.  In consideration,Wynnchurch Capital Partners, L.P. and the Company amended their agreements. The15% Senior Subordinated Convertible Notes conversion price was reduced from$2.50 to $1.50 per share of common stock. The exercise price of all outstanding warrants was reduced to $0.26 pershare.  Additionally, a provision wasmade that any draw on the guarantee by the Company could be satisfied with apurchase by Wynnchurch Capital Partners, L.P. of additional 15% SeniorSubordinated Convertible Notes having a principal amount equal to the Company’sdraw and having terms equal to the outstanding 15% Senior Convertible Notes andprovide for a $250,000 fee to Wynnchurch Capital Partners, L.P. in the event ofa draw upon their guaranty.  The$250,000 fee would be payable through the issuance of additional 15% SeniorSubordinated Convertible Notes.  As ofJune 30, 2003, the Company has not been required to draw on the guarantee, andno additional Convertible Notes have been issued. In July 2003, WynnchurchCapital Partners, L.P. agreed to waive the agreed requirement that theirguarantee be reduced by any amounts received from Bluecurrent. Consequently,Bluecurrent’s initial payment of $850,000 did not reduce the $2,000,000guarantee. However, all subsequent payments will continue to reduce theoutstanding guarantee. In consideration for this waiver, Wynnchurch CapitalPartners, L.P. received a fee of $125,000 payable as interest and added to theoutstanding balance of the notes.  Underthe Sixth Amendment to the securities purchase agreement Wynnchurch waived theevents of default as of June 30, 2003, relating to the tangible net worth andfixed charge covenants.  Additionallythe covenants were reset for the remainder of 2003 as follows; the tangiblenetworth covenant was reset to ($5,250,000) with the fixed charge covenantreset to an allowable shortfall of $700,000 for the three months endedSeptember 30, 2003 and $1,000,000 for the six months ended December 31,2003.  The fixed charge covenant will be0.95:1 thereafter.  In addition, theinterest rate on the Senior Subordinated Convertible Notes was changedeffective July 1, 2003 from 15% to 16% per annum.

 

Due to the change in theunderlying terms of the Convertible Notes and Warrants, the original valuationof the warrants was reassessed during the second quarter of 2003.  The fair value ascribed to these warrants wasdetermined to be approximately $2.3 million prior to the price change and $2.4million subsequent to the price change. This change in value ascribed to the price change of approximately$69,000 will be amortized over the seven-month life of the guarantee as a non-cashinterest charge.  The valuation of thewarrants was determined based on advice from a third-party valuation specialistwho utilized a valuation model with the following inputs: measurement date ofApril 14, 2003; fair value of $0.23; exercise price of $0.55 prior to the pricechange ($0.73 for contingent warrants) and $0.26 subsequent to the pricechange; contractual term of 10 years from the original issue date; dividendrate of zero; volatility rate of 123.5%; and risk-free interest rate of 3.76%.  A non-cash interest charge of approximately$173,000 and $241,000 was recorded for the six months ended June 30, 2002 and2003, respectively, related to the original valuation of the warrants inJanuary, 2002, plus the amortization of the guarantee value.

 

The Company concludedthat the change in conversion price of the convertible notes did not meet thecriteria of an extinguishment of debt per EITF 96-19 “Debtors Accounting for aModification or Exchange of Debt Instruments,” as the change in present valueof the cash flows did not exceed 10%.

 

The Company believes itscash balances, funds from operations, funds from the Bluecurrent Settlement asdiscussed in Part II-Item 1 “Legal Proceedings”, together with funds availableunder its credit facility will be sufficient to meet all of its anticipatedcash requirements for at least the next 12 months.  However, general economic and industry conditions could impactthe Company’s ability to meet anticipated cash requirements.  Since the existing credit facility issecured by the assets of the Company, principally consisting of accountsreceivable, these uncertainties may directly impact the availability of thiscredit facility.  Additionally, theCompany’s ability to successfully meet debt covenants in future periods is arisk factor.

 

The following summarizes the Company’s contractualobligations at June 30, 2003, and the effect such obligations are expected tohave on our liquidity and cash in the future periods. 

 
|                                |   | **Payments  Due by Period** |   |
|-------------------------------------|--------|-----------------------------|--------|
|                                |   | **Total**                   |   | **Less Than  1 Year** |   | **1-3  Years** |   | **4-5  Years** |   | **After  5 Years** |   |
|                                |   | **(in  thousands)**         |   |
| Contractual  Obligations:           |   |                        |   |   |   |   |   |   |   |   |   |
| Senior  Secured Revolving Credit    |   | $                           | 12,651 |   | $ | 12,651 |   | $ | — |   | $ | — |   | $ | — |   |
| Securities  Purchase Agreement      |   | 12,326                      |   | — |   | — |   | — |   | 12,326 |   |
| Non-cancelable  operating leases    |   | 12,825                      |   | 3,895 |   | 4,885 |   | 2,494 |   | 1,551 |   |
|                                |   |                        |   |   |   |   |   |   |   |   |   |
| Total  contractual cash obligations |   | $                           | 37,802 |   | $ | 16,546 |   | $ | 4,885 |   | $ | 2,494 |   | $ | 13,877 |   |

 

Although the Senior Secured Revolving Credit facilityis listed above as due within one year, the facility has an expiration date ofJanuary 31, 2005.  The Company hasclassified this instrument as current based on the requirements of EITF IssueNo. 95-22, “Balance Sheet Classification of Borrowings Outstanding underRevolving Credit Agreements that include both a Subjective Acceleration Clauseand a Lock-Box Arrangement.”

 

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**CRITICAL ACCOUNTING POLICIES**

 

The Company’s consolidated financial statements areimpacted by the accounting policies used,and the estimates and assumptions made by management.  The most significant accounting policies and management estimatesthat affect the presentation of the consolidated financial statements includerevenue recognition, allowance for doubtful accounts, analysis of goodwillimpairment and valuation allowance for deferred tax assets.

 

**Revenue Recognition**

 

The Company recognizes revenues as services areperformed, utilizing four different billing methodologies, as follows:  (1) time and material billing, whereby theclient is billed by the hour on a weekly basis for past services performed; (2)project-based billing, for which fees are fixed and are based on specificcontracts; (3) per-incident billing, whereby the Company charges a fee for eachspecific task related to certain services; and (4) fee-based billing, which isused for candidate placement/recruiting fees and vendor management fees.  The Company typically provides discounts onstaffing services to its largest clients in exchange for the opportunity tosell more volume, as well as the opportunity to sell its higher-margin,value-added services.  All revenues arerecognized net of such discounts and after services have been completed.

 

**Allowance for Doubtful Accounts**

 

The Company performs ongoing credit evaluations of its customers and adjustscredit limits based upon payment history and the customers’ current creditworthiness.  The Company continuouslymonitors collections and payments from its customer base and maintains aprovision for estimated credit losses based upon historical experience and anyspecific customer collection issues that have been identified.  The Company specifically reviews outstandingaccount balances that are overdue 90 days or more in making its assessment ofthe provision for bad debts in each period. While the Company has historically had sufficient coverage of allowancesfor credit losses, it cannot guarantee that it will continue to experience thesame credit loss rates as in past periods.

 

**Goodwill Impairment**

 

On January 1, 2002, the Company adopted SFAS No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”).  This Statement dictates that goodwill andintangible assets with indefinite useful lives should be tested and writtendown for impairment at least annually, instead of being amortized on an ongoingbasis.  The Company has terminated itspolicy of amortizing goodwill on a monthly basis and performs an annualanalysis of goodwill impairment, using the discounted future cash flowsmethodology.  Since the Company wroteoff the significant majority of its goodwill balance in 2000 due to impairment,the adoption of this standard has not had an impact on its financialstatements.

 

**Valuation Allowance forDeferred Tax Assets**

 

The Company records avaluation allowance to reduce its deferred tax assets to the amount that itbelieves is more likely than not to be realized.  A valuation allowance was established for the net deferred taxasset given the uncertainty with respect to the future realization of deferredtax assets.  This valuation allowance isrequired given that the net operating losses have no remaining carrybackpotential and the lack of ability to accurately forecast taxable income overthe 17-20 year net operating loss carryforward period.  When a valuation allowance is deemednecessary, the Company records an adjustment to the deferred tax asset, with acorresponding charge to the statement of operations.  In the event that the Company determines that it would be able torealize its deferred tax assets in the future in excess of its net recordedamount, an adjustment to the deferred tax assets would increase income, orreduce a net loss, in the period such determination was made.

 

 

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**PARTII - OTHER INFORMATION**

 

### **Item 6. - Exhibits and Reports on Form 8-K**

 

(a)                      Thefollowing documents are furnished as an exhibit and numbered pursuant to Item601 of Regulation S-K:

 
| **Exhibit Number** |   | **Description**                                                                                                                                                |
|--------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                           |
| 4.1                |   | Sixth Amendment to  credit and security agreement dated July 15, 2003.                                                                                         |
|               |   |                                                                                                                                                           |
| 4.2                |   | First Amendment to the  Guaranty Agreement dated July 15, 2003.                                                                                                |
|               |   |                                                                                                                                                           |
| 4.3                |   | Seventh Amendment to  credit and security agreement dated August 14, 2003.                                                                                     |
|               |   |                                                                                                                                                           |
| *31.1              |   | Certification of Chief  Executive Officer pursuant to Rule 13a-15(e) or Rule 15d-15(e), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|               |   |                                                                                                                                                           |
| *31.2              |   | Certification of Chief  Financial Officer pursuant to Rule 13a-15(e) or Rule 15d-15(e), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|               |   |                                                                                                                                                           |
| *32                |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                      |

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*Filed here within; allother exhibits previously filed.

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(b)                     Form 8-K wasfiled on April 15, 2003 reporting under Item 7. “Financial Statements andExhibits” and Item 9. “Results of Operations and Financial Condition”, thepress release and transcript of the teleconference call held on April 10, 2003discussing the Company’s December 31, 2002 operating results.

 

Form 8-K was filed on May14, 2003 reporting under Item 7. “Financial Statements and Exhibits” and Item9. “Results of Operations and Financial Condition”, the press release andtranscript of the teleconference call held on May 8, 2003 discussing theCompany’s March 31, 2003 operating results.

 

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**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                   | ALTERNATIVE RESOURCES  CORPORATION                                        |
|------------------------|---------------------------------------------------------------------------|
|                   |                                                                      |
|                   |                                                                      |
| Date: January 28, 2004 | /s/  Steven Purcell                                                       |   |
|                   | Steven Purcell                                                            |
|                   | Senior Vice President,  Chief Financial Officer,  Treasurer and Secretary |

 

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