----

----

**SECURITIESAND EXCHANGE COMMISSION****Washington,D.C.  20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

**For the quarterly period endedJune 30, 2001**

**Commission file number 0-23940**

 

**ALTERNATIVE RESOURCES CORPORATION**

----

(Exact name of registrant as specified in itscharter)

|                                                  | **Delaware**                                  | **38-2791069**      |   |
|-------------------------------------------------------|-----------------------------------------------|---------------------|--------|
|                                                  |                                               |                     |   |
|                                                  | (State or other  jurisdiction of              | (I.R.S. Employer    |   |
|                                                  | incorporation or  organization)               | Identification No.) |   |
|                                                  |                                          |                |   |
|                                                  | **600  Hart Road, Suite 300, Barrington, IL** | **60010**           |   |
|                                                  |                                               |                     |   |
|                                                  | (Address of principal  executive offices)     | (Zip code)          |   |
|                                                  |                                          |                |   |
| **(847)  381-6701**                                   |
|                                                       |
| (Registrant's  telephone number, including area code) |
|                                                       |                                               |                     |        |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  YES  ý  NO  o

Indicate the number of shares outstandingof each of the issuer's classes of common stock, as of the latest practicabledate:

             17,390,594shares of Common Stock outstanding as of August 6, 2001

----

----

**PART I. – FINANCIAL INFORMATIONItem 1. - Financial Statements**

**ALTERNATIVERESOURCES CORPORATIONCONSOLIDATED BALANCE SHEETS**(In thousands, except share data)

**ASSETS**

|                        | December  31,   2000                                               |        | June  30,   2001 |    |
|-----------------------------|--------------------------------------------------------------------|-------------|------------------|---------|
|                        |                                                                    |        |                  |    |
|                        |                                                               | (Unaudited) |             |
| Current assets:             |                                                               |        |             |    |
|                        | Cash and cash  equivalents                                         | $           | 114              |    | $ | 49 |   |
|                        | Short-term investment                                              | 639         |             | —  |   |
|                        | Trade accounts  receivable, net of allowance for doubtful accounts | 57,124      |             | 45,441  |   |
|                        | Prepaid expenses                                                   | 1,325       |             | 1,504   |   |
|                        | Income taxes  receivable                                           | 7,059       |             | 4,879   |   |
|                        | Other receivables                                                  | 295         |             | 391     |   |
|                        | Deferred income taxes                                              | 1,030       |             | 1,179   |   |
|                        |                                                                    |        |                  |    |
| Total current assets        | 67,586                                                             |        | 53,443           |    |
|                        |                                                                    |        |                  |    |
|                        | Property and  equipment:                                           |        |             |    |   |
|                        | Office equipment                                                   | 8,109       |             | 8,211   |   |
|                        | Furniture and fixtures                                             | 2,404       |             | 2,389   |   |
|                        | Software                                                           | 17,739      |             | 18,764  |   |
|                        | Leasehold improvements                                             | 1,973       |             | 1,982   |   |
|                        |                                                                    |        |                  |    |
|                        | 30,225                                                             |        | 31,346           |    |
|                        | Less accumulated  depreciation and amortization                    | (12,110     | )                | (14,844 | ) |
|                        |                                                                    |        |                  |    |
| Net property and  equipment | 18,115                                                             |        | 16,502           |    |
|                        | Other assets:                                                      |             |             |         |   |
|                        | Goodwill, net of  amortization                                     | 2,799       |             | 2,761   |   |
|                        | Other assets                                                       | 1,119       |             | 1,005   |   |
|                        |                                                                    |        |                  |    |
| Total other assets          | 3,918                                                              |        | 3,766            |    |
|                        |                                                                    |        |                  |    |
| Total assets                | $                                                                  | 89,619      |             | $       | 73,711 |   |
|                        |                                                                    |        |                  |    |
|                             |                                                                    |             |                  |         |  |  |  |  |  |

**LIABILITIES AND STOCKHOLDERS'EQUITY**

| Current liabilities:                        |                                                                                                                          |    |   |    |
|---------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|---------|--------|---------|
|                                        | Cash overdraft                                                                                                                | $       | 5,512  |    | $ | 2,782 |   |
|                                        | Short-term debt                                                                                                               | 43,966  |   | 37,124  |   |
|                                        | Accounts payable                                                                                                              | 14,053  |   | 11,731  |   |
|                                        | Payroll and related  expenses                                                                                                 | 10,927  |   | 9,168   |   |
|                                        | Accrued expenses                                                                                                              | 5,908   |   | 4,825   |   |
|                                        |                                                                                                                               |    |        |    |
|                                        | Total current  liabilities                                                                                                    | 80,366  |   | 65,630  |   |
| Other liabilities                           | 294                                                                                                                           |    | 307    |    |
| Deferred income taxes                       | 1,316                                                                                                                         |    | 1,316  |    |
|                                        |                                                                                                                               |    |        |    |
|                                        | Total liabilities                                                                                                             | 81,976  |   | 67,253  |   |
|                                        |                                                                                                                               |    |        |    |
| 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, 17,390,594 shares issued at December 31,  2000 and June 30, 2001 | 174     |   | 174     |   |
|                                        | Additional paid-in  capital                                                                                                   | 27,425  |   | 27,386  |   |
|                                        | Deferred compensation                                                                                                         | (318    | )      | (169    | ) |
|                                        | Accumulated other  comprehensive income (loss)                                                                                | 172     |   | (46     | ) |
|                                        | Accumulated deficit                                                                                                           | (15,013 | )      | (16,090 | ) |
|                                        |                                                                                                                               |    |        |    |
|                                        | 12,440                                                                                                                        |    | 11,255 |    |
|                                        | Less: Treasury stock,  at cost, 585,000 shares at December 31, 2000 and June 30, 2001                                         | (4,797  | )      | (4,797  | ) |
|                                        |                                                                                                                               |    |        |    |
|                                        | Total stockholders'  equity                                                                                                   | 7,643   |   | 6,458   |   |
|                                        |                                                                                                                               |    |        |    |
| Total liabilities and  stockholders' equity | $                                                                                                                             | 89,619  |   | $       | 73,711 |   |
|                                        |                                                                                                                               |    |        |    |
|                                             |                                                                                                                               |         |        |         |  |  |  |  |

See accompanying Notes to Consolidated Financial Statements

 

**ALTERNATIVERESOURCES CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS**(In thousands, except per share data)

 

|                                        | Three  Months   Ended June 30,                |   | Six  Months   Ended June 30, |   |
|---------------------------------------------|-----------------------------------------------|--------|------------------------------|--------|
|                                        |                                               |   |                              |   |
|                                        | 2000                                          |   | 2001                         |   | 2000 |   | 2001 |   |
|                                        |                                               |   |                              |   |  |   |  |   |
|                                        | (Unaudited)                                   |   | (Unaudited  )                |   |
|                                        |                                          |   |                         |   |
| Revenue                                     | $                                             | 65,856 |                         | $      | 52,900 |   | $ | 136,376 |   | $ | 110,620 |   |
|                                        |                                          |   |                         |   |   |   |   |   |
| Cost of services                            | 45,513                                        |   | 37,643                       |   | 97,295 |   | 78,512 |   |
|                                        |                                               |   |                              |   |  |   |  |   |
| Gross profit                                | 20,343                                        |   | 15,257                       |   | 39,081 |   | 32,108 |   |
| Operating expenses                          |                                          |   |                         |   |   |   |   |   |
|                                        | Selling, general and  administrative expenses | 20,005 |                         | 14,376 |   | 39,905 |   | 29,056 |   |
|                                        | Depreciation and  amortization                | 1,875  |                         | 1,370  |   | 3,733 |   | 2,838 |   |
|                                        |                                               |   |                              |   |  |   |  |   |
|                                        | Total operating  expenses                     | 21,880 |                         | 15,746 |   | 43,638 |   | 31,894 |   |
|                                        |                                               |   |                              |   |  |   |  |   |
| Income (loss) from  operations              | (1,537                                        | )      | (489                         | )      | (4,557 | ) | 214 |   |
| Other income (expense),  net                | (154                                          | )      | (1,132                       | )      | (1,183 | ) | (1,874 | ) |
|                                        |                                               |   |                              |   |  |   |  |   |
| Loss before income  taxes                   | (1,691                                        | )      | (1,621                       | )      | (5,740 | ) | (1,660 | ) |
| Income taxes                                | (543                                          | )      | (615                         | )      | (2,084 | ) | (583 | ) |
|                                        |                                               |   |                              |   |  |   |  |   |
| Net loss                                    | $                                             | (1,148 | )                            | $      | (1,006 | ) | $ | (3,656 | ) | $ | (1,077 | ) |
|                                        |                                               |   |                              |   |  |   |  |   |
| Net loss per share:                         |                                          |   |                         |   |   |   |   |   |
|                                        | Basic and diluted                             | $      | (0.07                        | )      | $ | (0.06 | ) | $ | (0.24 | ) | $ | (0.06 | ) |
|                                        |                                               |   |                              |   |  |   |  |   |
| Shares used to compute  net loss per share: |                                          |   |                         |   |   |   |   |   |
|                                        | Basic and diluted                             | 15,498 |                         | 16,805 |   | 15,509 |   | 16,805 |   |
|                                        |                                               |   |                              |   |  |   |  |   |
|                                             |                                               |        |                              |        |  |  |  |  |  |  |  |  |  |  |

See accompanying Notes to Consolidated Financial Statements

**ALTERNATIVERESOURCES CORPORATIONCONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)**(In thousands)

 
|                                | Three  Months  Ended June 30,                                    |   | Six  Months  Ended June 30, |   |
|-------------------------------------|------------------------------------------------------------------|--------|-----------------------------|--------|
|                                |                                                                  |   |                             |   |
|                                | 2000                                                             |   | 2001                        |   | 2000 |   | 2001 |   |
|                                |                                                                  |   |                             |   |  |   |  |   |
|                                | (Unaudited)                                                      |   | (Unaudited)                 |   |
|                                |                                                             |   |                        |   |
| Net loss                            | $                                                                | (1,148 | )                           | $      | (1,006 | ) | $ | (3,656 | ) | $ | (1,077 | ) |
| Other comprehensive  income (loss): |                                                             |   |                        |   |   |   |   |   |   |   |   |   |
|                                | Foreign currency  translation adjustment, net of tax             | __     |                        | (6     | ) | __ |   | 3 |   |
|                                | Unrealized holding  gain on security, net of tax:                |   |                        |   |   |   |   |   |   |
|                                | Unrealized holding  gain on security, net of tax                 | __     |                        | __     |   | __ |   | __ |   |
|                                | Less: reclassification  adjustment for gain included in net loss | __     |                        | __     |   | __ |   | (221 | ) |
|                                |                                                                  |   |                             |   |  |   |  |   |
| Other comprehensive  loss           | —                                                           |   | (6                          | )      | — |   | (218 | ) |
|                                |                                                                  |   |                             |   |  |   |  |   |
| Comprehensive loss                  | $                                                                | (1,148 | )                           | $      | (1,012 | ) | $ | (3,656 | ) | $ | (1,295 | ) |
|                                |                                                                  |   |                             |   |  |   |  |   |
|                                     |                                                                  |        |                             |        |  |  |  |  |  |  |  |  |  |  |

See accompanying Notes to Consolidated Financial Statements

**ALTERNATIVERESOURCES CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS**(In thousands)

|                                                          | Six  Months Ended June 30,                                                  |   |
|---------------------------------------------------------------|----------------------------------------------------------------------------------|--------|
|                                                          |                                                                                  |   |
|                                                          | 2000                                                                             |   | 2001 |   |
|                                                          |                                                                                  |   |  |   |
|                                                          | (Unaudited)                                                                      |   |
| Cash flows from  operating activities:                        |                                                                             |   |   |   |
|                                                          | Net loss                                                                         | $      | (3,656 | ) | $ | (1,077 | ) |
|                                                          | Adjustments to  reconcile net loss to net cash provided by operating activities: |   |   |   |   |
|                                                          | Depreciation and  amortization                                                   | 3,733  |   | 2,838 |   |
|                                                          | Deferred income taxes                                                            | — |   | (149 | ) |
|                                                          | Gain on sale of  interest rate swap                                              | (1,100 | ) | — |   |
|                                                          | Realized gain on sale  of security, net of tax                                   | — |   | (221 | ) |
|                                                          | Amortization of  deferred compensation on restricted shares                      | — |   | 149 |   |
|                                                          | Provision for doubtful  accounts                                                 | — |   | 82 |   |
|                                                          | Change in assets and  liabilities:                                               |   |   |   |   |
|                                                          | Trade accounts  receivable                                                       | 11,710 |   | 11,601 |   |
|                                                          | Prepaid expenses                                                                 | (1,379 | ) | (179 | ) |
|                                                          | Other receivables                                                                | 181    |   | (96 | ) |
|                                                          | Other assets                                                                     | (667   | ) | 114 |   |
|                                                          | Accounts payable                                                                 | 131    |   | (2,322 | ) |
|                                                          | Payroll and related  expenses                                                    | (2,144 | ) | (1,759 | ) |
|                                                          | Accrued expenses and  other liabilities                                          | (4,340 | ) | (1,070 | ) |
|                                                          | Income taxes  receivable                                                         | 1,875  |   | 2,180 |   |
|                                                          |                                                                             |        |   |  |   |
| Net cash provided by  operating activities                    | 4,344                                                                            |   | 10,091 |   |
|                                                          |                                                                                  |   |  |   |
| Cash flows from  investing activities:                        |                                                                             |   |   |   |
|                                                          | Purchases of property  and equipment                                             | (1,282 | ) | (1,187 | ) |
|                                                          | Redemption of  available-for-sale securities                                     | — |   | 639 |   |
|                                                          |                                                                                  |   |  |   |
| Net cash used in  investing activities                        | (1,282                                                                           | )      | (548 | ) |
|                                                          |                                                                                  |   |  |   |
| Cash flows from  financing activities:                        |                                                                             |   |   |   |
|                                                          | Payments received on  stock options exercised                                    | 52     |   | — |   |
|                                                          | Proceeds from  short-term debt                                                   | 4,400  |   | 168,704 |   |
|                                                          | Payments on short-term  debt                                                     | (4,400 | ) | (175,546 | ) |
|                                                          | Proceeds from sale of  interest rate swap                                        | 1,100  |   | — |   |
|                                                          | Repurchase of common  stock                                                      | (94    | ) | — |   |
|                                                          | Contributions to  employee stock purchase plan                                   | (70    | ) | (39 | ) |
|                                                          | Cash overdraft                                                                   | (3,086 | ) | (2,730 | ) |
|                                                          |                                                                             |        |   |  |   |
| Net cash used in  financing activities                        | (2,098                                                                           | )      | (9,611 | ) |
|                                                          |                                                                                  |   |  |   |
| Effect of exchange  rate changes on cash and cash equivalents | —                                                                           |   | 3 |   |
|                                                          |                                                                                  |   |  |   |
|                                                          |                                                                             |   |   |   |
| Net increase  (decrease) in cash and cash equivalents         | 964                                                                              |   | (65 | ) |
| Cash and cash  equivalents at beginning of period             | 374                                                                              |   | 114 |   |
|                                                          |                                                                                  |   |  |   |
| Cash and cash  equivalents at end of period                   | $                                                                                | 1,338  |   | $ | 49 |   |
|                                                          |                                                                                  |   |  |   |
| Supplemental  disclosures of cash flow information:           |                                                                             |   |   |   |
|                                                          | Cash paid for interest                                                           | $      | 2,198 |   | $ | 2,604 |   |
|                                                          | Cash paid for income  taxes                                                      | 246    |   | 133 |   |
|                                                               |                                                                                  |        |  |  |  |  |  |  |  |

See accompanying Notes to Consolidated FinancialStatements

**ALTERNATIVERESOURCES CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**          **Basis of Presentation**

             Theinterim consolidated financial statements presented are unaudited, but in theopinion of management, have been prepared in conformity with accountingprinciples generally accepted in the United States of America applied on abasis consistent with those of the annual financial statements.  Such interim consolidated financialstatements reflect all adjustments (consisting of normal recurring accruals)necessary for a fair presentation of the financial position and the results ofoperations for the interim periods presented. The results of operations for the interim periods presented are notnecessarily indicative of the results to be expected for the year endingDecember 31, 2001.  The interimconsolidated financial statements should be read in connection with the auditedconsolidated financial statements for the year ended December 31, 2000,included in the December 31, 2000 Form 10-K of Alternative ResourcesCorporation (“ARC” or the “Company”).

**2.**          **Computation of Earnings (Loss) per Share**

             Basicearnings (loss) per share are based on the weighted average number of commonshares outstanding for the period. Diluted earnings per share is based on the weighted average number ofcommon shares outstanding and includes the dilutive effect of unexercisedvested stock options using the treasury stock method.   Dilutive securities have not been included in the weightedaverage shares used for the calculation of earnings per share in periods of netloss because the effect of such securities would be anti-dilutive.

**3.**          **Recently Issued Accounting Pronouncements**

             InJune 1999, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards(“SFAS”) No. 133, “Accounting for Derivative Instruments and Certain HedgingActivities.”  In June 2000, the FASBissued SFAS No. 138, “Accounting for Certain Derivative Instruments and CertainHedging Activity, an Amendment of SFAS No. 133.”  SFAS No. 133 and SFAS No. 138 require that all derivativeinstruments be recorded on the balance sheet at their respective fair values.  SFAS No.133 and SFAS No. 138 are effectivefor all fiscal quarters of all fiscal years beginning after June 30, 2000; theCompany adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001, whichcurrently have no impact on the Company’s financial position or results ofoperations as the Company has not utilized derivative instruments or enteredinto any hedging transactions that are covered by those pronouncements.

**4.**          **Restructuring Charge – 2000**

             Duringthe fourth quarter of 2000, the Company incurred a $0.5 million restructuringcharge representing severance costs associated with the restructuring of theCompany’s sales, recruiting, delivery and administrative support models.  A total of 29 positions were eliminated,with 20 of them being administrative positions.  This charge was a continuation of the 1998 restructuring, whichwas designed to optimize the branch field model.

The primary components of therestructuring charge can be summarized as follows:

|             | Total   |   | 2000     |   | Balance at |   | 2001     |   | Balance at |
|------------------|---------|--------|----------|--------|------------|--------|----------|--------|------------|
|             | Initial |   | Cash     |   | December   |   | Cash     |   | June       |
| **In thousands** | Reserve |   | Payments |   | 31, 2000   |   | Payments |   | 30, 2001   |
|                  |
| Severance        | $       | 535    |     | $      | (246       | )      | $        | 289    |       | $ | (242 | ) | $ | 47 |
|                  |         |        |          |        |            |        |          |        |            |  |  |  |  |  |

** **

**5.**          **Restructuring Charge - 1999**

             Duringthe fourth quarter of 1999, the Company incurred a $4.1 million restructuringcharge representing real estate and severance costs associated withre-engineering the Company's sales, recruiting and delivery models. This actionwas a natural extension of the changes announced in 1998, which were designedto optimize the existing branch field model, and entails a comprehensive shiftto a model organized along the functional lines of sales, recruiting anddelivery. The new model is more efficient in terms of meeting the demands ofthe Company's clients at a lower cost.

The primary components of therestructuring charge can be summarized as follows:

 

|               | Total   |   | 1999     |   | Balance at |   | 2000     |   | Balance at |   | 2001     |   | Balance at |
|--------------------|---------|--------|----------|--------|------------|--------|----------|--------|------------|--------|----------|--------|------------|
|               | Initial |   | Cash     |   | December   |   | Cash     |   | December   |   | Cash     |   | June       |
| **In thousands**   | Reserve |   | Payments |   | 31, 1999   |   | Payments |   | 31, 2000   |   | Payments |   | 30, 2001   |
| ****               |
| Real  estate costs | $       | 3,538  |     | $      | (30        | )      | $        | 3,508  |       | $      | (1,888   | )      | $          | 1,620 |   | $ | (733 | ) | $ | 887 |
| Severance          | 630     |   | (416     | )      | 214        |   | (184     | )      | 30         |   | (30      | )      | —     |
|               | ****    |
| Total              | $       | 4,168  |     | $      | (446       | )      | $        | 3,722  |       | $      | (2,072   | )      | $          | 1,650 |   | $ | (763 | ) | $ | 887 |
|               |         |   |          |   |            |   |          |   |            |   |          |   |            |

 

             Theportion of the charge related to real estate costs, which totaled $3.5 million,relates to lease costs associated with vacating offices as the Companydownsizes its office space requirements. Through a combination of adopting amore virtual office model and eliminating administrative functions that hadbeen performed in the field offices, the Company relocated from most of itsexisting leased office space to smaller office space that will require 60% lesssquare footage than what was in use. The costs associated with this charge relatedprimarily to the present value of ongoing lease obligations for vacated officesnet of anticipated sublease income. A portion of the charge also related tobroker commissions and estimated leasehold improvement costs necessary tosublease vacated offices. The majority of the unpaid restructuring reserve asof June 30, 2001 relates to future lease obligations that will be paid over thenext 4 years.

**6.          Short-termborrowings**

             Duringthe second quarter of 2001, ARC and the lending syndicate executed amendmentsto the revolving credit agreement.  Theimpact of these amendments was to extend the maturity date to January 1, 2002and reduce the borrowing limit subject to pledged accounts receivable ascollateral in consideration for waiver of existing financial loan covenants andmodification of certain loan covenants. Additionally, the Company has two irrevocable standby letters of creditfor $1,268,000, which expire on December 31, 2001.

**Item 2.- Management's Discussion and Analysis of Financial Condition and Results ofOperations**

**Results of Operations**

             Essentiallyall of the Company’s revenue is generated from information technology servicesthat offer the benefits of outsourcing, while allowing information servicesoperations managers to retain strategic control of their operations.

**RESTRUCTURING AND OTHER CHARGES**

             Duringthe fourth quarter of 2000, the Company recorded a $36.6 million charge.  This charge was comprised of an impairmentcharge of $34.9 million related to goodwill, $1.2 million related to the write-off of excess assets, and $0.5 millionrelated to severance costs.

             Duringthe fourth quarter of 1999, the Company recorded a $5.2 million charge.  This charge was comprised of $3.5 millionrelated to lease costs, $0.6 million related to severance costs, and $1.1million related to the write-down of fixed asset values.

             Theresults of the above mentioned restructuring and other charges is evidenced bythe improvement of EBITDA noted below.

**Second Quarter Fiscal 2001 Compared to Second Quarter Fiscal 2000**

**             Revenue.**  Revenues consist of fees earned from ARCStaffing Management Services and ARC Technology Management Solutions.  Revenue decreased $13.0 million or 19.7%from $65.9 million in 2000 to $52.9 million in 2001, primarily from the overallslowdown in IT spending as companies curtailed spending on IT investments inreaction to a soft economy. ARC Technology Management Solutions revenuedecreased by $5.5 million or 27.2% from $20.3 million in 2000 to $14.8 millionin 2001. The Company’s traditional staffing business decreased by $7.5 millionor 16.3% from $45.6 million in 2000 to $38.1 million in 2001.

**             Grossprofit.**  Gross profit decreased by $5.1 million or25.0% from $20.3 million in 2000 to $15.2 million in 2001. The decrease wasprimarily attributable to the reduction in revenue. As a percentage ofrevenues, gross profit decreased 2.1 percentage points from 30.9% in 2000 to28.8% in 2001 due to an under utilization of technical resources on a majorproject with one customer. The major project situation was rectified early inthe third quarter of 2001 with a contract renewal that includes minimumbusiness levels or price increases.  Webelieve the new agreement should restore the margins to historical levels.

**             Operatingexpenses.**  Operating expenses consist of sales andmarketing costs, recruiting, retention and training costs, management andadministrative costs, and depreciation and amortization.  Operating expenses decreased by $6.1 millionor 28.0% from $21.9 million in 2000 to $15.7 million in 2001.  The operating expense decrease wasattributable to the restructuring actions taken in 2000, which is reflected inreduced office space and lower headcount. As a percentage of revenues, operating expenses decreased by 3.4percentage points from 33.2% in 2000 to 29.8% in 2001, primarily as a result ofthe actions described above.

**             Loss fromoperations.**  Loss from operations decreased by $1.0million from a loss of $1.5 million in 2000 to loss of $0.5 million in 2001.The decrease in loss from operations was the result of reduced operatingexpenses partially offset by the lower revenue levels.

             **Other(income) expense, net. **Otherexpense, net consists principally of interest expense on the Company’srevolving credit facility.  Otherexpense, net increased by $0.9 million from an expense of $0.2 million in 2000to an expense of $1.1 million in 2001. The increase in other expense isprimarily the result of a gain of $1.1 million on the sale of an interest rateswap agreement that was recognized in the second quarter of 2000, therebyreducing other expense for that period.

             **Earningsbefore interest, income taxes, depreciation and amortization. **Earnings before interest, incometaxes, depreciation and amortization (EBITDA) was $0.9 million for the quarter,which is comprised of loss before taxes of $(1.6) million plus depreciation andamortization of  $1.4 million and netinterest of $1.1 million.  This comparesto EBITDA of $0.3 million for the same three-month period in 2000.  The increase is primarily due to theincrease in income from operations.

**First Six Months Fiscal 2001 Compared to First Six MonthsFiscal 2000**

**             Revenue.**  Revenue decreased $25.8 million or 18.9%from $136.4 million in 2000 to $110.6 million in 2001, primarily from theoverall slowdown in IT spending as companies curtailed spending on ITinvestments in reaction to a soft economy. ARC Technology Management Solutionsrevenue decreased by $10.4 million or 25.4% from $41.0 million in 2000 to $30.6million in 2001. The Company’s traditional staffing business decreased by $15.3million or 16.1% from $95.3 million in 2000 to $80.0 million in 2001.

**             Grossprofit.**  Gross profit decreased by $7.0 million or17.8% from $39.1 million in 2000 to $32.1 million in 2001. The decrease wasprimarily attributable to the reduction in revenue. As a percentage ofrevenues, gross profit increased slightly from 28.7% in 2000 to 29.0% in 2001.

**             Operatingexpenses.**  Operating expenses consist of sales andmarketing costs, recruiting, retention and training costs, management andadministrative costs, and depreciation and amortization.  Operating expenses decreased by $11.7million or 26.8% from $43.6 million in 2000 to $31.9 million in 2001.  The operating expense decrease wasattributable to the restructuring actions taken in 2000, which is reflected inreduced office space and lower headcount. As a percentage of revenues, operating expenses decreased by 3.2percentage points from 32.0% in 2000 to 28.8% in 2001, primarily as a result ofthe actions described above.

**             Income(loss) from operations.**  Income (loss) from operations decreased by$4.8 million from a loss of $4.6 million in 2000 to income of $0.2 million in2001. The shift from loss from operations to income from operations was theresult of reduced operating expenses partially offset by the lower revenuelevels.

             **Other(income) expense, net,**Other expense, net consists of interestexpense of $2.6 million on the Company’s revolving credit facility offset by$0.3 million interest income on the Company’s tax refund and a $0.4 milliongain on the sale of stock that was distributed to ARC from its Health careprovider, MetLife, as it transitioned from a mutual company to a publiccompany.  Other expense, net increasedby $0.7 million from an expense of $1.2 million in 2000 to an expense of $1.9million in 2001.  The increase in otherexpense is primarily the result of a gain of $1.1 million on the sale of aninterest rate swap agreement that was recognized in the second quarter of 2000thereby reducing other expense for that period.

             **Earningsbefore interest, income taxes, depreciation and amortization. **Earnings before interest, incometaxes, depreciation and amortization (EBITDA) was $3.4 million year to date,which is comprised of loss before taxes of $(1.7) million plus depreciation andamortization of $2.8 million and net interest of $2.3 million.  This compares to EBITDA of a loss of $0.8million for the same six-month period in 2000. The increase is primarily due to having income from operations ascompared to a loss from operations in the prior period.

 

**Liquidityand Capital Resources**

             ARChas historically financed its operations and capital expenditures through salesof equity securities, a bank line of credit and cash generated from operations.Net cash provided by operations was $10.1 million during the first six monthsof 2001. Net cash provided by operations in 2001 was favorably impacted by thereduction in accounts receivable of $11.6 million and the receipt of income taxrefunds of $2.2 million.

             Currentliabilities exceeded current assets by $12.2 million at June 30, 2001. Currentliabilities include $37.1 million of outstanding borrowings against its line ofcredit that was recently amended to extend the maturity date through January 1,2002. During the first six months of 2001, the Company used the cash providedby operations to reduce its debt by $6.8 million and for capital purchases of$1.2 million.  In addition, the Companyis currently in discussion with several financial institutions to obtain a newline of credit, which would extend the maturity date to 2004. There can be noguarantee that the refinancing will be completed.  Should this not be completed, the Company will pursue otherfinancing alternatives.

          Assuming the successful negotiation ofa new credit facility, or the continued extension of its current bankingarrangement, the Company believes its cash balances, available line of creditand funds from operations will be sufficient to meet all of its anticipatedcash requirements for at least the next 12 months.

**Recently Issued Accounting Pronouncements**

             In June 2001, the FASB issued SFASNo. 142, "Goodwill and Other Intangible Assets" ("SFAS142") which supersedes APB Opinion No. 17, "Intangible Assets".SFAS 142 addressses how intangible assets that are acquired individually orwith a group of other assets (but not those acquired in a business combination)should be accounted for in financial statements upon their acquisition. SFAS142 also addresses how goodwill and other intangible assets should be accountedfor after they have been initially recognized in the financial statements. The provisions of SFAS 142 arerequired to be applied starting with fiscal years beginning after December 15, 2001. SFAS 142 is required to be applied at the beginning of anentity's fiscal year and to be applied to all goodwill and other intangibleassets recognized in its financial statements at that date. Management iscurrently evaluating the impact that adoption of SFAS 142 will have on itsconsolidated financial statements.

             In July 2001, the FinancialAccounting Standards Board ("FASB") issued SFAS No. 141,"Business Combinations" (SFAS 141") which supersedes APB OpinionNo. 16, "Business Combinations", and SFAS No. 38, "Accounting forPreacquisition Contingencies of Purchased Enterprises". SFAS 141 addressesfinancial accounting and reporting for business combinations and requires thatall business combinations within the scope of the SFAS 141 be accounted forusing only the purchase method.  SFAS141 is required to be adopted for all business combinations initiated afterJune 30, 2001.  Management has assessedthe impact of the adoption of SFAS 141 on its consolidated financial statementsand believes the impact will not be material. 

**FORWARD-LOOKING STATEMENTS**

             TheCompany makes forward-looking statements from time to time and desires to takeadvantage of the "safe harbor," which is afforded suchstatements  under the Private SecuritiesLitigation Reform Act of 1995, when they are accompanied by meaningfulcautionary statements identifying important factors that could cause actualresults to differ materially from those in the forward-looking statements.  The statements contained in this Form 10-Q,including those under "Management's Discussion and Analysis of FinancialCondition and Results of Operations," statements contained in futurefilings with the Securities and Exchange Commission and publicly disseminatedpress releases, and statements which may be made from time to time in thefuture by management of the Company in presentations to shareholders,prospective investors, and others interested in the business and financialaffairs of the Company, which are not historical facts, are forward-lookingstatements that involve risks and uncertainties that could cause actual resultsto differ materially from those set forth in the forward-lookingstatements.  Any projections offinancial performance or statements concerning expectations as to futuredevelopments should not be construed in any manner as a guarantee that suchresults or developments will, in fact, occur. There can be no assurance any forward-looking statement will be realizedor that actual results will not be significantly different from that set forth insuch forward-looking statement.

**Item 3. – Quantitative and Qualitative Disclosures AboutMarket Risk**

 The market risk that the Company is exposed to primarily relatesto changes in interest rates on its borrowings. At June 30, 2001 the Companyhad $37.1 million in floating-rate debt. An adverse charge in interest ratesduring any period that the loan is outstanding would cause an increase ininterest expense. A 100 basis point increase in the bank’s base rate wouldincrease the annual amount of interest expense by approximately $0.4 million.

**PART II - OTHER INFORMATION**

**Item 4.  – Submission ofMatters to a Vote of Security Holders**

|   | (a)    | The annual meeting of stockholders of Alternatives  Resources Corporation was held on June 14, 2001.                                                                                                                                           |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                           |
|   | (b)    | The individuals specified in (c) below were  elected as directors  at the meeting  and the terms of office of Syd N. Heaton, Steve Purcell, Bruce R. Smith,  Raymond Hipp, and Charles W. Sweet as directors continued after the meeting. |
|   |   |                                                                                                                                                                                                                                           |
|   | (c)    | Set forth below is the tabulation of the votes  with respect to the election of JoAnne Brandes and A. Donald Rully as Class I  Directors.                                                                                                      |

 

| Director        | For        | Withhold  Authority |
|-----------------|------------|---------------------|
|                 |            |                     |
| JoAnne Brandes  | 13,182,197 | 1,811,851           |
| A. Donald Rully | 13,264,762 | 1,729,286           |

** **

|   | * (d) | To approve an amendment to the Company's  Certificate of Incorporation to effect a reverse stock split of the Company's  issued and Outstanding Common Stock. |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

** **

| For        | Against | Withhold  Authority |
|------------|---------|---------------------|
|            |         |                     |
| 14,447,302 | 481,364 | 65,382              |

***** Although the amendment was approved, the Board of Directors decided thatit was in the best interest of the shareholders to not proceed with the reversesplit.

 

**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                                                                                                                         |
|                 |   |                                                                                                                                     |
|            | 4.1    |                                                                                                                                |   Eleventh Amendment to Credit Agreement |
|            | 4.2    |                                                                                                                                |   Twelfth Amendment to Credit Agreement |
|            | 4.3    |                                                                                                                                |   Thirteenth Amendment to Credit Agreement |
|            |   |                                                                                                                                |   |
|            |   |                                                                                                                                |
|            | (b)    | The  registrant was not required to file and did not voluntarily file any reports  on Form 8-K for the quarter ended June 30, 2001. |
|                 |        |                                                                                                                                     |  |  |  |

 

 

**SIGNATURES**

          Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

|                   | ALTERNATIVE  RESOURCES CORPORATION                                                          |
|------------------------|---------------------------------------------------------------------------------------------|
|                   |                                                                                        |
|                   |                                                                                        |
| Date:  August 14, 2001 |              /s/ Steven Purcell |
|                   |                                                                                             |
|                   | Steven  Purcell                                                                             |
|                   | Senior  Vice President, Chief Financial Officer, Treasurer and Secretary                    |