**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended June 30, 2002**

** **

**Commissionfile number 0-23940**

 

** **

| **ALTERNATIVE  RESOURCES 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 mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. YES    ý  NO    o.

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:

 

17,702,819 shares of Common Stock outstanding as ofAugust 05, 2002.

 

 

----

 

**ALTERNATIVE RESOURCES CORPORATION**

**FORM 10-Q**

**INDEX**

 
| PART I. FINANCIAL  INFORMATION |
|--------------------------------|
|                           |   |
| Item 1.                        | Financial Statements |
|                           |   |
|                           | Consolidated Balance  Sheets at June 30, 2002 (Unaudited) and December 31, 2001 |
|                           |   |
|                           | Consolidated  Statements of Operations for the three and six months ended June 30, 2002 and  2001 (Unaudited) |
|                           |   |
|                           | Consolidated  Statements of Comprehensive Income (Loss) for the three and six months ended  June 30, 2002 and 2001 (Unaudited) |
|                           |   |
|                           | Consolidated  Statements of Cash Flows for the six months ended  June 30, 2002 and 2001 (Unaudited) |
|                           |   |
|                           | Notes to  Consolidated Financial Statements (Unaudited) |
|                           |
| Item  2.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                           |   |
| Item  3.                       | Quantitative  and Qualitative Disclosures About Market Risk. |
|                           |   |
| PART II. OTHER INFORMATION     |
|                           |   |
| Item  4.                       | Submission  of Matters to a Vote of Security Holders |
|                           |   |
| Item 6.                        | Exhibits and  Reports on Form 8-K. |
|                           |   |
| SIGNATURES.                    |
|                                |  |  |  |

 

2

----

 

**PART I - FINANCIAL INFORMATION**

**Item 1. - Financial Statements**

** **

**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

(In thousands, exceptshare data)

** **
|                                                                                                                                                       |   | **December  31,  2001** |       | **June 30,  2002** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|--------------------|------------|
|                                                                                                                                                       |   |                    |       | **(Unaudited)**    |       |
| **ASSETS**                                                                                                                                                 |   |                    |       |               |       |
| **Current assets:**                                                                                                                                        |   |                    |       |               |       |
| Cash and cash  equivalents                                                                                                                                 |   | $                       | 127        |               | $          | 53 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts                                                                                         |   | 36,489                  |       | 33,192             |       |
| Prepaid expenses                                                                                                                                           |   | 2,091                   |       | 2,080              |       |
| Income taxes  receivable                                                                                                                                   |   | 1,497                   |       | 2,103              |       |
| Other  receivables                                                                                                                                         |   | 234                     |       | 320                |       |
| Total current  assets                                                                                                                                      |   | 40,438                  |       | 37,748             |       |
| **Property and equipment:**                                                                                                                                |   |                    |       |               |       |
| Office equipment                                                                                                                                           |   | 8,270                   |       | 8,288              |       |
| Furniture and  fixtures                                                                                                                                    |   | 2,389                   |       | 2,389              |       |
| Software                                                                                                                                                   |   | 19,355                  |       | 19,487             |       |
| Leasehold  improvements                                                                                                                                    |   | 1,972                   |       | 2,005              |       |
|                                                                                                                                                       |   | 31,986                  |       | 32,169             |       |
| Less accumulated  depreciation and amortization                                                                                                            |   | (17,394                 | )          | (19,598            | )          |
| Net property and  equipment                                                                                                                                |   | 14,592                  |       | 12,571             |       |
| **Other assets:**                                                                                                                                          |   |                    |       |               |       |
| Goodwill, net of  amortization                                                                                                                             |   | 2,723                   |       | 2,723              |       |
| Other assets                                                                                                                                               |   | 1,639                   |       | 2,581              |       |
| Total other  assets                                                                                                                                        |   | 4,362                   |       | 5,304              |       |
| Total assets                                                                                                                                               |   | $                       | 59,392     |               | $          | 55,623 |   |
|                                                                                                                                                       |   |                    |       |               |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                             |   |                    |       |               |       |
| **Current liabilities:**                                                                                                                                   |   |                    | ** ** |               | ** ** |
| Cash overdraft                                                                                                                                             |   | $                       | 4,404      |               | $          | 1,165 |   |
| Accounts payable                                                                                                                                           |   | 12,883                  |       | 12,362             |       |
| Payroll and  related expenses                                                                                                                              |   | 7,861                   |       | 7,074              |       |
| Accrued expenses                                                                                                                                           |   | 2,350                   |       | 3,510              |       |
| Total current  liabilities                                                                                                                                 |   | 27,498                  |       | 24,111             |       |
| Long-term debt                                                                                                                                             |   | 26,877                  |       | 25,799             |       |
| Other  liabilities                                                                                                                                         |   | 358                     |       | 371                |       |
| Total  liabilities                                                                                                                                         |   | 54,733                  |       | 50,281             |       |
| **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, 17,556,569 and 17,702,819  shares issued at December 31, 2001 and June 30, 2002, respectively |   | 176                     |       | 178                |       |
| Additional  paid-in capital                                                                                                                                |   | 27,508                  |       | 30,458             |       |
| Deferred  compensation                                                                                                                                     |   | (97                     | )          | —             |       |
| Accumulated  other comprehensive loss                                                                                                                      |   | (44                     | )          | (55                | )          |
| Accumulated  deficit                                                                                                                                       |   | (18,087                 | )          | (20,442            | )          |
|                                                                                                                                                       |   | 9,456                   |       | 10,139             |       |
| Less: Treasury  stock, at cost, 585,000 shares                                                                                                             |   | (4,797                  | )          | (4,797             | )          |
| Total  stockholders’ equity                                                                                                                           |   | 4,659                   |       | 5,342              |       |
| Total  liabilities and stockholders’ equity                                                                                                           |   | $                       | 59,392     |               | $          | 55,623 |   |

 

See accompanying Notes toConsolidated Financial Statements

 

3

----

 

**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands, except pershare data)

 
|                                          |   | **Three  Months  Ended June 30,** |   | **Six Months  Ended June 30,** |       |
|-----------------------------------------------|--------|-----------------------------------|--------|--------------------------------|------------|
|                                          |   | **2001**                          |   | **2002**                       |       | **2001** |   | **2002** |   |
|                                          |   | **(Unaudited)**                   |   | **(Unaudited)**                | ** ** |
| Revenue                                       |   | $                                 | 54,833 |                           | $          | 38,403 |   | $ | 114,434 |   | $ | 79,162 |   |
|                                          |   |                              |   |                           |       |   |   |   |   |
| Cost of services                              |   | 39,576                            |   | 27,830                         |       | 82,326 |   | 57,166 |   |
| Gross profit                                  |   | 15,257                            |   | 10,573                         |       | 32,108 |   | 21,996 |   |
|                                          |   |                              |   |                           |       |   |   |   |   |
| Operating  expenses                           |   |                              |   |                           |       |   |   |   |   |
| Selling, general  and administrative expenses |   | 14,376                            |   | 10,452                         |       | 29,056 |   | 21,362 |   |
| Depreciation and  amortization                |   | 1,370                             |   | 1,058                          |       | 2,838 |   | 2,204 |   |
| Other charges                                 |   | —                            |   | 1,100                          |       | — |   | 1,100 |   |
| Total operating  expenses                     |   | 15,746                            |   | 12,610                         |       | 31,894 |   | 24,666 |   |
| Income (loss)  from operations                |   | (489                              | )      | (2,037                         | )          | 214 |   | (2,670 | ) |
| Other income  (expense), net                  |   | (1,132                            | )      | (928                           | )          | (1,874 | ) | (1,739 | ) |
| Loss before  income taxes                     |   | (1,621                            | )      | (2,965                         | )          | (1,660 | ) | (4,409 | ) |
| Income taxes                                  |   | (615                              | )      | (1,275                         | )          | (583 | ) | (2,225 | ) |
|                                          |   |                              |   |                           |       |   |   |   |   |
| Net loss                                      |   | $                                 | (1,006 | )                              | $          | (1,690 | ) | $ | (1,077 | ) | $ | (2,184 | ) |
|                                          |   |                              |   |                           |       |   |   |   |   |
| Net loss per  share:                          |   |                              |   |                           |       |   |   |   |   |
| Basic and  diluted                            |   | $                                 | (0.06  | )                              | $          | (0.10 | ) | $ | (0.06 | ) | $ | (0.13 | ) |
|                                          |   |                              |   |                           |       |   |   |   |   |
| Shares used to  compute net loss per share:   |   |                              |   |                           |       |   |   |   |   |
| Basic and  diluted                            |   | 16,805                            |   | 17,117                         |       | 16,805 |   | 17,072 |   |

 

See accompanying Notes toConsolidated Financial Statements

 

4

----

 

**ALTERNATIVERESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)**

(In thousands)

 
|                                                            |   | **Three  Months  Ended June 30,** |       | **Six Months  Ended June 30,** |       |
|-----------------------------------------------------------------|--------|-----------------------------------|------------|--------------------------------|------------|
|                                                            |   | **2001**                          |       | **2002**                       |       | **2001** |   | **2002** |   |
|                                                            |   | **(Unaudited)**                   |       | **(Unaudited)**                |       |
|                                                            |   |                              |       |                           |       |
| Net loss                                                        |   | $                                 | (1,006     | )                              | $          | (1,690 | ) | $ | (1,077 | ) | $ | (2,184 | ) |
| Other  comprehensive income (loss):                             |   |                              |       |                           |       |   |   |   |   |
| Foreign currency  translation adjustment, net of  tax      |   | (6                                | )          | (18                            | )          | 3 |   | (11 | ) |
| Unrealized  holding gain on security, net of tax:               |   |                              |       |                           |       |   |   |   |   |
| Less  reclassification adjustment for gain included in net loss |   | —                            |       | —                         |       | (221 | ) | — |   |
| Other  comprehensive loss                                       |   | (6                                | )          | (18                            | )          | (218 | ) | (11 | ) |
|                                                            |   |                              | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Comprehensive  loss                                             |   | $                                 | (1,012     | )                              | $          | (1,708 | ) | $ | (1,295 | ) | $ | (2,195 | ) |

 

See accompanying Notes toConsolidated Financial Statements

 

5

----

 

**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In thousands)

 
|                                                                                       |   | **Six Months  Ended  June 30,** |       |
|--------------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                                       |   | **2001**                        |       | **2002** |   |
|                                                                                       |   | **(Unaudited)**                 |       |
| **Cash flows from operating  activities:**                                                 |   |                            | ** ** |   | ** ** |
| Net loss                                                                                   |   | $                               | (1,077     | ) | $ | (2,184 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |                            |       |   |   |
| Depreciation and  amortization                                                             |   | 2,838                           |       | 2,204 |   |
| Deferred income  taxes                                                                     |   | (149                            | )          | — |   |
| Provision for  doubtful accounts                                                           |   | 82                              |       | (192 | ) |
| Realized net  gain on sale of security                                                     |   | (221                            | )          | — |   |
| Deferred  compensation on restricted shares                                                |   | 149                             |       | 97 |   |
| Change in assets  and liabilities:                                                         |   |                            |       |   |   |
| Trade accounts  receivable                                                                 |   | 11,601                          |       | 3,489 |   |
| Prepaid expenses                                                                           |   | (179                            | )          | 11 |   |
| Other  receivables                                                                         |   | (96                             | )          | (86 | ) |
| Other assets                                                                               |   | 114                             |       | (1,148 | ) |
| Accounts payable                                                                           |   | (2,322                          | )          | (521 | ) |
| Payroll and  related expenses                                                              |   | (1,759                          | )          | (787 | ) |
| Accrued expenses  and other liabilities                                                    |   | (1,070                          | )          | 1,173 |   |
| Income taxes                                                                               |   | 2,180                           |       | (606 | ) |
| Net cash  provided by (used in) operating activities                                       |   | 10,091                          |       | 1,450 |   |
|                                                                                       |   |                            |       |   |   |
| **Cash flows from investing  activities:**                                                 |   |                            |       |   |   |
| Purchases of  property and equipment                                                       |   | (1,187                          | )          | (183 | ) |
| Redemption of  available-for-sale securities                                               |   | 639                             |       | — |   |
| Net cash  provided by (used in) investing activities                                       |   | (548                            | )          | (183 | ) |
|                                                                                       |   |                            |       |   |   |
| **Cash flows from financing  activities:**                                                 |   |                            |       |   |   |
| Proceeds from  long-term debt                                                              |   | 168,704                         |       | 118,150 |   |
| Payments on  long-term debt                                                                |   | (175,546                        | )          | (126,501 | ) |
| Proceeds from  issuance of debt and warrants                                               |   | —                          |       | 10,000 |   |
| Cash paid to  shareholders for cancellation of redemption plan                             |   | —                          |       | (171 | ) |
| Non-cash  interest expense of deferred financing costs                                     |   | —                          |       | 206 |   |
| Non-cash  interest expense on accretion of warrants                                        |   | —                          |       | 173 |   |
| Contributions to  employee stock purchase plan                                             |   | (39                             | )          | — |   |
| Proceeds from  issuance of shares to the employee stock purchase plan                      |   | —                          |       | 55 |   |
| Cash overdraft                                                                             |   | (2,730                          | )          | (3,239 | ) |
| Net cash  provided by (used in) financing activities                                       |   | (9,611                          | )          | (1,327 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                              |   | 3                               |       | (14 | ) |
|                                                                                       |   |                            |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                      |   | (65                             | )          | (74 | ) |
| Cash and cash  equivalents at beginning of period                                          |   | 114                             |       | 127 |   |
| Cash and cash  equivalents at end of period                                                |   | $                               | 49         |   | $ | 53 |   |
|                                                                                       |   |                            |       |   |   |
| Supplemental  disclosures of cash flow information:                                        |   |                            |       |   |   |
| Cash paid for  interest                                                                    |   | $                               | 2,604      |   | $ | 784 |   |
| Cash paid for  income taxes                                                                |   | 133                             |       | 30 |   |
| Cash refunds  received for income taxes                                                    |   | 2,895                           |       | 1,621 |   |

 

See accompanying Notes toConsolidated Financial Statements

 

6

----

 

**ALTERNATIVE RESOURCES CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(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 the year ending December 31, 2002.  The interim consolidated financial statements should be read inconnection with the audited consolidated financial statements for the yearended December 31, 2001, included in the 2001 Form 10-K of AlternativeResources 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, 2002and 2001, potentially dilutive securities consisted of options to purchase 2.5million and 2.6 million shares of common stock, respectively.  In addition, the Company issued 11,000,000warrants in connection with its refinancing described in note 4.  These warrants are also potentially dilutivesecurities.

 

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

 

In June 1999, the FASB issued SFAS No. 133, “Accounting forDerivative Instruments and Certain Hedging Activities.”  In June 2000, the FASB issued SFAS No. 138,“Accounting for Certain Derivative Instruments and Certain Hedging Activity, anAmendment of SFAS No. 133.”  SFAS No.133 and SFAS No. 138 require that all derivative instruments be recorded on thebalance sheet at their respective fair values as either liability or equityinstruments, depending on certain criteria. The Company adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001,which did not have an impact on its financial position or results of operationsgiven the Company did not have any derivative financial instruments at thattime.  As described in note 4, theCompany issued warrants in conjunction with the issuance of Senior SubordinatedConvertible Notes on January 31, 2002. Pursuant to SFAS 133 and interpretations by the Emerging Issues TaskForce covering derivative financial instruments, these warrants meet thecriteria for equity classification on the measurement date of January 31, 2002and the Company is not required to remeasure the warrants on subsequentdates.  As such, the fair value of thewarrants of approximately $3.0 million was recorded in equity as additionalpaid-in capital.  There was no effect onresults of operations for the six months ended June 30, 2002 as a result ofthese pronouncements.

 

In June 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”), which supersedesAccounting Principles Board (“APB”) Opinion No. 17, “Intangible Assets.”  SFAS 142 addresses how intangible assetsthat are acquired individually or with a group of other assets should beaccounted for in financial statements upon their acquisition. SFAS 142 alsoaddresses how goodwill and other intangible assets should be accounted forafter they have been initially recognized in the financial statements. Theprovisions of SFAS 142 are required to be applied starting with fiscal yearsbeginning after December 15, 2001.  SFAS142 is required to be applied at the beginning of an entity’s fiscal year toall goodwill and other intangible assets recognized in its financial statementsat that date. As of January 1, 2002, the date of adoption, the Company hasunamortized goodwill in the amount of approximately $2.7 million, which hasbeen subjected to the transition provisions, including the phase-in impairmenttest, of SFAS 142 and will not be amortized going forward.  In the six months ended June 30,2001, amortizationexpense was approximately $38,000.  Hadthis

 

7

----

 

amortization not been recorded, the reported net loss of $1,077 wouldhave been $1,039 with no effect on the reported loss per share of $0.06 for thesix months ended June 30, 2001.

 

In July 2001, the FASB issued SFAS No. 141, “BusinessCombinations” (“SFAS 141”), which supersedes APB Opinion No. 16, “BusinessCombinations,” and SFAS No. 38, “Accounting for Preacquisition Contingencies ofPurchased Enterprises.”  SFAS 141addresses financial accounting and reporting for business combinations andrequires that all business combinations within the scope of SFAS 141 beaccounted for using only the purchase method. SFAS 141 is required to beadopted for all business combinations initiated after June 30, 2001. As theCompany has not had any business combinations subsequent to June 30, 2001,there is no impact to date of the adoption of SFAS 141 on the Company’sconsolidated financial statements.

 

In October 2001, the FASB issued SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).  SFAS 144 addresses financial accounting andreporting for the impairment or disposal of long-lived assets.  While SFAS No. 144 supercedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of,” it retains many of the fundamental provisions of thatStatement.  SFAS 144 also supersedes theaccounting and reporting provisions of APB Opinion No. 30, “Reporting theResults of Operations-Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occuring Events andTransactions,” for the disposal of a segment of a business.  However, it retains the requirement inOpinion 30 to report separately discontinued operations and extends thatreporting to a component of an entity that either has been disposed of (bysale, abandonment, or in a distribution to owners) or is classified as held forsale.  SFAS 144 is effective for thefiscal years beginning after December 15, 2001 and interim periods within thosefiscal years.  SFAS 144 was adopted onJanuary 1, 2002 and had no effect on the consolidated financial statements.

 

In December 2001, the FASB issued Topic No. D-103,“Income Statement Characterization of Reimbursements Received for“Out-of-Pocket” Expenses Incurred” (“Topic D-103”), subsequentlyrecharacterized as Emerging Issues Task Force “EITF” No. 01-14, which iseffective for fiscal years beginning after December 15, 2001.  EITF No. 01-14 requires that certainout-of-pocket expenses rebilled to customers be recorded as revenue versus anoffset to the related expense. Comparative financial statements for prior periods must be conformed tothis presentation.  The Companyhistorically recorded rebilled out-of-pocket expenses as an offset to therelated expense. Effective January 1, 2002, the Company changed itspresentation to reflect rebilled expenses as revenue and also conformed thepresentation for prior periods. The impact of adopting this pronouncementresulted in the reclassification of $1.9 million and $1.6 million of expensesto revenue, with a corresponding decrease of approximately 1.0% and 1.2% ingross margin for the three months ended June 30, 2001 and 2002, respectively.  The impact of adopting this pronouncementresulted in the reclassification of $3.8 million and $2.9 million of expensesto revenue, with a corresponding decrease of approximately 0.9% and 1.1%, ingross margin for the six months ended June 30, 2001 and 2002, respectively.  Cost of services were increased by an equalamount with no impact on gross profit dollars.

 

**Recent Accounting Pronouncements, Not Yet Adopted**

 

In July 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with an Exit or Disposal Activity,” 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 is effective for exit or disposalactivities initiated after December 31, 2002. SFAS No. 146 requires that a company record a liability when thatliability is incurred and can be measured at fair value.  Incurred is defined as when an eventobligates the entity to transfer or use assets.  The recognition of termination benefits to employees will dependon whether additional service is required of the employee.  If the employee must continue to provideservice for a period of at least a minimum of sixty days in order to beeligible for the benefits (called a “minimum retention period”), the fair valueof the benefits should be accrued over the time the employee renders theservice.  If future service beyond aminimum retention period is not required, the liability for the fair value ofthe benefits should be recognized at the time the company communicates thearrangement to the employees.  TheCompany will adopt this statement in the year beginning January 1, 2003.

 

8

----

 

**4.****                                      Long-termborrowings**

 

During 1997, the Company entered into a $53.5 millionrevolving credit facility. As of December 31, 2001, borrowings under therevolving credit facility were $26.9 million. As part of this agreement, cashreceipts into the Company’s bank accounts are directly applied against theoutstanding bank line of credit balance. Advances from the line of credit are determined on a daily basis tominimize the Company’s average debt balance. The revolving credit facility expired on January 31, 2002.  The Company did not extend this creditfacility and successfully refinanced the debt on a long-term basis as describedbelow.

 

On January 31, 2002, the Company entered into a SeniorSecured Revolving Credit facility with a lending institution, that provides forup to $30 million of revolving credit based on the Company’s availablecollateral base.  The credit facilityhas a three-year term and bears interest at LIBOR plus 3.25% or the lenders’base rate plus 1.00%.  As of June 30,2002, the applicable rates are as follows: $15,000,000 at 5.15%, whichrepresents LIBOR plus 3.25%, with the remainder of the facility at 5.75%, whichrepresents the bank’s base rate plus 100 basis points.  The initial proceeds of this facilitytogether with the net proceeds from the sale of convertible subordinated notesdescribed below were used to repay the Company’s existing credit facility.  Advances from the revolving credit facilityare determined on a daily basis to minimize the Company's average debt balance.As of June 30, 2002 the Company has $2.3 million in excess availability.

 

On January 31, 2002, the Company also entered into aSecurities Purchase Agreement with a private equity investor, pursuant to whichthe Company sold $10 million principal amount of 15% Senior SubordinatedConvertible Notes due January 31, 2009. These notes are convertible into common stock of the Company at aconversion price of $2.50 per share.  Atthe Company’s election, one half of the interest may be deferred during thefirst four years, subject to certain conditions.

 

In conjunction with the sale of these notes, theCompany issued 10,000,000 warrants (immediately exercisable) to the privateequity investor to purchase shares of the Company’s common stock at $0.55 pershare and an additional 1,000,000 warrants to purchase its common stock at$0.73 per share, the latter of which are not exercisable for one year contigentupon the Company meeting certain performance measures, however, the warrantsexpire if such performance measures are met. A fair value was required to be ascribedto these warrants and recorded as a decrease in the debt and an increase toadditional-paid-in-capital.  This valueis then amortized over the seven-year life of the debt by a non-cash interestcharge.  The fair value of thesewarrants was determined to be approximately $3.0 million and will result in anon-cash quarterly interest charge of approximately $100 thousand ($70 thousandfor the three months ended March 31, 2002). The valuation of the warrants was determined based on advice fromthird-party valuation specialists who utilized a valuation model with thefollowing inputs: measurement date of Janaury 31, 2002; fair value of $0.80;exercise price of $0.55 ($0.73 for contingent warrants); contractual term of 10years; dividend rate of zero; volatility rate of 101%; risk-free rate of 5.49%;and probability of 70% (for contingent warrants only).  The value assigned to the warrants issubject to the finalization of the valuation advice and review by management.  Any changes, unless material, will be adjustedin the financial statements prospectively.

 

In conjunction with the Securities Purchase Agreementon January 31, 2002, the Company’s Board of Directors redeemed all of therights issued under its stockholders rights plan.  Each share of the Company’s common stock carried with it oneright to purchase a fraction of a share of the Company’s preferred stock incertain circumstances described in the Stockholder Rights Plan.  The rights were attached to, and could notbe separated from, shares of the Company’s common stock.  The Company paid a redemption payment of$0.01 per right to stockholders on February 8, 2002, at a total cost ofapproximately $171,000.

 

In August 2002, ARC and the lending institute executedan amendment to the revolving credit agreement.  ARC and the private equity investor executed a similar amendmentto the security purchase agreement.  Theimpact of these amendments was to reduce the borrowing limit subject to pledgedaccounts receivable as collateral in consideration for waiver of existingfinancial loan covenants and modification of certain loan covenants.

 

The Company has two irrevocable standby letters ofcredit for $1,268,000, which expire on December 31, 2002.

 

**5.****                                      OtherCharges**

 

During the second quarter of 2002 the Company recordeda charge of $1.1 million which represents the severance pay associated with thedeparture of the Company's former Chief Executive Officer.

 

9

----

 

**Item 2. - Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**Results of Operations**

 

Essentially all of the Company’s revenue is generatedfrom information technology services that offer the benefits of outsourcing,while allowing information services operations managers to retain strategiccontrol of 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; (4) and fee-based billing, which is usedfor 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 2002 Comparedto Second Quarter Fiscal 2001**

 

**Revenue.** Revenues consist of fees earned from the Company’s IT Staffing businessand its’ IT Solutions business. Revenue for the second quarter of 2002 was$38.4 million, which was down from $54.8 million in the second quarter of 2001.The IT Staffing revenue was $20.4 million, down from $38.4 million last yearand the IT Solutions revenue was $18.0 million, up from $16.4 million lastyear.  The Solutions revenue includes areclassification of $1.3 million in the second quarter of 2002 and a similarreclassification of $1.6 million in the second quarter of 2001. This reclassificationrepresents out-of-pocket expenses that were rebilled to customers andpreviously recorded as an offset to the related expense and now included inrevenue as required by the recent EITF No. 01-14, “Income StatementCharacterization of Reimbursements for “Out-of-Pocket” ExpensesIncurred."  Cost of services wereincreased by an equal amount with no impact on the dollar value of grossprofit.  The IT Staffing revenuesdropped by about 47% from the prior year. This decrease was driven by significantdeclines in outsourced staffing requirements from IBM and EDS, two of ourlargest staff augmentation customers. IT Staffing revenue was also reclassifiedfor EITF No. 01-14 by $0.2 million in the second quarter of 2002 and by a $0.3million in the second quarter of 2001.

 

**Gross margin.** Gross margin for the quarterwas 27.5%, down slightly from 27.8% in the second quarter of last year.  The decrease in margin from the secondquarter of 2002 is due to the very competitive staffing environment, which is causingsome margin pressure in our staffing business. This is partially offset by themargins in IT Solutions business, which have shown some improvement over thesecond quarter of last year.

 

**Operating expenses.**  Operating expenses consist of sales and marketingcosts, recruiting, retention and training costs, management and administrativecosts, and depreciation and amortization. Operating expenses decreased by $4.2 million or 26.9% from $15.7 millionin 2001 to $11.5 million in 2002.  Theoperating expense decrease was attributable to the restructuring actions theCompany has taken in the past, which is reflected in reduced office space andlower headcount.  As a percentage ofrevenues, operating expenses increased by 1.3% from 28.7% in 2001 to 30.0% in 2002,primarily as a result of the sharp decline in revenue.

 

**Other charges.**  During the second quarter of 2002 the Company recorded a chargeof $1.1 million which represents the severance pay associated with thedeparture of the Company’s former Chief Executive Officer.  There was no similar charge in the prioryear.

 

**Other (income) expense, net. **Other (income) expense consists primarily of interestexpense on the Company’s outstanding debt. Other (income) expense, netdecreased by $0.2 million in the second quarter of 2002 from $1.1 million in2001 to $0.9 million in 2002.  Thedecrease in other expense is primarily the result of a decrease in interestexpense related to decreased debt levels and lower interest rates.

 

10

----

 

**First Six Months Fiscal 2002 Comparedto First Six Months Fiscal 2001**

 

**Revenue.**  Revenues consist of fees earnedfrom the Company’s IT Staffing business and its’ IT Solutions business. Revenuedecreased by $35.2 million from $114.4 million in 2001 to $79.2 in 2002. The ITStaffing revenue was $43.1 million, down from $80.5 million last year and theIT Solutions revenue was $36.1 million, up from $33.9 million last year.  The Solutions revenue includes areclassification of $2.5 million in the six months of 2002 and a similarreclassification of $3.3 million in the six months of 2001. Thisreclassification represents out-of-pocket expenses that were rebilled tocustomers and previously recorded as an offset to the related expense and nowincluded in revenue as required by the recent EITF No. 01-14, “Income StatementCharacterization of Reimbursements for “Out-of-Pocket” Expenses Incurred.” Costof services were increased by an equal amount with no impact on the dollarvalue of gross profit.  The IT Staffingrevenues dropped by about 46% from the prior year. This decrease was driven bysignificant declines in outsourced staffing requirements from IBM and EDS, twoof our largest staff augmentation customers. IT Staffing revenue was alsoreclassified for EITF No. 01-14 by $0.4 million in the six months of 2002 andby a $0.5 million in the six months of 2001.

 

**Gross margin.**  Gross margin decreased by $10.1 million or 31.5% from $32.1million in 2001 to $22.0 million in 2002. The decrease in margin in 2002 is dueto the very competitive staffing environment, which is causing some marginpressure in our staffing business. This is partially offset by the margins inIT Solutions business, which have shown some improvement over the six months oflast year.

 

**Operating expenses.**  Operating expenses consist of sales andmarketing costs, recruiting, retention and training costs, management andadministrative costs, and depreciation and amortization.  Operating expenses decreased by $8.3 millionor 26.1% from $31.9 million in 2001 to $23.6 million in 2002.  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 increased by 1.9% from27.9% in 2001 to 29.8% in 2002, primarily as a result of the sharp decline inrevenue.

 

**Other charges.**  During the second quarter of 2002 the Company recorded a chargeof $1.1 million which represents the severance pay associated with thedeparture of the Company’s former Chief Executive Officer.  There was no similar charge in the prioryear.

 

**Other (income) expense, net. **In 2002, Other (income) expense consists primarily ofinterest expense on the Company’s outstanding debt. In 2001, Other (income)expense, net consisted of interest expense of $2.6 million on the Company’srevolving credit facility offset by interest income on the Company’s tax refundand a $0.4 million pre-tax gain on the sale of stock that was distributed toARC from its health care provider, MetLife, as it transitioned from a mutualcompany to a public company.

 

11

----

 

**Liquidity and Capital Resources**

 

On January 31, 2002, the Company replaced its existingbank line with a $30.0 million senior secured revolving credit facility withFleet Capital, a subsidiary of the FleetBoston Financial Corporation and $10.0million principal amount of Senior Subordinated Convertible Notes sold toWynnchurch Capital Partners, a private equity investor. The $30.0 millionrevolving credit facility is secured by the assets of the Company, principallyconsisting of accounts receivable. The agreement has a three-year term andbears interest at LIBOR plus 325 basis points or the bank’s base rate plus 100basis points.  As of June 30, 2002, theapplicable rates are as follows: $15,000,000 at 5.15%, which represents LIBORplus 3.25%, with the remainder of the facility at 5.75%, which represents thebank’s base rate plus 100 basis points.

 

The Senior Subordinated Convertible Notes bearinterest at 15% and are due January 31, 2009. These notes are convertible intocommon stock at a conversion price of $2.50 per share. At the Company’selection, one-half of the interest may be deferred during the first four years,subject to certain conditions.  Inconjunction with the sale of these notes, the Company issued 10,000,000warrants to purchase shares of the Company’s common stock at $0.55 per shareand an additional 1,000,000 warrants to purchase its common stock at $0.73 pershare, the latter of which are not exercisable for one year and expire on theoccurrence of certain events.

 

Current assets exceed current liabilities by $13.6million at June 30, 2002.  Net cashprovided by operations was $1.5 million in the first six months of 2002.  The Company utilized the net cash providedby operations to reduce its overall debt by $2.6 million during the secondquarter of 2002.

 

Capital spending was approximately $0.2 million in2002 and $1.2 million in 2001. The Company does not anticipate that its capitalspending going forward will be significantly greater than $2.0 million to $3.0million per annum.

 

The Company reported a tax benefit of $1.3 million inthe second quarter of 2002 and $950 thousand in the first quarter of 2002 dueto recently enacted Federal tax legislation. The new legislation provides for a five-year carry back of the Company’s2001 operating loss rather than the two years permitted under the prior legislation.  The Company intends to use the cashgenerated from the anticipated income tax refund for general operatingpurposes, including the reduction of debt.

 

In addition, pursuant to the January 31, 2002Securities Purchase Agreement with a private equity investor, the Company wasrequired to determine if it was subject to Section 382 limitations for federalincome tax purposes.  A company that hasa Section 382 ownership change faces an annual limitation on its ability to usenet operating loss carryovers and certain other tax attributes arising on orbefore the ownership change to offset taxable income arising after theownership change date.  Based on theresults of the analysis performed by a third party, the Company did notexperience an ownership change as defined in Section 382, and was allowed torecord a $1.3 million tax benefit for the six months ended June 30, 2002.

 

The Company believes its cash balances and funds fromoperations together with funds available under its new credit facility will besufficient to meet all of its anticipated cash requirements for at least thenext 12 months.  However, generaleconomic and industry conditions could impact the Company's ability to meetanticipated cash requirements.  Sincethe existing credit facility is secured by the assets of the Company, principallyconsisting of accounts receivable, these uncertainties may directly impact theavailability of this credit facility.

 

12

----

 

**Item 3. - Quantitative andQualitative Disclosures About Market Risk**

 

The market risk that the Company is exposed toprimarily relates to changes in interest rates on its borrowings. At June 30,2002, the Company had $18.2 million in floating-rate debt. An adverse change ininterest rates during any period that the loan is outstanding would cause anincrease in interest expense. A 100 basis point increase in the bank’s baserate would increase the annual amount of interest paid by $0.2 million.

 

The Company issued warrants on January 31, 2002 whichare classified as derivative financial instruments pursuant to SFAS 133, whichwas adopted by the Company on January 1, 2001. Pursuant to SFAS 133 and interpretations by the Emerging Issues TaskForce covering derivative financial instruments, these warrants meet thecriteria for equity classification on the measurement date of January 31, 2002and the Company is not required to remeasure the warrants on subsequentdates.  As such, there is nomark-to-market adjustment which will be reflected in the statement ofoperations as unrealized gains or losses as a result of changes in fair valueof these warrants in periods subsequent to the measurement date.  Additionally, there is no equity price riskassociated with changes in fair value of the warrants.  The Company does not have any derivativefinancial instruments other than the warrants.

 

**FORWARD-LOOKINGSTATEMENTS**

 

The Company makes forward-looking statements from time to time anddesires to take advantage of the “safe harbor,” which is afforded suchstatements under the Private Securities Litigation Reform Act of 1995, whenthey are accompanied by meaningful cautionary statements identifying importantfactors that could cause actual results to differ materially from those in theforward-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 future filingswith the Securities and Exchange Commission and publicly disseminated pressreleases, and statements which may be made from time-to-time in the future bymanagement of the Company in presentations to shareholders, prospectiveinvestors, and others interested in the business and financial affairs of theCompany, which are not historical facts, are forward-looking statements thatinvolve risks and uncertainties that could cause actual results to differmaterially from those set forth in the forward-looking statements. Anyprojections of financial performance or statements concerning expectations as tofuture developments should not be construed in any manner as a guarantee thatsuch results or developments will, in fact, occur. There can be no assuranceany forward-looking statement will be realized or that actual results will notbe significantly different from that set forth in such forward-lookingstatement.

 

In addition to the risks and uncertainties of ordinary businessoperations, the forward-looking statements of the Company referred to above arealso subject to the following risks and uncertainties:

 

•                       TheCompany’s ability to attract and retain qualified information technologyprofessionals;

**•**                       TheCompany’s ability to recruit, train, integrate and retain qualified salesdirectors, account managers, recruiters and client staffing managers;

**•**                       Competitionin the information technology services marketplace;

**•**                       TheCompany’s continued ability to initiate and develop client relationships;

**•**                       TheCompany’s ability to identify and respond to trends in information technology;

**•**                       Unforeseenbusiness trends in the Company’s national accounts or other large clients;

**•**                       Pricingpressures and/or wage inflation and the resulting impact on gross profit andnet operating margins;

•                       The abilityto successfully enter new geographic markets; and

•                       The effectof changes in general economic conditions.

 

13

----

 

**PART II - OTHER INFORMATION**

 

**Item 4. - Submission of Matters to aVote of Security Holders**

 

(a)          The annual meeting ofstockholders of Alternative Resources Corporation was held on June 13, 2002

 

(b)         The individuals specifiedin (c) below were elected as directors at the meeting and the terms of officeof JoAnne Brandes and Charles W. Sweet as directors continued after themeeting.

 

(c)          Set forth below is thetabulation of the votes with respect to the election of Frank Hayes and RichardJ. Renaud as Class I Directors; Syd N. Heaton, Steven Purcell, and John A.Hatherly as Class II Directors; and Michael J. Hering as a Class III Director.

 
| **Director**      |   | **For**    |   | **Withhold Authority** |   |
|-------------------|--------|------------|--------|------------------------|--------|
|              |   |       |   |                   |   |
| Frank Hayes       |   | 14,106,375 |   | 312,014                |   |
| Richard J. Renaud |   | 14,105,675 |   | 312,714                |   |
| Syd N. Heaton     |   | 14,130,447 |   | 287,942                |   |
| Steven Purcell    |   | 14,040,688 |   | 377,701                |   |
| John A. Hatherly  |   | 13,902,735 |   | 515,654                |   |
| Michael J. Hering |   | 14,190,585 |   | 227,804                |   |

 

**Item 6. - Exhibits and Reports onForm 8-K**

 

(a)          The following documentsare furnished as an exhibit and numbered pursuant to Item 601 of RegulationS-K:

 
| **Exhibit Number** |   | **Description**                                                                                                          |
|--------------------|--------|--------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                     |
| 3.1                |   | Amended and Restated By-Laws                                                                                             |
|               |   |                                                                                                                     |
| 4.1                |   | First Amendment to Credit Agreement and Waiver                                                                           |
|               |   |                                                                                                                     |
| 4.2                |   | First Amendment to Securities Purchase Agreement and  Waiver                                                             |
|               |   |                                                                                                                     |
| 10.1               |   | Executive Employment Agreement between  Alternative  Resources Corporation and  George W. Watts dated July 1, 2002. |
|               |   |                                                                                                                     |
| 10.2               |   | Executive Separation Agreement between Alternative  Resources Corporation and Raymond R. Hipp  dated June 13, 2002. |
|               |   |                                                                                                                     |
| 10.3               |   | Director Agreement between Alternative Resources  Corporation and Robert Stanojev dated August 5, 2002.                  |
|               |   |                                                                                                                     |
| 99.1               |   | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

(b)         No Current Reports onForm 8-K were filed during the three-month period ended June 30, 2002. ACurrent Report on Form 8-K was filed on July 2, 2002, reporting under Item 5.“Other Events”, the departure of Ray R. Hipp as Chairman and Chief ExecutiveOfficer and the appointment of George W. Watts as President and Chief ExecutiveOfficer.

 

14

----

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                         | ALTERNATIVE RESOURCES CORPORATION                                        |
|------------------------------|--------------------------------------------------------------------------|
|                         |                                                                     |
|                         |                                                                     |
| Date:  August  14, 2002 | /s/ Steven  Purcell                                                      |   |
|                         | Steven Purcell                                                           |
|                         | Senior Vice President, Chief Financial Officer,  Treasurer and Secretary |

 

15

----