** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

 

**FORM 10-Q**

 

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thequarterly period ended September 30, 2001**

** **

**Commissionfile number 0-23940**

 

 

**ALTERNATIVE RESOURCES CORPORATION**

----

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                  |   | **38-2791069**      |
|-----------------------------------------------|--------|---------------------|
| (State or other  jurisdiction of              |   | (I.R.S. Employer    |
| incorporation or  organization)               |   | Identification No.) |
|                                          |   |                |
| **600  Hart Road, Suite 300, Barrington, IL** |   | **60010**           |
| (Address of principal  executive offices)     |   | (Zip code)          |

 

**(847) 381-6701**

(Registrant's telephone number, including area code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports),

and (2) has beensubject to such filing requirements for the past 90 days.  YES  ý  NO  o

 

 

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

 

                      17,409,904 shares of Common Stock outstandingas of November 5, 2001

 

 

**PART I. – FINANCIAL INFORMATION**

**Item 1.**–**FinancialStatements**

**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

(In thousands,except share data)

 

** **
| **ASSETS**                                                                                                                                                      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |   | **December 31, 2000** |   | **September 30, 2001** |   |
|                                                                                                                                                            |   |   |   | **(Unaudited)** |   |
| Current assets:                                                                                                                                                 |   |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                      |   | $ | 114 |   | $ | 76 |   |
| Short-term  investment                                                                                                                                          |   | 639 |   |  |   |
| Trade accounts  receivable, net of allowance for doubtful accounts                                                                                              |   | 57,124 |   | 40,350 |   |
| Prepaid expenses                                                                                                                                                |   | 1,325 |   | 1,289 |   |
| Income taxes  receivable                                                                                                                                        |   | 7,059 |   | 2,307 |   |
| Other  receivables                                                                                                                                              |   | 295 |   | 263 |   |
| Deferred income  taxes                                                                                                                                          |   | 1,030 |   | 1,179 |   |
| Total current  assets                                                                                                                                           |   | 67,586 |   | 45,464 |   |
| Property and  equipment:                                                                                                                                        |   |   |   |   |   |
| Office equipment                                                                                                                                                |   | 8,109 |   | 8,240 |   |
| Furniture and  fixtures                                                                                                                                         |   | 2,404 |   | 2,389 |   |
| Software                                                                                                                                                        |   | 17,739 |   | 19,202 |   |
| Leasehold  improvements                                                                                                                                         |   | 1,973 |   | 1,977 |   |
|                                                                                                                                                            |   | 30,225 |   | 31,808 |   |
| Less accumulated  depreciation and amortization                                                                                                                 |   | (12,110 | ) | (16,121 | ) |
| Net property and  equipment                                                                                                                                     |   | 18,115 |   | 15,687 |   |
| Other assets:                                                                                                                                                   |   |   |   |   |   |
| Goodwill, net of  amortization                                                                                                                                  |   | 2,799 |   | 2,742 |   |
| Other assets                                                                                                                                                    |   | 1,119 |   | 952 |   |
| Total other  assets                                                                                                                                             |   | 3,918 |   | 3,694 |   |
| Total assets                                                                                                                                                    |   | $ | 89,619 |   | $ | 64,845 |   |
|                                                                                                                                                            |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                                                        |
| Current  liabilities:                                                                                                                                           |   |   |   |   |   |
| Cash overdraft                                                                                                                                                  |   | $ | 5,512 |   | $ | 3,296 |   |
| Short-term debt                                                                                                                                                 |   | 43,966 |   | 30,585 |   |
| Accounts payable                                                                                                                                                |   | 14,053 |   | 12,011 |   |
| Accrued payroll  and related expenses                                                                                                                           |   | 10,927 |   | 7,720 |   |
| Accrued expenses                                                                                                                                                |   | 5,908 |   | 3,841 |   |
| Total current  liabilities                                                                                                                                      |   | 80,366 |   | 57,453 |   |
| Other  liabilities                                                                                                                                              |   | 294 |   | 318 |   |
| Deferred income  taxes                                                                                                                                          |   | 1,316 |   | 1,316 |   |
| Total  liabilities                                                                                                                                              |   | 81,976 |   | 59,087 |   |
| Stockholders'  equity:                                                                                                                                          |   |   |   |   |   |
| Preferred Stock,  $.01 par value, 1,000,000 shares authorized, none issued and outstanding                                                                      |   | — |   | — |   |
| Common Stock,  $.01 par value, 50,000,000 shares authorized, 17,390,594 and 17,334,103  shares issued at December 31, 2000 and September 30, 2001, respectively |   | 174 |   | 174 |   |
| Additional  paid-in capital                                                                                                                                     |   | 27,425 |   | 27,415 |   |
| Deferred  compensation                                                                                                                                          |   | (318 | ) | (130 | ) |
| Accumulated  other comprehensive income (loss)                                                                                                                  |   | 172 |   | (38 | ) |
| Accumulated  deficit                                                                                                                                            |   | (15,013 | ) | (16,866 | ) |
|                                                                                                                                                            |   | 12,440 |   | 10,555 |   |
| Less: Treasury  stock, at cost, 585,000 shares at December 31, 2000 and September 30, 2001                                                                      |   | (4,797 | ) | (4,797 | ) |
| Total  stockholders' equity                                                                                                                                     |   | 7,643 |   | 5,758 |   |
| Total  liabilities and stockholders' equity                                                                                                                     |   | $ | 89,619 |   | $ | 64,845 |   |

##### **See accompanying Notes to Consolidated Financial Statements**

##### ** **

**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands,except per share data)

 
|                                          |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |   |
|-----------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                          |   | **2000**                             |   | **2001**                            |   | **2000** |   | **2001** |   |
|                                          |   | **(Unaudited)**                      |   | **(Unaudited)**                     |   |
| Revenue                                       |   | $                                    | 64,372 |                                | $      | 46,830 |   | $ | 200,748 |   | $ | 157,450 |   |
| Cost of services                              |   | 44,250                               |   | 32,744                              |   | 141,545 |   | 111,256 |   |
| Gross profit                                  |   | 20,122                               |   | 14,086                              |   | 59,203 |   | 46,194 |   |
| Operating  expenses                           |   |                                 |   |                                |   |   |   |   |   |
| Selling, general  and administrative expenses |   | 19,265                               |   | 12,520                              |   | 59,170 |   | 41,576 |   |
| Depreciation and  amortization                |   | 1,955                                |   | 1,294                               |   | 5,688 |   | 4,132 |   |
| Total operating  expenses                     |   | 21,220                               |   | 13,814                              |   | 64,858 |   | 45,708 |   |
| Income (loss)  from operations                |   | (1,098                               | )      | 272                                 |   | (5,655 | ) | 486 |   |
| Other income  (expense), net                  |   | (2,173                               | )      | (1,048                              | )      | (3,356 | ) | (2,922 | ) |
| Loss before  income taxes                     |   | (3,271                               | )      | (776                                | )      | (9,011 | ) | (2,436 | ) |
| Income taxes                                  |   | (1,050                               | )      | —                              |   | (3,134 | ) | (583 | ) |
|                                          |   |                                 |   |                                |   |   |   |   |   |
| Net loss                                      |   | $                                    | (2,221 | )                                   | $      | (776 | ) | $ | (5,877 | ) | $ | (1,853 | ) |
| Net loss per  share:                          |   |                                 |   |                                |   |   |   |   |   |
| Basic and  diluted                            |   | $                                    | (0.14  | )                                   | $      | (0.05 | ) | $ | (0.38 | ) | $ | (0.11 | ) |
|                                          |   |                                 |   |                                |   |   |   |   |   |
| Shares used to  compute net loss per share:   |   |                                 |   |                                |   |   |   |   |   |
| Basic and  diluted                            |   | 15,506                               |   | 16,679                              |   | 15,509 |   | 16,763 |   |

 

See accompanying Notes toConsolidated Financial Statements

 

**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF**

**COMPREHENSIVE INCOME (LOSS)**

(In thousands)

 
|                                                                   |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                   |   | **2000**                              |   | **2001**                             |   | **2000** |   | **2001** |   |
|                                                                   |   | **(Unaudited)**                       |   | **(Unaudited)**                      |   |
| Net loss                                                               |   | $                                     | (2,221 | )                                    | $      | (776 | ) | $ | (5,877 | ) | $ | (1,853 | ) |
| Other  comprehensive income (loss):                                    |   |                                  |   |                                 |   |   |   |   |   |
| Foreign currency  translation adjustment, net of  tax             |   | 9                                     |   | 8                                    |   | 9 |   | 11 |   |
| Unrealized  holding gain on security, net of tax:                      |   |                                  |   |                                 |   |   |   |   |   |
| Reclassification  adjustment for gain included in net loss, net of tax |   | —                                |   | —                               |   | — |   | (221 | ) |
| Other  comprehensive income (loss)                                     |   | 9                                     |   | 8                                    |   | 9 |   | (210 | ) |
|                                                                   |   |                                  |   |                                 |   |   |   |   |   |
| Comprehensive  loss                                                    |   | $                                     | (2,212 | )                                    | $      | (768 | ) | $ | (5,868 | ) | $ | (2,063 | ) |
|                                                                   |   |                                  |   |                                 |   |   |   |   |   |

 

See accompanying Notes toConsolidated Financial Statements

 

**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In thousands)

 
|                                                                             |   | **Nine Months Ended September 30,** |   |
|----------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                             |   | **2000**                            |   | **2001** |   |
|                                                                             |   | **(Unaudited)**                     |   |
| Cash flows from  operating activities:                                           |   |                                |   |   |   |
| Net loss                                                                         |   | $                                   | (5,877 | ) | $ | (1,853 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |   |                                |   |   |   |
| Depreciation and  amortization                                                   |   | 5,688                               |   | 4,132 |   |
| Deferred income  taxes                                                           |   | —                              |   | (149 | ) |
| Gain on sale of  interest rate swap                                              |   | (1,100                              | )      | — |   |
| Realized gain on  sale of security, net of tax                                   |   | —                              |   | (221 | ) |
| Amortization of  deferred compensation on restricted shares                      |   | —                              |   | 188 |   |
| Provision for  doubtful accounts                                                 |   | —                              |   | 350 |   |
| Change in assets  and liabilities:                                               |   |                                |   |   |   |
| Trade accounts  receivable                                                       |   | 14,135                              |   | 16,424 |   |
| Prepaid expenses                                                                 |   | (811                                | )      | 36 |   |
| Other  receivables                                                               |   | 183                                 |   | 32 |   |
| Other assets                                                                     |   | (517                                | )      | 167 |   |
| Accounts payable                                                                 |   | (2,054                              | )      | (2,042 | ) |
| Accrued payroll  and related expenses                                            |   | (4,014                              | )      | (3,207 | ) |
| Accrued expenses  and other liabilities                                          |   | (3,856                              | )      | (2,043 | ) |
| Income taxes  receivable                                                         |   | 834                                 |   | 4,752 |   |
| Net cash  provided by operating activities                                       |   | 2,611                               |   | 16,566 |   |
|                                                                             |   |                                |   |   |   |
| Cash flows from  investing activities:                                           |   |                                |   |   |   |
| Purchases of  property and equipment                                             |   | (1,847                              | )      | (1,647 | ) |
| Redemption of  available-for-sale securities                                     |   | —                              |   | 639 |   |
|                                                                             |   |                                |   |   |   |
| Net cash used in  investing activities                                           |   | (1,847                              | )      | (1,008 | ) |
|                                                                             |   |                                |   |   |   |
| Cash flows from  financing activities:                                           |   |                                |   |   |   |
| Payments  received on stock options exercised                                    |   | 52                                  |   | — |   |
| Proceeds from  short-term debt                                                   |   | 26,105                              |   | 212,263 |   |
| Payments on  short-term debt                                                     |   | (27,512                             | )      | (225,644 | ) |
| Proceeds from  sale of interest rate swap                                        |   | 1,100                               |   | — |   |
| Repurchase of  common stock                                                      |   | (94                                 | )      | — |   |
| Contributions to  employee stock purchase plan                                   |   | (100                                | )      | (57 | ) |
| Issuance of  common stock under employee stock purchase plan                     |   | 200                                 |   | 47 |   |
| Cash overdraft                                                                   |   | (892                                | )      | (2,216 | ) |
| Net cash used in  financing activities                                           |   | (1,141                              | )      | (15,607 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                    |   | 9                                   |   | 11 |   |
|                                                                             |   |                                |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                            |   | (368                                | )      | (38 | ) |
| Cash and cash  equivalents at beginning of period                                |   | 374                                 |   | 114 |   |
| Cash and cash  equivalents at end of period                                      |   | $                                   | 6      |   | $ | 76 |   |
| Supplemental  disclosures of cash flow information:                              |   |                                |   |   |   |
| Cash paid for  interest                                                          |   | $                                   | 3,198  |   | $ | 3,162 |   |
| Cash paid for  income taxes                                                      |   | 257                                 |   | 133 |   |

 

See accompanying Notes toConsolidated Financial Statements

**ALTERNATIVE RESOURCES CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

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

 

          The interim consolidated financial statements presented areunaudited, but in the opinion of management, have been prepared in conformitywith accounting principles generally accepted in the United States of Americaapplied on a basis consistent with those of the annual financialstatements.  Such interim consolidatedfinancial statements reflect all adjustments (consisting of normal recurringaccruals) necessary for a fair presentation of the financial position and theresults of operations for the interim periods presented.  The results of operations for the interimperiods presented are not necessarily indicative of the results to be expectedfor the year ending December 31, 2001. The interim consolidated financial statements should be read in connectionwith the audited consolidated financial statements for the year ended December31, 2000, included in the December 31, 2000 Form 10-K of Alternative ResourcesCorporation (“ARC” or the “Company”).

 

 

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

 

**         **Basicearnings (loss) per share are based on the weighted average number of commonshares outstanding for the period. Diluted earnings per share is based on the weighted average number ofcommon shares outstanding and includes the dilutive effect of unexercisedvested stock options using the treasury stock method.   Dilutive securities have not been included in the weightedaverage shares used for the calculation of earnings per share in periods of netloss because the effect of such securities would be anti-dilutive. At September30, 2001 and 2000, potential dilutive securities consisted of options topurchase 16 and 113 thousand shares of common stock, respectively.

 

 

**3.      Recently Issued Accounting Pronouncements**

 

In June 1999, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting forDerivative Instruments and Certain Hedging Activities.”  In June 2000, the FASB issued SFAS No. 138,“Accounting for Certain Derivative Instruments and Certain Hedging Activity, anAmendment of SFAS No. 133.”  SFAS No.133 and SFAS No. 138 require that all derivative instruments be recorded on thebalance sheet at their respective fair values. SFAS No.133 and SFAS No. 138 are effective for all fiscal quarters ofall fiscal years beginning after June 30, 2000; the Company adopted SFAS No.133 and SFAS No. 138 on January 1, 2001, which currently have no impact on theCompany’s financial position or results of operations as the Company has notutilized derivative instruments or entered into any hedging transactions thatare covered by those pronouncements.

 

 

**4.     Restructuring Charge – 2000**

 

During the fourthquarter of 2000, the Company incurred a $0.5 million restructuring chargerepresenting severance costs associated with the restructuring of the Company’ssales, recruiting, delivery and administrative support models.  A total of 29 positions were eliminated,with 20 of them being administrative positions.  This charge was a continuation of the 1998 restructuring, whichwas designed to optimize the branch field model.

 

Theprimary components of the restructuring charge can be summarized as follows:

 
|              |   | **Total**   |   | **2000**     |   | **Balance at** |   | **2001**     |   | **Balance at** |   |
|-------------------|--------|-------------|--------|--------------|--------|----------------|--------|--------------|--------|----------------|--------|
|              |   | **Initial** |   | **Cash**     |   | **December**   |   | **Cash**     |   | **September**  |   |
| **In  thousands** |   | **Reserve** |   | **Payments** |   | **31, 2000**   |   | **Payments** |   | **30, 2001**   |   |
| Severance         |   | $           | 535    |         | $      | (246           | )      | $            | 289    |           | $      | (279 | ) | $ | 10 |   |
|                   |        |             |        |              |        |                |        |              |        |                |        |  |  |  |  |  |

 

Theremainder of the unpaid severance will be paid during the fourth quarter 2001.

 

**5.**       **Restructuring Charge**–**1999**

 

     During the fourth quarter of 1999, theCompany incurred a $4.1 million restructuring charge representing real estateand severance costs associated with re-engineering the Company's sales,recruiting and delivery models. This action was a natural extension of thechanges announced in 1998, which were designed to optimize the existing branchfield model, and entails a comprehensive shift to a model organized along thefunctional lines of sales, recruiting and delivery. The new model is moreefficient in terms of meeting the demands of the Company's clients at a lowercost.

 

Theprimary components of the restructuring charge can be summarized as follows:

 
|              |   | **Total**   |   | **1999**     |   | **Balance at** |   | **2000**     |   | **Balance at** |   | **2001**     |   | **Balance at** |   |
|-------------------|--------|-------------|--------|--------------|--------|----------------|--------|--------------|--------|----------------|--------|--------------|--------|----------------|--------|
|              |   | **Initial** |   | **Cash**     |   | **December**   |   | **Cash**     |   | **December**   |   | **Cash**     |   | **September**  |   |
| **In thousands**  |   | **Reserve** |   | **Payments** |   | **31, 1999**   |   | **Payments** |   | **31, 2000**   |   | **Payments** |   | **30, 2001**   |   |
| Real estate costs |   | $           | 3,538  |         | $      | (30            | )      | $            | 3,508  |           | $      | (1,888       | )      | $              | 1,620  |   | $ | (1,039 | ) | $ | 581 |   |
| Severance         |   | 630         |   | (416         | )      | 214            |   | (184         | )      | 30             |   | (30          | )      | -              |   |
|              |   |        |   |         |   |           |   |         |   |           |   |         |   |           |   |
| Total             |   | $           | 4,168  |         | $      | (446           | )      | $            | 3,722  |           | $      | (2,072       | )      | $              | 1,650  |   | $ | (1,069 | ) | $ | 581 |   |
|              |   |        |   |         |   |           |   |         |   |           |   |         |   |           |   |

 

 

     The portion of the charge related to realestate costs, which totaled $3.5 million, relates to lease costs associatedwith vacating offices as the Company downsizes its office space requirements.Through a combination of adopting a more virtual office model and eliminatingadministrative functions that had been performed in the field offices, theCompany relocated from most of its existing leased office space to smaller officespace that will require 60% less square footage than what was in use. The costsassociated with this charge related primarily to the present value of ongoinglease obligations for vacated offices net of anticipated sublease income. Aportion of the charge also related to broker commissions and estimatedleasehold improvement costs necessary to sublease vacated offices. The majorityof the unpaid restructuring reserve as of September 30, 2001 relates to futurelease obligations that will be paid over the next 4 years.

 

##### ** **

##### **6.       Short-termborrowings**

 

##### **          During the second quarter of 2001, ARCand the lending syndicate executed amendments to the revolving creditagreement.  The impact of theseamendments was to extend the maturity date to January 1, 2002 and reduce theborrowing limit subject to pledged accounts receivable as collateral inconsideration for waiver of existing financial loan covenants and modificationof certain loan covenants. Additionally, the Company has two irrevocable standby letters of creditfor $1,268,000, which expire on December 31, 2001.**

##### **Item 2. – Management's Discussion and Analysisof Financial Condition and Results of Operations**

 

 

## **Results of Operations**

 

                Essentially 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.

 

**RESTRUCTURINGAND OTHER CHARGES**

 

During the fourth quarter of 2000, the Companyrecorded a $36.6 million charge.  Thischarge was comprised of an impairment charge of $34.9 million related togoodwill,  $1.2 million related to thewrite-off of excess assets, and $0.5 million related to severance costs.

 

During the fourth quarter of 1999, the Company recordeda $5.2 million charge.  This charge wascomprised of $3.5 million related to lease costs, $0.6 million related toseverance costs, and $1.1 million related to the write-down of fixed assetvalues.

 

The results of the above mentioned restructuring andother charges is evidenced by the improvement of EBITDA noted below.

 

# **ThirdQuarter Fiscal 2001 Compared to Third Quarter Fiscal 2000**

 

**Revenue.** Revenues consist of fees earned from ARC Staffing Management Servicesand ARC Technology Management Solutions. Revenue decreased $17.6 million or 27.3% from $64.4 million in 2000 to$46.8 million in 2001, primarily from the overall slowdown in IT spending ascompanies curtailed spending on IT investments in reaction to a soft economy.ARC Technology Management Solutions revenue decreased by $4.8 million or 23.6%from $20.4 million in 2000 to $15.6 million in 2001. The Company’s traditionalstaffing business revenue decreased by $12.7 million or 28.9% from $44.0million in 2000 to $31.2 million in 2001.

 

**Gross profit.**  Gross profit decreased by $6.0 million or 30.0% from $20.1million in 2000 to $14.1 million in 2001. The decrease was primarilyattributable to the reduction in revenue and a change in product line mix. As apercentage of revenues, gross profit decreased 1.2 percentage points from 31.3%in 2000 to 30.1% in 2001 due to an under utilization of technical resources ona major project with one customer. The major project situation was rectifiedearly in the third quarter of 2001 with a contract renewal that includesminimum business levels or price increases. We believe the new agreement should restore the margins to historicallevels.

 

**Operating expenses.**  Operating expenses consist of sales andmarketing costs, recruiting, retention and training costs, management andadministrative costs, and depreciation and amortization.  Operating expenses decreased by $7.4 millionor 34.9% from $21.2 million in 2000 to $13.8 million in 2001.  The operating expense decrease wasattributable to the restructuring actions taken in 2000, which is reflected inreduced office space and lower headcount. As a percentage of revenues, operating expenses decreased by 3.4percentage points from 32.9% in 2000 to 29.5% in 2001, primarily as a result ofthe actions described above.

 

**Income (loss) from operations.  **Income from operations increased by $1.4million from a loss of $1.1 million in 2000 to income of $0.3 million in 2001.The increase in income from operations was the result of reduced operatingexpenses partially offset by the lower revenue levels.

 

**Other(income) expense, net.** Other expense, net, consists principally of interest expense on theCompany’s revolving credit facility. Other expense, net decreased by $1.1 million from an expense of $2.2million in 2000 to an expense of $1.1 million in 2001.  The decrease in other expense is primarilythe result of a decrease in interest expense related to decreased debt levelsand lower interest rates.

**Earningsbefore interest, income taxes, depreciation and amortization.**  Earnings before interest, income taxes,depreciation and amortization (EBITDA) was $1.6 million for the quarter, whichis comprised of loss before taxes of $(0.8) million plus depreciation andamortization of  $1.3 million and netinterest of $1.1 million.  This comparesto EBITDA of $0.9 million for the same three-month period in 2000.  The increase is primarily due to havingincome from operations as compared to a loss from operations in the priorperiod.

 

# **FirstNine Months Fiscal 2001 Compared to First Nine Months Fiscal 2000**

 

**Revenue.** Revenue decreased $43.3 million or 21.6% from $200.7 million in 2000 to$157.4 million in 2001, primarily from the overall slowdown in IT spending ascompanies curtailed spending on IT investments in reaction to a soft economy.ARC Technology Management Solutions revenue decreased by $15.2 million or 24.8%from $61.4 million in 2000 to $46.2 million in 2001. The Company’s traditionalstaffing business revenue decreased by $28.1 million or 20.2% from $139.3million in 2000 to $111.2 million in 2001.

 

**Gross profit.**  Gross profit decreased by $13.0 million or 22.0% from $59.2million in 2000 to $46.2 million in 2001. The decrease was primarilyattributable to the reduction in revenue. As a percentage of revenues, grossprofit decreased slightly from 29.5% in 2000 to 29.3% in 2001.

 

**Operating expenses.**  Operating expenses consist of sales andmarketing costs, recruiting, retention and training costs, management andadministrative costs, and depreciation and amortization.  Operating expenses decreased by $19.2million or 29.5% from $64.9 million in 2000 to $45.7 million in 2001.  The operating expense decrease wasattributable to the restructuring actions taken in 2000, which is reflected in reducedoffice space and lower headcount.  As apercentage of revenues, operating expenses decreased by 3.3 percentage pointsfrom 32.3% in 2000 to 29.0% in 2001, primarily as a result of the actionsdescribed above.

 

**Income (loss) from operations.**  Income from operations increased by $6.1million from a loss of $5.6 million in 2000 to income of $0.5 million in 2001.The shift from a loss from operations to income from operations was the resultof reduced operating expenses partially offset by the lower revenue levels.

 

**Other (income) expense, net.**Other expense,net, consists of interest expense of $3.6 million on the Company’s revolvingcredit facility offset by $0.3 million interest income on the Company’s taxrefund and a $0.4 million gain on the sale of stock that was distributed to ARCfrom its Health care provider, MetLife, as it transitioned from a mutualcompany to a public company.  Otherexpense, net decreased by $0.5 million from an expense of $3.4 million in 2000to an expense of $2.9 million in 2001. The decrease in other expense is primarily the result of a decrease ininterest expense resulting from decreased debt levels and lower interest rates,offset by a gain of $1.1 million on the sale of an interest rate swap agreementthat was recognized in the second quarter of 2000.

 

**Earnings before interest, income taxes, depreciation andamortization. **Earningsbefore interest, income taxes, depreciation and amortization (EBITDA) was $5.0million year to date, which is comprised of loss before taxes of $(2.4) millionplus depreciation and amortization of $4.1 million and net interest of $3.3million.  This compares to EBITDA of$0.0 million for the same nine-month period in 2000.  The increase is primarily due to having income from operations ascompared to a loss from operations in the prior period.

# **Liquidityand Capital Resources**

 

                ARC has historically financedits operations and capital expenditures through sales of equity securities, abank line of credit and cash generated from operations. Net cash provided byoperations was $16.6 million as compared to net cash provided by operations of$2.6 million during the first nine months of 2001 and 2000, respectively. Netcash provided by operations in 2001 was favorably impacted by the reduction inaccounts receivable of $16.4 million and the receipt of income tax refunds of$5.2 million.

 

Currentliabilities exceeded current assets by $12.0 million at September 30, 2001.Current liabilities include $30.6 million of outstanding borrowings against itsline of credit which has a maturity date of January 1, 2002. During the firstnine months of 2001, the Company used the cash provided by operations to reduceits debt by $13.4 million and for capital purchases of $1.6 million. Inaddition, the Company is currently in discussion with several financial institutionsto obtain a new line of credit, which would extend the maturity date to 2004.There can be no guarantee that the refinancing will be completed or that thecurrent loan agreement will be extended past January 1, 2002.

 

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

 

**Recently Issued AccountingPronouncements**

 

                In June 2001, theFASB issued SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”)which supersedes APB Opinion No. 17, “Intangible Assets”. SFAS 142 addresseshow intangible assets that are acquired individually or with a group of otherassets (but not those acquired in a business combination) should be accountedfor in financial statements upon their acquisition. SFAS 142 also addresses howgoodwill and other intangible assets should be accounted for after they havebeen initially recognized in the financial statements. The provisions of SFAS142 are required to be applied starting with fiscal years beginning afterDecember 15, 2001. SFAS 142 is required to be applied at the beginning of anentity’s fiscal year and to be applied to all goodwill and other intangibleassets recognized in its financial statements at that date. As of the date ofadoption, the Company expects to have unamortized goodwill in the amount ofapproximately $2.7 million which will be subject to the transition provisionsof SFAS 142.  In 2001, amortizationexpense will be approximately $76,000. As such, management has deemed that the implementation of this changewill not be material.

 

                In July 2001, theFASB issued SFAS No. 141, “Business Combinations” ("SFAS 141") whichsupersedes APB Opinion No. 16, “Business Combinations”, and SFAS No. 38,“Accounting for Preacquisition Contingencies of Purchased Enterprises”. SFAS141 addresses financial accounting and reporting for business combinations andrequires that all business combinations within the scope of the SFAS 141 beaccounted for using only the purchase method. SFAS 141 is required to beadopted for all business combinations initiated after June 30, 2001. Managementhas assessed the impact of the adoption of SFAS 141 on its consolidatedfinancial statements and believes the impact will not be material.

 

                In October 2001,the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal ofLong-Lived Assets” (“SFAS 144”).  SFAS144 addresses financial accounting and reporting for the impairment or disposalof long-lived assets.  While SFAS 144supercedes SFAS No. 121, “Accounting for the Impairment of Long-Loved Assetsand for Long-Lived Assets to Be Disposed Of” it retains many of the fundamentalprovisions of that Statement.  SFAS 144also supersedes the accounting and reporting provisions of APB Opinion No. 30,“Reporting the Results of Operations-Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual and Infrequently OccuringEvents and Transactions” for the disposal of a segment of a business.  However, it retains the requirement inOpinion 30 to report separately discontinued operations and extends thatreporting to a component of an entity that either has been disposed of (bysale, abandonment, or in a distribution to owners) or is classified as held forsale.  SFAS 144 is effective for thefiscal years beginning after December 15, 2001 and interim periods within thosefiscal years.  The Company is in theprocess of evaluating the impact that adoption of SFAS 144 may have on thefinancial statements, however, such impact, if any, is not known or reasonablyestimable at this time.

 

#### **FORWARD-LOOKINGSTATEMENTS**

 

                The Company makes forward-looking statements fromtime to time and desires to take advantage of the “safe harbor”, which isafforded such statements under the Private Securities Litigation Reform Act of1995, when they are accompanied by meaningful cautionary statements identifyingimportant factors that could cause actual results to differ materially fromthose in the forward-looking statements. The statements contained in this Form10-Q, including those under “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” statements contained in future filingswith the Securities and Exchange Commission publicly disseminated pressreleases, and statements which may be made from time to time in the future bymanagement of the company in presentations to shareholders, prospectiveinvestors, and others interested in the business and financial affairs of theCompany, which are not historical facts, are forward-looking statements. Anyprojections of financial performance or statements concerning expectations asto future developments should not be construed in any manner as a guaranteethat such results or developments will, in fact, occur. There can be noassurance any forward-looking statement will be realized or that actual resultswill not be significantly different from that set forth in such forward-lookingstatements.

 

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

 

•      The Company’s ability to successfullyrefinance its debt;

 

•      The Company’s ability to attract andretain qualified information technology professionals;

 

•      The Company’s ability to recruit, train,integrate and retain qualified sales directors, account mangers, recruiters andclient staffing managers;

 

•      Competition in the information technologyservices marketplace;

 

•      The Company’s continued ability toinitiate 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 and netoperating margins;

 

•       Theability to successfully enter new geographic markets; and

 

•       Theeffect of changes in general economic conditions.

 

##### **Item 3. – Quantitativeand Qualitative Disclosures About Market Risk**

 

 The market risk that the Company is exposedto primarily relates to changes in interest rates on its borrowings. AtSeptember 30, 2001 the Company had $30.6 million in floating-rate debt. Anadverse change in interest rates during any period that the loan is outstandingwould cause an increase in interest expense. A 100 basis point increase in thebank’s base rate would increase the annual amount of interest expense byapproximately $0.3 million.

 

**PART II**–**OTHER INFORMATION**

 

 

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

 

 

                (b)       The registrant was not required to fileand did not voluntarily file any reports on Form 8-K for the quarter endedSeptember 30, 2001.

 

**SIGNATURES**

 

 

 

          Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

|                    |   | ALTERNATIVE RESOURCES CORPORATION

                                  |
|-------------------------|--------|---------------------------------------------------------------------------|
|                    |   |                                                                      |
| Date: November 14, 2001 |   |      /s/  Steven Purcell                              |
|                    |   | Steven Purcell                                                            |
|                    |   | Senior Vice President, Chief Financial Officer, 

Treasurer and Secretary |