**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

 

**FORM 10-Q**

 

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March31, 2002**

** **

**Commission file number 0-23940**

 

 

**ALTERNATIVE RESOURCES CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **38-2791069**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer

Identification No.) |
|                                                            |   |                                  |
| **600  Hart Road, Suite 300, Barrington, IL**                   |   | **60010**                             |
| (Address of principal  executive offices)                       |   | (Zip code)                            |

 

**(847) 381-6701**

(Registrant’s telephone number, including area code)

 

Indicate by 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 ýNOo.

 

 

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

 

17,702,819shares of Common Stock outstanding as of May 6, 2002.

 

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**ALTERNATIVE RESOURCES CORPORATION**

**FORM 10-Q**

**INDEX**

 
| PART I. FINANCIAL  INFORMATION                                                                                         |   |
|------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                   |   |
| Item 1. Financial  Statements                                                                                          |   |
|                                                                                                                   |   |
| Consolidated Balance Sheets  at March 31, 2002 (Unaudited) and December 31, 2001                                       | 3      |
|                                                                                                                   |   |
| Consolidated  Statements of Operations for the three months ended March 31, 2002 and 2001  (Unaudited)                 | 4      |
|                                                                                                                   |   |
| Consolidated  Statements of Comprehensive Income (Loss) for the three months ended  March 31, 2002 and 2001(Unaudited) | 5      |
|                                                                                                                   |   |
| Consolidated  Statements of Cash Flows for the three months ended March 31, 2002 and 2001  (Unaudited)                 | 6      |
|                                                                                                                   |   |
| Notes to  Consolidated Financial Statements (Unaudited)                                                                | 7      |
|                                                                                                                   |   |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations                   | 10     |
|                                                                                                                   |   |
| Item  3. Quantitative and Qualitative Disclosures About Market Risk.                                                   | 12     |
|                                                                                                                   |   |
| PART II. OTHER INFORMATION                                                                                             |   |
|                                                                                                                   |   |
| Item 6.  Exhibits and Reports on Form 8-K.                                                                             | 13     |
|                                                                                                                   |   |
| SIGNATURES.                                                                                                            | 14     |

 

 

2

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

**Item1. - Financial Statements**

**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

(In thousands,except share data)

 

**ASSETS**
|                                                               |   | **December  31,  2001** |   | **March 31,   2002** |   |
|--------------------------------------------------------------------|--------|-------------------------|--------|----------------------|--------|
|                                                               |   | **(Unaudited)**         |   |
| Current assets:                                                    |   |                    |   |
| Cash and cash equivalents                                          |   | $                       | 127    |                 | $      | 117 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts |   | 36,489                  |   | 37,610               |   |
| Prepaid expenses                                                   |   | 2,091                   |   | 1,978                |   |
| Income taxes  receivable                                           |   | 1,497                   |   | 980                  |   |
| Other  receivables                                                 |   | 234                     |   | 262                  |   |
| Deferred income  taxes                                             |   | 938                     |   | 938                  |   |
| Total current  assets                                              |   | 41,376                  |   | 41,885               |   |
| Property and  equipment:                                           |   |                    |   |                 |   |
| Office equipment                                                   |   | 8,270                   |   | 8,276                |   |
| Furniture and  fixtures                                            |   | 2,389                   |   | 2,389                |   |
| Software                                                           |   | 19,355                  |   | 19,425               |   |
| Leasehold  improvements                                            |   | 1,972                   |   | 1,995                |   |
|                                                               |   | 31,986                  |   | 32,085               |   |
| Less accumulated  depreciation and amortization                    |   | (17,394                 | )      | (18,540              | )      |
| Net property and  equipment                                        |   | 14,592                  |   | 13,545               |   |
| Other assets:                                                      |   |                    |   |                 |   |
| Goodwill, net of  amortization                                     |   | 2,723                   |   | 2,723                |   |
| Other assets                                                       |   | 1,639                   |   | 2,752                |   |
| Total other  assets                                                |   | 4,362                   |   | 5,475                |   |
| Total assets                                                       |   | $                       | 60,330 |                 | $      | 60,905 |   |

 

**LIABILITIES AND STOCKHOLDERS’ EQUITY**
| Current  liabilities:                                                                                                                                       |   |    |   |    |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|---------|--------|
| Cash overdraft                                                                                                                                              |   | $       | 4,404  |    | $      | 1,626 |   |
| Accounts payable                                                                                                                                            |   | 12,883  |   | 11,703  |   |
| Payroll and  related expenses                                                                                                                               |   | 7,861   |   | 7,579   |   |
| Accrued expenses                                                                                                                                            |   | 2,350   |   | 3,248   |   |
| Total current  liabilities                                                                                                                                  |   | 27,498  |   | 24,156  |   |
| Long-term debt                                                                                                                                              |   | 26,877  |   | 28,427  |   |
| Other  liabilities                                                                                                                                          |   | 358     |   | 368     |   |
| Deferred income  taxes                                                                                                                                      |   | 938     |   | 938     |   |
| Total  liabilities                                                                                                                                          |   | 55,671  |   | 53,889  |   |
| Stockholders’  equity:                                                                                                                                 |   |    |   |    |   |
| Preferred stock,  $.01 par value, 1,000,000 shares authorized, none issued and outstanding                                                                  |   | —  |   | —  |   |
| Common stock,  $.01 par value, 50,000,000 shares authorized, 17,556,569 and 17,702,819  shares issued at December 31, 2001 and March 31, 2002, respectively |   | 176     |   | 178     |   |
| Additional  paid-in capital                                                                                                                                 |   | 27,508  |   | 30,489  |   |
| Deferred  compensation                                                                                                                                      |   | (97     | )      | (64     | )      |
| Accumulated  other comprehensive loss                                                                                                                       |   | (44     | )      | (37     | )      |
| Accumulated  deficit                                                                                                                                        |   | (18,087 | )      | (18,753 | )      |
|                                                                                                                                                        |   | 9,456   |   | 11,813  |   |
| Less: Treasury  stock, at cost, 585,000 shares at December 31, 2001 and March 31, 2002                                                                      |   | (4,797  | )      | (4,797  | )      |
| Total  stockholders’ equity                                                                                                                            |   | 4,659   |   | 7,016   |   |
| Total  liabilities and stockholders’ equity                                                                                                            |   | $       | 60,330 |    | $      | 60,905 |   |

 

See accompanyingNotes to Consolidated Financial Statements

 

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**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(In thousands,except per share data)

 

|                                          |   | **Three  Months   Ended March 31,** |   |
|-----------------------------------------------|--------|-------------------------------------|--------|
|                                          |   | **2001**                            |   | **2002** |   |
|                                          |   | **(Unaudited)**                     |   |
| Revenue                                       |   | $                                   | 59,601 |   | $ | 40,759 |   |
| Cost of services                              |   | 42,750                              |   | 29,336 |   |
| Gross profit                                  |   | 16,851                              |   | 11,423 |   |
| Operating  expenses                           |   |                                |   |   |   |
| Selling, general  and administrative expenses |   | 14,680                              |   | 10,910 |   |
| Depreciation and  amortization                |   | 1,468                               |   | 1,146 |   |
| Total operating  expenses                     |   | 16,148                              |   | 12,056 |   |
| Income (loss)  from operations                |   | 703                                 |   | (633 | ) |
| Other expense,  net                           |   | (742                                | )      | (811 | ) |
| Loss before  income tax expense (benefit)     |   | (39                                 | )      | (1,444 | ) |
| Income tax  expense (benefit)                 |   | 32                                  |   | (950 | ) |
| Net loss                                      |   | $                                   | (71    | ) | $ | (494 | ) |
| Net loss per  share:                          |   |                                |   |   |   |
| Basic and  diluted                            |   | $                                   | (0.00  | ) | $ | (0.03 | ) |
|                                          |   |                                |   |   |   |
| Shares used to  compute loss per share:       |   |                                |   |   |   |
| Basic and  diluted                            |   | 16,805                              |   | 17,026 |   |

 

 

See accompanyingNotes to Consolidated Financial Statements

 

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**ALTERNATIVERESOURCES CORPORATION**

**CONSOLIDATEDSTATEMENTS OF**

**COMPREHENSIVE INCOME (LOSS)**

(In thousands)

 

|                                                                   |   | **Three  Months   Ended March 31,** |   |
|------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                   |   | **2001**                            |   | **2002** |   |
|                                                                   |   | **(Unaudited)**                     |   |
| Net loss                                                               |   | $                                   | (71    | ) | $ | (494 | ) |
|                                                                   |   |                                |   |   |   |
| Other comprehensive  income (loss):                                    |   |                                |   |   |   |
| Foreign currency  translation adjustment, net of tax                   |   | 9                                   |   | 7 |   |
| Unrealized  holding gain on security, net of tax:                      |   |                                |   |   |   |
| Reclassification  adjustment for gain included in net loss, net of tax |   | (221                                | )      | — |   |
| Other  comprehensive income (loss)                                     |   | (212                                | )      | 7 |   |
| Comprehensive  loss                                                    |   | $                                   | (283   | ) | $ | (487 | ) |

 

 

 

See accompanyingNotes to Consolidated Financial Statements

 

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**ALTERNATIVE RESOURCES CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(In thousands)

 
|                                                                  |   | **Three  Months   Ended March 31,** |   |
|-----------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                  |   | **2001**                            |   | **2002** |   |
| Cash flows from  operating activities:                                |   |                                |   |   |   |
| Net loss                                                              |   | $                                   | (71    | ) | $ | (494 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in)  |   |                                |   |   |   |
| operating  activities:                                                |   |                                |   |   |   |
| Depreciation and  amortization                                        |   | 1,468                               |   | 1,146 |   |
| Deferred income  taxes                                                |   | (81                                 | )      | — |   |
| Provision for  doubtful accounts                                      |   | (150                                | )      | (126 | ) |
| Realized net  gain on sale of security                                |   | (221                                | )      | — |   |
| Deferred  compensation on restricted shares                           |   | 89                                  |   | 33 |   |
| Non-cash  interest expense of deferred financing costs                |   | —                              |   | 83 |   |
| Non-cash  interest expense on accretion of warrants                   |   | —                              |   | 69 |   |
| Change in assets  and liabilities:                                    |   |                                |   |   |   |
| Trade accounts  receivable                                            |   | 8,449                               |   | (995 | ) |
| Prepaid expenses                                                      |   | (81                                 | )      | 113 |   |
| Other  receivables                                                    |   | (22                                 | )      | (28 | ) |
| Other assets                                                          |   | 52                                  |   | (1,196 | ) |
| Accounts payable                                                      |   | (2,034                              | )      | (1,180 | ) |
| Payroll and  related expenses                                         |   | (1,172                              | )      | (282 | ) |
| Accrued expenses  and other liabilities                               |   | (797                                | )      | 908 |   |
| Income taxes                                                          |   | 2,784                               |   | 517 |   |
| Net cash  provided by (used in) operating activities                  |   | 8,213                               |   | (1,432 | ) |
|                                                                  |   |                                |   |   |   |
| Cash flows from  investing activities:                                |   |                                |   |   |   |
| Purchases of  property and equipment                                  |   | (424                                | )      | (99 | ) |
| Redemption of  available-for-sale securities                          |   | 639                                 |   | — |   |
| Net cash  provided by (used in) investing activities                  |   | 215                                 |   | (99 | ) |
|                                                                  |   |                                |   |   |   |
| Cash flows from  financing activities:                                |   |                                |   |   |   |
| Proceeds from  long-term debt                                         |   | 85,870                              |   | 59,672 |   |
| Payments on  long-term debt                                           |   | (91,242                             | )      | (65,291 | ) |
| Proceeds from  issuance of debt and warrants                          |   | —                              |   | 10,000 |   |
| Cash paid to  shareholders for cancellation of redemption plan        |   | —                              |   | (172 | ) |
| Contributions to  employee stock purchase plan                        |   | (18                                 | )      | — |   |
| Proceeds from  issuance of shares to the employee stock purchase plan |   | —                              |   | 83 |   |
| Cash overdraft                                                        |   | (3,120                              | )      | (2,778 | ) |
| Net cash  provided by (used in) financing activities                  |   | (8,510                              | )      | 1,514 |   |
| Effect of  exchange rate changes on cash and cash equivalents         |   | 9                                   |   | 7 |   |
|                                                                  |   |                                |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                 |   | (73                                 | )      | (10 | ) |
| Cash and cash  equivalents at beginning of period                     |   | 114                                 |   | 127 |   |
| Cash and cash  equivalents at end of period                           |   | $                                   | 41     |   | $ | 117 |   |
|                                                                  |   |                                |   |   |   |   |   |
| Supplemental  disclosures of cash flow information:                   |   |                                |   |   |   |
| Cash paid for  interest                                               |   | $                                   | 1,246  |   | $ | 313 |   |
| Cash paid for  income taxes                                           |   | 10                                  |   | 11 |   |

 

 

See accompanyingNotes to Consolidated Financial Statements

 

6

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**ALTERNATIVE RESOURCES CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

 

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

 

Theinterim consolidated financial statements presented are unaudited, but in theopinion of management, have been prepared in conformity with accountingprinciples generally accepted in the United States of America applied on abasis consistent with those of the annual financial statements.  Such interim consolidated financialstatements reflect all adjustments (consisting of normal recurring accruals)necessary for a fair presentation of the financial position and the results ofoperations for the interim periods presented. The results of operations for the interim periods presented are notnecessarily indicative of the results to be expected for the year endingDecember 31, 2002.  The interimconsolidated financial statements should be read in connection with the auditedconsolidated financial statements for the year ended December 31, 2001,included in the 2001 Form 10-K of Alternative Resources Corporation (“ARC” orthe “Company”).

 

 

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

 

Basic earnings(loss) per share is based on the weighted average number of common sharesoutstanding for the period.  Dilutedearnings (loss) per share is based on the weighted average number of commonshares outstanding and includes the dilutive effect of unexercised stockoptions which are in-the-money using the treasury stock method.   Dilutive securities have not been includedin the weighted average shares used for the calculation of earnings per sharein periods of net loss because the effect of such securities would beanti-dilutive.  At March 31, 2002 and2001, potentially dilutive securities consisted of options to purchase 2.5million and 2.7 million shares of common stock, respectively.  In addition, the Company issued 11,000,000warrants in connection with its debt refinancing described in note 4.  These warrants are also potentially dilutivesecurities.

 

 

**3.****                   ****Recently Adopted Accounting Pronouncements**

 

In June 2001, the Financial Accounting Standards Board("FASB") issued Statement of Financial Accounting Standards("SFAS") No. 142, “Goodwill and Other Intangible Assets” (“SFAS142”), which supersedes Accounting Principles Board ("APB") OpinionNo. 17, “Intangible Assets.”  SFAS 142addresses how intangible assets that are acquired individually or with a groupof other assets should be accounted for in financial statements upon theiracquisition. SFAS 142 also addresses how goodwill and other intangible assets shouldbe accounted for after they have been initially recognized in the financialstatements. The provisions of SFAS 142 are required to be applied starting withfiscal years beginning after December 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 January 1,2002, the date of adoption, the Company has unamortized goodwill in the amountof approximately $2.7 million, which has been subjected to the transitionprovisions, including the phase-in impairment test, of SFAS 142 and will not beamortized going forward.  In the threemonths ended March 31,2001, amortization expense was approximately $19,000.  Had this amortization not been recorded, thereported net loss of $71 would have been $52 with no effect on thereported  loss per share of $0.00 forthe three months ended March 31, 2001.

 

In July 2001, the FASB issued SFAS No. 141, “BusinessCombinations” (“SFAS 141”), which supersedes APB Opinion No. 16, “BusinessCombinations,” and SFAS No. 38, “Accounting for Preacquisition Contingencies ofPurchased Enterprises.”  SFAS 141addresses financial accounting and reporting for business combinations andrequires that all business combinations within the scope of 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. As theCompany has not had any business combinations subsequent to June 30, 2001,management has assessed that there is no impact to date of the adoption of SFAS141 on its consolidated financial statements.

 

In October 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS144”).  SFAS 144 addresses financialaccounting and reporting for the impairment or disposal of long-livedassets.  While SFAS No. 144 supercedesSFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of,” it retains many of the fundamental provisions ofthat Statement.  SFAS 144 alsosupersedes 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

 

 

7

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held for sale.  SFAS 144 iseffective for the fiscal years beginning after December 15, 2001 and interimperiods within those fiscal years.  SFAS144 was adopted on January 1, 2002 and had no effect on the consolidatedfinancial statements.

 

In December 2001, the FASB issued Topic No. D-103,“Income Statement Characterization of Reimbursements Received for“Out-of-Pocket” Expenses Incurred” (“Topic D-103”), which is effective forfiscal years beginning after December 15, 2001.  Topic D-103 requires that certain out-of-pocket expenses rebilledto customers be recorded as revenue versus an offset to the relatedexpense.  Comparative financialstatements for prior periods must be conformed to this presentation.  The Company historically recorded rebilledout-of-pocket expenses as an offset to the related expense. Effective January1, 2002, the Company changed its presentation to reflect rebilled expenses asrevenue and also conformed the presentation for prior periods. The impact ofadopting this pronouncement resulted in the reclassification of $1.9 millionand $1.4 million of expenses to revenues, respectively, with a correspondingdecrease of approximately 0.9% and 1.0%, respectively, in gross margin for thethree months ended March 31, 2001 and 2002. Cost of services were increased by an equal amount with no impact ongross profit dollars.

 

InJune 1999, the FASB issued SFAS No. 133, “Accounting for Derivative Instrumentsand Certain Hedging Activities.”  InJune 2000, the FASB issued SFAS No. 138, “Accounting for Certain DerivativeInstruments and Certain Hedging Activity, an Amendment of SFAS No. 133.”  SFAS No. 133 and SFAS No. 138 require thatall derivative instruments be recorded on the balance sheet at their respectivefair values as either liability or equity instruments, depending on certaincriteria.  The Company adopted SFAS No.133 and SFAS No. 138 on January 1, 2001, which did not have an impact on theits financial position or results of operations given the Company did not haveany derivative financial instruments at that time.  As described in note 4, the Company issued warrants inconjunction with the issuance of Senior Subordinated Convertible Notes onJanuary 31, 2002.  Pursuant to SFAS 133and interpretations by the Emerging Issues Task Force covering derivativefinancial instruments, these warrants meet the criteria for equityclassification on the measurement date of January 31, 2002 and the Company isnot required to remeasure the warrants on subsequent dates.  As such, the fair value of the warrants ofapproximately $3.0 million was recorded in equity as additional paid-incapital.  There was no effect on resultsof operations for the three months ended March 31, 2002 as a result of thesepronouncements.

 

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

 

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

 

OnJanuary 31, 2002, the Company entered into a Senior Secured Revolving Creditfacility with a lending institution, that provides for up to $30 million ofrevolving credit based on the Company’s available collateral base.  The credit facility has a three-year termand bears interest at LIBOR plus 3.25% or the lenders’ base rate plus1.00%.  As of March 31, 2002, the applicablerate is 5.75% which represents the bank's base rate plus 100 basis points.  The initial proceeds of this facilitytogether with the net proceeds from the sale of convertible subordinated notesdescribed below were used to repay the Company’s existing credit facility andto provide working capital.

 

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

 

In conjunction with the sale of these notes, theCompany issued 10,000,000 warrants (immediately exercisable) to the privateequity investor to purchase shares of the Company’s common stock at $0.55 pershare and an additional 1,000,000 warrants to purchase its common stock at$0.73 per share, the latter of which are not exercisable for one yearcontingent upon the Company meeting certain performance measures, however, thewarrants expire if such performance measures are met.

 

 

8

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A fair value is required to be ascribed to these warrants and recordedas a decrease in the debt and an increase to additional-paid-in-capital.  This value is then amortized over theseven-year life of the debt by a non-cash interest charge.  The fair value of these warrants wasdetermined to be approximately $3.0 million and will result in a non-cashquarterly interest charge of approximately $100 thousand ($70 thousand for thethree months ended March 31, 2002).  Thevaluation of the warrants was determined based on advice from third-party valuationspecialists who utilized a valuation model with the following inputs:   measurement date of Janaury 31, 2002; fairvalue of $0.70; exercise price of $0.55 ($0.73 for contingent warrants);contractual term of 10 years; dividend rate of zero; volatility rate of 101%;risk-free rate of 5.49%; and probability of 70% (for contingent warrantsonly).  The value assigned to thewarrants is subject to the finalization of the valuation advice and review bymanagement.  Any changes, unlessmaterial, will be adjusted in the financial statements prospectively.

 

In conjunction with the Securities Purchase Agreementon January 31, 2002, the Company’s Board of Directors redeemed all of therights issued under its stockholders rights plan.  Each share of the Company’s common stock carried with it oneright to purchase a fraction of a share of the Company’s preferred stock incertain circumstances described in the Stockholder Rights Plan.  The rights were attached to, and could notbe separated from, shares of the Company’s common stock.  The Company paid a redemption payment of$0.01 per right to stockholders on February 8, 2002, at a total cost ofapproximately $172,000.

 

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

 

 

9

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##### **Item2. - Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

 

## **Results of Operations**

 

Essentially all of the Company’s revenue is generatedfrom information technology services that offer the benefits of outsourcing,while allowing information services operations managers to retain strategiccontrol of their operations. Revenues are recognized as services are performed,utilizing four different billing methodologies, as follows:  (1) time and material billing, whereby theclient is billed by the hour on a weekly basis for past services performed; (2)project-based billing, for which fees are fixed and are based on specificcontracts; (3) per-incident billing, whereby the Company charges a fee for eachspecific task related to certain services; (4) and fee-based billing, which isused for candidate placement/recruiting fees and vendor management fees.   The Company typically provides discounts onstaffing services to its largest clients in exchange for the opportunity tosell more volume, as well as the opportunity to sell its higher-margin,value-added services.  All revenues arerecognized net of such discounts and after services have been completed.

 

 

 

# **First Quarter Fiscal 2002 Compared to First QuarterFiscal 2001**

 

**Revenue.**  Revenuesconsist of fees earned from the Company’s IT Staffing business and its’ ITSolutions business. Revenue for the first quarter of 2002 was $40.8 million,which was down from $59.6 million in the first quarter of 2001. The IT Staffingrevenue was $22.6 million, down from $42.0 million last year and the ITSolutions revenue was $18.2 million, up from $17.6 million last year. Theincrease in the IT Solutions revenue was due to increases in the TechnologyDeployment, Field Services and Smartsourcing service offerings. The Solutionsrevenue includes an adjustment of $1.2 million in the first quarter of 2002 anda similar adjustment of $1.7 million in the first quarter of 2001. This adjustmentrepresents out-of-pocket expenses that were rebilled to customers andpreviously recorded as an offset to the related expense as required by therecent FASB staff announcement Topic No. D-103, “Income StatementCharacterization of Reimbursements for “Out-of-Pocket” Expenses Incurred”. Costof services were increased by an equal amount with no impact on grossprofit.  The IT Staffing revenuesdropped by about 46% from the prior year. This decrease was driven by significantdeclines in outsourced staffing requirements from IBM and EDS, two of ourlargest staff augmentation customers. IT Staffing revenue was also adjusted forTopic No. D-103 by $0.2 million in the first quarter of 2001 and 2002.

 

**Gross margin.** Gross margin for the quarter was 28.0%, down slightlyfrom 28.3% in the first quarter of last year, and also down from 29.8% in thefourth quarter of last year. The decrease in the gross margin from the fourthquarter is seasonal and reflects the impact of increased payroll taxes early inthe year. The decrease in margin from the first quarter of 2001 is due to thevery competitive staffing environment, which is causing some margin pressure inour staffing business. This is partially offset by the margins in IT Solutionsbusiness, which have shown some improvement over the first quarter of lastyear.

 

**Operating expenses.**  Operatingexpenses consist of sales and marketing costs, recruiting, retention andtraining costs, management and administrative costs, and depreciation andamortization.  Operating expensesdecreased by $4.0 million or 24.8% from $16.1 million in 2001 to $12.1 millionin 2002.  The operating expense decreasewas attributable to the restructuring actions the Company has taken in thepast, which is reflected in reduced office space and lower headcount and to theimpact of significantly lower revenue. As a percentage of revenues, operatingexpenses increased by 2.5 percentage points from 27.1% in 2001 to 29.6% in2002, primarily as a result of the sharp decline in revenue.

 

**Income (loss) from operations.**  Income (loss)from operations decreased from income of $0.7 million in 2001 to a loss of $0.6million in 2002. The decrease in income from operations was the result of lowergross margins and higher operating expenses as previously discussed.

 

**Other (income) expense, net. **In 2002,Other (income) expense consists primarily of interest expense on the Company’soutstanding debt. In 2001, Other (income) expense, net consisted of interestexpense of $1.4 million on the Company’s revolving credit facility offset byinterest income on the Company’s tax refund and a $0.4 million gross 

 

 

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gain on the sale of stock that was distributed to ARC from its Healthcare provider, MetLife, as it transitioned from a mutual company to a publiccompany.

 

**Earnings before interest, income taxes, depreciation andamortization. **Earnings before interest, income taxes,depreciation and amortization (EBITDA) was $0.5 million for the quarter, whichis comprised of loss before income taxes of $(1.4) million plus depreciation of$1.1 million and net interest of $0.8 million. This compares to EBITDA of $2.5 million in the first quarter of2001.  The decrease is primarily due tothe decrease in income from operations in 2002 and the $0.4 million in gain onthe sale of stock in the first quarter of 2001.

# ** **

# **Liquidity and Capital Resources**

 

On January 31, 2002, the Company replaced its existingbank line with a $30.0 million senior secured revolving credit facility withFleet Capital, a subsidiary of the FleetBoston Financial Corporation and $10.0million principal amount of Senior Subordinated Convertible Notes sold toWynnchurch Capital Partners, a private equity investor. The $30.0 millionrevolver is secured by the assets of the Company, principally consisting ofaccounts receivable. The agreement has a three-year term and bears interest atLIBOR plus 325 basis points or the bank’s base rate plus 100 basis points.  As of March 31, 2002, the applicable rate is5.75%, which represents the bank’s base rate plus 100 basis points.

 

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

 

Current assets exceedcurrent liabilities by $17.7 million at March 31, 2002.  Net cash used in operations was $1.4 millionin the first quarter 2002.

 

Capital spending was approximately $0.1 million in2002 and $0.4 million in 2001. The Company does not anticipate that its capitalspending going forward will be significantly greater than $2.0 million to $3.0million per annum.

 

The Company reported a tax benefit of $950 thousand inthe first quarter of 2002 due to recently enacted Federal tax legislation.  The new legislation provides for a five-yearcarry back of the Company's operating loss in 2001 rather than the two yearspermitted under the prior legislation. The Company intends to use the cash generated from the anticipatedincome tax refund for general operating purposes, including the reduction ofdebt.

 

The Company believes its cash balances and funds fromoperations together with funds available under its new credit facility will besufficient to meet all of its anticipated cash requirements for at least thenext 12 months.

 

 

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

 

The market risk that the Company is exposed toprimarily relates to changes in interest rates on its borrowings. At March 31,2002, the Company had $21.3 million in floating-rate debt. An adverse change ininterest rates during any period that the loan is outstanding would cause anincrease in interest expense. A 100 basis point increase in the bank’s baserate would increase the annual amount of interest paid by $0.2 million.

 

The Company issued warrants on January 31, 2002 whichare classified as derivative financial instruments pursuant to SFAS 133, whichwas adopted by the Company on January 1, 2001. Pursuant to SFAS 133 and interpretations by the Emerging Issues TaskForce covering derivative financial instruments, these warrants meet thecriteria for equity classification on the measurement date of January 31, 2002and the Company is not required to remeasure the warrants on subsequent dates.  As such, there is no mark-to-marketadjustment which will be reflected in the statement of operations as unrealizedgains or losses as a result of changes in fair value of these warrants inperiods subsequent to the measurement date. Additionally, there is no equity price risk associated with changes infair value of the warrants.  The Companydoes not have any derivative financial instruments other than the warrants.

 

#### **FORWARD-LOOKING STATEMENTS**

 

The Company makes forward-looking statements from timeto time and desires to take advantage of the “safe harbor,” which is affordedsuch statements under the Private Securities Litigation Reform Act of 1995,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 and publicly disseminated pressreleases, and statements which may be made from time-to-time in the future bymanagement of the Company in presentations to shareholders, prospectiveinvestors, and others interested in the business and financial affairs of theCompany, which are not historical facts, are forward-looking statements thatinvolve risks and uncertainties that could cause actual results to differmaterially from those set forth in the forward-looking statements. Anyprojections of financial performance or statements concerning expectations asto future developments should not be construed in any manner as a guaranteethat such results or developments will, in fact, occur. There can be noassurance any forward-looking statement will be realized or that actual resultswill not be significantly different from that set forth in such forward-lookingstatement.

 

In addition to the risks and uncertainties of ordinarybusiness operations, the forward-looking statements of the Company referred toabove are also subject to the following risks and uncertainties:

 

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

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

•      Competitionin the information technology services marketplace;

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

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

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

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

•      The abilityto successfully enter new geographic markets; and

•      The effectof changes in general economic conditions.

 

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**PARTII - OTHER INFORMATION**

 

 

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

 

                                                (a)       Noexhibits were required to be filed pursuant to Item 601 of Regulation S-K:

 

 

                                                (b)       Form8-K was filed on February 12, 2002, under Item 5. “Other Events”, to disclosethe Senior Secured Revolving Credit facility agreement entered into with FleetCapital Corporation and the Securities Purchase Agreements with WynnchurchCapital Partners, L.P. and Wynnchurch Capital Partners Canada L.P. and to filesuch agreements and related documents as exhibits.

 

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**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: May 15, 2002 |   /s/ Steven  Purcell                                               |
|               | Steven Purcell                                                           |
|               | Senior Vice President, Chief Financial Officer,  Treasurer and Secretary |

 

 

 

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