**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q/A**

 

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

 

**For thequarterly period ended March 31, 2003**

 

**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 checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  YES  ý    NO o.

 

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

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date:

 

17,117,019 shares of theregistrant’s common stock were outstanding as of May 5, 2003.

 

 

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**EXPLANATORY NOTE**

 

This Form 10-Q/A of Alternative Resources Corporation is being filedfor the purpose of amending and restating Items 1, 2 and 6 of our Form 10-Q forthe quarter ended March 31, 2003, filed May 14, 2003, to reflect therestatement of our Consolidated Financial Statements for the quarters endedMarch 31, 2003 and 2002.  We restatedour Consolidated Financial Statements as of and for the quarters ended March31, 2003 and 2002 to properly classify our revolving line of credit with FleetCapital at March 31, 2003 and 2002 as a current liability.  Prior to the filing of our March 31, 2003Form 10-Q, the Company’s management believed that the classification of thisrevolving line of credit as long-term debt was appropriate.  However, the Company subsequently determinedthat Emerging Issues Task Force (EITF) Issue No. 95-22, “Balance SheetClassification of Borrowings Outstanding under Revolving Credit Agreements thatinclude both a Subjective Acceleration Clause and a Lock-Box Arrangement,”should be applied and that this revolving line of credit should be classifiedas a current liability because it meets the criteria of EITF No. 95-22.  The information in this Form 10-Q/A does notreflect any subsequent information or events or otherwise amend the Form 10-Qexcept as noted above.  Accordingly, theamendments set forth in this Form 10-Q/A relate solely to such restatement.  **This restatement had no impact on our results of operationsor loss per share for the quarters ended March 31, 2003 and 2002.**

** **

 

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**ALTERNATIVE RESOURCES CORPORATION**

**FORM 10-Q**

**INDEX**

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

 

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

**Item 1****. -Financial Statements**

 

**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED BALAN****CE SHEETS**

(In thousands,except share data)

 
|                                                                                                                                                       |   | **December  31,  2002** |       | **March 31,  2003** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|---------------------|------------|
|                                                                                                                                                       |   |                    |       | **(Unaudited)**     |       |
|                                                                                                                                                       |   | **(Restated)**          |       | **(Restated)**      |       |
| **ASSETS**                                                                                                                                                 |   |                    |       |                |       |
| **Current  Assets:**                                                                                                                                       |   |                    | ** ** |                | ** ** |
| Cash  and cash equivalents                                                                                                                                 |   | $                       | 54         |                | $          | 43 |   |
| Trade  accounts receivable, net of allowance for doubtful accounts                                                                                         |   | 34,497                  |       | 25,754              |       |
| Prepaid  expenses                                                                                                                                          |   | 1,787                   |       | 1,632               |       |
| Income  taxes receivable                                                                                                                                   |   | 94                      |       | 31                  |       |
| Other  receivables                                                                                                                                         |   | 178                     |       | 115                 |       |
| Total  current assets                                                                                                                                      |   | 36,610                  |       | 27,575              |       |
| **Property  and Equipment:**                                                                                                                               |   |                    |       |                |       |
| Office  equipment                                                                                                                                          |   | 8,319                   |       | 8,384               |       |
| Furniture  and fixtures                                                                                                                                    |   | 2,389                   |       | 2,389               |       |
| Software                                                                                                                                                   |   | 19,726                  |       | 19,785              |       |
| Leasehold  improvements                                                                                                                                    |   | 2,012                   |       | 2,008               |       |
|                                                                                                                                                       |   | 32,446                  |       | 32,566              |       |
| Less  accumulated depreciation and amortization                                                                                                            |   | (21,448                 | )          | (22,377             | )          |
| Net  property and equipment                                                                                                                                |   | 10,998                  |       | 10,189              |       |
| **Other Assets:**                                                                                                                                          |   |                    |       |                |       |
| Goodwill                                                                                                                                                   |   | 2,723                   |       | 2,723               |       |
| Other  assets                                                                                                                                              |   | 2,399                   |       | 2,261               |       |
| Total  other assets                                                                                                                                        |   | 5,122                   |       | 4,984               |       |
| Total  assets                                                                                                                                              |   | $                       | 52,730     |                | $          | 42,748 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                   |   |                    |       |                |       |
| **Current  Liabilities:**                                                                                                                                  |   |                    |       |                |       |
| Cash  overdraft                                                                                                                                            |   | $                       | 3,202      |                | $          | 2,825 |   |
| Short-term  debt                                                                                                                                           |   |                    | 18,501     |                |       | 12,183 |   |
| Accounts  payable                                                                                                                                          |   | 12,236                  |       | 10,903              |       |
| Payroll  and related expenses                                                                                                                              |   | 5,920                   |       | 5,832               |       |
| Accrued  expenses                                                                                                                                          |   | 2,340                   |       | 2,441               |       |
| Accrued  restructuring and other charges                                                                                                                   |   | 4,922                   |       | 4,112               |       |
| Total  current liabilities                                                                                                                                 |   | 47,121                  |       | 38,296              |       |
| Long-term  debt                                                                                                                                            |   | 8,606                   |       | 9,143               |       |
| Other  liabilities                                                                                                                                         |   | 384                     |       | 379                 |       |
| Total  liabilities                                                                                                                                         |   | 56,111                  |       | 47,818              |       |
| **Stockholders’  Equity (Deficit):**                                                                                                                  |   |                    |       |                |       |
| Preferred  stock ($.01 par value, 1,000,000 shares authorized; none issued and  outstanding)                                                               |   | —                  |       | —              |       |
| Common  stock ($.01 par value, 50,000,000 shares authorized; 17,702,819 shares issued  and 17,117,019 outstanding at December 31, 2002 and March 31, 2003) |   | 178                     |       | 178                 |       |
| Additional  paid-in capital                                                                                                                                |   | 30,695                  |       | 30,695              |       |
| Accumulated  other comprehensive loss                                                                                                                      |   | (64                     | )          | (99                 | )          |
| Accumulated  deficit                                                                                                                                       |   | (29,393                 | )          | (31,047             | )          |
|                                                                                                                                                       |   | 1,416                   |       | (273                | )          |
| Less:  Treasury stock, at cost (585,800 shares)                                                                                                            |   | (4,797                  | )          | (4,797              | )          |
| Total  stockholders’ equity (deficit)                                                                                                                 |   | (3,381                  | )          | (5,070              | )          |
| Total  liabilities and stockholders’ equity (deficit)                                                                                                 |   | $                       | 52,730     |                | $          | 42,748 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED STATE****MENTS OF OPERATIONS**

(In thousands,except per share data)

 

 
|                                        |   | **Three Months  Ended March 31,** | ** ** |
|---------------------------------------------|--------|-----------------------------------|------------|
|                                        |   | **2002**                          |       | **2003** |   |
|                                        |   | **(Unaudited)**                   | ** ** |
|                                        |   |                              |       |   |   |   |   |
| Revenue                                     |   | $                                 | 40,759     |   | $ | 36,846 |   |
| Cost  of services                           |   | 29,336                            |       | 27,668 |   |
| Gross  profit                               |   | 11,423                            |       | 9,178 |   |
| Operating  expenses:                        |   |                              |       |   |   |
| Selling,  general and administrative        |   | 10,910                            |       | 8,921 |   |
| Depreciation  and amortization              |   | 1,146                             |       | 929 |   |
| Total  operating expenses                   |   | 12,056                            |       | 9,850 |   |
| Loss  from operations                       |   | (633                              | )          | (672 | ) |
| Other  expense, net                         |   | (811                              | )          | (983 | ) |
| Loss  before income taxes                   |   | (1,444                            | )          | (1,655 | ) |
| Income  tax expense (benefit)               |   | (950                              | )          | (1 | ) |
|                                        |   |                              |       |   |   |
| Net  loss                                   |   | $                                 | (494       | ) | $ | (1,654 | ) |
|                                        |   |                              |       |   |   |
| Net  loss per share:                        |   |                              |       |   |   |
| Basic  and diluted                          |   | $                                 | (0.03      | ) | $ | (0.10 | ) |
|                                        |   |                              |       |   |   |
| Shares  used to compute net loss per share: |   |                              |       |   |   |
| Basic  and diluted                          |   | 17,026                            |       | 17,117 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**ALTERNATIVERESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS****OFCOMPREHENSIVE INCOME (LOSS)**

(In thousands)

 
|                                                 |   | **Three  Months  Ended March 31,** | ** ** |
|------------------------------------------------------|--------|------------------------------------|------------|
|                                                 |   | **2002**                           |       | **2003** | ** ** |
|                                                 |   | **(Unaudited)**                    | ** ** |
| Net  loss                                            |   | $                                  | (494       | ) | $ | (1,654 | ) |
| Other  comprehensive income (loss):                  |   |                               |       |   |   |
| Foreign  currency translation adjustment, net of tax |   | 7                                  |       | 35 |   |
| Other  comprehensive income                          |   | 7                                  |       | 35 |   |
|                                                 |   |                               |       |   |   |
| Comprehensive  loss                                  |   | $                                  | (487       | ) | $ | (1,619 | ) |

 

See accompanyingnotes to consolidated financial statements.

 

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**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED****STATEMENTSOF CASH FLOWS**

(In thousands)

 
|                                                                                      |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                      |   | **2002**                           |   | **2003** |   |
|                                                                                      |   | **(Unaudited)**                    |   |
| **Cash  flows from operating activities:**                                                |   |                               |   |   |   |
| Net  loss                                                                                 |   | $                                  | (494   | ) | $ | (1,654 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in)operating activities: |   |                               |   |   |   |
| Depreciation  and amortization                                                            |   | 1,146                              |   | 929 |   |
| Provision  for (recoveries of) doubtful accounts                                          |   | (126                               | )      | (39 | ) |
| Deferred  compensation on restricted shares                                               |   | 33                                 |   | — |   |
| Non-cash  interest expense from deferred financing costs                                  |   | 83                                 |   | 131 |   |
| Non-cash  interest expense from accretion of warrants                                     |   | 69                                 |   | 112 |   |
| Change  in assets and liabilities:                                                        |   |                               |   |   |   |
| Trade  accounts receivable                                                                |   | (995                               | )      | 8,782 |   |
| Prepaid  expenses                                                                         |   | 113                                |   | 155 |   |
| Income  taxes receivable                                                                  |   | 517                                |   | 63 |   |
| Other  receivables                                                                        |   | (28                                | )      | 63 |   |
| Other  assets                                                                             |   | (1,196                             | )      | 7 |   |
| Accounts  payable                                                                         |   | (1,180                             | )      | (1,333 | ) |
| Payroll  and related expenses                                                             |   | (282                               | )      | (88 | ) |
| Accrued  expenses and other liabilities                                                   |   | 908                                |   | (714 | ) |
| Net  cash provided by (used in) operating activities                                      |   | (1,432                             | )      | 6,414 |   |
|                                                                                      |   |                               |   |   |   |
| **Cash  flows from investing activities:**                                                |   |                               |   |   |   |
| Purchases  of property and equipment                                                      |   | (99                                | )      | (120 | ) |
| Net  cash used in investing activities                                                    |   | (99                                | )      | (120 | ) |
|                                                                                      |   |                               |   |   |   |
| **Cash  flows from financing activities:**                                                |   |                               |   |   |   |
| Proceeds  from short-term debt                                                            |   | 59,672                             |   | 55,166 |   |
| Payments  on short-term debt                                                              |   | (65,291                            | )      | (61,059 | ) |
| Proceeds  from issuance of debt and warrants                                              |   | 10,000                             |   | — |   |
| Cash  paid for cancellation of stockholder rights plan                                    |   | (172                               | )      | — |   |
| Proceeds  from issuance of shares under the employee stock purchase plan                  |   | 83                                 |   | — |   |
| Cash  overdraft                                                                           |   | (2,778                             | )      | (377 | ) |
| Net  cash provided by (used in) financing activities                                      |   | 1,514                              |   | (6,270 | ) |
| Effect  of exchange rate changes                                                          |   | 7                                  |   | (35 | ) |
|                                                                                      |   |                               |   |   |   |
| Net  decrease in cash and cash equivalents                                                |   | (10                                | )      | (11 | ) |
| Cash  and cash equivalents at beginning of period                                         |   | 127                                |   | 54 |   |
| Cash  and cash equivalents at end of period                                               |   | $                                  | 117    |   | $ | 43 |   |
|                                                                                      |   |                               |   |   |   |
| Supplemental  disclosures of cash flow information:                                       |   |                               |   |   |   |
| Cash  paid for interest                                                                   |   | $                                  | 313    |   | $ | 310 |   |
| Cash  paid for income taxes                                                               |   | 11                                 |   | 1 |   |
| Cash  refunds received for income taxes                                                   |   | 1,467                              |   | 65 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**ALTERNATIVE RESOURCES CORPORATION**

**NOTES****TOCONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

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

 

The interim consolidatedfinancial statements presented are unaudited, but in the opinion of management,have been prepared in conformity with accounting principles generally acceptedin the United States of America applied on a basis consistent with those of theannual financial statements.  Suchinterim consolidated financial statements reflect all adjustments (consistingprincipally of normal recurring accruals) necessary for a fair presentation ofthe financial position and the results of operations for the interim periodspresented.  The results of operationsfor the interim periods presented are not necessarily indicative of the resultsto be expected for any other interim period and the year ending December 31,2003.  The interim consolidatedfinancial statements should be read in connection with the audited consolidatedfinancial statements for the year ended December 31, 2002, included in the 2002Form 10-K/A of Alternative Resources Corporation (“ARC” or the “Company”).

 

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

 

Basic earnings (loss) pershare is based on the weighted average number of common shares outstanding forthe period.  Diluted earnings (loss) pershare is based on the weighted average number of common shares outstanding andincludes the dilutive effect of unexercised stock options and warrants whichare in-the-money 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. At March 31,2003 and 2002, potentially dilutive securities consisted of options to purchase4.0 million and 2.5 million shares of common stock, respectively.  In addition, the Company issued 11.0 millionwarrants to purchase common stock in connection with its debt refinancingdescribed in note 4.  These warrants arealso potentially dilutive securities as of March 31, 2003 and 2002.

 

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

 

In July 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with an Exit or DisposalActivity,” (“SFAS 146”) which supercedes EITF No. 94-3 “Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(Including Certain Costs Incurred in a Restructuring),” which was effective forexit or disposal activities initiated after December 31, 2002.  SFAS 146 requires that a company record aliability when that liability is incurred and can be measured at fairvalue.  Incurred is defined as when anevent obligates 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 has adopted this statement in the year beginning January 1, 2003 and itis not anticipated to have a material effect on the Company’s consolidatedfinancial position or results of operations for any restructuring activityinitiated after December 31, 2002.

 

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

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation–Transition and Disclosure–an Amendment of FASBStatement No. 123.” (“SFAS 148”) This Statement amends FASB StatementNo. 123, Accounting for Stock-Based Compensation, to provide alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. In addition, this statementamends the disclosure requirements of SFAS No. 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results. The Company has elected not to change to the fairvalue based method of accounting for stock-based employee compensation. TheCompany accounts for employee stock options under Accounting Principles Board(APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” underwhich no compensation cost was recognized by us and provides the disclosuresrequired by SFAS No. 123 and SFAS No. 148.

 

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

 

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

 

**4a.     Restatement**

 

We have restated our Consolidated Financial Statementsfor the quarters ended March 31, 2003 and 2002 to properly classify ourrevolving credit facility with Fleet Capital as a current liability inaccordance with EITF No. 95-22, “Balance Sheet Classification of BorrowingsOutstanding under Revolving Credit Agreements that include both a SubjectiveAcceleration Clause and a Lock-Box Arrangement.”  This restatement had no impact on our results of operations orloss per share for the quarters ended March 31, 2003 and 2002.

 

The restatement had the following impact to our consolidated balancesheets:

 
|                       |   | **As  reported** |       | **As  restated** |       |
|----------------------------|--------|------------------|------------|------------------|------------|
| **March 31, 2003**    |   |             | ** ** |             | ** ** |
| Short-term debt            |   | $                | —     |             | $          | 12,183 | ** ** |
| Total current liabilities  |   | 26,113           |       | 38,296           | ** ** |
| Long-term debt             |   | 21,326           |       | 9,143            | ** ** |
|                       |   |             |       |             | ** ** |
| **December 31, 2002** |   |             |       |             | ** ** |
| Short-term debt            |   | $                | —     |             | $          | 18,501 | ** ** |
| Total current liabilities  |   | 28,620           |       | 47,121           | ** ** |
| Long-term debt             |   | 27,107           |       | 8,606            | ** ** |

 

**4b.     Borrowings**

 

On January 31, 2002,the Company entered into a Senior Secured Revolving Credit facility with Fleet CapitalCorporation, that provides for up to $30.0 million of revolving creditbased on the Company’s available collateral base. This facility was reduced to$28.0 million in August 2002 as discussed below. 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 March 31, 2003, the applicable rate is 5.25%, whichrepresents the bank’s base rate plus 1.00%. The initial proceeds of thisfacility together with the net proceeds from the sale of convertiblesubordinated notes described below were used to repay the

 

9

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Company’s existing creditfacility. Advances from the revolving credit facility are determined on a dailybasis to minimize the Company’s average debt balance. As of March 31, 2003, theCompany has $1.5 million in excess availability and $12.2 millionoutstanding.

 

On January 31, 2002,the Company also entered into a Securities Purchase Agreement with WynnchurchCapital Partners, L.P., pursuant to which the Company sold $10 millionprincipal amount of 15% Senior Subordinated Convertible Notes dueJanuary 31, 2009. These notes are convertible into common stock of theCompany at a conversion price of $2.50 per share. At the Company’s election,one half of the interest may be deferred during the first four years, subjectto certain conditions. Effective August 8, 2002, the Company andWynnchurch Capital Partners, L.P. agreed to defer all of the interest.

 

In conjunction with thesale of these notes, the Company issued 10,000,000 warrants (immediatelyexercisable) to Wynnchurch Capital Partners, L.P. to purchase shares of theCompany’s common stock at $0.55 per share. Additionally, the Company issued1,000,000 warrants to purchase its common stock at $0.73 per share. Thesewarrants were not exercisable for one-year, contingent upon the Company meetingcertain performance measures, however, the warrants would expire if suchperformance measures were met. As of December 31, 2002, the Company didnot meet the specific performance measures related to the 1,000,000 contingentwarrants and these warrants did not expire. A fair value was required to beascribed to these warrants and recorded as a decrease in the debt and anincrease to additional-paid-in-capital. This value is then amortized over theseven-year life of the debt by a non-cash interest charge. The fair value ofthese warrants was determined to be approximately $3.1 million andresulted in a non-cash interest charge of approximately $69,000 and $112,000for the three month periods ended March 31, 2002 and 2003, respectively. Thevaluation of the warrants was determined based on advice from third-partyvaluation specialists who utilized a valuation model with the following 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 10 years;dividend rate of zero; volatility rate of 101%; risk-free interest rate of5.49%; and probability of 100% (for contingent warrants only).

 

In conjunction with theSecurities Purchase Agreement on January 31, 2002, the Company’s Board ofDirectors redeemed all of the rights issued under its stockholder rights plan.Each share of the Company’s common stock carried with it one right to purchasea fraction of a share of the Company’s preferred stock in certain circumstancesdescribed in the Stockholder Rights Plan. The rights were attached to, andcould not be separated from, shares of the Company’s common stock. The Companypaid a redemption payment of $0.01 per right to stockholders onFebruary 8, 2002, at a total cost of approximately $171,000.

 

Throughout 2002, theCompany and Fleet Capital Corporation executed certain amendments to therevolving credit agreement. The impact of these amendments was to reduce theborrowing limit subject to pledged accounts receivable as collateral to$28.0 million in consideration for the waiver of existing financial loancovenants.

 

In April 2003, theCompany and Fleet Capital Corporation executed additional amendments to therevolving credit agreement. The impact of these amendments was to obtain awaiver of financial loan covenants existing as of December 31, 2002 and toredefine financial loan covenant calculations for future periods.

 

In April 2003, inconnection with an amendment to the Company’s credit agreement with FleetCapital Corporation, the Company’s senior lender, to allow overadvances of upto $2,000,000 through December 31, 2003, Wynnchurch Capital Partners, L.P.executed a guaranty to Fleet Capital Corporation of the overadvance amounts. Inconsideration, Wynnchurch Capital Partners, L.P. and the Company amended theiragreements, 15% Senior Subordinated Convertible Notes and warrants to reducethe conversion price of the notes to common stock to $1.50 per share,reduce the exercise price of all outstanding warrants to $0.26 per share,provide that any draw on the guaranties could be satisfied by a purchase byWynnchurch Capital Partners, L.P. of additional 15% Senior SubordinatedConvertible Notes having a principal amount equal to Fleet CapitalCorporation's draw and having terms equal to the outstanding 15% SeniorSubordinated Convertible Notes and provide for a $250,000 fee to WynnchurchCapital Partners, L.P. in the event of a draw upon their guaranty, payablethrough the issuance of additional 15% Senior Subordinated ConvertibleNotes.  The value of the warrants willbe reassessed during the second quarter of 2003, due to the decrease inexercise price; amortization will be adjusted accordingly. 

 

At March 31, 2003, theCompany has debt of $21.3 million. This is comprised of $12.2 million of short-term debt in Senior SecuredRevolving Credit with Fleet Capital Corporation and $9.1 million of long-termdebt related to the Securities Purchase Agreement with Wynnchurch CapitalPartners, L.P.

 

At March 31, 2003, the total contractual obligation to WynnchurchCapital Partners, L.P. is $11.8 million. This is comprised of $10.0 million in original principal and$1.8 million in accrued interest. $6.9 million of the principal is included in long-term debt whilethe remaining $3.1 million is classified as equity, representing the valueassigned to the warrants.  The$9.1 million of this obligation recorded as long-term debt is comprised ofthe following:

 
|                   |   | **(in  thousands)** |   |
|------------------------|--------|---------------------|--------|
|                   |   |                |   |
| Original  principal    |   | $                   | 6,865  |   |
| Accrued interest       |   | 1,755               |   |
| Accretion of  warrants |   | 522                 |   |
|                   |   |                |   |
| Total long-term  debt  |   | $                   | 9,142  |   |
|                   |   |                |   |

 

As of March 31,2003, the Company has two irrevocable standby letters of credit for $1,625,000,which expire on December 31, 2003.

 

10

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

 

The Company recordedrestructuring and other charges in the aggregate amount of $6.1 millionduring 2002. During the second quarter of 2002, the Company recorded a chargeof $1.1 million representing the severance pay associated with thedeparture of the Company’s former Chief Executive Officer. During the thirdquarter of 2002, the Company recorded a $4.7 million restructuring chargedue to excess office space and the restructuring of the service deliveryfunction. An additional $0.3 million restructuring charge was recorded inthe fourth quarter, which was also due to the restructuring of the servicedelivery function. The primary components of the restructuring and othercharges can be summarized as follows:

 

| **(in millions)**     |   |   |   |
|-----------------------|--------|--------|--------|
| Restructuring  charge |   |   |   |
| Real  estate costs    |   | $      | 4.4    |   |
| Severance             |   | 0.6    |   |
| Other  charges        |   | 1.1    |   |
|                  |   |   |   |
|                  |   | $      | 6.1    |   |

 

The primary components ofthe restructuring charge can be summarized as follows:

 
|                        |   | **Total  Initial  Reserve** |   | **2002  Cash  Payments** |   | **Balance at  December 31,  2002** |   | **2003  Cash  Payments** |   | **Balance at  March 31,  2003** |   |
|-----------------------------|--------|-----------------------------|--------|--------------------------|--------|------------------------------------|--------|--------------------------|--------|---------------------------------|--------|
| **(in thousands)**          |   |                        |   |                     |   |                               |   |                     |   |                            |   |
| Real  estate costs          |   | $                           | 4,328  |                     | $      | (569                               | )      | $                        | 3,759  |                            | $      | (550 | ) | $ | 3,209 |   |
| Severance                   |   | 627                         |   | $                        | (362   | )                                  | 265    |                     | $      | (173                            | )      | 92 |   |
| Other  charges              |   | 1,100                       |   | (202                     | )      | 898                                |   | (87                      | )      | 811                             |   |
|                        |   |                        |   |                     |   |                               |   |                     |   |                            |   |
| Total  restructuring charge |   | $                           | 6,055  |                     | $      | (1,133                             | )      | $                        | 4,922  |                            | $      | (810 | ) | $ | 4,112 |   |

 

The portion of the chargerelated to real estate costs, which totaled $4.3 million, relates to leasecosts associated with decreased requirements for office space as the Companyrestructured its service delivery organization. The costs associated with thischarge related primarily to ongoing lease obligations for vacated offices, netof anticipated sublease income. A portion of the charge also related to brokercommissions and estimated leasehold improvement costs necessary to subleasevacated offices.

 

The $0.6 millionseverance charge related to head-count reductions associated with centralizingthe service delivery organization as part of a re-engineering exercise. A totalof 60 positions were eliminated with the largest group being the clientstaffing managers. The remainder of positions eliminated was a mix of corporatestaff and recruiting personnel. The remaining severance balance atMarch 31, 2003 relates to employees with employment agreements. Thisamount will be paid out through July 2003.

 

The $1.1 million othercharges related to the severance pay associated with the departure of theCompany's former Chief Executive Officer. The remaining balance at March 31, 2003 is required to be paid in fullby July 2004.

 

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

 

The Company accounts forits stock options in accordance with the provisions of Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (APB25) and related interpretations. Under APB 25, no compensation cost hasbeen recognized for the Company’s stock-based compensation plans. The Companycontinues to apply the provisions of APB 25 and provides the pro formadisclosures required by SFAS No. 123 and SFAS No. 148.

 

The following datareflect the pro forma effects of the stock-based compensation cost forthe Company’s stock option transactions in accordance with SFAS No. 123and SFAS No. 148:

 
|                            |   | **Three  Months Ended March 31,**         |   |
|---------------------------------|--------|-------------------------------------------|--------|
|                            |   | **2002**                                  |   | **2003** |   |
|                            |   |                                      |   |   |   |
|                            |   | **(in thousands, except per share data)** |   |
|                            |   |                                      |   |   |   |
| Net loss, as  reported          |   | $                                         | (494   | ) | $ | (1,654 | ) |
| Pro forma  compensation expense |   | (704                                      | )      | (211 | ) |
|                            |   |                                      |   |   |   |
| Pro forma net  loss             |   | $                                         | (1,198 | ) | $ | (1,865 | ) |
|                            |   |                                      |   |   |   |   |   |
| Diluted loss per  share:        |   |                                      |   |   |   |
| As reported                     |   | $                                         | (0.03  | ) | $ | (0.10 | ) |
| Pro forma                       |   | (0.07                                     | )      | (0.11 | ) |

 

Thefair value of each option is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted average assumptions usedfor grants for the three months ended March 31, 2002 and 2003,respectively: risk-free interest rates of 4.7% and 3.8%; expectedlives of 5 and 9 years; expected volatility of 145% and 123%; and no dividendsexpected to be paid.

 

 

##### **Item2. - Management’**s Discussion andAnalysis of Financial Condition and Results of Operations

 

## **Results of Operations**

 

Essentially all of theCompany’s revenue is generated from information technology services that offerthe benefits of outsourcing, while allowing information services operationsmanagers to retain strategic control of their operations. Revenues arerecognized as services are performed, utilizing four different billingmethodologies as follows:  (1) time andmaterial billing, whereby the client is billed by the hour on a weekly basisfor past services performed; (2) project-based billing, for which fees arefixed and are based on specific contracts; (3) per-incident billing, wherebythe Company charges a fee for each specific task related to certain services;and (4) fee-based billing, which is used for candidate placement/recruitingfees and vendor management fees.  TheCompany typically provides discounts on staffing services to its largestclients in exchange for the opportunity to sell more volume, as well as theopportunity to sell its higher-margin, value-added services.  All revenues are recognized net of suchdiscounts and after services have been completed.

 

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

 

**Revenue.**Revenuesconsist of fees earned from ARC Staffing Management Solutions and ARCTechnology Management Solutions. Revenue decreased $3.9 million or 9.6% from $40.8 million in the firstquarter of 2002 to $36.9 million in the first quarter of 2003, primarily fromthe slowdown in IT spending experienced industry-wide.  ARC Technology Management Solutions revenueincreased by $1.3 million or 7.4% from $18.2 million in the first quarter of2002 to $19.5 million in the first quarter of 2003.  The Company’s traditional Staffing Management Solutions revenuedecreased by $5.2 million or 23.2% from $22.6 million in the first quarter of2002 to $17.4 million in the first quarter of 2003.

 

**Gross profit.** Grossprofit decreased by $2.2 million or 19.7% from $11.4 million in the firstquarter of 2002 to $9.2 million in the first quarter of 2003.  As a percentage of revenue, gross profitdecreased by 3.1% from 28.0% in the first quarter of 2002 to 24.9% in the firstquarter of 2003 due to the very competitive IT staffing environment, which iscausing some margin pressures in all service offerings.

 

**Operating expenses. **Operating expenses consistof salaries and benefits, sales costs, recruiting, retention and trainingcosts, management and administrative costs, and depreciation andamortization.  Operating expensesdecreased by $2.2 million or 18.3% from $12.1 million in the first quarter of2002 to $9.9 million in the first quarter of 2003.  The operating expense decrease was attributable to therestructuring actions the Company has taken in the past, which is reflected inreduced office space and lower headcount. As a percentage of revenue, operatingexpenses decreased by 2.9% from 29.6% in the first quarter of 2002 to 26.7% inthe first quarter of 2003.

 

**Other expense, net. **Other expense, net,consists primarily of interest expense on the Company’s outstanding debt. Otherexpense, net, increased by $0.2 million or 21.2% from $0.8 million in the firstquarter of 2002 to $1.0 million in the first quarter of 2003. The increase inother expense, net, is primarily the result of an increase in interest expenserelated to increased average debt levels.

 

**Income tax benefit.**Duringthe first quarter of 2002, the Company recorded a tax benefit of $1.0 millionrelated to a refund obtained due to a change in income tax law.  There was no similar benefit in the firstquarter of 2003.

 

# **Liquidity and Capital Resources**

 

Current liabilitiesexceed current assets by $10.7 million at March 31, 2003.  Current liabilities include $12.2 million ofoutstanding borrowings against the revolving credit agreement that has amaturity date of January 31, 2005.  Theborrowings under the revolving credit agreement are classified as current inaccordance with EITF Issue No. 95-22. Net cash provided by operations was $6.4 million in the first threemonths of 2003.  Net cash provided byoperations was principally the result of a decrease in accounts receivable ofapproximately $8.8 million offset by decreases in accounts payable and accruedexpenses and other liabilities of $1.3 million and $0.7 million,respectively.  The significant decreasein accounts receivable was due to a payment agent agreement entered into withIBM Credit, LLC in the first quarter of 2003. This agreement provides for an expedited receipt of outstanding IBMreceivables from 45 days to 15 days in exchange for a discount of 0.76%.

 

Capital spending wasapproximately $0.1 million in both of the three months ended March 31, 2003 and2002. The Company does not anticipate that its capital spending going forwardwill be significantly greater than $1.0 million to $2.0 million per annum.

 

On January 31, 2002, theCompany replaced its existing bank line with a $30.0 million senior securedrevolving credit facility with Fleet Capital Corporation, a subsidiary of theFleetBoston Financial Corporation and $10.0 million principal amount of SeniorSubordinated Convertible Notes sold to Wynnchurch Capital Partners, L.P., aprivate equity investor. The $30.0 million revolving credit facility is securedby the assets of the Company, principally consisting of accountsreceivable.  In August 2002, ARC andFleet Capital Corporation executed an amendment to the revolving creditagreement.  The impact of this amendmentwas to reduce the borrowing limit subject to pledged accounts receivable ascollateral to $28.0 million in consideration for the waiver of existingfinancial loan covenants.  The creditfacility has a three-year term and bears interest at LIBOR plus 3.25% or thelender's base rate plus 1.00%. As of March 31, 2003, the applicable rate is5.25%, which represents the bank’s base rate plus 1.00%.

 

The Senior SubordinatedConvertible Notes bear interest at 15% and are due January 31, 2009. Thesenotes are convertible into common stock anytime after January 31, 2002 at aconversion price of $2.50 per share. At the Company’s election, one-half of the

 

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interest may be deferredduring the first four years, subject to certain conditions.  Effective August 8, 2002, the Company andWynnchurch Capital Partners, L.P. agreed to defer all of the interest.  In conjunction with the sale of these notes,the Company issued 10,000,000 warrants to purchase shares of the Company’scommon stock at $0.55 per share. An additional 1,000,000 warrants to purchaseits common stock at $0.73 per share, were not exercisable for one yearcontingent upon the Company meeting certain performance measures, however, thewarrants would expire if such performance measures were met.  As of December 31, 2002, the Company did notmeet the specific performance measures related to the 1,000,000 contingentwarrants and these warrants did not expire.

 

Throughout 2002, theCompany and Fleet Capital Corporation executed certain amendments to therevolving credit agreement.  The impactof these amendments was to reduce the borrowing limit subject to pledgedaccounts receivable as collateral to $28.0 million in consideration for thewaiver of existing financial loan covenants.

 

In April 2003, theCompany and Fleet Capital Corporation executed additional amendments to therevolving credit agreement.  The impactof these amendments was to obtain a waiver of financial loan covenants existingas of December 31, 2002 and to redefine financial loan covenant calculationsfor future periods.

 

In April 2003, inconnection with an amendment to the Company’s credit agreement with FleetCapital Corporation, the Company’s senior lender, to allow overadvances of upto $2.0 million through December 31, 2003, Wynnchurch Capital Partners, L.P.executed a guaranty to Fleet Capital Corporation of the overadvanceamounts.  In consideration, WynnchurchCapital Partners, L.P and the Company amended their agreements, 15% SeniorSubordinated Convertible Notes and warrants to reduce the conversion price ofthe notes to common stock to $1.50 per share, reduce the exercise price of alloutstanding warrants to $0.26 per share, provide that any draw on theguaranties could be satisfied by a purchase by Wynnchurch Capital Partners, L.Pof additional 15% Senior Subordinated Convertible Notes having a principalamount equal to Fleet Capital Corporation’s draw and having terms equal to theoutstanding 15% Senior Convertible Notes and provide for a $250,000 fee toWynnchurch Capital Partners, L.P in the event of a draw upon their guaranty,payable through the issuance of additional 15% Senior Subordinated ConvertibleNotes.  The value of the warrants will bereassessed during the second quarter 2003, due to the decrease in exerciseprice; amortization will be adjusted accordingly.

 

The Company believes itscash balances and funds from operations together with funds available under itscredit facility will be sufficient to meet all of its anticipated cashrequirements for at least the next 12 months. However, general economic and industry conditions could impact theCompany’s ability to meet anticipated cash requirements.  Since the existing credit facility issecured by the assets of the Company, principally consisting of accountsreceivable, these uncertainties may directly impact the availability of thiscredit facility.

 

The following summarizesthe Company’s contractual obligations at March 31, 2003, and the effectsuch obligations are expected to have on our liquidity and cash in the futureperiods.

 
|                                |   | **Payments  Due by Period** |   |
|-------------------------------------|--------|-----------------------------|--------|
|                                |   | **Total**                   |   | **Less Than  1 Year** |   | **1-3  Years** |   | **4-5  Years** |   | **After  5 Years** |   |
|                                |   | **(in  thousands)**         |   |
|                                |   |                        |   |   |   |   |   |   |   |   |   |
| Contractual  Obligations:           |   |                        |   |   |   |   |   |   |   |   |   |
| Senior  Secured Revolving Credit    |   | $                           | 12,183 |   | $ | 12,183 |   | $ | — |   | $ | — |   | $ | — |   |
| Securities  Purchase Agreement      |   | 11,755                      |   | — |   | — |   | — |   | 11,755 |   |
| Non-cancelable  operating leases    |   | 14,126                      |   | 4,125 |   | 5,494 |   | 2,651 |   | 1,856 |   |
|                                |   |                        |   |   |   |   |   |   |   |   |   |
| Total  contractual cash obligations |   | $                           | 38,064 |   | $ | 16,308 |   | $ | 5,494 |   | $ | 2,651 |   | $ | 13,611 |   |

 

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

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’sconsolidated financial statements are impacted by the accounting policies used, and the estimates and assumptionsmade by management.  The mostsignificant accounting policies and management estimates that affect the presentationof the consolidated financial statements include revenue recognition, allowancefor doubtful accounts, analysis of goodwill impairment and valuation allowancefor deferred tax assets.

 

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**Revenue Recognition**

 

The Company recognizesrevenues as services are performed, utilizing four different billingmethodologies, as follows:  (1) time andmaterial billing, whereby the client is billed by the hour on a weekly basisfor past services performed; (2) project-based billing, for which fees arefixed and are based on specific contracts; (3) per-incident billing, wherebythe Company charges a fee for each specific task related to certain services;and (4) fee-based billing, which is used for candidate placement/recruitingfees and vendor management fees.   TheCompany typically provides discounts on staffing services to its largestclients in exchange for the opportunity to sell more volume, as well as theopportunity to sell its higher-margin, value-added services.  All revenues are recognized net of suchdiscounts and after services have been completed.

 

**Allowance for Doubtful Accounts**

 

The Company performs ongoing credit evaluationsof its customers and adjusts credit limits based upon payment history and thecustomers’ current credit worthiness. The Company continuously monitors collections and payments from itscustomer base and maintains a provision for estimated credit losses based uponhistorical experience and any specific customer collection issues that havebeen identified.  The Companyspecifically reviews outstanding account balances that are overdue 90 days ormore in making its assessment of the provision for bad debts in each period.  While the Company has historically hadsufficient coverage of allowances for credit losses, it cannot guarantee thatit will continue to experience the same credit loss rates as in past periods.

 

**Goodwill Impairment**

 

On January 1, 2002, theCompany adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS142”).  This Statement dictates thatgoodwill and intangible assets with indefinite useful lives should be testedand written down for impairment at least annually, instead of being amortizedon an ongoing basis.  The Company hasterminated its policy of amortizing goodwill on a monthly basis and willperform an annual analysis of goodwill impairment, using the discounted futurecash flows methodology.  Since theCompany wrote off the significant majority of its goodwill balance in 2000 dueto impairment, the adoption of this standard has not had an impact on itsfinancial statements.

 

**Valuation Allowance forDeferred Tax Assets**

 

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

 

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**PART II****- OTHERINFORMATION**

### ** **

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

 

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

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                           |
| 4.1                 |   | Fifth Amendment to  credit and security agreement dated April 14, 2003.                                                                                        |
|                |   |                                                                                                                                                           |
| 4.2                 |   | Fifth Amendment to  securities purchase agreement dated April 14, 2003.                                                                                        |
|                |   |                                                                                                                                                           |
| 4.3                 |   | First Amendment to  subordination and intercreditor agreement dated April 14, 2003.                                                                            |
|                |   |                                                                                                                                                           |
| 4.4                 |   | Guaranty Agreement  dated April 14, 2003.                                                                                                                      |
|                |   |                                                                                                                                                           |
| 4.5                 |   | Amendment to  subordinated convertible promissory notes dated April 14, 2003.                                                                                  |
|                |   |                                                                                                                                                           |
| 4.6                 |   | Amendment to stock  purchase and contingent warrants dated April 14, 2003.                                                                                     |
|                |   |                                                                                                                                                           |
| *31.1               |   | Certification of Chief  Executive Officer pursuant to Rule 13a-15(e) or Rule 15d-15(e), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                |   |                                                                                                                                                           |
| *31.2               |   | Certification of Chief  Financial Officer pursuant to Rule 13a-15(e) or Rule 15d-15(e), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                |   |                                                                                                                                                           |
| *32                 |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 905 of the  Sarbanes-Oxley Act of 2002.                                      |

----

*                                         Filedhere within; all other exhibits previously filed.

 

(b)                     No reports onForm 8-K were required to be filed during the quarterly period ended March 31,2003.

 

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**SIGNA****TURES**

 

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

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

 

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