**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 the quarterly period endedSeptember 30, 2002**

 

**Commission file number 0-23940**

 

 

**ALTERNATIVE RESOURCES CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                     |   | **38-2791069**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  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:

 

17,702,819shares of Common Stock outstanding as of November 04, 2002.

 

 

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**ALTERNATIVERESOURCES CORPORATION**

**FORM10-Q**

**INDEX**

 
|                                                                                                                                 | **Page**                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
| PART I.                                                                                                                              | FINANCIAL INFORMATION                                                                       |   |
|                                                                                                                                 |                                                                                        |
| Item 1.                                                                                                                              | Financial Statements                                                                        |   |
|                                                                                                                                 |                                                                                        |
| Consolidated  Balance Sheets at September 30, 2002 (Unaudited) and December 31, 2001                                                 | 3                                                                                           |
|                                                                                                                                 |                                                                                        |
| Consolidated Statements of Operations for  the three and nine months ended September 30, 2002 and 2001 (Unaudited)                   | 4                                                                                           |
|                                                                                                                                 |                                                                                        |
| Consolidated  Statements of Comprehensive Income (Loss) for the three and nine months ended  September 30, 2002 and 2001 (Unaudited) | 5                                                                                           |
|                                                                                                                                 |                                                                                        |
| Consolidated  Statements of Cash Flows for the nine months ended September 30, 2002 and  2001 (Unaudited)                            | 6                                                                                           |
|                                                                                                                                 |                                                                                        |
| Notes  to Consolidated Financial Statements (Unaudited)                                                                              | 7                                                                                           |
|                                                                                                                                 |                                                                                        |
| Item 2.                                                                                                                              | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 11 |
|                                                                                                                                 |                                                                                        |
| Item 3.                                                                                                                              | Quantitative and Qualitative Disclosures About  Market Risk.                                | 15 |
|                                                                                                                                 |                                                                                        |
| Item 4.                                                                                                                              | Controls and Procedures                                                                     | 15 |
|                                                                                                                                 |                                                                                        |
| PART II.                                                                                                                             | OTHER INFORMATION                                                                           |   |
|                                                                                                                                 |                                                                                        |
| Item 6.                                                                                                                              | Exhibits and Reports on Form 8-K.                                                           | 16 |
|                                                                                                                                 |                                                                                        |
| SIGNATURES.                                                                                                                          | 17                                                                                          |
|                                                                                                                                 |                                                                                        |
| CERFITICATIONS.                                                                                                                      | 18                                                                                          |

 

2

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**PART I****- FINANCIAL INFORMATION**

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

 

**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED BALANCESHEETS**

(In thousands, exceptshare data)

 
|                                                                                                                                                            |   | **December  31,  2001** |   | **September  30,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------------------------|--------|
|                                                                                                                                                            |   |                    |   | **(Unaudited)**          |   |
| **ASSETS**                                                                                                                                                      |   |                    |   |                     |   |
| **Current assets:**                                                                                                                                             |   |                    |   |                     |   |
| Cash and cash  equivalents                                                                                                                                      |   | $                       | 127    |                     | $      | 7 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts                                                                                              |   | 36,489                  |   | 34,320                   |   |
| Prepaid expenses                                                                                                                                                |   | 2,091                   |   | 1,555                    |   |
| Income taxes  receivable                                                                                                                                        |   | 1,497                   |   | 3,035                    |   |
| Other  receivables                                                                                                                                              |   | 234                     |   | 262                      |   |
| Total current  assets                                                                                                                                           |   | 40,438                  |   | 39,179                   |   |
| **Property and equipment:**                                                                                                                                     |   |                    |   |                     |   |
| Office equipment                                                                                                                                                |   | 8,270                   |   | 8,304                    |   |
| Furniture and  fixtures                                                                                                                                         |   | 2,389                   |   | 2,389                    |   |
| Software                                                                                                                                                        |   | 19,355                  |   | 19,650                   |   |
| Leasehold  improvements                                                                                                                                         |   | 1,972                   |   | 2,014                    |   |
|                                                                                                                                                            |   | 31,986                  |   | 32,357                   |   |
| Less accumulated  depreciation and amortization                                                                                                                 |   | (17,394                 | )      | (20,595                  | )      |
| Net property and  equipment                                                                                                                                     |   | 14,592                  |   | 11,762                   |   |
| **Other assets:**                                                                                                                                               |   |                    |   |                     |   |
| Goodwill, net of  amortization of $2,727                                                                                                                        |   | 2,723                   |   | 2,723                    |   |
| Other assets                                                                                                                                                    |   | 1,639                   |   | 2,487                    |   |
| Total other  assets                                                                                                                                             |   | 4,362                   |   | 5,210                    |   |
| Total assets                                                                                                                                                    |   | $                       | 59,392 |                     | $      | 56,151 |   |
|                                                                                                                                                            |   |                    |   |                     |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                  |   |                    |   |                     |   |
| **Current liabilities:**                                                                                                                                        |   |                    |   |                     |   |
| Cash overdraft                                                                                                                                                  |   | $                       | 4,404  |                     | $      | 2,294 |   |
| Accounts payable                                                                                                                                                |   | 12,883                  |   | 11,169                   |   |
| Payroll and  related expenses                                                                                                                                   |   | 7,861                   |   | 6,744                    |   |
| Accrued expenses                                                                                                                                                |   | 2,350                   |   | 8,252                    |   |
| Total current  liabilities                                                                                                                                      |   | 27,498                  |   | 28,459                   |   |
| Long-term debt                                                                                                                                                  |   | 26,877                  |   | 27,050                   |   |
| Other  liabilities                                                                                                                                              |   | 358                     |   | 359                      |   |
| Total  liabilities                                                                                                                                              |   | 54,733                  |   | 55,868                   |   |
| **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 September 30, 2002, respectively |   | 176                     |   | 178                      |   |
| Additional  paid-in capital                                                                                                                                     |   | 27,508                  |   | 30,561                   |   |
| Deferred  compensation                                                                                                                                          |   | (97                     | )      | —                   |   |
| Accumulated  other comprehensive loss                                                                                                                           |   | (44                     | )      | (48                      | )      |
| Accumulated  deficit                                                                                                                                            |   | (18,087                 | )      | (25,611                  | )      |
|                                                                                                                                                            |   | 9,456                   |   | 5,080                    |   |
| Less: Treasury  stock, at cost, 585,000 shares                                                                                                                  |   | (4,797                  | )      | (4,797                   | )      |
| Total  stockholders’ equity                                                                                                                                |   | 4,659                   |   | 283                      |   |
| Total  liabilities and stockholders’ equity                                                                                                                |   | $                       | 59,392 |                     | $      | 56,151 |   |

 

See accompanying Notes toConsolidated Financial Statements

 

3

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**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands, except pershare data)

 
|                                          |   | **Three  Months  Ended September 30,** |   | **Nine  Months  Ended September 30,** |   |
|-----------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                          |   | **2001**                               |   | **2002**                              |   | **2001** |   | **2002** |   |
|                                          |   | **(Unaudited)**                        |   | **(Unaudited)**                       |   |
|                                          |   |                                   |   |                                  |   |
| Revenue                                       |   | $                                      | 48,509 |                                  | $      | 40,379 |   | $ | 162,943 |   | $ | 119,541 |   |
| Cost of services                              |   | 34,423                                 |   | 29,388                                |   | 116,749 |   | 86,554 |   |
| Gross profit                                  |   | 14,086                                 |   | 10,991                                |   | 46,194 |   | 32,987 |   |
|                                          |   |                                   |   |                                  |   |   |   |   |   |
| Operating  expenses:                          |   |                                   |   |                                  |   |   |   |   |   |
| Selling, general  and administrative expenses |   | 12,520                                 |   | 10,542                                |   | 41,576 |   | 31,904 |   |
| Depreciation and  amortization                |   | 1,294                                  |   | 997                                   |   | 4,132 |   | 3,201 |   |
| Restructuring  and other charges              |   | —                                 |   | 4,650                                 |   | — |   | 5,750 |   |
| Total operating  expenses                     |   | 13,814                                 |   | 16,189                                |   | 45,708 |   | 40,855 |   |
| Income (loss)  from operations                |   | 272                                    |   | (5,198                                | )      | 486 |   | (7,868 | ) |
| Other income  (expense), net                  |   | (1,048                                 | )      | (959                                  | )      | (2,922 | ) | (2,698 | ) |
| Loss before  income taxes                     |   | (776                                   | )      | (6,157                                | )      | (2,436 | ) | (10,566 | ) |
| Income taxes                                  |   | —                                 |   | (988                                  | )      | (583 | ) | (3,213 | ) |
| Net loss                                      |   | $                                      | (776   | )                                     | $      | (5,169 | ) | $ | (1,853 | ) | $ | (7,353 | ) |
|                                          |   |                                   |   |                                  |   |   |   |   |   |
| Net loss per  share:                          |   |                                   |   |                                  |   |   |   |   |   |
| Basic and  diluted                            |   | $                                      | (0.05  | )                                     | $      | (0.30 | ) | $ | (0.11 | ) | $ | (0.43 | ) |
|                                          |   |                                   |   |                                  |   |   |   |   |   |
| Shares used to  compute net loss per share:   |   |                                   |   |                                  |   |   |   |   |   |
| Basic and  diluted                            |   | 16,679                                 |   | 17,117                                |   | 16,763 |   | 17,087 |   |

 

See accompanying Notes toConsolidated Financial Statements

 

4

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**ALTERNATIVE RESOURCESCORPORATION**

**CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)**

(In thousands)

 
|                                                            |   | **Three  Months  Ended September 30,** |   | **Nine  Months  Ended September 30,** |   |
|-----------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                            |   | **2001**                               |   | **2002**                              |   | **2001** |   | **2002** |   |
|                                                            |   | **(Unaudited)**                        |   | **(Unaudited)**                       |   |
|                                                            |   |                                   |   |                                  |   |
| Net loss                                                        |   | $                                      | (776   | )                                     | $      | (5,169 | ) | $ | (1,853 | ) | $ | (7,353 | ) |
| Other  comprehensive income (loss):                             |   |                                   |   |                                  |   |   |   |   |   |
| Foreign currency  translation adjustment, net of  tax      |   | 8                                      |   | 7                                     |   | 11 |   | (4 | ) |
| Unrealized  holding gain on security, net of tax:               |   |                                   |   |                                  |   |   |   |   |   |
| Less  reclassification adjustment for gain included in net loss |   | —                                 |   | —                                |   | (221 | ) | — |   |
| Other  comprehensive loss                                       |   | 8                                      |   | 7                                     |   | (210 | ) | (4 | ) |
| Comprehensive  loss                                             |   | $                                      | (768   | )                                     | $      | (5,162 | ) | $ | (2,063 | ) | $ | (7,357 | ) |

 

See accompanying Notes toConsolidated Financial Statements

 

5

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**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In thousands)

 
|                                                                                       |   | **Nine  Months Ended  September 30,** |   |
|--------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                       |   | **2001**                              |   | **2002** |   |
|                                                                                       |   | **(Unaudited)**                       |   |
| **Cash flows from operating  activities:**                                                 |   |                                  |   |   |   |
| Net loss                                                                                   |   | $                                     | (1,853 | ) | $ | (7,353 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |                                  |   |   |   |
| Depreciation and  amortization                                                             |   | 4,132                                 |   | 3,201 |   |
| Deferred income  taxes                                                                     |   | (149                                  | )      | — |   |
| Provision for  doubtful accounts                                                           |   | 350                                   |   | (133 | ) |
| Realized gain on  sale of security                                                         |   | (221                                  | )      | — |   |
| Deferred  compensation on restricted shares                                                |   | 188                                   |   | 97 |   |
| Non-cash  interest expense from deferred financing costs                                   |   | —                                |   | 379 |   |
| Non-cash  interest expense from accretion of warrants                                      |   | —                                |   | 286 |   |
| Change in assets  and liabilities:                                                         |   |                                  |   |   |   |
| Trade accounts  receivable                                                                 |   | 16,424                                |   | 2,302 |   |
| Prepaid expenses                                                                           |   | 36                                    |   | 536 |   |
| Other  receivables                                                                         |   | 32                                    |   | (28 | ) |
| Other assets                                                                               |   | 167                                   |   | (1,227 | ) |
| Accounts payable                                                                           |   | (2,042                                | )      | (1,714 | ) |
| Payroll and  related expenses                                                              |   | (3,207                                | )      | (1,117 | ) |
| Accrued expenses  and other liabilities                                                    |   | (2,043                                | )      | 5,903 |   |
| Income taxes                                                                               |   | 4,752                                 |   | (1,538 | ) |
| Net cash  provided by (used in) operating activities                                       |   | 16,566                                |   | (406 | ) |
|                                                                                       |   |                                  |   |   |   |
| **Cash flows from investing  activities:**                                                 |   |                                  |   |   |   |
| Purchases of property  and equipment                                                       |   | (1,647                                | )      | (370 | ) |
| Redemption of  available-for-sale securities                                               |   | 639                                   |   | — |   |
| Net cash used in  investing activities                                                     |   | (1,008                                | )      | (370 | ) |
|                                                                                       |   |                                  |   |   |   |
| **Cash flows from financing  activities:**                                                 |   |                                  |   |   |   |
| Proceeds from  long-term debt                                                              |   | 212,263                               |   | 174,022 |   |
| Payments on  long-term debt                                                                |   | (225,644                              | )      | (181,132 | ) |
| Proceeds from  issuance of debt and warrants                                               |   | —                                |   | 10,000 |   |
| Cash paid for  cancellation of stockholder rights plan                                     |   | —                                |   | (171 | ) |
| Contributions to  employee stock purchase plan                                             |   | (57                                   | )      | — |   |
| Proceeds from  issuance of shares under the employee stock purchase plan                   |   | 47                                    |   | 55 |   |
| Cash overdraft                                                                             |   | (2,216                                | )      | (2,110 | ) |
| Net cash  provided by (used in) financing activities                                       |   | (15,607                               | )      | 664 |   |
| Effect of  exchange rate changes on cash and cash equivalents                              |   | 11                                    |   | (8 | ) |
|                                                                                       |   |                                  |   |   |   |
| Net decrease in  cash and cash equivalents                                                 |   | (38                                   | )      | (120 | ) |
| Cash and cash  equivalents at beginning of period                                          |   | 114                                   |   | 127 |   |
| Cash and cash  equivalents at end of period                                                |   | $                                     | 76     |   | $ | 7 |   |
|                                                                                       |   |                                  |   |   |   |
| Supplemental  disclosures of cash flow information:                                        |   |                                  |   |   |   |
| Cash paid for  interest                                                                    |   | $                                     | 3,162  |   | $ | 1,086 |   |
| Cash paid for  income taxes                                                                |   | 133                                   |   | 30 |   |
| Cash refunds  received for income taxes                                                    |   | 5,476                                 |   | 1,675 |   |

 

See accompanying Notes toConsolidated Financial Statements

 

6

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**ALTERNATIVE RESOURCES CORPORATION**

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

**(UNAUDITED)**

 

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

 

Theinterim consolidated financial statements presented are unaudited, but in theopinion of management, have been prepared in conformity with accountingprinciples generally accepted in the United States of America applied on abasis consistent with those of the annual financial statements.  Such interim consolidated financialstatements reflect all adjustments (consisting principally of normal recurring accruals)necessary for a fair presentation of the financial position and the results ofoperations for the interim periods presented. The results of operations for the interim periods presented are notnecessarily indicative of the results to be expected for the year endingDecember 31, 2002.  The interimconsolidated financial statements should be read in connection with the auditedconsolidated financial statements for the year ended December 31, 2001,included in the 2001 Form 10-K of Alternative Resources Corporation (“ARC” orthe “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 average sharesused for the calculation of earnings per share in periods of net loss becausethe effect of such securities would be anti-dilutive. At September 30, 2002 and2001, potentially dilutive securities consisted of options to purchase 2.8million and 2.5 million shares of common stock, respectively.  In addition, the Company issued 11.0 millionwarrants in connection with its refinancing described in note 4.  These warrants are also potentially dilutivesecurities.

 

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

 

In June 1999, the FASB issuedSFAS No. 133, “Accounting for Derivative Instruments and Certain HedgingActivities.”  In June 2000, the FASBissued SFAS No. 138, “Accounting for Certain Derivative Instruments and CertainHedging Activity, an Amendment of SFAS No. 133.”  SFAS No. 133 and SFAS No. 138 require that all derivativeinstruments be recorded on the balance sheet at their respective fair values aseither liability or equity instruments, depending on certain criteria.  The Company adopted SFAS No. 133 and SFASNo. 138 on January 1, 2001, which did not have an impact on its financialposition or results of operations given the Company did not have any derivativefinancial instruments at that time.  Asdescribed in note 4, the Company issued warrants in conjunction with theissuance of Senior Subordinated Convertible Notes on January 31, 2002.  Pursuant to SFAS 133 and interpretations bythe Emerging Issues Task Force covering derivative financial instruments, thesewarrants meet the criteria for equity classification on the measurement date ofJanuary 31, 2002 and the Company is not required to remeasure the warrants onsubsequent dates.  As such, the fairvalue of the warrants of approximately $3.0 million was recorded in equity asadditional paid-in capital.  There wasno effect on results of operations for the nine months ended September 30, 2002as a result of these 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 nine months ended September 30,2001,amortization expense was approximately $57,000.  Had this amortization not been recorded, the reported net loss of$1,853,000 would have been

 

7

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$1,796,000 with no effect on the reported loss per share of $0.11 forthe nine months ended September 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,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS144”).  SFAS 144 addresses financialaccounting and reporting for the impairment or disposal of long-livedassets.  While SFAS No. 144 supercedesSFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of,” it retains many of the fundamentalprovisions of that Statement.  SFAS 144also supersedes the accounting and reporting provisions of APB Opinion No. 30,“Reporting the Results of Operations-Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual and Infrequently OccuringEvents and Transactions,” 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”), subsequently recharacterizedas Emerging Issues Task Force “EITF” No. 01-14, which is effective for fiscalyears beginning after December 15, 2001. EITF No. 01-14 requires that certain out-of-pocket expenses rebilled tocustomers be recorded as revenue versus an offset to the related expense.  Comparative financial statements for priorperiods must be conformed to this presentation.  The Company historically recorded rebilled out-of-pocket expensesas an offset to the related expense. Effective January 1, 2002, the Company changedits presentation to reflect rebilled expenses as revenue and also conformed thepresentation for prior periods. The impact of adopting this pronouncementresulted in the reclassification of $1.7 million of expenses to revenue forboth of the three months ended September 30, 2001 and 2002, with acorresponding decrease of approximately 1.0% and 1.2% in gross margin for thethree months ended September 30, 2001 and 2002, respectively. The impact ofadopting this pronouncement resulted in the reclassification of $5.5 millionand $4.6 million of expenses to revenue with a corresponding decrease ofapproximately 1.0% and 1.1% in gross margin for the nine months ended September30, 2001 and 2002, respectively.  Cost ofservices were increased by an equal amount with no impact on gross profitdollars.

 

**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

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##### **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 were directly applied against theoutstanding bank line of credit balance. Advances from the line of credit were 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 $30.0 million of revolving credit based on the Company’s availablecollateral base.  This facility wasreduced to $28.0 million in August 2002 as discussed below.  The credit facility has a three-year termand bears interest at LIBOR plus 3.25% or the lenders’ base rate plus1.00%.  As of September 30, 2002, theapplicable rates are as follows: $17,000,000 at 5.02%, 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 initial proceeds of this facility together with the net proceedsfrom the sale of convertible subordinated notes described below were used torepay the Company’s existing credit facility. Advances from the revolving credit facility are determined on a dailybasis to minimize the Company’s average debt balance.  As of September 30, 2002 the Company has $2.3 million in excessavailability.

 

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.  Effective August 8, 2002, the Company and the private equityinvestor agreed to defer all of the interest.

 

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.  Additional 1,000,000 warrants topurchase its common stock at $0.73 per share, are not exercisable for one yearcontingent upon the Company meeting certain performance measures, however, thewarrants expire if such performance measures are met.  As of September 30, 2002, it is not likely that the Company willmeet the specific performance measures related to the 1,000,000 contingentwarrants and these warrants will 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 the seven-year life of the debt by anon-cash interest charge.  The fairvalue of these warrants was determined to be approximately $3.0 million andwill result in a non-cash quarterly interest charge of approximately $107,000($70,000 for 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 bymanagement.  Any changes, unlessmaterial, will be adjusted in 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 stockholder 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 institutionexecuted an amendment to the revolving credit agreement.  The impact of this amendment was to reducethe borrowing limit subject to pledged accounts receivable as collateral to$28.0 million in consideration for the waiver of existing financial loancovenants.

 

In November 2002, ARC and the lending institutionexecuted an amendment to the revolving credit agreement.  The impact of this amendment was to obtain awaiver of existing financial loan covenants. Additionally, financial loan covenant calculations were redefined forfuture periods.

 

In August 2002, ARC and the private equity investorexecuted an amendment to the Security Purchase Agreement.  The impact of this amendment was toacknowledge the amendment made with the lending institution as well as to deferall interest payments.

 

As of September 30, 2002, the Company has twoirrevocable standby letters of credit for $1,268,000, which expire on December31, 2002.

 

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##### **5.**                   OtherCharges

 

Duringthe second quarter of 2002 the Company recorded a charge of $1.1 million whichrepresents the severance pay associated with the departure of the Company’sformer Chief Executive Officer.

 

##### **6.**                   RestructuringCharge

 

Duringthe third quarter of 2002, the Company decided to restructure its servicedelivery function by eliminating the client support organization.  This organization was primarily responsiblefor facilitating the administrative tasks associated with the Company’sbillable consulting staff as well as being the liaison between the technicalconsultants and the Company.  After anextensive study, the Company proceeded to establish an enterprise-wide servicecenter which will be responsible for all the administrative functions for thetechnical consultants.  The account managerswill assume the liaison role with the technical consultants.  The Company believes this will make for amore effective and cost efficient organization.  The Company recorded a $4.7 million restructuring charge duringthe third quarter of 2002.  The primarycomponents of the restructuring charge can be summarized as follows:

 
| **In thousands**   |   | **Total  Initial  Reserve** |   | **2002  Cash  Payments** |   | **Balance at  September  30, 2002** |   |
|--------------------|--------|-----------------------------|--------|--------------------------|--------|-------------------------------------|--------|
| Real  estate costs |   | $                           | 4,328  |                     | $      | —                              |   | $ | 4,328 |   |
| Severance          |   | 322                         |   | (59                      | )      | 263                                 |   |
| Total              |   | $                           | 4,650  |                     | $      | (59                                 | )      | $ | 4,591 |   |

 

The portion of thecharge related to real estate costs, which totaled $4.4 million, relates tolease costs associated with decreased utilization of office space as theCompany restructured its service delivery organization. The costs associatedwith this charge related primarily to the value of ongoing lease obligationsfor vacated offices, net of anticipated sublease income.  A portion of the charge also related tobroker commissions and estimated leasehold improvement costs necessary tosublease vacated offices.

 

The $0.3 millionseverance charge related to head-count reductions associated with centralizingthe service delivery organization as part of a re-engineering exercise.  A total of 60 positions were eliminated withthe largest group being the client staffing managers.  The remainder of positions eliminated was a mix of corporatestaff and recruiting personnel. The Company has offered stay bonuses to certainemployees to continue employment through a certain date.  This additional expense of approximately$0.3 million will be recognized through the term of the employee’s remainingemployment, which is expected to end during the fourth quarter of 2002.  In 2003, operating expenses are expected tobe reduced by approximately $4.7 million based on the restructuring actionsdescribed above.  There is no impact oncash flows until the leases expire.

 

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##### **Item 2**.– Management’s Discussion and Analysis of FinancialCondition and Results of Operations

 

## **Resultsof 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 isused for candidate placement/recruiting fees and vendor management fees.   The Company typically provides discounts onstaffing services to its largest clients in exchange for the opportunity tosell more volume, as well as the opportunity to sell its higher-margin,value-added services.  All revenues arerecognized net of such discounts and after services have been completed.

 

# **ThirdQuarter Fiscal 2002 Compared to Third Quarter Fiscal 2001**

 

**Revenue.** Revenues consist of fees earned from the Company’s IT Staffing businessand it’s IT Solutions business. Revenue for the third quarter of 2002 was $40.4million, which was down from $48.5 million in the third quarter of 2001. The ITStaffing revenue was $18.2 million, down from $31.5 million last year and theIT Solutions revenue was $22.2 million, up from $17.0 million last year.  The increase in the Solutions revenue isprimarily the result of increased technology deployments and smartsourcingengagements during the quarter.  TheSolutions revenue includes a reclassification of $1.5 million in the thirdquarter of 2002 and 2001. This reclassification represents out-of-pocketexpenses that were rebilled to customers and previously recorded as an offsetto the related expense and now included in revenue as required by the recentEITF No. 01-14, “Income Statement Characterization of Reimbursements for“Out-of-Pocket” Expenses Incurred.” Cost of services were increased by an equalamount with no impact on the dollar value of gross profit.  The IT Staffing revenues dropped by 42.1%from the prior year. This decrease was driven by significant declines inoutsourced staffing requirements from IBM and EDS, two of our largest staffaugmentation customers. IT Staffing revenue also includes $0.2 millionreclassified for EITF No. 01-14 in the third quarter of 2002 and 2001.

 

**Gross margin.** Gross margin for the third quarter was $11.0 million or 27.2%,down from $14.1 million or 29.0% in the third quarter of last year.  The decrease in margin from the third quarterof 2002 is due to the very competitive IT staffing environment, which iscausing some margin pressure in all service offerings.

 

**Operating expenses. **Operatingexpenses consist of sales and marketing costs, recruiting, retention andtraining costs, management and administrative costs, and depreciation andamortization.  Operating expensesdecreased by $2.2 million or 16.0% from $13.8 million in 2001 to $11.6 millionin 2002.  The operating expense decreasewas attributable to the restructuring actions the Company has taken in thepast, which is reflected in reduced office space and lower headcount. As apercentage of revenues, operating expenses increased by 0.2% from 28.5% in 2001to 28.7% in 2002, primarily as a result of the sharp decline in revenue.

 

**Restructuring charge.**Duringthe third quarter of 2002, the Company decided to restructure its servicedelivery function by eliminating the client support organization.  This organization was primarily responsiblefor facilitating the administrative tasks associated with the Company’sbillable consulting staff as well as being the liaison between the technicalconsultants and the Company.  After anextensive study, the Company proceeded to establish an enterprise-wide servicecenter which will be responsible for all the administrative functions for thetechnical consultants.  The accountmanagers will assume the liaison role with the technical consultants.  The Company believes this will make for amore effective and cost efficient organization.  The Company recorded a $4.7 million restructuring charge duringthe third quarter of 2002.

 

The portion of the charge related to real estatecosts, which totaled $4.4 million, relates to lease costs associated withdecreased utilization of office space as the Company restructured its servicedelivery organization. The costs associated with this charge related primarilyto the value of ongoing lease obligations for vacated offices, net ofanticipated sublease income.  A portionof the charge also related to

 

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broker commissions and estimated leasehold improvement costs necessaryto sublease vacated offices.

 

The $0.3 million severance charge related tohead-count reductions associated with centralizing the service deliveryorganization as part of a re-engineering exercise.  A total of 60 positions were eliminated with the largest groupbeing the client staffing managers.  Theremainder of positions eliminated was a mix of corporate staff and recruitingpersonnel. The Company has offered stay bonuses to certain employees tocontinue employment through a certain date. This additional expense of approximately $0.3 million will be recognizedthrough the term of the employee’s remaining employment, which is expected toend during the fourth quarter of 2002. The savings expected from this headcount reduction will be approximately$2.5 million and will be fully realized during 2003.

 

**Other (income) expense, net. **Other (income) expense consists primarily of interestexpense on the Company’s outstanding debt. Other (income) expense, netdecreased by $0.1 million in the third quarter of 2002 from $1.0 million in2001 to $0.9 million in 2002. The decrease in other expense is primarily theresult of a decrease in interest expense related to decreased debt levels andlower interest rates.

 

**Incometaxes.** During thethird quarter of 2002, the Company recorded a tax benefit of $1.0 million dueto recently enacted Federal tax legislation. The new legislation provides for afive-year carry back of the Company's operating loss rather than the two yearspermitted under prior legislation.

 

# **FirstNine Months Fiscal 2002 Compared to First Nine Months Fiscal 2001**

 

**Revenue.** Revenues consist of fees earned from the Company’s IT Staffing businessand it’s IT Solutions business. Revenue decreased by $43.4 million from $162.9million in 2001 to $119.5 in 2002. The IT Staffing revenue was $61.2 million,down from $112.0 million last year and the IT Solutions revenue was $58.3million, up from $51.0 million last year. The increase in the Solutions revenueis due to increased technology deployments, smartsourcing, and field servicesduring the year. The Solutions revenue includes a reclassification of $4.1million in the nine months of 2002 and a similar reclassification of $3.8million in the nine months of 2001. This reclassification representsout-of-pocket expenses that were rebilled to customers and previously recordedas an offset to the related expense and now included in revenue as required bythe recent EITF No. 01-14, “Income Statement Characterization of Reimbursementsfor “Out-of-Pocket” Expenses Incurred.” Cost of services were increased by anequal amount with no impact on the dollar value of gross profit.  The IT Staffing revenues dropped by 45.3%from the prior year. This decrease was driven by significant declines inoutsourced staffing requirements from IBM and EDS, two of our largest staffaugmentation customers. IT Staffing revenue also includes $0.5 millionreclassified for EITF No. 01-14 in the nine months of 2002 and $0.7 million inthe nine months of 2001.

 

**Gross margin.**  Gross margin for the nine months ended September 30, 2002 was$33.0 million or 27.6%, down from $46.2 million or 28.3% for the nine monthsended September 30, 2001. The decrease in margin in 2002 is due to the verycompetitive IT staffing environment, which is causing some margin pressure inour staffing business. This is partially offset by the margins in the ITSolutions business, which have shown some improvement over the nine 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 $10.5million or 23.1% from $45.7 million in 2001 to $35.1 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 1.3% from28.1% in 2001 to 29.4% in 2002, primarily as a result of the sharp decline inrevenue.

 

**Restructuring charge.**Duringthe third quarter of 2002, the Company decided to restructure its servicedelivery function by eliminating the client support organization.  This organization was primarily responsiblefor facilitating the administrative tasks associated with the Company’sbillable consulting staff as well as being the liaison between the technicalconsultants and the Company.  After anextensive study, the Company proceeded to establish an enterprise-wide servicecenter which will be responsible for all the administrative functions for thetechnical consultants.  The accountmanagers will assume the liaison role with the technical consultants.  The Company believes this will make for amore effective and cost efficient organization.  The Company recorded a $4.7 million restructuring charge duringthe third quarter of 2002.

 

The portion of thecharge related to real estate costs, which totaled $4.4 million, relates tolease costs associated with decreased utilization of office space as theCompany restructured its service delivery organization. The costs associatedwith this charge related primarily to the value of ongoing lease obligationsfor vacated

 

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offices,net of anticipated sublease income.  Aportion of the charge also related to broker commissions and estimatedleasehold improvement costs necessary to sublease vacated offices.

 

The $0.3 millionseverance charge related to head-count reductions associated with centralizingthe service delivery organization as part of a re-engineering exercise.  A total of 60 positions were eliminated withthe largest group being the client staffing managers.  The remainder of positions eliminated was a mix of corporatestaff and recruiting personnel. The Company has offered stay bonuses to certainemployees to continue employment through a certain date.  This additional expense of approximately$0.3 million will be recognized through the term of the employee’s remainingemployment, which is expected to end during the fourth quarter of 2002.  The savings expected from this headcountreduction will be approximately $2.5 million and will be fully realized during2003.

 

**Other charges.** During the second quarter of2002, the Company recorded a charge of $1.1 million which represents theseverance pay associated with the departure of the Company’s former ChiefExecutive Officer.  There was no similarcharge in the prior year.

 

**Other (income) expense, net.**In 2002, other(income) expense consists primarily of interest expense on the Company’soutstanding debt. In 2001, other (income) expense, net consisted of interestexpense of $3.6 million on the Company’s revolving credit facility offset byinterest income on the Company’s tax refund and a $0.4 million pre-tax gain onthe sale of stock that was distributed to ARC from its health care provider,MetLife, as it transitioned from a mutual company to a public company.

 

**Incometaxes.**  For the ninemonths ended September 30, 2002, the Company recorded a tax benefit of $3.2million due to recently enacted Federal tax legislation.  The new legislation provides for a five-yearcarry back of the Company's operating loss rather than the two years permittedunder prior legislation.

 

# **Liquidityand 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.  InAugust 2002, ARC and Fleet Capital executed an amendment to the revolvingcredit agreement. The impact of this amendment was to reduce the borrowinglimit subject to pledged accounts receivable as collateral to $28.0 million inconsideration for the waiver of existing financial loan covenants.  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 September 30, 2002, the applicable rates are as follows:$17,000,000 at 5.02%, which represents LIBOR plus 3.25%, with the remainder ofthe facility at 5.75%, which represents the bank’s base rate plus 100 basispoints.

 

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 share.Additional 1,000,000 warrants to purchase its common stock at $0.73 per share,are not exercisable for one year contingent upon the Company meeting certainperformance measures, however, the warrants expire if such performance measuresare met.  As of September 30, 2002, itis not likely that the Company will meet the specific performance measuresrelated to the 1,000,000 contingent warrants and these warrants will notexpire.

 

Current assets exceed current liabilities by $10.7million at September 30, 2002.  Net cashused in operations was $0.4 million in the first nine months of 2002.

 

Capital spending was approximately $0.4 million forthe nine months ended September 30, 2002 and $1.6 million for the nine monthsended September 30, 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 $0.9 million inthe third quarter; $1.3 million in the second quarter; and $1.0 million in thefirst quarter of 2002 due to recently enacted federal tax legislation.  The new legislation provides for a five-yearcarry back of the Company’s operating loss rather than the two years permittedunder the prior legislation.  TheCompany intends to use the cash generated from the anticipated income taxrefund for general operating purposes, including the reduction of debt.

 

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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,principally consisting of accounts receivable, these uncertainties may directlyimpact the availability of this credit facility.

 

**CRITICALACCOUNTING POLICIES**

 

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

 

**RevenueRecognition**

 

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

 

**Allowancefor Doubtful Accounts**

 

The Company performs ongoing credit evaluations of its customers and adjustscredit limits based upon payment history and the customers’ current creditworthiness.  The Company continuouslymonitors collections and payments from its customer base and maintains a provisionfor estimated credit losses based upon historical experience and any specificcustomer collection issues that have been identified.  The Company specifically reviews outstanding account balancesthat are overdue 90 days or more in making its assessment of the provision forbad debts in each period.  While theCompany has historically had sufficient coverage of allowances for creditlosses, it cannot guarantee that it will continue to experience the same creditloss rates as in past periods.

 

**Goodwill Impairment**

 

On January 1, 2002, the Company adopted SFAS No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”).  This Statement dictates that goodwill and intangible assets withindefinite useful lives should be tested and written down for impairment atleast annually, instead of being amortized on an ongoing basis.  The Company has terminated its policy ofamortizing goodwill on a monthly basis and will perform an annual analysis ofgoodwill impairment, using the discounted future cash flows methodologyprescribed by SFAS No. 142.  The Companyadopted SFAS 142 in 2002 and has determined there was no impairment and thus noimpact on its financial statements.

 

**Valuation Allowance for Deferred Tax Asset**

 

The Company records a valuation allowance to reduceits deferred tax assets to the amount that it believes is more likely than notto be realized.  This valuationallowance is recorded based on the uncertainty with respect to the futurerealization of deferred tax assets, particularly the net operating losses, andthe lack of ability to accurately forecast taxable income over the 20 year netoperating loss carryforward period. When a valuation allowance is deemed necessary, the Company records anadjustment to the deferred tax asset, with a corresponding charge to thestatement of operations.  In the eventthat the Company determines that it would be able to realize its deferred taxassets in the future in excess of its net recorded amount, an adjustment to thedeferred tax assets would increase income, or reduce a net loss, in the periodsuch determination was made.

 

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##### **Item 3**.– Quantitative and Qualitative Disclosures About Market Risk

 

The market risk that the Company is exposed toprimarily relates to changes in interest rates on its borrowings. At September30, 2002, the Company had $18.9 million in floating-rate debt. An adversechange in interest rates during any period that the loan is outstanding wouldcause an increase in interest expense. A 100 basis point increase in the bank’sbase rate 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.

 

**Item 4****. – Controls and Procedures**

 

Our Chief Executive Officer and Chief FinancialOfficer have concluded, based on their evaluation within 90 days of the filingdate of this report, that our disclosure controls and procedures are effectivefor gathering, analyzing and disclosing the information we are required todisclose in our reports filed under the Securities Exchange Act of 1934.  There have been no significant changes inour internal controls or in other factors that could significantly affect thesecontrols subsequent to the date of the previously mentioned evaluation.

 

**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 asto future developments should not be construed in any manner as a guaranteethat such results or developments will, in fact, occur. There can be noassurance any forward-looking statement will be realized or that actual resultswill not be 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:

 

•                  The Company’s abilityto attract and retain qualified information technology professionals;

•                  The Company’sability to recruit, train, integrate and retain qualified sales directors,account managers, and recruiters;

•                  Competition inthe information technology services marketplace;

•                  The Company’scontinued ability to initiate and develop client relationships;

•                  The Company’sability 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 ability tosuccessfully enter new geographic markets; and

•                  The effect ofchanges in general economic conditions.

 

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**PART II****– OTHER INFORMATION**

 

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

 

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

 
| Exhibit  Number |   | Description                                                                                                              |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                     |
| 4.1             |   | Second Amendment to Credit Agreement.                                                                                    |
|            |   |                                                                                                                     |
| 4.2             |   | Third Amendment to Credit Agreement                                                                                      |
|            |   |                                                                                                                     |
| 10.1            |   | Executive Employment Agreement between Alternative  Resources Corporation and Bill McLendon dated September 16, 2002.    |
|            |   |                                                                                                                     |
| 10.2            |   | Executive Separation Agreement between Alternative  Resources Corporation and Miner Smith dated August 2, 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)                                 Form8-K was filed on July 2, 2002, reporting under Item 5. “Other Events”, thedeparture of Ray R. Hipp as Chairman and Chief Executive Officer and theappointment of George W. Watts as President and Chief Executive Officer.

 

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**SIGN****ATURES**

 

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:   November 14, 2002 | /s/ Steven  Purcell                                                      |   |
|                           | Steven Purcell                                                           |
|                           | Senior Vice President, Chief Financial Officer,  Treasurer and Secretary |

 

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**CERTIFICATIONS**

 

 

I, George W. Watts,certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Alternative Resources Corporation;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

(a) designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

(b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to filingdate of this quarterly report (the “Evaluation Date”); and

 

(c) presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalent function):

 

(a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

(b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date:   November 14, 2002 | /s/ George W.  Watts    |   |
|--------------------------------|-------------------------|--------|
|                           | George W. Watts         |
|                           | Chief Executive Officer |

 

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**CERTIFICATIONS**

 

 

I, Steven Purcell,certify that:

 

7.               I have reviewedthis quarterly report on Form 10-Q of Alternative Resources Corporation;

 

8.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

9.               Based on myknowledge, the financial statements, and other financial information included inthis quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

10.         The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

(a) designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

(b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to filingdate of this quarterly report (the “Evaluation Date”); and

 

(c) presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

11.         The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

(a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and have identifiedfor the registrant’s auditors any material weaknesses in internal controls; and

 

(b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

12.         The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date:   November 14, 2002 | /s/ Steven  Purcell     |   |
|--------------------------------|-------------------------|--------|
|                           | Steven Purcell          |
|                           | Chief Executive Officer |

 

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