** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period endedSeptember 30, 2003**

 

**Commission file number 0-23940**

 

**ALTERNATIVE RESOURCES CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES  ý   NO  o

 

Indicate by check mark whetherthe registrant (1) is an accelerated filer (as defined in Rule 12b-2 of theAct). YES  o   NO  ý.

 

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

 

17,117,819shares of the registrant’s common stock were outstanding as of November 7,2003.

 

 

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**ALTERNATIVE RESOURCES CORPORATION**

**FORM 10-Q**

**INDEX**

 

 
| PART  I. FINANCIAL INFORMATION                                                                                                            |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                      |   |
| Item  1. Financial Statements.                                                                                                            |   |
|                                                                                                                                      |   |
| Consolidated Balance  Sheets at September 30, 2003 (Unaudited) and December 31, 2002                                            |   |
|                                                                                                                                      |   |
| Consolidated  Statements of Operations for the three and nine months ended  September 30, 2003 and 2002 (Unaudited)                  |   |
|                                                                                                                                      |   |
| Consolidated  Statements of Comprehensive Income (Loss) for the three and nine months ended  September 30, 2003 and 2002 (Unaudited) |   |
|                                                                                                                                      |   |
| Consolidated  Statements of Cash Flows for the nine months ended September 30, 2003  and 2002 (Unaudited)                            |   |
|                                                                                                                                      |   |
| Notes to  Consolidated Financial Statements (Unaudited)                                                                                   |   |
|                                                                                                                                      |   |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations.                                     |   |
|                                                                                                                                      |   |
| Item  3. Quantitative and Qualitative Disclosures About Market Risk.                                                                      |   |
|                                                                                                                                      |   |
| Item  4. Controls and Procedures.                                                                                                         |   |
|                                                                                                                                      |   |
| PART  II. OTHER INFORMATION                                                                                                               |   |
|                                                                                                                                      |   |
| Item 1. Legal Proceedings.                                                                                                                |   |
|                                                                                                                                      |   |
| Item 6. Exhibits and  Reports on Form 8-K.                                                                                                |   |
|                                                                                                                                      |   |
| SIGNATURES.                                                                                                                               |   |

 

2

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#####  

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

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

**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

(In thousands,except share data)

 

** **

 
|                                                                                                                                                                      |   | **December 31,  2002** |   | **September 30,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|------------------------------|--------|
|                                                                                                                                                                      |   |                        |   | **(Unaudited)**              |   |
| **ASSETS**                                                                                                                                                                |   |                        |   |                         |   |
| **Current  Assets:**                                                                                                                                                      |   |                        |   |                         |   |
| Cash  and cash equivalents                                                                                                                                                |   | $                           | 54     |                         | $      | 81 |   |
| Trade  accounts receivable, net of allowance for doubtful accounts                                                                                                        |   | 34,497                      |   | 22,693                       |   |
| Prepaid  expenses                                                                                                                                                         |   | 1,787                       |   | 1,204                        |   |
| Income  taxes receivable                                                                                                                                                  |   | 94                          |   | 1,412                        |   |
| Other  receivables                                                                                                                                                        |   | 178                         |   | 43                           |   |
| Total  current assets                                                                                                                                                     |   | 36,610                      |   | 25,433                       |   |
| **Property  and Equipment:**                                                                                                                                              |   |                        |   |                         |   |
| Office  equipment                                                                                                                                                         |   | 8,319                       |   | 8,411                        |   |
| Furniture  and fixtures                                                                                                                                                   |   | 2,389                       |   | 2,388                        |   |
| Software                                                                                                                                                                  |   | 19,726                      |   | 19,787                       |   |
| Leasehold  improvements                                                                                                                                                   |   | 2,012                       |   | 1,999                        |   |
|                                                                                                                                                                      |   | 32,446                      |   | 32,585                       |   |
| Less  accumulated depreciation and amortization                                                                                                                           |   | (21,448                     | )      | (24,163                      | )      |
| Net  property and equipment                                                                                                                                               |   | 10,998                      |   | 8,422                        |   |
| **Other  Assets:**                                                                                                                                                        |   |                        |   |                         |   |
| Goodwill                                                                                                                                                                  |   | 2,723                       |   | 2,723                        |   |
| Other  assets                                                                                                                                                             |   | 2,399                       |   | 987                          |   |
| Total  other assets                                                                                                                                                       |   | 5,122                       |   | 3,710                        |   |
| Total  assets                                                                                                                                                             |   | $                           | 52,730 |                         | $      | 37,565 |   |
|                                                                                                                                                                      |   |                        |   |                         |   |
| **LIABILITIES AND STOCKHOLDERS’  DEFICIT**                                                                                                                           |   |                        |   |                         |   |
| **Current  Liabilities:**                                                                                                                                                 |   |                        |   |                         |   |
| Cash  overdraft                                                                                                                                                           |   | $                           | 3,202  |                         | $      | 2,874 |   |
| Accounts  payable                                                                                                                                                         |   | 12,236                      |   | 11,474                       |   |
| Payroll  and related expenses                                                                                                                                             |   | 5,920                       |   | 5,468                        |   |
| Accrued  expenses                                                                                                                                                         |   | 2,340                       |   | 2,555                        |   |
| Accrued  restructuring and other charges                                                                                                                                  |   | 4,922                       |   | 3,226                        |   |
| Total  current liabilities                                                                                                                                                |   | 28,620                      |   | 25,597                       |   |
| Long-term  debt                                                                                                                                                           |   | 27,107                      |   | 25,854                       |   |
| Other  liabilities                                                                                                                                                        |   | 384                         |   | 442                          |   |
| Total  liabilities                                                                                                                                                        |   | 56,111                      |   | 51,893                       |   |
| **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 17,117,819 outstanding at December 31, 2002 and September 30,  2003) |   | 178                         |   | 178                          |   |
| Additional  paid-in capital                                                                                                                                               |   | 30,695                      |   | 30,764                       |   |
| Accumulated  other comprehensive loss                                                                                                                                     |   | (64                         | )      | (148                         | )      |
| Accumulated  deficit                                                                                                                                                      |   | (29,393                     | )      | (40,325                      | )      |
|                                                                                                                                                                      |   | 1,416                       |   | (9,531                       | )      |
| Less:  Treasury stock, at cost (585,000 shares)                                                                                                                           |   | (4,797                      | )      | (4,797                       | )      |
| Total  stockholders’ deficit                                                                                                                                         |   | (3,381                      | )      | (14,328                      | )      |
| Total  liabilities and stockholders’ deficit                                                                                                                         |   | $                           | 52,730 |                         | $      | 37,565 |   |

 

See accompanyingnotes to consolidated financial statements.

 

3

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**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands,except per share data)

 
|                                        |   | **Three  Months  Ended September 30,** |   | **Nine Months  Ended September 30,** |   |
|---------------------------------------------|--------|---------------------------------------------|--------|-------------------------------------------|--------|
|                                        |   | **2002**                                    |   | **2003**                                  |   | **2002** |   | **2003** |   |
|                                        |   | **(Unaudited)**                             |   | **(Unaudited)**                           |   |
| Revenue                                     |   | $                                           | 40,379 |                                      | $      | 34,374 |   | $ | 119,541 |   | $ | 105,107 |   |
| Cost  of services                           |   | 29,388                                      |   | 26,662                                    |   | 86,554 |   | 80,617 |   |
| Gross  profit                               |   | 10,991                                      |   | 7,712                                     |   | 32,987 |   | 24,490 |   |
| Operating  expenses                         |   |                                        |   |                                      |   |   |   |   |   |
| Selling,  general and administrative        |   | 10,542                                      |   | 8,356                                     |   | 31,904 |   | 26,028 |   |
| Depreciation  and amortization              |   | 997                                         |   | 862                                       |   | 3,201 |   | 2,715 |   |
| Other  charges (recoveries)                 |   | 4,650                                       |   | (60                                       | )      | 5,750 |   | (60 | ) |
| Debt  extinguishment and origination fees   |   | —                                      |   | 4,463                                     |   | — |   | 4,463 |   |
| Total  operating expenses                   |   | 16,189                                      |   | 13,621                                    |   | 40,855 |   | 33,146 |   |
| Loss  from operations                       |   | (5,198                                      | )      | (5,909                                    | )      | (7,868 | ) | (8,656 | ) |
| Other  expense, net                         |   | (959                                        | )      | (934                                      | )      | (2,698 | ) | (3,094 | ) |
| Loss  before income taxes                   |   | (6,157                                      | )      | (6,843                                    | )      | (10,566 | ) | (11,750 | ) |
| Income  tax benefit                         |   | (988                                        | )      | (819                                      | )      | (3,213 | ) | (818 | ) |
|                                        |   |                                        |   |                                      |   |   |   |   |   |
| Net  loss                                   |   | $                                           | (5,169 | )                                         | $      | (6,024 | ) | $ | (7,353 | ) | $ | (10,932 | ) |
| Net  loss per share:                        |   |                                        |   |                                      |   |   |   |   |   |
| Basic  and diluted                          |   | $                                           | (0.30  | )                                         | $      | (0.35 | ) | $ | (0.43 | ) | $ | (0.64 | ) |
|                                        |   |                                        |   |                                      |   |   |   |   |   |
| Shares  used to compute net loss per share: |   |                                        |   |                                      |   |   |   |   |   |
| Basic  and diluted                          |   | 17,118                                      |   | 17,118                                    |   | 17,087 |   | 17,118 |   |

 

See accompanyingnotes to consolidated financial statements.

 

4

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**ALTERNATIVE RESOURCESCORPORATION**

**CONSOLIDATED STATEMENTS OF**

**COMPREHENSIVE INCOME (LOSS)**

(In thousands)

 
|                                                        |   | **Three  Months  Ended September 30,** |       | **Nine  Months  Ended September 30,** |       |
|-------------------------------------------------------------|--------|---------------------------------------------|------------|--------------------------------------------|------------|
|                                                        |   | **2002**                                    |       | **2003**                                   |       | **2002** |   | **2003** |   |
|                                                        |   | **(Unaudited)**                             |       | **(Unaudited)**                            |       |
| Net  loss                                                   |   | $                                           | (5,169     | )                                          | $          | (6,024 | ) | $ | (7,353 | ) | $ | (10,932 | ) |
| Other  comprehensive income (loss):                         |   |                                        |       |                                       |       |   |   |   |   |
| Foreign  currency translation adjustment, net of   tax |   | 7                                           |       | (2                                         | )          | (4 | ) | 84 |   |
| Other  comprehensive income (loss)                          |   | 7                                           |       | (2                                         | )          | (4 | ) | 84 |   |
|                                                        |   |                                        | ** ** |                                       | ** ** |   | ** ** |   | ** ** |
| Comprehensive  loss                                         |   | $                                           | (5,162     | )                                          | $          | (6,026 | ) | $ | (7,357 | ) | $ | (10,848 | ) |

 

See accompanyingnotes to consolidated financial statements.

 

5

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**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In thousands)

 
|                                                                                       |   | **Nine  Months Ended  September 30,** |   |
|--------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                       |   | **2002**                                   |   | **2003** |   |
|                                                                                       |   | **(Unaudited)**                            |   |
| **Cash  flows from operating activities:**                                                 |   |                                       |   |   |   |
| Net  loss                                                                                  |   | $                                          | (7,353 | ) | $ | (10,932 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities: |   |                                       |   |   |   |
| Depreciation  and amortization                                                             |   | 3,201                                      |   | 2,715 |   |
| Provision  for doubtful accounts                                                           |   | 109                                        |   | 333 |   |
| Deferred  compensation on restricted shares                                                |   | 97                                         |   | — |   |
| Non-cash  interest expense from deferred financing costs                                   |   | 379                                        |   | 453 |   |
| Non-cash  interest expense from accretion of warrants                                      |   | 286                                        |   | 267 |   |
| Debt  extinguishment and origination fees                                                  |   | —                                     |   | 4,463 |   |
| Change  in assets and liabilities:                                                         |   |                                       |   |   |   |
| Trade  accounts receivable                                                                 |   | 2,060                                      |   | 11,471 |   |
| Prepaid  expenses                                                                          |   | 536                                        |   | 583 |   |
| Income  taxes receivable                                                                   |   | (1,538                                     | )      | (1,318 | ) |
| Other  receivables                                                                         |   | (28                                        | )      | 135 |   |
| Other  assets                                                                              |   | (1,227                                     | )      | 106 |   |
| Accounts  payable                                                                          |   | (1,714                                     | )      | (762 | ) |
| Payroll  and related expenses                                                              |   | (1,117                                     | )      | (452 | ) |
| Accrued  expenses and other liabilities                                                    |   | 5,903                                      |   | (1,423 | ) |
| Net  cash provided by (used in) operating activities                                       |   | (406                                       | )      | 5,639 |   |
|                                                                                       |   |                                       |   |   |   |
| **Cash  flows from investing activities:**                                                 |   |                                       |   |   |   |
| Purchases  of property and equipment                                                       |   | (370                                       | )      | (139 | ) |
| Net  cash used in investing activities                                                     |   | (370                                       | )      | (139 | ) |
|                                                                                       |   |                                       |   |   |   |
| **Cash  flows from financing activities:**                                                 |   |                                       |   |   |   |
| Proceeds  from long-term debt                                                              |   | 174,022                                    |   | 158,603 |   |
| Payments  on long-term debt                                                                |   | (181,132                                   | )      | (163,664 | ) |
| Proceeds  from issuance of debt and warrants                                               |   | 10,000                                     |   | — |   |
| Cash  paid for cancellation of stockholder rights plan                                     |   | (171                                       | )      | — |   |
| Proceeds  from issuance of shares under the employee stock purchase plan                   |   | 55                                         |   | — |   |
| Cash  overdraft                                                                            |   | (2,110                                     | )      | (328 | ) |
| Net  cash provided by (used in) financing activities                                       |   | 664                                        |   | (5,389 | ) |
| Effect  of exchange rate changes                                                           |   | (8                                         | )      | (84 | ) |
|                                                                                       |   |                                       |   |   |   |
| Net  increase (decrease) in cash and cash equivalents                                      |   | (120                                       | )      | 27 |   |
| Cash  and cash equivalents at beginning of period                                          |   | 127                                        |   | 54 |   |
| Cash  and cash equivalents at end of period                                                |   | $                                          | 7      |   | $ | 81 |   |
|                                                                                       |   |                                       |   |   |   |
| Supplemental  disclosures of cash flow information:                                        |   |                                       |   |   |   |
| Cash  paid for interest                                                                    |   | $                                          | 1,086  |   | $ | 814 |   |
| Cash  paid for income taxes                                                                |   | 30                                         |   | 3 |   |
| Cash  refunds received for income taxes                                                    |   | 1,675                                      |   | 65 |   |

 

See accompanyingnotes to consolidated financial statements.

 

6

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**ALTERNATIVE RESOURCES CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(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 endingDecember 31, 2003.  The interimconsolidated financial statements should be read in connection with the auditedconsolidated financial statements for the year ended December 31, 2002,included in the 2002 Form 10-K of Alternative Resources Corporation (“ARC” orthe “Company”).

 

##### **2.             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 for theCompany’s stock option transactions in accordance with SFAS No. 123 and SFASNo. 148:

 

 
|                            |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,**  |   |
|---------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|
|                            |   | **2002**                                    |   | **2003**                                    |   | **2002** |   | **2003** |   |
|                            |   | **(in  thousands, except per  share data)** |   | **(in  thousands, except per  share data)** |   |
|                            |   |                                        |   |                                        |   |   |   |   |   |
| Net  loss, as reported          |   | $                                           | (5,169 | )                                           | $      | (6,024 | ) | $ | (7,353 | ) | $ | (10,932 | ) |
|                            |   |                                        |   |                                        |   |   |   |   |   |
| Pro  forma compensation expense |   | (735                                        | )      | (217                                        | )      | (2,146 | ) | (638 | ) |
|                            |   |                                        |   |                                        |   |   |   |   |   |
| Pro  forma net loss             |   | $                                           | (5,904 | )                                           | $      | (6,241 | ) | $ | (9,499 | ) | $ | (11,570 | ) |
|                            |   |                                        |   |                                        |   |   |   |   |   |
| Diluted  loss per share:        |   |                                        |   |                                        |   |   |   |   |   |
| As  reported                    |   | $                                           | (0.30  | )                                           | $      | (0.35 | ) | $ | (0.43 | ) | $ | (0.64 | ) |
| Pro  forma                      |   | (0.34                                       | )      | (0.36                                       | )      | (0.56 | ) | (0.68 | ) |

 

The fair value of each option is estimated on the dateof grant using the Black-Scholes option-pricing model with the followingweighted average assumptions used for grants for the nine months endedSeptember 30, 2002 and 2003, respectively: risk-free interest ratesof 3.5% and 4.3%; expected lives of 7 and 9 years; expected volatility of 126%and 155%; and no dividends expected to be paid.

 

**3.             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. AtSeptember 30, 2003 and 2002, potentially dilutive securities consisted ofoptions to purchase 4.2 million and 2.8 million shares of common stock,respectively.  In addition, the Companyissued 11.0 million warrants to purchase common stock in connection with itsdebt refinancing described in note 5. These warrants are also potentially dilutive securities as ofSeptember 30, 2003 and 2002**.**

 

**4.             RecentlyAdopted Accounting Pronouncements**

 

In July 2002, theFASB issued SFAS No. 146, “Accounting for Costs Associated with an Exit orDisposal Activities,” (“SFAS 146”) which supercedes EITF No. 94-3 “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity

 

7

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(Including Certain CostsIncurred in a Restructuring),” which was 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 has adopted this statement in the year beginning January 1, 2003and followed this guidance in the third quarter 2003 restructuring charge.  This statement did not  have a material effect on the Company’sconsolidated financial position or results of operations.

 

In November 2002,the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Guarantees ofIndebtedness to Others.” This interpretation expands the disclosures to be madeby a guarantor in its financial statements about its obligations under certainguarantees and requires the guarantor to recognize a liability for the fairvalue of an obligation assumed under guarantee. In general, FIN 45 applies tocontracts or indemnification agreements that contingently require that theguarantor make payments to the guaranteed party. The disclosure requirements ofFIN 45 are effective as of December 31, 2002, and require disclosure ofthe nature of the guarantee, the maximum potential amount of future paymentsthat the guarantor could be required to make under the guarantee, and thecurrent amount of the liability, if any, for the guarantor’s obligations underthe guarantee. The recognition requirements of FIN 45 are to be appliedprospectively to guarantees issued or modified after December 31, 2002.The Company does not have any guarantees and thus the requirements of FIN 45did not have an impact on its consolidated financial statements.

 

In December 2002,the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure–an Amendment of FASB StatementNo. 123.” (“SFAS 148”) This Statement amends FASB Statement No. 123,“Accounting for Stock-Based Compensation”, to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this statement amends thedisclosure requirements of SFAS No. 123 to require prominent disclosuresin both annual and interim financial statements about the method of accountingfor stock-based employee compensation and the effect of the method used onreported results. The Company has elected not to change to the fair value basedmethod of accounting for stock-based employee compensation. The Companyaccounts for employee stock options under Accounting Principles Board (APB)Opinion No. 25, “Accounting for Stock Issued to Employees,” under which nocompensation cost was recognized and provides the disclosures required by SFASNo. 123 and SFAS No. 148.

 

In January 2003, theFASB issued Interpretation No. 46, “Consolidation of Variable InterestEntities” to provide new guidance with respect to the consolidation of certainpreviously unconsolidated entities, including special purpose entities. InOctober 2003, the FASB issued a staff position deferring the effectivedate of the interpretation for all public entities until the first interim orannual period ending after December 31, 2003.  The Company does not believe that the adoption of thisinterpretation will have a material effect on the consolidated financialstatements or results of operations.

 

In April 2003, theFASB issue SFAS No. 149, “Amendment of Statement No. 133 on DerivativeInstruments and Hedging Activities.”  ThisStatement amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities under SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.”  This Statement is primarily effective for contracts and hedgingrelationships entered into or modified after June 30, 2003, except forthose provisions of this Statement that relate to SFAS No. 133.  Implementation issues that have beeneffective for fiscal quarters that began prior to June 15, 2003, shouldcontinue to be applied in accordance with their respective effectivedates.  The Company does not believethat the adoption of SFAS No. 149 will have a material effect on the consolidatedfinancial statements.

 

In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  This statement establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  This statementis effective for financial instruments entered into or modified afterMay 31, 2003 and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003 except for certain provisionsrelated to mandatorily redeemable financial instruments, which have beendeferred. The Company does not believe that adoption of the remainingprovisions of SFAS No. 150 will have a material effect on the consolidatedfinancial statements or results of operations.

 

8

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##### **5.             Long-termborrowings**

 

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

 

The $30.0 millionrevolving credit facility is secured by the assets of the Company, principallyconsisting of accounts receivable.  Thecredit facility has a three-year term and bears interest at LIBOR plus 3.25% orthe bank’s base rate plus 2.00%.

 

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

 

In 2003, the Company andFleet Capital Corporation executed additional amendments to the revolvingcredit agreement. The Fifth amendment addressed the fact that the Company hadentered into litigation with a major customer, Bluecurrent.  This action eliminated that account from theCompany’s borrowing base creating a borrowing overadvance.  The amendment allows for an overadvance of$2,000,000 through December 31, 2003. In addition, the amendment waived the events of default relative to thefixed charge and tangible net worth covenants that occurred atDecember 31, 2002.  The tangiblenet worth covenant was reset at ($1,000,000) and the fixed charge shortfall wasset to $1,000,000 through March 31, 2003 and $1,400,000 up throughJune 30, 2003 and a ratio of 1:1, thereafter.  The Sixth amendment eliminated the requirement that any amountsreceived as a result of the settlement with Bluecurrent reduce the WynnchurchCapital Partners, L.P. guarantee as discussed below.  The Seventh amendment waived the events of default as ofJune 30, 2003 relating to the tangible net worth and fixed chargecovenants.  Additionally, the covenantswere reset for the remainder of 2003 as follows; the tangible net worthcovenant was reset to ($5,000,000) with the fixed charge covenant reset to anallowable shortfall of $650,000 for the three months ended September 30,2003, and $950,000 for the six months ended December 31, 2003. The fixedcharge covenant will be 1:1, thereafter. In addition, the interest rate waschanged effective August 1, 2003 from the bank’s base rate plus 1.00% tothe base rate plus 2.00%. As of September 30, 2003, the applicable rate is6.00%, which represents the bank’s base rate plus 2.00%.  The Seventh Amendment also reduced themaximum revolving credit commitment from $28.0 million to $23.0 million.  The Eighth Amendment waived the events ofdefault as of September 30, 2003 relating to the tangible net worth andfixed charge covenants.  Additionally,the covenants were reset for future periods as follows: the tangible net worthcovenant was reset to ($8,500,000) for the quarter ending December 31,2003 and each quarter thereafter.  Thefixed charge covenant was reset to an allowable shortfall of $1,000,000 for thethree months ending December 31, 2003, $1,801,000 for the six monthsending March 31, 2004, and $1,867,000 for the nine months endingJune 30, 2004.  The fixed chargecovenant will be 1:1, thereafter. Capital expenditures will also be limited to $50,000 per quartercommencing with the quarter ending December 31, 2003.

 

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 ata conversion price of $2.50 per share. At the Company’s election, one-half ofthe interest could be deferred during the first four years, subject to certainconditions. In conjunction with the sale of these notes, the Company issued10,000,000 warrants to purchase shares of the Company’s common stock at $0.55per share. An additional 1,000,000 warrants to purchase its common stock at$0.73 per share were not exercisable for one year contingent upon the Companymeeting certain performance measures, however, the warrants would expire ifsuch performance measures were met.  Asof December 31, 2002, the Company did not meet the specific performancemeasures related to the 1,000,000 contingent warrants and these warrants didnot expire.

 

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

 

In 2003, in connectionwith an amendment to the Company’s credit agreement with Fleet CapitalCorporation, Wynnchurch Capital Partners, L.P. executed a guarantee with FleetCapital Corporation to allow overadvances of up to $2,000,000 throughDecember 31, 2003,

 

9

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reduced by any paymentsreceived from Bluecurrent.  Inconsideration, Wynnchurch Capital Partners, L.P. and the Company amended theiragreements. The 15% Senior Subordinated Convertible Notes conversion price wasreduced from $2.50 to $1.50 per share of common stock.  The exercise price of all outstandingwarrants was reduced to $0.26 per share. Additionally, a provision was made that any draw on the guarantee by theCompany could be satisfied with a purchase by Wynnchurch Capital Partners, L.P.of additional 15% Senior Subordinated Convertible Notes having a principalamount equal to the Company’s draw and having terms equal to the outstanding 15%Senior Convertible Notes, and provided for a $250,000 fee to Wynnchurch CapitalPartners, L.P. in the event of a draw upon their guarantee.  The $250,000 fee would be payable throughthe issuance of additional 15% Senior Subordinated Convertible Notes.  As of September 30, 2003, the Companyhas not been required to draw on the guarantee, and no additional ConvertibleNotes have been issued. In July 2003, Wynnchurch Capital Partners, L.P.agreed to waive the agreed requirement that their guarantee be reduced by anyamounts received from Bluecurrent. Consequently, Bluecurrent’s initial paymentof $850,000 did not reduce the $2,000,000 guarantee. However, all subsequentpayments from Bluecurrent will continue to reduce the outstanding guarantee. Inconsideration for this waiver, Wynnchurch Capital Partners, L.P. received a feeof $125,000 payable as interest and added to the principal amount of thenotes.  Under the Sixth Amendment to thesecurities purchase agreements with Wynnchurch Capital Partners, L.P. waived the events of default as ofJune 30, 2003, relating to the tangible net worth and fixed chargecovenants.  Additionally, the covenantswere reset for the remainder of 2003 as follows;  the tangible net worth covenant was reset to ($5,250,000) withthe fixed charge covenant reset to an allowable shortfall of $700,000 for thethree months ended September 30, 2003 and $1,000,000 for the six monthsending December 31, 2003.  Thefixed charge covenant will be 0.95:1 thereafter.  In addition, the interest rate of the Senior SubordinatedConvertible Notes was changed effective July 1, 2003 from 15% to 16% perannum.  In September 2003,Wynnchurch Capital Partners L.P. agreed to maintain its $2,000,000 guaranteeand not to reduce such guarantee by any payments received fromBluecurrent.  In consideration formaintaining the guarantee, the Company agreed to pay Wynnchurch CapitalPartners, L.P. $300,000 payable as additional interest and added to theprincipal amount.  The Company alsoexecuted a Seventh amendment to the securities purchase agreement that waivedthe events of default that occurred as of September 30, 2003 relating tothe tangible net worth and fixed charge covenants.  Additionally, the covenants were reset for future periods asfollows:  the tangible net worthcovenant was reset to ($8,925,000) for the quarter ending December 31, 2003 andeach quarter thereafter.  The fixedcharge covenant was reset to an allowable shortfall of $1,050,000 for the threemonths ending December 31, 2003, $1,851,000 for the six months ending March 31,2004 and $1,917,000 for the nine months ending June 30, 2004.  The fixed charge covenant will be .95:1thereafter.  Capital expenditures will alsobe limited to $52,500 per quarter commencing with the quarter ending December31, 2003.  In consideration for thiswaiver and for continuing to maintain the $2,000,000 guarantee, WynnchurchCapital Partners, L.P. will receive a monthly fee of $30,000 for each monthsuch guarantee is in effect.  This feewill be payable as additional interest and added to the principal amount.

 

Due to the change in theunderlying terms of the Convertible Notes and Warrants, the original valuationof the warrants was reassessed during the second quarter of 2003.  The fair value ascribed to these warrantswas determined to be approximately $2.3 million prior to the price change and$2.4 million subsequent to the price change. This change in value ascribed to the price change of approximately$69,000 is being amortized over the seven-month life of the guarantee as anon-cash interest charge.  The valuationof the warrants was determined based on advice from a third-party valuationspecialist.  A non-cash interest chargeof approximately $286,000 and $267,000 was recorded for the nine months endedSeptember 30, 2002 and 2003, respectively, related to the originalvaluation of the warrants in January, 2002, plus the amortization of theguarantee value.

 

During the third quarterof 2003, the Company concluded that the change in interest rate combined with thechange in conversion price of the convertible notes in the second quarter of2003 met the criteria of an extinguishment of debt per EITF 96-19 “DebtorsAccounting for a Modification or Exchange of Debt Instruments,” as the changein the present value of the notes exceeded the present value prior to themodifications by more than 10%.  Thedebt extinguishment and origination fees expense represents a non-cashadjustment and has no impact on the amount of debt ultimately owed toWynnchurch Capital Partners, L.P. The valuation of the notes was determinedbased on advice from a third-party valuation specialist who utilized avaluation model with the following inputs: measurement date of July 1, 2003; fair value of $0.31; conversion priceof $1.50; contractual term of 5.5 years; dividend rate of zero; volatility rateof 160.0%; and risk-free interest rate of 2.56%.  Based on the results, the fair value of the notes was determinedto be $13.2 million versus the carrying value of $9.7 million.  As such, a $3.5 million charge wasrecognized for the extinguishment of debt to recognize the fair value of thenotes in the financial statements. Additionally, origination fees of $0.9 million related to these notesand $0.1 million related to the revolving credit commitment were written offdue to the modifications.

 

At September 30,2003, the Company has long-term debt of $25.9 million.  This is comprised of $12.0 million in SeniorSecured Revolving Credit with Fleet Capital Corporation and $13.9 millionof long-term debt related to the Senior Subordinated Convertible Notes withWynnchurch Capital Partners, L.P.  The$13.9 million represents the July 1, 2003 fair value of $13.2 million plussubsequent accrued interest.

 

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At September 30,2003, the total contractual obligation to Wynnchurch Capital Partners, L.P. is$12.7 million due in January, 2009. This is comprised of $10.0 million in original principal and $2.7 millionin accrued interest.

 

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

 

##### **6.             Restructuringand Other Charges – 2003**

 

During the third quarterof 2003, the Company incurred a $0.5 million restructuring charge representingseverance costs associated with the restructuring of the Company’s sales,delivery and corporate staff.  A totalof 33 positions were eliminated, comprised of 11 in sales, 9 in delivery and 13in corporate staff positions.

 

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

 
| **(in thousands)** |   | **Total  Initial  Reserve** |   | **2003  Cash  Payments** |   | **Balance at  September 30,  2003** |   |
|--------------------|--------|-----------------------------|--------|--------------------------|--------|------------------------------------------|--------|
| Severance          |   | $                           | 545    |                     | $      | (31                                      | )      | $ | 514 |   |
|                    |        |                             |        |                          |        |                                          |        |  |  |  |

 

The remaining severancebalance at September 30, 2003 will be paid primarily during the fourthquarter of 2003 with the exception of one employee.  Included in this charge is the severance of an executive employeethat will be paid out in accordance with an employment agreement through August 2005.

 

##### **7.             Restructuringand Other Charges – 2002**

 

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 the departureof the Company’s former Chief Executive Officer. During the third quarter of2002, the Company recorded a $4.7 million restructuring charge due toexcess office space and the restructuring of the service delivery function. Anadditional $0.3 million restructuring charge was recorded in the fourthquarter, which was also due to the restructuring of the service deliveryfunction. The primary components of the restructuring and other charges can besummarized as follows **(in millions):**

 

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

 

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

 
| **(in thousands)**           |   | **Total  Initial  Reserve** |   | **2002  Cash  Payments** |   | **Balance at  December 31,    2002** |   | **2003  Cash  Payments** |   | **Adjustment  to reserve** |   | **Balance at  September 30,    2003** |   |
|------------------------------|--------|-----------------------------|--------|--------------------------|--------|------------------------------------------------|--------|--------------------------|--------|----------------------------|--------|-------------------------------------------------|--------|
|                         |   |                        |   |                     |   |                                           |   |                     |   |                       |   |                                            |   |
| Real  estate costs           |   | $                           | 4,328  |                     | $      | (569                                           | )      | $                        | 3,759  |                       | $      | (1,318                                          | )      | $ | (605 | ) | $ | 1,836 |   |
| Severance                    |   | 627                         |   | (362                     | )      | 265                                            |   | (200                     | )      | —                     |   | 65                                              |   |
| Other  charges               |   | 1,100                       |   | (202                     | )      | 898                                            |   | (87                      | )      | —                     |   | 811                                             |   |
|                         |   |                        |   |                     |   |                                           |   |                     |   |                       |   |                                            |   |
| Total  restructuring reserve |   | $                           | 6,055  |                     | $      | (1,133                                         | )      | $                        | 4,922  |                       | $      | (1,605                                          | )      | $ | (605 | ) | $ | 2,712 |   |
|                              |        |                             |        |                          |        |                                                |        |                          |        |                            |        |                                                 |        |  |  |  |  |  |  |  |

 

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.

 

During the third quarterof 2003, the Company revisited its 2002 restructuring accrual assumptions.  Based on this review, the Company determinedthe initial reserve was overstated by $0.6 million due to various real estatecost assumptions made versus actual activity. The majority of this adjustment relates to the successful early terminationnegotiated on the lease of the Company’s previous headquarters.

 

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The $0.6 millionseverance charge related to headcount reductions associated with centralizingthe service delivery organization. A total of 60 positions were eliminated withthe largest group being the client staffing managers. The remainder ofpositions eliminated was a mix of corporate staff and recruiting personnel. Theremaining severance balance at September 30, 2003 relates to an employeewith an employment agreement. It is anticipated that this amount will be paidout through December 2003.

 

The $1.1 millionother charges related to the severance pay associated with the departure of theCompany’s former Chief Executive Officer. The remaining balance at September 30, 2003 is required to be paidin full by July 2004.

 

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

 

## **Results of Operations**

 

All of the Company’srevenue is generated from information technology services that offer thebenefits 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.

 

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

 

**Revenue.**Revenuesconsist of fees earned from ARC Staffing Management Solutions and ARCTechnology Management Solutions. Revenue decreased $6.0 million or 14.9% from $40.4 million in the thirdquarter of 2002 to $34.4 million in the third quarter of 2003.  ARC Technology Management Solutions revenuedecreased by $5.6 million or 25.4% from $22.2 million in the third quarter of2002 to $16.6 million in the third quarter of 2003.  The decline in Technology Management Solutions revenue was drivenby declines in the Technology Deployments and Field Service offerings. Thedecline in the Technology Deployments revenue is attributable to the loss of amajor customer.  The Company’straditional Staffing Management Solutions revenue decreased by $0.4 million or2.0% from $18.2 million in the third quarter of 2002 to $17.8 million in thethird quarter of 2003.

 

**Gross profit.** Grossprofit decreased by $3.3 million or 29.8% from $11.0 million in the thirdquarter of 2002 to $7.7 million in the third quarter of 2003.  As a percentage of revenue, gross profitdecreased from 27.2% in the third quarter of 2002 to 22.4% in the third quarterof 2003.  The most significant factor inthe margin percent decline was the decrease in margins in the TechnologyManagement Solutions business.  TheCompany experienced margin declines in its Managed Services, Field Services,and Technology Deployment service offerings. The Company also experienced some margin pressures in its StaffingManagement Solutions business.

 

**Operating expenses. **Operating expenses consistof salaries and benefits, sales costs, recruiting, retention and trainingcosts, management and administrative costs, and depreciation andamortization.  Operating expensesdecreased by $2.3 million or 20.1% from $11.5 million in the third quarter of2002 to $9.2 million in the third quarter of 2003.  The operating expense decrease was attributable to therestructuring actions the Company has taken in the past, which is reflected inreduced office space and lower headcount. As a percentage of revenue, operatingexpenses decreased from 28.6% in the third quarter of 2002 to 26.8% in thethird quarter of 2003.

 

**Other charges.**Duringthe third quarter of 2002, the Company decided to restructure its service deliveryfunction 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.  TheCompany recorded a $4.7 million restructuring charge during the third quarterof 2002. The portion of the charge related to real estate costs, which totaled$4.4 million, relates to lease costs associated with decreased utilization ofoffice space as the Company restructured its service delivery organization. The$0.3 million severance charge related to headcount reductions associated withcentralizing the service delivery organization.  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.

 

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During the third quarterof 2003, the Company incurred a $0.5 million restructuring charge representingseverance costs associated with the restructuring of the Company’s sales,delivery and corporate staff.  A totalof 33 positions were eliminated, comprised of 11 in sales, 9 in delivery and 13in corporate staff positions. The remaining severance balance atSeptember 30, 2003 will be paid primarily during the fourth quarter of2003 with the exception of one employee. Included in this charge is the severance of an executive employee thatwill be paid out in accordance with an employment agreement throughAugust 2005. The savings expected from this headcount reduction will beapproximately $2.9 million and will be fully realized during 2004.Additionally, during the third quarter of 2003, the Company revisited its 2002restructuring accrual assumptions. Based on this review, the Company determined the initial reserve wasoverstated by $0.6 million due to various real estate cost assumptions madeversus actual activity.  The majority ofthis adjustment relates to the successful early termination negotiated on thelease of the Company’s previous headquarters.

 

**Debt extinguishment and originationfees.** Debt extinguishment and origination fees for the threemonths ended September 30, 2003 totaled $4.5 million and are comprised of$3.5 million of debt extinguishment related to the convertible notes and $1.0million of origination fees written off. The debt extinguishment andorigination fees expense represents a non-cash adjustment and has no impact onthe amount of debt ultimately owed to Wynnchurch Capital Partners, L.P. Thevaluation of the notes was determined based on advice from a third-partyvaluation specialist who utilized a valuation model.  Based on the results, the fair value of the notes was determinedto be $13.2 million versus the carrying value of $9.7 million.  As such, a $3.5 million charge wasrecognized for the extinguishment of debt to recognize the fair value of thenotes in the financial statements. Additionally, origination fees of $0.9 million related to these notesand $0.1 million related to the revolving credit commitment were written offdue to the modifications.

 

**Other expense, net. **Other expense, net,consists primarily of interest expense on the Company’s outstanding debt. Otherexpense, net, is $0.9 million in 2003 down from $1.0 million in the thirdquarter of 2002.

 

**Income tax benefit.**Duringthe third quarter of 2002, the Company recorded a tax benefit of $1.0million.  During the third quarter of2003, the Company recorded a tax benefit of $0.8 million which represents arefund for the Company’s 2002 operating loss.

 

# **First Nine Months Fiscal 2003 Compared to First NineMonths Fiscal 2002**

# ** **

**Revenue.**Revenuesconsist of fees earned from ARC Staffing Management Solutions and ARCTechnology Management Solutions.  Totalrevenue decreased $14.4 million or 12.1% from $119.5 million in the nine monthsof 2002 to $105.1 million in the nine months of 2003.  Technology Management Solutions revenue decreased by $5.3 millionor 9.1% from $58.3 million in the nine months of 2002 to $53.0 million in thenine months of 2003.  The decline inTechnology Management Solutions revenue was driven by declines in theTechnology Deployments and Field Service offerings. During the second quarterof 2003, the Company recorded a $0.6 million write-off attributable to thesettlement of the Bluecurrent litigation as discussed in Part II-Item 1. “LegalProceedings.” The Company’s traditional Staffing Management Solutions revenuedecreased by $9.1 million or 14.9% from $61.2 million in the nine months of2002 to $52.1 million in the nine months of 2003 primarily from the continuedslowdown in IT spending experienced industry-wide.

 

**Gross profit.** Grossprofit decreased by $8.5 million or 25.8% from $33.0 million in the nine monthsof 2002 to $24.5 million in the nine months of 2003.  As a percentage of revenue, gross profit decreased from 27.6% inthe nine months of 2002 to 23.3% in the nine months of 2003. The most significantfactor in the margin percent decline was the decrease in margins in theTechnology Management Solutions business. The Company experienced margin declines in its Managed Services, FieldServices, and Technology Deployment service offerings.  The Company also experienced some marginpressures in its Staffing Management Solutions business.

 

**Operating expenses. **Operating expenses consistof salaries and benefits, sales costs, recruiting, retention and trainingcosts, management and administrative costs, and depreciation andamortization.  Operating expensesdecreased by $6.4 million or 18.1% from $35.1 million in the nine months of2002 to $28.7 million in the nine months of 2003.  The operating expense decrease was attributable to therestructuring actions the Company has taken in the past, which is reflected inreduced office space and lower headcount. As a percentage of revenue, operatingexpenses decreased from 29.4% in the nine months of 2002 to 27.3% in the ninemonths of 2003.

 

**Other charges. **During the second quarterof 2002 the Company recorded a charge of $1.1 million which represents theseverance pay associated with the departure of the Company’s former ChiefExecutive Officer.  During the thirdquarter of 2002, the Company decided to restructure its service deliveryfunction by eliminating the client support

 

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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.  TheCompany recorded a $4.7 million restructuring charge during the third quarterof 2002. The portion of the charge related to real estate costs, which totaled$4.4 million, relates to lease costs associated with decreased utilization ofoffice space as the Company restructured its service delivery organization. The$0.3 million severance charge related to headcount reductions associated withcentralizing the service delivery organization.  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.

 

During the third quarterof 2003, the Company incurred a $0.5 million restructuring charge representingseverance costs associated with the restructuring of the Company’s sales,delivery and corporate staff.  A totalof 33 positions were eliminated, comprised of 11 in sales, 9 in delivery and 13in corporate staff positions. The remaining severance balance atSeptember 30, 2003 will be paid primarily during the fourth quarter of2003 with the exception of one employee. Included in this charge is the severance of an executive employee thatwill be paid out in accordance with an employment agreement throughAugust 2005. The savings expected from this headcount reduction will beapproximately $2.9 million and will be fully realized during 2004.Additionally, during the third quarter of 2003, the Company revisited its 2002 restructuringaccrual assumptions.  Based on thisreview, the Company determined the initial reserve was overstated by $0.6million due to various real estate cost assumptions made versus actualactivity.  The majority of thisadjustment relates to the successful early termination negotiated on lease ofthe Company’s previous headquarters.

 

**Debt extinguishment and originationfees.** Debt extinguishment and origination fees for the ninemonths ended September 30, 2003 totaled $4.5 million and are comprised of$3.5 million of debt extinguishment related to the convertible notes and $1.0million of origination fees written off. The debt extinguishment andorigination fees expense represents a non-cash adjustment and has no impact onthe amount of debt ultimately owed to Wynnchurch Capital Partners, L.P. Thevaluation of the notes was determined based on advice from a third-partyvaluation specialist who utilized a valuation model.  Based on the results, the fair value of the notes was determinedto be $13.2 million versus the carrying value of $9.7 million.  As such, a $3.5 million charge wasrecognized for the extinguishment of debt to recognize the fair value of thenotes in the financial statements. Additionally, origination fees of $0.9 million related to these notesand $0.1 million related to the revolving credit commitment were written offdue to the modifications.

 

**Other expense, net. **Other expense, net,consists primarily of interest expense on the Company’s outstanding debt. Otherexpense, net, increased by $0.4 million or 14.7% from $2.7 million in the ninemonths of 2002 to $3.1 million in the nine months of 2003. The increase inother expense, net, is primarily the result of increased interest rates on theCompany’s long-term debt.  Additionally,interest due to the IRS as a result of an IRS audit covering the years 1996through 2001 was recorded during the second quarter of 2003.

 

**Income tax benefit.**Incometax benefit for the nine months of 2002 was $3.2 million.  During the first quarter of 2002, theCompany recorded a tax benefit of $1.0 million related to a refund obtained dueto a change in income tax law.  Duringthe second quarter of 2002, the Company recorded a tax benefit of $1.2 millionrelated to the 2002 operating loss. During the third quarter of 2002, theCompany recorded a tax benefit of $1.0 million related to the 2002 operatingloss. During the third quarter of 2003, the Company recorded a tax benefit of$0.8 million representing a refund for the Company’s 2002 operating loss.

 

# **Liquidity and Capital Resources**

# ** **

Current liabilitiesexceed current assets by $0.2 million at September 30, 2003.  Net cash provided by operations was $5.6million in the first nine months of 2003. Net cash provided by operations was principally the result of a decreasein accounts receivable of approximately $11.8 million offset by decreases inlong-term debt of $5.1 million, accrued expenses and other liabilities of $1.4million, and accounts payable of $0.8 million. The significant decrease in accounts receivable was due to a paymentagent agreement entered into with IBM Credit, LLC in the first quarter of2003.  This agreement provides for anexpedited receipt of outstanding IBM receivables from 45 days to 15 days in exchangefor a discount of 0.76%.

 

Capital spending wasapproximately $0.1 million and $0.4 million for the nine months endedSeptember 30, 2003 and 2002, respectively. The Company is restricted byits credit agreement to spending not more than $50,000 per quarter beginningwith the quarter ended December 31, 2003.

 

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

 

The $30.0 millionrevolving credit facility is secured by the assets of the Company, principallyconsisting of accounts receivable.  Thecredit facility has a three-year term and bears interest at LIBOR plus 3.25% orthe bank’s base rate plus 2.00%.

 

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

 

In 2003, the Company andFleet Capital Corporation executed additional amendments to the revolvingcredit agreement. The Fifth amendment addressed the fact that the Company hadentered into litigation with a major customer, Bluecurrent.  This action eliminated that account from theCompany’s borrowing base creating a borrowing overadvance.  The amendment allows for an overadvance of$2,000,000 through December 31, 2003. In addition, the amendment waived the events of default relative to thefixed charge and tangible net worth covenants that occurred at December 31,2002.  The tangible net worth covenantwas reset at ($1,000,000) and the fixed charge shortfall was set to $1,000,000through March 31, 2003 and $1,400,000 up through June 30, 2003 and aratio of 1:1, thereafter.  The Sixthamendment eliminated the requirement that any amounts received as a result of thesettlement with Bluecurrent reduce the Wynnchurch Capital Partners, L.P.guarantee as discussed below.  TheSeventh amendment waived the events of default as of June 30, 2003relating to the tangible net worth and fixed charge covenants.  Additionally, the covenants were reset forthe remainder of 2003 as follows; the tangible net worth covenant was reset to($5,000,000) with the fixed charge covenant reset to an allowable shortfall of$650,000 for the three months ended September 30, 2003, and $950,000 forthe six months ended December 31, 2003. The fixed charge covenant will be1:1, thereafter. In addition, the interest rate was changed effectiveAugust 1, 2003 from the bank’s base rate plus 1.00% to the base rate plus2.00%. As of September 30, 2003, the applicable rate is 6.00%, whichrepresents the bank’s base rate plus 2.00%. The Seventh Amendment also reduced the maximum revolving creditcommitment from $28.0 million to $23.0 million.  The Eighth Amendment waived the events of default as of September 30,2003 relating to the tangible net worth and fixed charge covenants.  Additionally, the covenants were reset forfuture periods as follows: the tangible net worth covenant was reset to($8,500,000) for the quarter ending December 31, 2003 and each quarterthereafter.  The fixed charge covenantwas reset to an allowable shortfall of $1,000,000 for the three months endingDecember 31, 2003, $1,801,000 for the six months ending March 31,2004, and $1,867,000 for the nine months ending June 30, 2004.  The fixed charge covenant will be 1:1,thereafter.  Capital expenditures willalso be limited to $50,000 per quarter commencing with the quarter endingDecember 31, 2003.

 

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 ata conversion price of $2.50 per share. At the Company’s election, one-half ofthe interest could be deferred during the first four years, subject to certainconditions. In conjunction with the sale of these notes, the Company issued10,000,000 warrants to purchase shares of the Company’s common stock at $0.55per share. An additional 1,000,000 warrants to purchase its common stock at$0.73 per share were not exercisable for one year contingent upon the Companymeeting certain performance measures, however, the warrants would expire ifsuch performance measures were met.  Asof December 31, 2002, the Company did not meet the specific performancemeasures related to the 1,000,000 contingent warrants and these warrants didnot expire.

 

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

 

In 2003, in connectionwith an amendment to the Company’s credit agreement with Fleet CapitalCorporation, Wynnchurch Capital Partners, L.P. executed a guarantee with FleetCapital Corporation to allow overadvances of up to $2,000,000 throughDecember 31, 2003, reduced by any payments received from Bluecurrent.  In consideration, Wynnchurch CapitalPartners, L.P. and the Company amended their agreements. The 15% SeniorSubordinated

 

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Convertible Notesconversion price was reduced from $2.50 to $1.50 per share of commonstock.  The exercise price of alloutstanding warrants was reduced to $0.26 per share.  Additionally, a provision was made that any draw on the guaranteeby the Company could be satisfied with a purchase by Wynnchurch CapitalPartners, L.P. of additional 15% Senior Subordinated Convertible Notes having aprincipal amount equal to the Company’s draw and having terms equal to theoutstanding 15% Senior Convertible Notes, and provided for a $250,000 fee toWynnchurch Capital Partners, L.P. in the event of a draw upon theirguarantee.  The $250,000 fee would bepayable through the issuance of additional 15% Senior Subordinated ConvertibleNotes.  As of September 30, 2003,the Company has not been required to draw on the guarantee, and no additionalConvertible Notes have been issued. In July 2003, Wynnchurch CapitalPartners, L.P. agreed to waive the agreed requirement that their guarantee bereduced by any amounts received from Bluecurrent. Consequently, Bluecurrent’sinitial payment of $850,000 did not reduce the $2,000,000 guarantee. However,all subsequent payments from Bluecurrent will continue to reduce theoutstanding guarantee. In consideration for this waiver, Wynnchurch CapitalPartners, L.P. received a fee of $125,000 payable as interest and added to theprincipal amount of the notes.  Underthe Sixth Amendment to the securities purchase agreements with  Wynnchurch Capital Partners, L.P. waived theevents of default as of June 30, 2003, relating to the tangible net worthand fixed charge covenants. Additionally, the covenants were reset for the remainder of 2003 asfollows;  the tangible net worthcovenant was reset to ($5,250,000) with the fixed charge covenant reset to anallowable shortfall of $700,000 for the three months ended September 30,2003 and $1,000,000 for the six months ending December 31, 2003.  The fixed charge covenant will be 0.95:1thereafter.  In addition, the interestrate of the Senior Subordinated Convertible Notes was changed effective July 1,2003 from 15% to 16% per annum.  InSeptember 2003, Wynnchurch Capital Partners L.P. agreed to maintain its$2,000,000 guarantee and not to reduce such guarantee by any payments receivedfrom Bluecurrent.  In consideration formaintaining the guarantee, the Company agreed to pay Wynnchurch CapitalPartners, L.P. $300,000 payable as additional interest and added to theprincipal amount.  The Company alsoexecuted a Seventh amendment to the securities purchase agreement that waivedthe events of default that occurred as of September 30, 2003 relating tothe tangible net worth and fixed charge covenants.  Additionally, the covenants were reset for future periods asfollows:  the tangible net worthcovenant was reset to ($8,925,000) for the quarter ending December 31, 2003 andeach quarter thereafter.  The fixedcharge covenant was reset to an allowable shortfall of $1,050,000 for the threemonths ending December 31, 2003, $1,851,000 for the six months ending March 31,2004 and $1,917,000 for the nine months ending June 30, 2004.  The fixed charge covenant will be .95:1thereafter.  Capital expenditures willalso be limited to $52,500 per quarter commencing with the quarter endingDecember 31, 2003.  In consideration forthis waiver and for continuing to maintain the $2,000,000 guarantee, WynnchurchCapital Partners, L.P. will receive a monthly fee of $30,000 for each monthsuch guarantee is in effect.  This feewill be payable as additional interest and added to the principal amount.

 

Due to the change in theunderlying terms of the Convertible Notes and Warrants, the original valuationof the warrants was reassessed during the second quarter of 2003.  The fair value ascribed to these warrantswas determined to be approximately $2.3 million prior to the price change and$2.4 million subsequent to the price change. This change in value ascribed to the price change of approximately$69,000 is being amortized over the seven-month life of the guarantee as anon-cash interest charge.  The valuationof the warrants was determined based on advice from a third-party valuationspecialist.  A non-cash interest chargeof approximately $286,000 and $267,000 was recorded for the nine months endedSeptember 30, 2002 and 2003, respectively, related to the originalvaluation of the warrants in January, 2002, plus the amortization of theguarantee value.

 

During the third quarterof 2003, the Company concluded that the change in interest rate combined withthe change in conversion price of the convertible notes in the second quarterof 2003 met the criteria of an extinguishment of debt per EITF 96-19 “DebtorsAccounting for a Modification or Exchange of Debt Instruments,” as the changein the present value of the notes exceeded the present value prior to themodifications by more than 10%.  Thedebt extinguishment and origination fees expense represents a non-cashadjustment and has no impact on the amount of debt ultimately owed toWynnchurch Capital Partners, L.P. The valuation of the notes was determinedbased on advice from a third-party valuation specialist who utilized avaluation model with the following inputs: measurement date of July 1, 2003; fair value of  $0.31; conversion price of $1.50;contractual term of 5.5 years; dividend rate of zero; volatility rate of 160.0%;and risk-free interest rate of 2.56%. Based on the results, the fair value of the notes was determined to be$13.2 million versus the carrying value of $9.7 million.  As such, a $3.5 million charge wasrecognized for the extinguishment of debt to recognize the fair value of thenotes in the financial statements. Additionally, origination fees of $0.9 million related to these notesand $0.1 million related to the revolving credit commitment were written offdue to the modifications.

 

The Company currentlyanticipates its cash balances, funds from operations, funds from theBluecurrent Settlement as discussed in Part II-Item 1 “Legal Proceedings”,together with funds available under its credit facility should be sufficient tomeet all of its anticipated cash requirements for at least the next 12months.  However, general economic andindustry conditions could impact the Company’s ability to meet anticipated cashrequirements.  Since the existing creditfacility is secured by the assets of the Company, principally consisting ofaccounts receivable, these uncertainties may directly impact the availabilityof this credit facility.  Additionally,the Company’s ability to successfully meet debt covenants in future periods isa significant risk factor.

 

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The following summarizesthe Company’s contractual obligations at September 30, 2003, and theeffect such obligations are expected to have on liquidity and cash in thefuture periods.

 
|                                |   | **Payments  Due by Period** |   |
|-------------------------------------|--------|-----------------------------|--------|
|                                |   | **Total**                   |   | **Less Than  1 Year** |   | **1-3  Years** |   | **4-5  Years** |   | **After  5 Years** |   |
|                                |   | **(in  thousands)**         |   |
| Contractual  Obligations:           |   |                        |   |   |   |   |   |   |   |   |   |
| Senior  Secured Revolving Credit    |   | $                           | 11,996 |   | $ | — |   | $ | 11,996 |   | $ | — |   | $ | — |   |
| Securities  Purchase Agreement      |   | 12,691                      |   | — |   | — |   | — |   | 12,691 |   |
| Non-cancelable  operating leases    |   | 10,972                      |   | 3,539 |   | 4,990 |   | 2,443 |   | — |   |
|                                |   |                        |   |   |   |   |   |   |   |   |   |
| Total  contractual cash obligations |   | $                           | 35,659 |   | $ | 3,539 |   | $ | 16,986 |   | $ | 2,443 |   | $ | 12,691 |   |

 

**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 thepresentation of the consolidated financial statements include revenuerecognition, allowance for doubtful accounts, analysis of goodwill impairmentand valuation allowance for deferred tax assets.

 

**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 Companycontinuously monitors collections and payments from its customer base andmaintains a provision for estimated credit losses based upon historicalexperience and any specific customer collection issues that have beenidentified.  The Company specificallyreviews outstanding account balances that are overdue 90 days or more in makingits 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,the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS142”).  This Statement dictates thatgoodwill and intangible assets with indefinite useful lives should be tested andwritten down for impairment at least annually, instead of being amortized on anongoing basis.  The Company hasterminated its policy of amortizing goodwill on a monthly basis and performs anannual analysis of goodwill impairment, using the discounted future cash flowsmethodology.  Since the Company wroteoff the significant majority of its goodwill balance in 2000 due to impairment,the adoption of this standard has not had an impact on its financial 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 20 year net operating loss carryforward period.  When a valuation allowance is deemed necessary, the Companyrecords an adjustment to the deferred tax asset, with a corresponding charge tothe statement of

 

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operations.  In the event that the Company determinesthat it would be able to realize its deferred tax assets in the future inexcess of its net recorded amount, an adjustment to the deferred tax assetswould increase income, or reduce a net loss, in the period such determinationwas made.

 

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

##### ** **

The market risk that theCompany is exposed to primarily relates to changes in interest rates on itsborrowings. At September 30, 2003, the Company had $12.0 million infloating-rate debt. An adverse change in interest rates during any period thatthe loan is outstanding would cause an increase in interest expense. A 100basis point increase in the bank’s base rate would increase the annual amountof interest paid by $0.1 million.

 

The Company issuedwarrants on January 31, 2002, which are classified as derivative financialinstruments pursuant to SFAS No. 133, “Accounting for Derivative Instrumentsand Certain Hedging Activities,” which was adopted by the Company on January 1,2001.  Pursuant to SFAS No. 133 andinterpretations by the Emerging Issues Task Force covering derivative financialinstruments, these warrants meet the criteria for equity classification on themeasurement date of January 31, 2002 and the Company is not required toremeasure the warrants on subsequent dates. As such, there is no mark-to-market adjustment which will be reflectedin the statement of operations as unrealized gains or losses as a result of changesin fair value of these warrants in periods subsequent to the measurementdate.  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****. – Controlsand Procedures**

 

Our Chief ExecutiveOfficer and Chief Financial Officer have concluded, based on their evaluationas of the end of the period covered by this report, that our disclosurecontrols and procedures are effective for gathering, analyzing and disclosingthe information we are required to disclose in our reports filed under theSecurities Exchange Act of 1934.

 

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**FORWARD-LOOKING STATEMENTS**

 

The Company makesforward-looking statements from time-to-time and desires to take advantage ofthe “safe harbor,” which is afforded such statements under the PrivateSecurities Litigation Reform Act of 1995, when they are accompanied bymeaningful cautionary statements identifying important factors that could causeactual results to differ materially from those in the forward-lookingstatements. The statements contained in this Form 10-Q, including those under“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” statements contained in future filings with the Securities andExchange Commission and publicly disseminated press releases, and statementswhich may be made from time-to-time in the future by management of the Companyin presentations to shareholders, prospective investors, and others interestedin the business and financial affairs of the Company, which are not historicalfacts, are forward-looking statements that involve risks and uncertainties thatcould cause actual results to differ materially from those set forth in theforward-looking statements. Any projections of financial performance orstatements concerning expectations as to future developments should not beconstrued in any manner as a guarantee that such results or developments will,in fact, occur. There can be no assurance any forward-looking statement will berealized or that actual results will not be significantly different from thatset forth in such forward-looking statement.

 

In addition to the risksand uncertainties of ordinary business operations, the forward-lookingstatements of the Company referred to above are also subject to the followingrisks and uncertainties:

 

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

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

•                  Competitionin the information technology services marketplace;

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

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

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

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

•                  Theability to successfully enter new geographic markets;

•                  TheCompany’s ability to successfully meet debt covenants; and

•                  Theeffect of changes in general economic conditions.

 

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

 

**Item 1. – Legal Proceedings**

** **

Reference is made to“Item 3. Legal Proceedings.” in the Company’s Form 10-K and Annual Report forthe year ended December 31, 2002.

 

On May 29, 2003,Bluecurrent and the Company entered into an agreement providing for thesettlement of the Illinois lawsuit and Texas lawsuit.  Pursuant to the settlement agreement, both the Company andBluecurrent released the other party from its obligations under the MasterService Agreement and from all claims under the respective lawsuits.  In connection with the releases, Bluecurrentagreed to pay the Company an aggregate amount of $5.3 million.  Such amount was reduced by a credit of $1.5million issued by the Company to Bluecurrent with respect to outstandinginvoices.  On the settlement date, Bluecurrentpaid the Company $850,000 which was applied to the aggregate cash settlementbalance of $3.8 million.  The remainingsettlement balance is payable in weekly installments of $100,000.

 

In addition to the creditissued by the Company, the Company has agreed not to develop its own integratedtechnically-enabled deployment tool for a period of fifteen months nor will itperform any work using such tool for a specified group of customers identifiedin the settlement agreement.

 

As of September 30,2003, the remaining receivable balance of this settlement is $1.8 million.

 

### **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                 |   | Eight Amendment dated  November 14, 2003 to credit and security agreement.                                                                                     |
|                |   |                                                                                                                                                                |
| 4.2                 |   | Second Amendment dated  November 14, 2003 to the Guarantee agreement.                                                                                          |
|                |   |                                                                                                                                                                |
| 4.3                 |   | Sixth Amendment dated  August 14, 2003 to the Securities Purchase Agreement.                                                                                   |
|                |   |                                                                                                                                                                |
| 4.4                 |   | Second Amendment dated  August 14, 2003 to Convertible Promissory Notes.                                                                                       |
|                |   |                                                                                                                                                                |
| 4.5                 |   | Seventh Amendment dated  November 14, 2003 to the Securities Purchase Agreement.                                                                               |
|                |   |                                                                                                                                                                |
| 10.1                |   | Executive Separation  Agreement dated August 22, 2003 between Alternative  Resources Corporation and Sharon McKinney.                                     |
|                |   |                                                                                                                                                                |
| 31.1                |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                |   |                                                                                                                                                                |
| 31.2                |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                |   |                                                                                                                                                                |
| 32                  |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                 |

 

(b)**                                **Noreports on Form 8-K were required to be filed for the quarterly period endedSeptember 30, 2003.

 

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**SIGNATURES**

 

 

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

 

 
|                          | ALTERNATIVE RESOURCES  CORPORATION                                        |
|-------------------------------|---------------------------------------------------------------------------|
|                          |                                                                      |
|                          |                                                                      |
| Date: November 14,  2003 | /s/  Steven Purcell                                                       |   |
|                          | Steven Purcell                                                            |
|                          | Senior Vice President,  Chief Financial Officer,  Treasurer and Secretary |

 

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