On March 22, 2001, the Company’s Board of Directors adopted a resolution to change the Company’s fiscal year, which was previously a calendar year.  Beginning in 2001, the fiscal year will consist of the 52 or 53 weeks ending on the last Sunday in December.  Accordingly, the Company’s current fiscal year will end on Sunday, December 30, 2001.

               On November 30, 2000, immediately prior to a scheduled jury trial, the Company settled its long-standing litigation with two former executives of the Company, Austin Iodice and Anthony Giglio.  In accordance with the terms of the settlement, the Company paid to the plaintiffs $325,000 on January 2, 2001 and $300,000 on May 1, 2001 and issued options to them to purchase 555,628 shares of common stock in the aggregate at an exercise price of $0.6625 per share on January 2, 2001. 

Revenues and profits in the Staff Augmentation segment are generated by providing supplemental staffing to client companies, generally on a time-and-materials basis.  In the IT field, the Company provides highly skilled programmers, help desk personnel, systems consultants and analysts, software engineers and project managers for a wide range of technical assignments, including client server, mainframe, desktop services, help desk and Internet/Intranet.   In the telecom sector, the Company provides skilled telecom personnel to plan, design, engineer, install and maintain wireless and wireline telecommunications systems, including cellular, PCS, microwave, radio, satellite and other networks.   In addition, the Company provides a broad range of other staffing services to its customers in the Staff Augmentation segment, including laboratory support (through the Company’s Labforce® division), medical office support, professional, scientific, clerical and call center staffing. 

            On January 1, 2001, the Company adopted Statement of Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” However, since the Company does not have any derivatives and does not engage in hedging activities, the adoption of SFAS No. 133 had no impact on the Company’s consolidated financial statements.

10.   NEW ACCOUNTING STANDARDS

               In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001.  Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

               The Company is required to adopt the provisions of Statement 141 immediately, and to adopt Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142.

               Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

                In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company’s statement of operations.

               As of the date of adoption, the Company expects to have unamortized goodwill and identifiable intangible assets in the amount of $134.2 million, which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $4.1 million and $2.1 million for the year ended December 31, 2000 and the six months ended July 1, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company’s financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.

Overview

Prior to filing its Annual Report on Form 10-K for the year ended December 31, 2000, the Company reported its results through two operating segments -- Staff Augmentation and Financial Services.  Principally as a result of the development by the Company’s PrO Unlimited subsidiary of a business offering web-enabled solutions for the procurement, tracking and engagement of contingent labor, the Company began reporting its results through three operating segments -- Staff Augmentation, Human Capital Management Services and Financial Services. The Staff Augmentation segment provides information technology (IT), telecom and other staffing services.  The Human Capital Management Services segment provides contingent workforce management services.  The Financial Services segment provides payroll, funding and outsourcing services to independent consulting and staffing companies. 

               As part of its strategy to reduce its higher interest rate debt and improve its balance sheet, on February 28, 2001, the Company completed the repurchase of $11.0 million principal amount of its Senior Notes due 2007 (the “Senior Notes”) for $7.5 million and on March 5, 2001, the Company completed the repurchase of an additional $2.0 million of Senior Notes for $1.4 million, the repurchase prices of which were paid from lower interest rate borrowings under the Company’s revolving credit facility agented by IBJ Whitehall Business Credit Corporation (the “IBJ Credit Facility”).  In addition, on March 5, 2001, the Company entered into an amendment of the IBJ Credit Facility to permit borrowings thereunder to repurchase the Company’s 15% Senior Secured PIK Debentures due 2009 (the “PIK Debentures”) under certain circumstances.  As amended, the IBJ Credit Facility permits the use of up to $16.5 million in loan proceeds to pay the aggregate repurchase prices of Senior Notes and PIK Debentures and costs associated therewith (including related tax expenses), not more than $9.0 million of which may be used to pay the repurchase price of PIK Debentures and such associated costs.   On March 6, 2001, the Company completed the repurchase of $5.2 million principal amount of PIK Debentures for $2.5 million using lower interest rate borrowings under the IBJ Credit Facility. Prior thereto, during the third quarter of 2000, the Company repurchased $10.0 million principal amount of the Senior Notes for a purchase price of $5.1 million, the repurchase price of which was paid from lower interest rate borrowings under the now retired Heller Credit Facility.   

Results of Operations

               Three Months Ended July 1, 2001 Compared to Three Months Ended June 30, 2000

Net sales of services for the three months ended July 1, 2001 were $112.2 million, a decrease of 4.7% from net sales of services for the three months ended June 30, 2000 of $117.7 million.  The decline in net sales of services for the second quarter of 2001 is attributable principally to recent upheavals in the telecom industry resulting in lower sales to telecom customers in the Staff Augmentation division. Sales to staffing services customers also contributed to lower sales in the Staff Augmentation division and net sales of services to the Company as a whole, partially offset by an increase in net sales of services to information technology customers.

Cost of services for the three months ended July 1, 2001 was 78.6% of net sales of services as compared to cost of services of 79.3% for the three months ended June 30, 2000.  The cost of services decreased as a percentage of net sales for the second quarter of 2001 as compared to the second quarter of 2000 as a result of the continued strategies undertaken by management to increase margins throughout the Company. 

Selling, general and administrative expenses as a percentage of net sales of services were 14.9% for the three months ended July 1, 2001, compared to 13.7% for the three months ended June 30, 2000.  This increase resulted principally from higher payroll and recruiting costs with respect to non-billable staff and investments to expand the infrastructure for the Company’s Human Capital Management Services segment.

               Operating income for the three months ended July 1, 2001 was $5.3 million as compared to operating income of $6.5 million for the three months ended June 30, 2000.  This 18.9% decrease in operating income for the second quarter of 2001 resulted principally from the decrease in sales discussed above, higher selling, general and administrative expenses and an increase in depreciation and amortization.

The Company's interest expense for the three months ended July 1, 2001 and June 30, 2000 is attributable to the interest on the Company's credit facility with Heller Financial, Inc. (the “Heller Credit Facility”), which had been retired in 2000, and with the IBJ Credit Facility, the Senior Notes and the PIK Debentures.  During the first quarter of 2001, the Company repurchased $13.0 million principal amount of Senior Notes for $8.9 million and $5.2 million principal amount of PIK Debentures for $2.5 million (including accrued and unpaid interest of $340,000), the repurchase prices of which were paid from lower interest rate borrowings under the IBJ Credit Facility. The interest expense was lower in the second quarter of 2001 due to lower interest rates under the IBJ Credit Facility as compared to the interest rates under the Heller Credit Facility in the second quarter of 2000, and by the reduction of Senior Notes and PIK Debentures through the repurchases described above as well as the repurchase of $10.0 million principal amount of Senior Notes during the third quarter of 2000.

The IBJ Credit Facility was entered into in December 2000 to repay the Heller Credit Facility and provide the Company additional borrowing availability.  The Heller Credit Facility as well as the financings evidenced by the Senior Notes and PIK Debentures were incurred in 1997, principally in connection with the funding of business acquisitions. 

The income tax provision for the three months ended July 1, 2001 was $578,000 on income before taxes and extraordinary gain of $177,000.  The income tax provision for the three months ended June 30, 2000 was $544,000 on income before taxes of $605,000. The Company provides for income taxes, based upon the estimated effective tax rate (on a year to date basis).  The difference between the federal statutory income tax rate and the Company’s effective tax rate relates primarily to the nondeductibility of amortization expense associated with certain intangible assets, the nondeductibility of a portion of the interest expense associated with the PIK Debentures and state income taxes.

               Six Months Ended July 1, 2001 Compared to Six Months Ended June 30, 2000

Net sales of services for the six months ended July 1, 2001 were $235.6 million, an increase of 4.9% from net sales of services for the six months ended June 30, 2000 of $224.6 million.  The increase in net sales of services for the six months ended July 1, 2001 is attributable to higher sales in each of the Company’s three operating segments -- Human Capital Management Services, Staff Augmentation, and Financial Services. This increase was principally attributable to higher sales to information technology and engineering related service customers and to an increased client base in the Financial Services segment, partially offset by a decrease to telecom customers in the Staff Augmentation segment.

Cost of services for the six months ended July 1, 2001 was 78.6% of net sales of services as compared to cost of services of 79.8% for the six months ended June 30, 2000.  The cost of services decreased as a percentage of net sales for the first six months of 2001 as compared to the first six months of 2000 as a result of the continued strategies undertaken by management to increase margins throughout the Company. 

Selling, general and administrative expenses as a percentage of net sales of services were 14.6% for the six months ended July 1, 2001, compared to 13.9% for the six months ended June 30, 2000.  This increase resulted principally from higher payroll and recruiting costs with respect to non-billable staff and investments to expand the infrastructure for the Company’s Human Capital Management Services segment. 

Operating income for the six months ended July 1, 2001 was $12.1 million as compared to operating income of $10.5 million for the six months ended June 30, 2000.  This 14.9% increase in operating income for the six months ended July 1, 2001 resulted principally from an increase in sales and corresponding gross margin, partially offset by higher selling, general and administrative expenses and an increase in depreciation and amortization.

The Company's interest expense for the six months ended July 1, 2001 and June 30, 2000 is attributable to the interest on the Heller Credit Facility, which had been retired in 2000, and with the IBJ Credit Facility, the Senior Notes and the PIK Debentures.  During the first quarter of 2001, the Company repurchased $13.0 million principal amount of Senior Notes for $8.9 million and $5.2 million principal amount of PIK Debentures for $2.5 million (including accrued and unpaid interest of $340,000), the repurchase prices of which were paid from lower interest rate borrowings under the IBJ Credit Facility.  The extraordinary gain that was realized by these repurchases was $3.9 million, which includes the reduction of $540,000 of deferred financing costs associated with the repurchases net of tax expense of $2.7 million. See “Financial Condition, Liquidity and Capital Resources” in this Item 2. 

The interest expense was lower in the first six months of 2001 due to lower interest rates under the IBJ Credit Facility as compared to the interest rates under the Heller Credit Facility in the first six months of 2000, and by the reduction of Senior Notes and PIK Debentures through the repurchases described above as well as the repurchase of $10.0 million principal amount of Senior Notes during the third quarter of 2000.

The income tax provision for the six months ended July 1, 2001 was $1.5 million on income before taxes and extraordinary gain of $1.3 million.  The income tax provision for the six months ended June 30, 2000 was $544,000 on a loss before taxes of $937,000. The Company provides for income taxes, based upon the estimated effective tax rate (on a year to date basis).  The difference between the federal statutory income tax rate and the Company’s effective tax rate relates primarily to the nondeductibility of amortization expense associated with certain intangible assets, the nondeductibility of a portion of the interest expense associated with the PIK Debentures and state income taxes.

Financial Condition, Liquidity and Capital Resources

The Company pays its billable employees weekly for their services, and remits certain statutory payroll and related taxes as well as other fringe benefits.  Invoices are generated to reflect these costs plus the Company’s markup.  These bills are typically paid within 45 days.  Increases in the Company's net sales of services, resulting from expansion of existing offices or establishment of new offices, will require additional cash resources.

Management of the Company believes that cash flow from operations and funds anticipated to be available under the IBJ Credit Facility will be sufficient to service the Company’s indebtedness and to meet anticipated working capital requirements for the foreseeable future.

During the six months ended July 1, 2001, the Company's primary sources of funds to meet working capital needs were from borrowings under the IBJ Credit Facility.  Cash and cash equivalents increased $514,000 during the six months ended July 1, 2001.  Cash flows provided by operating activities of $14.3 million exceeded cash flows used in financing activities of $10.8 million and cash flows used in investing activities of $3.0 million. 

As of July 1, 2001, the Company had outstanding $67.3 million in principal amount under the IBJ Credit Facility bearing interest at a weighted average rate of 6.7%.  In addition, as of July 1, 2001, the Company had outstanding $27.7 million in principal amount of PIK Debentures bearing interest at a rate of 15%, and $87.0 million in principal amount of Senior Notes bearing interest at a rate of 12%.  The debt service costs associated with the PIK Debentures may be satisfied through the issuance of new notes.  To date, the Company has chosen to issue new PIK Debentures to pay these costs. 

In December 2000, the Company entered into the IBJ Credit Facility to provide greater borrowing availability.  The maximum availability of $100.0 million was increased to $110.0 million in January 2001 when additional lending institutions requested to join the loan syndicate.  The IBJ Credit Facility was further amended in March 2001 to permit the Company to use certain borrowed funds to repurchase PIK Debentures (in addition to Senior Notes, the repurchase of which was previously permitted). 

               As of July 1, 2001, approximately $136.3 million, or 50.9%, of the Company's total assets were intangible assets. These intangible assets substantially represent amounts attributable to goodwill recorded in connection with the Company's acquisitions.  Intangible assets are amortized over a 5 to 40 year period, resulting in an annual non-cash charge of approximately $4.5 million. Effective January 1, 2002, the Company will cease recording goodwill amortization amounting to approximately $4.2 million, as described below under “—New Accounting Standards.”

The Company is obligated under various agreements to make earn-out payments to the sellers of companies acquired by the Company and to sellers of franchised businesses repurchased by the Company, subject to the sellers meeting specified contractual requirements.  The maximum amount of the remaining potential earn-out payments is approximately $525,000 in cash payable through December 31, 2002.  The Company cannot currently estimate whether it will be obligated to pay the maximum amount; however, the Company anticipates that the cash generated by the operations of the acquired companies or franchised businesses will provide all or a substantial part of the capital required to fund the cash portion of the earn-out payments.

               In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

               The Company is required to adopt the provisions of Statement 141 immediately, and to adopt Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142.

               Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

               In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company’s statement of operations.

               As of the date of adoption, the Company expects to have unamortized goodwill and identifiable intangible assets in the amount of $134.2 million, which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $4.1 million and $2.1 million for the year ended December 31, 2000 and the six months ended July 1, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company’s financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.

Forward Looking Statements

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

               The information required by Item 3 has been disclosed in Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2000.  There has been no material change in the disclosure regarding market risk.

PART II - OTHER INFORMATION