SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2004

Commission file number 0-23940

ALTERNATIVE RESOURCES CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		38-2791069
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

600 Hart Road, Suite 300, Barrington, IL		60010
(Address of principal executive offices)		(Zip code)

(847) 381-6701
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o.

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

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

17,117,304 shares of the registrant’s common stock were outstanding as of May 5, 2004.

ALTERNATIVE RESOURCES CORPORATION

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

	Consolidated Balance Sheets at March 31, 2004 (Unaudited) and December 31, 2003

	Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 (Unaudited)

	Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2004 and 2003 (Unaudited)

	Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (Unaudited)

	Notes to Consolidated Financial Statements (Unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

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

SIGNATURES.

PART I - FINANCIAL INFORMATION

Item 1. - Financial Statements

ALTERNATIVE RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	December 31, 2003			March 31, 2004
				(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	19		$	63
Trade accounts receivable, net of allowance for doubtful accounts of $326 at December 31, 2003 and March 31, 2004	21,423			20,469
Prepaid expenses	1,217			1,088
Income taxes receivable	76			76
Other assets	442			452
Total current assets	23,177			22,148
Property and Equipment:
Office equipment	8,413			8,413
Furniture and fixtures	2,389			2,389
Software	19,786			19,835
Leasehold improvements	1,998			1,998
	32,586			32,635
Less accumulated depreciation and amortization	(25,053		)	(25,914		)
Net property and equipment	7,533			6,721
Other Assets:
Goodwill	2,723			2,723
Deposits	380			343
Total other assets	3,103			3,066
Total assets	$	33,813		$	31,935

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Cash overdraft	$	2,213		$	2,018
Short-term debt	11,789			12,393
Accounts payable	11,223			9,852
Payroll and related expenses	4,660			4,919
Accrued expenses	1,434			1,955
Accrued restructuring and other charges	3,019			2,559
Income taxes payable	697			697
Total current liabilities	35,035			34,393
Long-term debt	14,725			15,349
Other liabilities	438			448
Total liabilities	50,198			50,190
Stockholders’ Equity (Deficit):
Preferred stock ($.01 par value, 1,000,000 shares authorized; none issued and outstanding)	—			—
Common stock ($.01 par value, 50,000,000 shares authorized; 17,703,104 shares issued and 17,117,304 outstanding at December 31, 2003 and March 31, 2004)	178			178
Additional paid-in capital	30,764			30,764
Accumulated other comprehensive loss	(56		)	(79		)
Accumulated deficit	(42,474		)	(44,321		)
	(11,588		)	(13,458		)
Less: Treasury stock, at cost (585,800 shares)	(4,797		)	(4,797		)
Total stockholders’ deficit	(16,385		)	(18,255		)
Total liabilities and stockholders’ deficit	$	33,813		$	31,935

See accompanying notes to consolidated financial statements.

ALTERNATIVE RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three Months Ended March 31,
	2003			2004
	(Unaudited)

Revenue	$	36,846		$	29,130
Cost of services	27,668			22,453
Gross profit	9,178			6,677

Operating expenses:
Selling, general and administrative	8,921			6,662
Depreciation and amortization	929			861
Other charges	—			38
Total operating expenses	9,850			7,561
Loss from operations	(672		)	(884		)
Other expense, principally interest, net	(983		)	(959		)
Loss before income taxes	(1,655		)	(1,843		)
Income tax expense (benefit)	(1		)	4

Net loss	$	(1,654	)	$	(1,847	)

Net loss per share:
Basic and diluted	$	(0.10	)	$	(0.11	)

Shares used to compute net loss per share:
Basic and diluted	17,117			17,117

See accompanying notes to consolidated financial statements.

ALTERNATIVE RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME (LOSS)

(In thousands)

	Three Months Ended March 31,
	2003			2004
	(Unaudited)

Net loss	$	(1,654	)	$	(1,847	)

Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax	(35		)	(23		)
Other comprehensive loss	(35		)	(23		)

Comprehensive loss	$	(1,689	)	$	(1,870	)

See accompanying notes to consolidated financial statements.

ALTERNATIVE RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Three Months Ended March 31,
	2003			2004
	(Unaudited)

Cash flows from operating activities:
Net loss	$	(1,654	)	$	(1,847	)
Adjustments to reconcile net loss to net cash provided by (used in)operating activities:
Depreciation and amortization	929			861
Provision for (recoveries of) doubtful accounts	(39		)	21
Non-cash interest expense from deferred financing costs	131			100
Non-cash interest expense from accretion of warrants	112			—
Non-cash interest expense from security purchase agreement	425			624
Change in assets and liabilities:
Trade accounts receivable	8,782			933
Prepaid expenses	155			129
Income taxes receivable	63			—
Other assets	64			(110		)
Deposits	6			37
Accounts payable	(1,333		)	(1,371		)
Payroll and related expenses	(88		)	259
Accrued expenses and other liabilities	(714		)	71
Net cash provided by (used in) operating activities	6,839			(293		)

Cash flows from investing activities:
Purchases of property and equipment	(120		)	(49		)
Net cash used in investing activities	(120		)	(49		)

Cash flows from financing activities:
Proceeds from short-term debt	55,166			45,723
Payments on short-term debt	(61,484		)	(45,119		)
Cash overdraft	(377		)	(195		)
Net cash provided by (used in) financing activities	(6,695		)	409
Effect of exchange rate changes	(35		)	(23		)

Net increase (decrease) in cash and cash equivalents	(11		)	44
Cash and cash equivalents at beginning of period	54			19
Cash and cash equivalents at end of period	$	43		$	63

Supplemental disclosures of cash flow information:
Cash paid for interest	$	310		$	238
Cash paid for income taxes	1			4
Cash refunds received for income taxes	65			—

See accompanying notes to consolidated financial statements.

ALTERNATIVE RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

The interim consolidated financial statements presented are unaudited, but in the opinion of management, have been prepared in conformity with accounting principles generally accepted in the United States of America applied on a basis consistent with those of the annual financial statements. Such interim consolidated financial statements reflect all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 31, 2004. The interim consolidated financial statements should be read in connection with the audited consolidated financial statements for the year ended December 31, 2003, included in the 2003 Form 10-K of Alternative Resources Corporation (“ARC” or the “Company”).

Certain prior year balances have been reclassified in order to conform to the current year presentation.

2. Stock Options

The Company accounts for its stock options in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations. Under APB 25, no compensation cost has been recognized for the Company’s stock-based compensation plans. The Company continues to apply the provisions of APB 25 and provides the pro forma disclosures required by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123” (SFAS 148).

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

	Three Months Ended March 31,
	2003			2004
	(in thousands, except per share data)

Net loss, as reported	$	(1,654	)	$	(1,847	)
Pro forma compensation expense	(74		)	(45		)

Pro forma net loss	$	(1,728	)	$	(1,892	)

Diluted loss per share:
As reported	$	(0.10	)	$	(0.11	)
Pro forma	(0.10		)	(0.11		)

During the first quarter of 2004, there were no options granted. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for options granted for the three months ended March 31, 2003: risk-free interest rates of 3.8%; expected lives of 7 years; expected volatility of 165%; and no dividends expected to be paid.

3. Computation of Earnings (Loss) per Share

Basic earnings (loss) per share is based on the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is based on the weighted average number of common shares outstanding and includes the dilutive effect of unexercised stock options and warrants which are in-the-money using the treasury stock method. Dilutive securities have not been included in the weighted average shares used for the calculation of earnings per share in periods of net loss because the effect of such securities would be anti-dilutive. At March 31, 2003 and 2004, potentially dilutive securities consisted of options to purchase 5 thousand and 354 thousand shares of common stock, respectively. In addition, the Company issued 11.0 million warrants to purchase common stock in connection with its debt refinancing described in Note 4. These warrants are also potentially dilutive securities as of March 31, 2003 and 2004.

4. Borrowings

Short-Term Borrowings:

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

Throughout 2002, the Company and Fleet Capital Corporation executed four amendments to the revolving credit agreement. These amendments were required to waive events of default that occurred relative to the fixed charge and tangible net worth covenants. Both covenants were reset with tangible net worth reestablished at $2.8 million and the fixed charge covenant reestablished at an allowable shortfall of $0.7 million through October 1, 2002 and a ratio of 1:1, thereafter. In addition, the borrowing limit subject to pledged accounts receivable as collateral was reduced to $28.0 million and certain restrictions were placed on the amount of capital spending in consideration for the waiver of existing financial loan covenants.

In 2003, the Company and Fleet Capital Corporation executed additional amendments to the revolving credit agreement. The Fifth Amendment addressed the fact that the Company had entered into litigation with a major customer, Bluecurrent. This action eliminated that account from the Company’s borrowing base creating a borrowing overadvance. The amendment allowed for an overadvance of $2.0 million through December 31, 2003. In addition, the amendment waived the events of default relative to the fixed charge and tangible net worth covenants that occurred at December 31, 2002. The tangible net worth covenant was reset at ($1.0) million and the fixed charge shortfall was set to $1.0 million through March 31, 2003 and $1.4 million up through June 30, 2003 and a ratio of 1:1, thereafter. The Sixth Amendment eliminated the requirement that any amounts received as a result of the settlement with Bluecurrent reduce the Wynnchurch Capital Partners, L.P. guarantee as discussed below. The Seventh Amendment waived the events of default as of June 30, 2003 relating to the tangible net worth and fixed charge covenants. Additionally, the covenants were reset for the remainder of 2003 as follows; the tangible net worth covenant was reset to ($5.0) million with the fixed charge covenant reset to an allowable shortfall of $0.7 million for the three months ended September 30, 2003, and $1.0 million for the six months ended December 31, 2003. The fixed charge covenant will be 1:1, thereafter. In addition, the interest rate was changed effective August 1, 2003 from the bank’s base rate plus 1.00% to the base rate plus 2.00%. As of March 31, 2004, the applicable rate is 6.00%, which represents the bank’s base rate plus 2.00%. The Seventh Amendment also reduced the maximum revolving credit commitment from $28.0 million to $23.0 million. The Eighth Amendment waived the events of default as of September 30, 2003 relating to the tangible net worth and fixed charge covenants. Additionally, the covenants were reset for future periods as follows: the tangible net worth covenant was reset to ($8.5) million for the quarter ending December 31, 2003 and each quarter thereafter. The fixed charge covenant was reset to an allowable shortfall of $1.0 million for the three months ending December 31, 2003, $1.8 million for the six months ended March 31, 2004, and $1.9 million for the nine months ending June 30, 2004. The fixed charge covenant will be 1:1, thereafter. Capital expenditures will also be limited to $50,000 per quarter commencing with the quarter ended December 31, 2003. The Company was in compliance with its covenants as of March 31, 2004.

Long-Term Borrowings:

On January 31, 2002, $10.0 million principal amount of Senior Subordinated Convertible Notes was sold to Wynnchurch Capital Partners, L.P., a private equity investor.

The Senior Subordinated Convertible Notes originally bore interest at 15% and are due January 31, 2009. These notes were initially convertible into common stock anytime after January 31, 2002 at a conversion price of $2.50 per share. At the Company’s election, one-half of the interest could be deferred during the first four years, subject to certain conditions. In conjunction with the sale of these notes, the Company issued 10.0 million warrants to purchase shares of the Company’s common stock at $0.55 per share. An additional 1.0 million warrants to purchase its common stock at $0.73 per share were not exercisable for one year contingent upon the Company meeting certain performance measures, however, the warrants would expire if such performance measures were met. As of December 31, 2002, the Company did not meet the specific performance measures related to the 1.0 million contingent warrants and these warrants did not expire.

Throughout 2002, the Company and Wynnchurch Capital Partners, L.P. executed four amendments to the securities purchase agreement. These amendments were required to waive events of default that occurred relative to the fixed charge and tangible net worth covenants. Both covenants were reset with tangible net worth reestablished at $2.6 million and the fixed charge covenant reestablished at an allowable shortfall of $0.7 million through October 1, 2002 and a ratio of .95:1, thereafter. In addition, the Company and Wynnchurch Capital, L.P. agreed to defer all quarterly cash interest payments until the Company satisfied the covenants with the senior lender, Fleet Capital Corporation.

In 2003, in connection with an amendment to the Company’s credit agreement with Fleet Capital Corporation, Wynnchurch Capital Partners, L.P. executed a guarantee with Fleet Capital Corporation to allow overadvances of up to $2.0 million through December 31, 2003, reduced by any payments received from Bluecurrent. In consideration, Wynnchurch Capital Partners, L.P. and the Company amended their agreements. The 15% Senior Subordinated Convertible Notes conversion price was reduced from $2.50 to $1.50 per share of common stock. The exercise price of all outstanding warrants was reduced to $0.26 per share. Additionally, a provision was made that any draw on the guarantee by the Company could be satisfied with a purchase by Wynnchurch Capital Partners, L.P. of additional 15% Senior Subordinated Convertible Notes having a principal amount equal to the Company’s draw and having terms equal to the outstanding 15% Senior Convertible Notes, and provided for a $0.3 million fee to Wynnchurch Capital Partners, L.P. in the event of a draw upon their guarantee. The $0.3 million fee would be payable through the issuance of additional 15% Senior Subordinated Convertible Notes. As of March 31, 2004, the Company has not been required to draw on the guarantee, and no additional Convertible Notes have been issued. In July 2003, Wynnchurch Capital Partners, L.P. agreed to waive the agreed requirement that their guarantee be reduced by any amounts received from Bluecurrent. Consequently, Bluecurrent’s initial payment of $0.9 million did not reduce the $2.0 million guarantee. However, all subsequent payments from Bluecurrent will continue to reduce the outstanding guarantee. In consideration for this waiver, Wynnchurch Capital Partners, L.P. received a fee of $0.1 million payable as interest and added to the principal amount of the notes. Under the Sixth Amendment to the securities purchase agreements, Wynnchurch Capital Partners, L.P. waived the events of default as of June 30, 2003, relating to the tangible net worth and fixed charge covenants. Additionally, the covenants were reset for the remainder of 2003 as follows; the tangible net worth covenant was reset to ($5.2) million with the fixed charge covenant reset to an allowable shortfall of $0.7 million for the three months ended September 30, 2003 and $1.0 million for the six months ending December 31, 2003. The fixed charge covenant will be 0.95:1 thereafter. In addition, the interest rate of the Senior Subordinated Convertible Notes was changed effective July 1, 2003 from 15% to 16% per annum. In September 2003, Wynnchurch Capital Partners L.P. agreed to maintain its $2.0 million guarantee and not to reduce such guarantee by any payments received from Bluecurrent. In consideration for maintaining the guarantee, the Company agreed to pay Wynnchurch Capital Partners, L.P. $0.3 million payable as additional interest and added to the principal amount of the notes. The Company also executed a Seventh Amendment to the securities purchase agreement that waived the events of default that occurred as of September 30, 2003 and reset the financial covenants for future quarters. The covenants were reset for future quarters as follows; the tangible net worth covenant was reset to ($8.9) million for the quarter ended December 31, 2003 and each quarter thereafter. The fixed charge covenant was reset to an allowable shortfall of $1.0 million for the three months ended December 31, 2003, $1.8 million for the six months ended March 31, 2004, and $1.9 million for the nine months ended June 30, 2004. The fixed charge covenant will be 0.95:1 thereafter. Capital expenditures will also be limited to $52,500 per quarter commencing with the quarter ended December 31, 2003. In consideration for this waiver and for continuing to maintain the $2.0 million guarantee, Wynnchurch Capital Partners, L.P. will receive a

monthly fee of $30,000 for each month such guarantee is in effect. This fee will be payable as additional interest and added to the principal amount of the notes. On March 29, 2004, a letter of agreement was executed to maintain the $2.0 million guarantee until June 30, 2004. The Company was in compliance with its covenants as of March 31, 2004. Wynnchurch Capital Partners, L.P. has waived compliance by the Company with respect to the financial covenants through January 1, 2005. Additionally, Wynnchurch Capital Partners, L.P. has provided a commitment up to $5.0 million of additional financing, should the need arise, on such terms as the Company, its Board of Directors and Wynnchurch Capital Partners, L.P. may agree.

Due to the change in the underlying terms of the Convertible Notes and Warrants, the original valuation of the warrants was reassessed during the second quarter of 2003. The fair value ascribed to these warrants was determined to be approximately $2.3 million prior to the price change and $2.4 million subsequent to the price change. This change in value ascribed to the price change of approximately $69,000 was amortized over the seven-month life of the guarantee as a non-cash interest charge. The valuation of the warrants was determined based on advice from a third-party valuation specialist who utilized a valuation model with the following inputs: measurement date of April 14, 2003; fair value of $0.23; exercise price of $0.55 prior to the price change ($0.73 for contingent warrants) and $0.26 subsequent to the price change; contractual term of 10 years from the original issue date; dividend rate of zero; volatility rate of 123.5%; and risk-free interest rate of 3.76%.

During the third quarter of 2003, the Company concluded that the change in interest rate combined with the change in conversion price of the convertible notes in the second quarter of 2003 met the criteria of an extinguishment of debt per EITF 96-19 “Debtors Accounting for a Modification or Exchange of Debt Instruments,” as the change in the present value of the notes exceeded the present value prior to the modifications by more than 10%. The valuation of the notes was determined based on advice from a third-party valuation specialist who utilized a valuation model. Based on the results, the fair value of the notes was determined to be $13.2 million versus the carrying value of $9.7 million. As such, a $3.5 million charge was recognized for the modification of debt to recognize the fair value of the notes in the financial statements. Additionally, origination fees of $0.9 million related to these notes and $0.1 million related to the revolving credit commitment were written off due to the modifications.

As of March 31, 2004, the Company has three irrevocable standby letters of credit for $1.8 million, which expire as follows: $0.5 million on November 1, 2004, $0.5 million on November 15, 2004, and $0.8 million on December 31, 2004.

5. Restructuring and Other Charges

Restructuring and Other Charges – 2003

During the third quarter of 2003, the Company incurred a $0.5 million restructuring charge representing severance costs associated with the restructuring of the Company’s sales, delivery and corporate staff. A total of 33 positions were eliminated, comprised of 11 in sales, 9 in delivery and 13 in corporate staff positions. The Company recorded an additional restructuring charge of $0.4 million in the fourth quarter of 2003 related to the severance cost of two executive employees and $38.0 thousand in the first quarter of 2004 related to portions of severance recognized over the employee’s service period.

The primary components of the restructuring charge can be summarized as follows:

	Total Initial Reserve		2003 Cash Payments			Balance at December 31, 2003		2004 Additional Charges		2004 Cash Payments			Balance at March 31, 2004
	(in thousands)

Severance	$	952	$	(270	)	$	682	$	38	$	(169	)	$	551

The remaining severance balance at March 31,2004 represents the severance of three executive employees that will be paid out in accordance with their respective employment agreements through December 2007.

Restructuring and Other Charges – 2002

The Company recorded restructuring and other charges in the aggregate amount of $6.1 million during 2002. During the second quarter of 2002, the Company recorded a charge of $1.1 million, classified as other charges, representing the severance pay associated with the departure of the Company’s former Chief Executive Officer. During the third quarter of 2002, the Company recorded a $4.7 million restructuring charge due to excess office space and the restructuring of the service delivery function. An additional $0.3 million restructuring charge was recorded in the fourth quarter, which was also due to the restructuring of the service delivery function.

The primary activity in the restructuring reserve can be summarized as follows:

	Total Initial Reserve		2002 Cash Payments			Balance at December 31, 2002		2003 Cash Payments			Adjustment to reserve			Balance at December 31, 2003		2004 Cash Payments			Balance at March 31, 2004
	(in thousands)

Real estate costs	$	4,328	$	(569	)	$	3,759	$	(1,659	)	$	(605	)	$	1,495	$	(295	)	$	1,200

Severance	627		(362		)	265		(200		)	—			65		—			65

Other charges	1,100		(202		)	898		(121		)	—			777		(34		)	743

Total restructuring reserve	$	6,055	$	(1,133	)	$	4,922	$	(1,980	)	$	(605	)	$	2,337	$	(329	)	$	2,008

The portion of the charge related to real estate costs, which totaled $4.3 million, relates to lease costs associated with decreased requirements for office space as the Company restructured its service delivery organization. The costs associated with this charge related primarily to the value of ongoing lease obligations for vacated offices, net of anticipated sublease income. A portion of the charge also related to broker commissions and estimated leasehold improvement costs necessary to sublease vacated offices.

During the third quarter of 2003, the Company reassessed its 2002 restructuring accrual requirements. Based on this review, the Company determined the remaining reserve was overstated by $0.6 million due to various real estate cost assumptions made versus actual activity. The majority of this adjustment relates to the successful early termination negotiated on the lease of the Company’s previous headquarters.

The $0.6 million severance charge related to headcount reductions associated with centralizing the service delivery organization as part of a re-engineering exercise. A total of 60 positions were eliminated with the largest group being the client staffing managers. The remainder of positions eliminated was a mix of corporate staff and recruiting personnel. The remaining severance balance at March 31, 2004 relates to an employee with an employment agreement. It is anticipated that this amount will be paid out through July 2004.

The $1.1 million other charges related to the severance pay associated with the departure of the Company’s former Chief Executive Officer. The remaining balance at March 31, 2004 is anticipated to be paid in full by July 2004.

Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

All of the Company’s revenue is generated from information technology services that offer the benefits of outsourcing, while allowing information services operations managers to retain strategic control of their operations. Revenues are recognized as services are performed, utilizing four different billing methodologies as follows: (1) time and material billing, whereby the client 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 specific contracts; (3) per-incident billing, whereby the Company charges a fee for each specific task related to certain services; and (4) fee-based billing, which is

used for candidate placement/recruiting fees and vendor management fees. The Company typically provides discounts on staffing services to its largest clients in exchange for the opportunity to sell more volume, as well as the opportunity to sell its higher-margin, value-added services. All revenues are recognized net of such discounts and after services have been completed.

First Quarter Fiscal 2004 Compared to First Quarter Fiscal 2003

The following table presents quarter-over-quarter changes in revenue and gross profit from 2003 to 2004.

(in thousands)	Revenues			Gross Profit

2003	$	36,846		$	9,178
Staffing	69			(359		)
Solutions	(7,785		)	(2,142		)
2004	$	29,130		$	6,677

Revenue. Revenues consist of fees earned from Staffing Services and Solutions Services. Revenue decreased $7.7 million or 20.9% from $36.8 million in the first quarter of 2003 to $29.1 million in the first quarter of 2004. The Company’s Solutions revenue decreased by $7.8 million or 39.9% from $19.5 million in the first quarter of 2003 to $11.7 million in the first quarter of 2004. The decline in Solutions revenue was driven by declines in the Technology Deployments and Field Service offerings. The decline in Field Services was due to the Company’s largest customer of these services changing to a multi-vendor strategy. The Company’s traditional Staffing Services revenue increased by $0.1 million or 0.4% from $17.3 million in the first quarter of 2003 to $17.4 million in the first quarter of 2004.

Gross profit. Gross profit decreased by $2.5 million or 27.3% from $9.2 million in the first quarter of 2003 to $6.7 million in the first quarter of 2004. Margins decreased by $0.4 million in the Staffing Service offerings due to overall pricing pressures from customers. Margins decreased by $2.1 million in the Solutions Service offerings due to decreased revenue as well as overall pricing pressures from customers. As a percentage of revenue, gross profit decreased by 2.0% from 24.9% in the first quarter of 2003 to 22.9% in the first quarter of 2004.

Operating expenses. Operating expenses consist of salaries and benefits, sales costs, recruiting, retention and training costs, management and administrative costs, and depreciation and amortization. Operating expenses decreased by $2.3 million or 23.2% from $9.9 million in the first quarter of 2003 to $7.6 million in the first quarter of 2004. The operating expense decrease was attributable to the restructuring actions the Company has taken in the past, which is reflected in reduced office space and lower headcount. As a percentage of revenue, operating expenses decreased by 0.7% from 26.7% in the first quarter of 2003 to 26.0% in the first quarter of 2004.

Other expense, net. Other expense, net, consists primarily of interest expense on the Company’s outstanding debt. Other expense, net, was level during the first quarters of 2003 and 2004.

Liquidity and Capital Resources

Current liabilities exceed current assets by $12.2 million at March 31, 2004. Included in current liabilities is $12.4 million of outstanding borrowings against the revolving credit agreement that has a maturity date of January 31, 2005.

Net cash used in operations was $0.3 million in the first three months of 2004. Net cash used in operations is comprised of a net loss for the quarter of $0.3 million (net of adjustments for non-cash charges including depreciation and amortization of $0.9 million and non-cash interest expense totaling $0.7 million); offset by a decrease in accounts receivable of approximately $0.9 million; a decrease in accounts payable of $1.4 million and an increase in payroll and related expenses of $0.2 million.

Net cash used in investing activities was approximately $0.1 million in both of the quarters ended March 31, 2004 and 2003. Beginning with the quarter ended December 31, 2003, the Company has been restricted by its credit agreement to capital spending of $50,000 per quarter.

On January 31, 2002, the Company replaced its existing bank line with a $30.0 million senior secured revolving credit facility with Fleet Capital Corporation, a subsidiary of the FleetBoston Financial Corporation. Additionally, $10.0 million principal amount of Senior Subordinated Convertible Notes was sold to Wynnchurch Capital Partners, L.P., a private equity investor.

payable as additional interest and added to the principal amount of the notes. On March 29, 2004, a letter of agreement was executed to maintain the $2.0 million guarantee until June 30, 2004. The Company was in compliance with its covenants as of March 31, 2004. Wynnchurch Capital Partners, L.P. has waived compliance by the Company with respect to the financial covenants through January 1, 2005. Additionally, Wynnchurch Capital Partners, L.P. has provided a commitment up to $5.0 million of additional financing, should the need arise, on such terms as the Company, its Board of Directors and Wynnchurch Capital Partners, L.P. may agree.

The Company currently anticipates its cash balances and funds from operations, together with funds available under its credit facility will be sufficient to meet all of its anticipated cash requirements for at least the next 12 months. Additionally, Wynnchurch Capital Partners, L.P. has provided a commitment up to $5.0 million of additional financing, should the need arise, on such terms as the Company, its Board of Directors, and Wynnchurch Capital, L.P. may agree. General economic and industry conditions could impact the Company’s ability to meet anticipated cash requirements. Since the existing credit facility is secured by the assets of the Company, principally consisting of accounts receivable, these uncertainties may directly impact the availability of this credit facility. Additionally, the Company’s ability to successfully meet debt covenants in future periods is a significant risk factor.

The following summarizes the Company’s contractual obligations at March 31, 2004, and the effect such obligations are expected to have on our liquidity and cash in the future periods.

			Payments Due by Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		After 5 Years
	(in thousands)

Contractual Obligations:
Senior Secured Revolving Credit	$	12,393	$	12,393	$	—	$	—	$	—
Securities Purchase Agreement	14,375		—		—		14,375		—
Non-cancelable operating leases	8,494		2,676		2,769		2,425		624

Total contractual cash obligations	$	35,262	$	15,069	$	2,769	$	16,800	$	624

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are impacted by the accounting policies used, and the estimates and assumptions made by management. The most significant accounting policies and management estimates that affect the presentation of the consolidated financial statements include revenue recognition, allowance for doubtful accounts, analysis of goodwill impairment and valuation allowance for deferred tax assets.

Revenue Recognition

The Company recognizes revenues as services are performed, utilizing four different billing methodologies, as follows: (1) time and material billing, whereby the client 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 specific contracts; (3) per-incident billing, whereby the Company charges a fee for each specific task related to certain services; and (4) fee-based billing, which is used for candidate placement/recruiting fees and vendor management fees. The Company typically provides discounts on staffing services to its largest clients in exchange for the opportunity to sell more volume, as well as the opportunity to sell its higher-margin, value-added services. All revenues are recognized net of such discounts and after services have been completed.

Allowance for Doubtful Accounts

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

Goodwill Impairment

On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). This Statement dictates that goodwill and intangible assets with indefinite useful lives should be tested for impairment at least annually, instead of being amortized on an ongoing basis. The Company has terminated its policy of amortizing goodwill on a monthly basis and performs an annual analysis of goodwill impairment on December 31, or upon the occurrence of circumstances which could indicate impairment, using the discounted future cash flows methodology in determining fair value.

Valuation Allowance for Deferred Tax Assets

The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. A valuation allowance was established for the net deferred tax asset given the uncertainty with respect to the future realization of deferred tax assets. This valuation allowance is required given that the net operating losses have no remaining carryback potential and the lack of ability to accurately forecast taxable income over the 20 year net operating loss carryforward period. When a valuation allowance is deemed necessary, the Company records an adjustment to the deferred tax asset, with a corresponding charge to the statement of operations. In the event that the Company determines that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income, or reduce a net loss, in the period such determination was made.

Item 3. - Quantitative and Qualitative Disclosures About Market Risk

The market risk that the Company is exposed to primarily relates to changes in interest rates on its borrowings. At March 31, 2004, the Company had $12.4 million in floating-rate debt. An adverse change in interest rates during any period that the loan is outstanding would cause an increase in interest expense. A 100 basis point increase in the bank’s base rate would increase the annual amount of interest paid by $0.1 million.

The Company issued warrants on January 31, 2002, which are classified as derivative financial instruments pursuant to SFAS 133, “Accounting for Derivative Instruments and Certain Hedging Activities,” which was adopted by the Company on January 1, 2001. Pursuant to SFAS No. 133 and interpretations by the Emerging Issues Task Force covering derivative financial instruments, these warrants meet the criteria for equity classification on the measurement date of January 31, 2002 and the Company is not required to remeasure the warrants on subsequent dates. As such, there is no mark-to-market adjustment which will be reflected in the statement of operations as unrealized gains or losses as a result of changes in fair value of these warrants in periods subsequent to the measurement date. There is no equity price risk associated with changes in fair value of the warrants. The Company does not have any derivative financial instruments other than the warrants.

Item 4. - Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this annual report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i.) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and (ii.) is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2004 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

FORWARD-LOOKING STATEMENTS

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

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

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

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

• Competition in the information technology services marketplace;

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

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

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

• Pricing pressures and/or wage inflation and the resulting impact on gross profit and net operating margins;

• The ability to successfully enter new geographic markets;

• The Company’s ability to successfully meet debt covenants; and

• The effect of changes in general economic conditions.

PART II - OTHER INFORMATION

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

(a) The following documents are furnished as an exhibit and numbered pursuant to Item 601 of Regulation S-K:

Exhibit Number		Description

10.1		Executive Employment Agreement between Alternative Resources Corporation and Gibbs Vandercook dated February 1, 2004.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-15(e) or Rule 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-15(e) or Rule 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) No reports on Form 8-K were required to be filed during the quarterly period ended March 31, 2004.

SIGNATURES

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

	ALTERNATIVE RESOURCES CORPORATION


Date: May 10, 2004	/s/ Steven Purcell
	Steven Purcell
	Senior Vice President, Chief Financial Officer, Treasurer and Secretary