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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

for the fiscal year ended December 31, 2001

or

For the Transition period from                                      to                                     

Commission file number: 0-23940

ALTERNATIVE RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value
(Title of Class)

        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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        The registrant estimates that the aggregate market value of the registrant's common stock held by non-affiliates of Alternative Resources Corporation as of March 22, 2002 (based upon an estimate that 93.21% of the shares are so owned by non-affiliates and upon the closing price for the common stock on the OTC BB) on that date was approximately $9,736,000. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to these requirements and registrant is not bound by this determination for any other purpose.

        As of March 22, 2002, 17,702,819 shares of the registrant's common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Certain portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on June 13, 2002 (Part III).

PART I

ITEM 1. BUSINESS.

OVERVIEW

        Alternative Resources Corporation ("ARC" or the "Company") is a leading provider of information technology management and staffing services. The Company has developed a significant, high quality business in the IT staffing industry with an emphasis on Help Desk, Desktop Support, Technology Deployment Service, and Field Service offerings. The Company also has a consulting practice that supports those service offerings. The Company operates through 38 field offices with over 80 personnel in field sales, supported by 55 recruiters and its unique organization of over 50 client support managers. The Company serves Fortune 1000 and mid-sized clients throughout the United States and Canada.

MAJOR DEVELOPMENTS IN 2001

        The Company's 2001 operating results were significantly impacted by two principal factors. First was the significantly reduced IT spending on temporary and outsourced workers. Temporary staffing, as reported by the Bureau of Labor Statistics, has experienced the sharpest deceleration in history. Second, was the complete evolution of the Company's business model from a branch model to a functional model. As discussed in the 2000 Form 10-K, the Company reorganized its field structure from a branch-based model to a model organized by the functional areas of sales, recruiting and service delivery. The new model was announced in late 1999 and implementation began in January 2000. The new model is designed to sell, recruit for and deliver the Company's services much more effectively and efficiently. As part of this process, administrative functions that were previously attended to in the branch structure have now been centralized where they can be processed in a more efficient manner. In addition, with this new model many of the field sales and delivery functions will require less office space than required under the old model. During 2001 this model became fully functional. As a result, the Company was able to generate increased operating income and earnings before interest, income taxes, depreciation and amortization (EBITDA) despite the sharp reduction in revenue. In connection with the new model, the Company incurred restructuring and other charges of $1.7 million in 2000, most of which related to a write-off of excess fixed assets related to the downsizing of office space and severance costs associated with the elimination of certain positions. These charges are more fully explained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the "Notes to Consolidated Financial Statements," included in this Form 10-K. No additional charges were taken in 2001.

        The two primary objectives of reorganizing the Company's field structure were to become more effective in providing its services and to reduce costs. Under the former model, the sales, recruiting and service delivery functions were managed to meet the needs and priorities of each particular metropolitan market with very little consideration given to business opportunities in other markets. Now, the sales, recruiting and service delivery organizations are managed functionally without regard to the geographic barriers.

        The functional organization allows for a more focused management effort on each respective function. This has facilitated the Company's goal of achieving excellence in each function. Sales are now managed on a regional basis allowing the Company to reach markets that were previously ignored.

        The recruiting function, which had previously operated from three regional centers in Chicago, Philadelphia and Denver, supplemented by a network of recruiters operating in various markets, has evolved into a total virtual recruiting organization. Through the use of technology, the Company has been able to achieve greater efficiencies in recruiting and has developed a recruiting model that is totally variable in terms of cost structure.

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        The reorganization has also benefited the Company's service delivery function. Under the old model, the branch staff was responsible for various administrative functions like order processing, and credit and invoice processing. These functions have been removed from the field responsibility and centralized at the Company's corporate headquarters. This has allowed the employees responsible for service delivery to focus on their primary responsibility, which is assigning and managing the Company's technical consultants at client sites. The centralization of administrative functions has also provided the Company with more efficient and accurate processing that is associated with economies of scale.

        While these changes are significant, it is important to note that the Company's services and its approach to selling, recruiting and service delivery have remained relatively intact. The primary change has been how the functions are managed. Instead of all three functions being managed at a local level under the direction of a branch manager, they are now managed regionally with greater focus on their functional objectives. The increased focus is made possible through the removal of administrative duties and through a management structure that now places a vice-president over each function.

        The Company's second objective in reorganizing its field structure was to reduce costs. The Company believes that the competitive nature of its industry requires that services be delivered in the most cost effective manner. By changing to a functional model the Company was able to reduce its real estate requirements and increase management's span of control by centralizing all of the administrative functions. These actions have resulted in the Company reducing its operating costs by $23.9 million in 2001 as compared to the year 2000.

ARC SERVICE OFFERINGS

        During the past six years, ARC has evolved from a pure IT staffing company into a solutions-based provider of IT services. The Company's IT staffing and solutions services are now sold under the names ARC Staffing Management Solutions and ARC Technology Management Solutions, respectively. ARC's service offerings are designed to provide its clients with flexibility and expertise to address their IT execution needs whether for managed delivery of a help desk, data center or network administration; developing applications to support business processes; deploying technology across an enterprise; or providing qualified, motivated technical consultants for short or long-term engagements.

        ARC Staffing Management Solutions, offered since the Company's inception in 1988, enables clients to adapt their organizations to changing business or technology needs without adding to fixed costs or making long-term commitments to staff. Client staffing needs are fulfilled in several ways:

•

Staff Augmentation;

•

Managed Staffing;

•

Temp-to-Perm; and

•

Managed Vendor Program.

        ARC Technology Management Solutions provides management and delivery of infrastructure development and maintenance expertise, offering managed solutions and best practice methodologies. ARC Technology Management Solutions assists clients in integrating the resources, processes and systems for the design, deployment, operation and support of the clients key IT assets. Technology Management Services are delivered through the following service offerings:

•

Applications Development Services;

•

Technology Deployment Services;

•

End-User Support Services;

•

Field Services;

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•

Life-Cycle Asset Management Services; and

•

Consulting Services.

ARC SALES APPROACH

        The Company has developed a customized approach to the project assignment process that it believes results in a high degree of client and technical consultant satisfaction and repeat business from clients. The Company believes a superior project assignment entails developing a comprehensive understanding of clients' needs, matching identified needs with requisite skills on a timely basis, and monitoring performance throughout the project. However, the Company believes that the professional and interpersonal skills required to interact with clients and interpret and communicate their needs differ greatly from those required to manage the recruitment and project assignment of technical consultants. Under the ARC approach, project responsibilities are shared between account managers, recruiters and client staffing managers.

        Account managers focus principally on building and fostering relationships with clients, understanding the client's organization and assessing the client's needs, and proposing tailored staffing solutions. Recruiters focus principally on recruiting and establishing relationships with technical personnel, assessing their technical and interpersonal skills, and selecting appropriate technical personnel for a project. Client staffing managers assist in the selection of appropriate technical personnel for a project as well as monitoring and motivating technical consultants on a project. This separation of responsibilities allows account managers, recruiters, and client staffing managers to meet the needs of their respective constituencies while working together to enhance the prospects of a superior project assignment.

        Historically, the Company categorized the market into three different tiers: Business Partners, which includes the Company's large national accounts, Select Accounts, which consists of accounts with the potential for more than $1 million in annual revenue, and the General Market, which represents hundreds of companies outside the Fortune 1000. The Company's sales approach has evolved into being more focused on the Business Partners and Select Accounts. These accounts provide the greatest opportunity for the Company and allow the Company to build on its customer relationships and take advantage of its quality of service delivery.

        The Company maintains a Technology Management support staff which is primarily located at its headquarters in Barrington, Illinois to assist account managers in selling and delivering ARC Technology Management Solutions.

RECRUITING OF TECHNICAL PERSONNEL

        As the leading edge of technology continues to outpace the availability of leading edge skills, the recruitment and retention of technical personnel represents an expanding challenge. To recruit qualified technical personnel, the Company places newspaper advertisements, maintains a presence at local technical colleges and obtains referrals from its technical employees and clients. The Company has also expanded its use of the internet as a recruiting tool.

        Prospective technical consultants are required to complete an extensive questionnaire regarding skill levels, experience, education and availability, and to provide references. Recruiters maintain an active database of qualified technical personnel along with their related skill levels and availability. This database along with major job boards is the primary tools used to match qualified technical skills to client requests.

        Client staffing managers oversee technical personnel once they are assigned to a client. The responsibilities include answering employment-related questions, addressing unique client requirements such as training, drug testing, etc. and handling any travel needs that are associated with the project. In

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order to retain a qualified workforce, the Company devotes considerable time and resources towards serving the needs of its technical consultants. All technical consultants receive a competitive hourly wage determined by the Company and may be eligible to participate in the Company's 401(k) plan, employee stock purchase plan and earn bonuses based on referrals of technical personnel. The Company also provides technical consultants access to computer based training programs. Technical consultants may also receive a benefits package that allows them to select from a variety of benefit options, including comprehensive group medical insurance, vision and dental insurance, long-term disability insurance and group life insurance.

        The Company's recruiting efforts were strengthened in 2001 by two key developments: the enhancement of the Company's recruiting software and the development of a just-in-time recruiting methodology.

        The Company implemented LINX, an enterprise front office management application. LINX supports the full transaction cycle of our staffing business encompassing prospecting, order entry, recruiting and fulfillment. The application tracks existing clients, resources and partners as well as past and prospective clients, resources and partners. It is used extensively by sales, recruiting and delivery personnel. LINX is tightly integrated into our back office applications as data flows directly to the Company's Peoplesoft Enterprise Software.

        The Company also implemented a just-in-time methodology for having technical resources immediately available for anticipated demand. Through the development and maintenance of multiple hot lists the Company has resources available for deployment on 24 hours notice based on anticipated customer requirements.

OPERATIONS

        The Company operates through a network of 38 field offices utilized primarily to accommodate the field sales organization as well as to interview potential candidates. The majority of the Company's recruiting personnel operate from home offices creating a virtual network. The Company's principal executive offices are located in Barrington, Illinois.

CLIENTS

        During 2001, the Company provided technical staffing solutions to a wide variety of entities including computer services companies, systems integrators, telecommunications companies, banking and financial service entities, manufacturers, distributors, health care providers and utilities. The Company's computer services and systems integrator clients often subcontract ARC's services to their own customers. In 2001, the Company's largest clients, IBM and Hewlett Packard, accounted for approximately 20% and 17%, respectively, of the Company's total revenue. The Company's remaining clients consist of Fortune 1000 companies and mid-sized organizations with sizable and complex IT operations. The IT requirements of these organizations often provide opportunities for major projects that extend for multiple years or generate additional projects.

        ARC will typically provide discounts on staffing services to its largest clients in exchange for the opportunity to sell more volume and the opportunity to sell its higher margin, value added services, such as its Technology Management Solutions.

        The vast majority of the traditional Staffing Management Solutions business is invoiced on an hourly basis. Technology Management Solutions business is invoiced on an hourly basis, fixed fee basis, or a per incident charge. In all cases, invoicing is not processed until the services are rendered.

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COMPETITION

        The IT services industry is highly competitive and fragmented and has low barriers to entry. The Company competes for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, other providers of technical staffing services and, to a lesser extent, temporary personnel agencies. The Company competes for technical personnel with private and public companies, other providers of technical staffing services, systems integrators, providers of outsourcing services, computer systems consultants, clients and temporary personnel agencies.

        The Company believes that the principal competitive factors in obtaining and retaining clients are accurate assessment of clients' requirements, timely assignment of technical consultants with appropriate skills, and the price of services. The Company is dependent upon its ability to continue to attract and retain technical personnel who possess the technical skills and experience necessary to meet the IT servicing requirements of its clients. The principal competitive factors in attracting qualified technical personnel are schedule flexibility, the availability of training, competitive benefits and compensation, as well as the availability, quality and variety of projects. The Company believes that many of the technical personnel included in its databases may also be pursuing other employment opportunities. Therefore, the Company believes that responsiveness to the needs of technical personnel is an important factor in the Company's ability to fill projects.

SEASONALITY

        The Company's quarterly results are affected by employment taxes. In general, the first two quarters of the year carry a significant portion of payroll tax expense. As employees reach annual payroll limits, usually in the third and fourth quarters, the Company's payroll tax expense is reduced. See "Quarterly Financial Information," included elsewhere herein.

EMPLOYEES

        At December 31, 2001, the Company employed approximately 320 staff employees and approximately 1,900 technical employees.

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-K, 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.

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        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:

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

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The Company's ability to recruit, train, integrate and retain qualified sales directors, account managers, recruiters and client staffing managers;

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Competition in the information technology services marketplace;

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

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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;

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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; and

•

The effect of changes in general economic conditions.

EXECUTIVE OFFICERS OF THE REGISTRANT

        The executive officers of the Company are as follows:

        Mr. Raymond R. Hipp has been Chairman of the Board, President and Chief Executive Officer of the Company since July 1998. Previously he was Chief Executive Officer of ITI Marketing Services, a provider of telemarketing services, from August 1996 until May 1998 when the company was sold. He was a self-employed management consultant from September 1994 to August 1996. Mr. Hipp was President of Comdisco Disaster Recovery Services, a provider of business continuity services for the information technology industry, from 1980 through August 1994. Mr. Hipp previously held executive and management positions with International Business Machines Corporation. He currently serves on the Board of Directors of Gardner Denver Inc.

        Mr. Miner Smith joined the Company as the President of Field Operations for ARC, responsible for all staffing sales and operations in July 2001. In February 2002, Mr. Smith was appointed President and General Manager—IT Staffing Business. From 1982 until July 2001, Mr. Smith was with the TAC Worldwide Companies, the largest privately held staffing company in the US, where he was an Area Vice President responsible for TAC's EDP Contract Services Business Unit. Previous to that, Mr. Smith held a variety of positions with TAC in sales and management.

        Mr. Victor Fricas joined the Company in November 1999 as Vice President, Field Operations with responsibility for delivery in the solutions and staffing business. In April, Mr. Fricas received additional responsibility for delivery in the consulting business and also became the Company's Chief Information Officer in November 2000 and was promoted to Senior Vice President. In February 2002, Mr. Fricas was appointed to the position of President and General Manager—IT Solution Business having

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responsibility for the Company's solutions business. Prior to joining ARC, Mr. Fricas held executive, operational and information technology management positions with Comdisco from 1987 to 1999, and Illinois Tool Works from 1970 to 1987.

        Mr. Steven Purcell joined the Company in August 1998 as Senior Vice President, Chief Financial Officer, Secretary and Treasurer. In May 1999, Mr. Purcell was elected to the Board of Directors. Prior to that he was Chief Financial Officer for American Business Information, a provider of business and consumer data and data processing services. From 1991 to 1996 he served as Vice President—Finance, Chief Financial Officer and Treasurer, of Micro Warehouse, a direct marketer of hardware, software and accessories. From 1985 to 1991, he worked for Electrocomponents, PLC, a London-based distributor of electrical products, serving as Chief Executive Officer for its Misco, Inc. subsidiary and, prior to that, as Vice President—Finance for Electrocomponents, Inc., the U.S. holding company.

        Ms. Sharon A. McKinney was named Senior Vice President of Human Resources in January 1999. Ms. McKinney reports to ARC's chief executive officer and is responsible for the human resources function within corporate headquarters and across the entire field organization. She brings to this position 18 years of domestic and international business and human resources management experience. Ms. McKinney joined ARC from GE Capital Fleet Services where she held the position of Senior Vice President, Global Human Resources from 1997 to January 1999. Previously, Ms. McKinney spent 1988 to 1997 with Square D Company, which today is known as Groupe Schneider, a French company. Following a series of increasingly responsible human resources positions, Ms. McKinney spent her last three years at Groupe Schneider as Director of Human Resources based in Paris, France.

ITEM 2. PROPERTIES.

        The Company's principal executive office is currently located in approximately 42,000 square feet of office space in Barrington, Illinois, pursuant to a lease agreement that expires in October 2009. The Company leases office space in major markets across the United States and Canada for all of its sales offices.

ITEM 3. LEGAL PROCEEDINGS.

        The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        None.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        ARC's common stock has been traded on the OTC Bulletin Board under the symbol "ALRC.OB" since June 20, 2001. Prior to that date, the Company's common stock was traded on the NASDAQ National Market, but was delisted for failure to satisfy the minimum bid price requirement for continued listing. No cash dividends have been paid on the common stock since the initial trading in 1994, except as noted below.

        In conjunction with the refinancing of the Company's revolving line of credit on January 31, 2002, the Company's Board of Directors redeemed all of the rights issued under its stockholders rights plan. The Company paid a redemption payment of $0.01 per right to stockholders on February 8, 2002 at a total cost of approximately $172,000.

        As of March 22, 2002 ARC had 209 stockholders of record and 17,702,819 outstanding shares of common stock. The following table shows the reported high and low sale prices of the common stock for the periods indicated, during the years ended December 31, 2001 and 2000:

        During 2001, the Company issued an aggregate of approximately 296,000 unregistered shares of common stock pursuant to its employees stock purchase plan. The shares were issued at prices ranging from $0.40 to $0.55 per share for aggregate consideration of $157,000.

        On January 31, 2002, the Company entered into a Securities Purchase Agreement with Wynnchurch Capital Partners, a private equity investor, pursuant to which the Company sold to Wynnchurch $10.0 million principal amount of 15.0% Senior Subordinated Convertible Notes due January 31, 2009. These notes are convertible into common stock of the Company 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 subject to certain conditions. In conjunction with the sale of these notes, the Company issued 10,000,000 warrants to purchase shares of the Company's common stock at $0.55 per share 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 year and expire on the occurrence of certain events. The sale was exempt from registration under the Securities Act of 1933 by virtue of Section 4(2) exemption under the Act for sales not involving a public offering.

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ITEM 6. SELECTED FINANCIAL DATA.

(1)

As detailed in Management's Discussion and Analysis of Financial Condition and Results of Operations, results for 2000 include a pre-tax charge for restructuring, other charges, and goodwill impairment totaling $36.6 million. Excluding these items, loss from operations was $5.8 million, net loss was $6.1 million and loss per share was $(0.39).

(2)

As detailed in Management's Discussion and Analysis of Financial Condition and Results of Operations, results for 1999 include a pre-tax charge for restructuring and other charges totaling $5.2 million. Excluding these items, income from operations was $9.1 million, net income was $2.7 million and diluted earnings per share was $0.17.

(3)

Results for 1998 include pre-tax charges for restructuring and goodwill impairment totaling $29.6 million. Excluding these items, income from operations was $20.7 million, net income was $10.4 million and diluted earnings per share was $0.64.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

        Alternative Resources Corporation ("ARC" or the "Company") is a leading provider of information technology management and staffing solutions. The Company serves Fortune 1000 and mid-sized clients from a network of offices located throughout the United States and Canada.

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        The Company's 2001 operating results were significantly impacted by two principal factors. First was the significantly reduced IT spending on temporary and outsourced workers. Temporary staffing, as reported by the Bureau of Labor Statistics, has experienced the sharpest deceleration in history. Second, was the complete evolution of the Company's business model from a branch model to a functional model. As discussed in the 2000 Form 10-K, the Company reorganized its field structure from a branch-based model to a model organized by the functional areas of sales, recruiting and service delivery. The new model was announced in late 1999 and implementation began in January 2000. The new model is designed to sell, recruit for and deliver the Company's services much more effectively and efficiently. As part of this process, administrative functions that were previously attended to in the branch structure have now been centralized where they can be processed in a more efficient manner. In addition, with this new model many of the field sales and delivery functions will require less office space than required under the old model. During 2001 this model became fully functional. As a result, the Company was able to generate increased operating income and earnings before interest, income taxes, depreciation and amortization (EBITDA) despite the sharp reduction in revenue. In connection with the new model, the Company incurred restructuring and other charges of $1.7 million in 2000, most of which related to a write-off of excess fixed assets related to the downsizing of office space and severance costs associated with the elimination of certain positions. These actions have resulted in the Company reducing its operating costs by $23.9 million in 2001 as compared to the year 2000.

        The Company also reviewed its intangibles during the 4th quarter of 2000 and recorded an impairment charge of $34.9 million related to goodwill. A more detailed explanation is described below in the "Impairment of Goodwill—2000."

        The Company had no similar charges in 2001.

RESTRUCTURING AND OTHER CHARGES—2000

        The Company recorded a $36.6 million charge during the fourth quarter of 2000, which consisted of the following components (in millions):

        The 2000 restructuring and other charges impacted the Company's 2000 statement of operations by decreasing income before income taxes by $36.6 million, decreasing net income by $37.3 million and decreasing earnings per share by $2.37.

Impairment of Goodwill—2000

        During the fourth quarter of 2000, the Company reviewed its remaining intangible assets relating to the 1997 acquisition of CGI Systems, Inc. ("CGI") for any impairment based on a trend of declining operating margins. After giving effect to purchase price adjustments, escrow refunds, acquisition costs, amortization and the write-down of goodwill in 1998, the remaining unamortized goodwill balance as of September 30, 2000 was $37.7 million, which consisted of goodwill allocated to the following three components of CGI's acquired business (in millions):

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        The Company allocated goodwill separately to each component of the acquired business due to each component having a different operating cash flow and business strategy. Thus, the Company performed a recoverability analysis for each component of the business for purposes of impairment. The recoverability analysis compared the projected future undiscounted cash flows over the estimated useful life for each component versus the carrying net book value of the goodwill allocated to each component. This analysis supported a goodwill valuation of zero for the Programming Services and Consulting components of the acquired business, which resulted in a write off of impaired goodwill totaling $34.9 million. The recoverability analysis for the NTS component of the business resulted in a positive future undiscounted cash flow in excess of the unamortized balance of goodwill allocated to the NTS business; as such, there was no impairment to the $2.8 million goodwill allocated to NTS.

Impairment of Assets and Other Charges—2000

        The $1.2 million impairment of assets and other charges relates primarily to write-downs of fixed asset values due to the re-engineering of the Company's field operations. The charge includes a write-down of office furniture, leasehold improvements and computers to their estimated fair value as a result of the reduction in staff and office space.

Restructuring Charge—2000

        The restructuring charge of $0.5 million represents the severance costs associated with the restructuring of the Company's sales, recruiting, delivery and administrative support models. A total of 29 positions were eliminated, with 20 of them being administrative positions. At December 31, 2000, the remaining accrued severance costs on the balance sheet was $0.3 million, all of which was paid out during 2001. The Company's savings resulting from the restructuring relating to selling, general and administrative expenses totaled approximately $8.0 million for the year ended December 31, 2000.

RESTRUCTURING AND OTHER CHARGES—1999

        The Company recorded a $5.2 million charge during the fourth quarter of 1999, which consisted of the following components (in millions):

        The 1999 restructuring and other charges impacted the Company's 1999 statement of operations by decreasing income before income taxes by $5.2 million, decreasing net income by $3.1 million and decreasing earnings per share by $0.20.

Restructuring Charge—1999

        The 1999 restructuring charge, which totaled $4.1 million, represented real estate and severance costs associated with re-engineering the Company's sales, recruiting and delivery models. This action was a natural extension of the restructuring announced in 1998, which was designed to optimize the existing branch field model, and entails a comprehensive shift to a model organized along the functional lines of sales, recruiting and delivery. The new model is more efficient in terms of meeting the demands of the Company's clients at a lower cost.

        A majority of the $4.1 million restructuring charge related to lease costs associated with vacating offices as the Company downsized its office space requirements. Through a combination of adopting a more virtual office model and eliminating administrative functions that had been performed in the field offices, the Company relocated from most of its existing leased office space to smaller office space that

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required 60% less square footage than what is currently used. The net impact lowered the Company's annual fixed occupancy costs by approximately $1.8 million without a loss in geographic coverage or functionality of workspace. Of the $4.1 million restructuring charge, $3.5 million represents the present value of ongoing lease obligations for vacated offices net of anticipated sublease income as well as estimated broker commissions and leasehold improvement costs necessary to sublease vacated offices. Management moved the majority of its office locations into smaller space by the end of the first quarter of 2000 with the remainder of the office locations moved in the second quarter of 2000.

        The remaining $0.6 million of the $4.1 million restructuring charge related to severance costs associated with automating and centralizing field administrative processes as part of the re-engineering exercise. A total of 88 positions were eliminated, 49 employees left in the fourth quarter of 1999 and the remainder left in the first quarter of 2000.

Impairment of Assets and Other Charges—1999

        Approximately $0.8 million of the $1.1 million impairment of assets and other charges relates to write-downs of fixed asset values, primarily due to the re-engineering of the Company's field operations. The reduction in staff and office space has created excess office furniture, leasehold improvements and computers, which were written down to their estimated fair value.

RESULTS OF OPERATIONS

        The following table sets forth the percentage of revenue represented by certain line items of ARC's consolidated statements of operations for the periods indicated:

FISCAL 2001 COMPARED TO FISCAL 2000

        Revenue.    Revenues consist of fees earned from ARC Staffing Management Solutions and ARC Technology Management Solutions. Revenue decreased $60.1 million or 23.0% from $261.8 million in 2000 to $201.7 million in 2001, primarily from the slowdown in IT spending experienced industry-wide. ARC Technology Management Solutions revenue decreased by $14.8 million or 18.9% from $78.2 million in 2000 to $63.4 million in 2001. The Company's traditional staffing business decreased by $45.3 million or 24.7% from $183.6 million in 2000 to $138.3 million in 2001.

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        Gross profit.    Gross profit decreased by $17.6 million or 22.7% from $77.5 million in 2000 to $59.9 million in 2001. The decrease was primarily attributable to the reduction in revenue. As a percentage of revenues, gross profit increased by 0.1% from 29.6% in 2000 to 29.7% in 2001.

        Selling, general and administrative expenses.    Selling, general and administrative expenses consist of salaries and benefits, sales costs, recruiting, retention and training costs and management and administrative costs. Selling, general and administrative expenses decreased by $23.9 million or 28.7% from $83.3 million in 2000 to $59.4 million in 2001. The selling, general and administrative expense decrease was attributable to the restructuring actions begun in 1999, which is reflected in reduced office space and lower headcount. The Company took further restructuring actions in late 2000, which is reflected in the 2000 restructuring and other charges. The impact of these actions was fully realized during 2001 resulting in a decrease of selling, general and administrative expenses of $23.9 million. As a percentage of revenues, selling, general and administrative expenses decreased by 2.4% from 31.8% in 2000 to 29.4% in 2001.

        Restructuring and other charges.    The Company did not incur any restructuring charges during 2001. As such, the restructuring and other charges decreased by $36.6 million or 100.0% from $36.6 million in 2000 to $0.0 in 2001.

        Income (loss) from operations.    Income (loss) from operations increased by $42.9 million from a loss of $42.4 million in 2000 to income of $0.5 million in 2001. Included in the 2000 loss was the restructuring charge of $36.6 million, as previously discussed. Excluding the restructuring charge, the loss was $5.8 million. The increase in 2001 is primarily attributable to the approximate $23.9 million in savings realized in selling, general and administrative expenses as a result of the restructuring actions.

FISCAL 2000 COMPARED TO FISCAL 1999

        Revenue.    Revenues consist of fees earned from ARC Staffing Management Solutions and ARC Technology Management Solutions. Revenue decreased $67.8 million or 20.6% from $329.6 million in 1999 to $261.8 million in 2000, primarily from the restructuring of the Company from a branch organization to a functionally organized business model. This change in business model resulted in significant disruption to the business and increased the turnover in both the staff and technical consultants. Also contributing to the decrease in revenue was an overall slowdown in IT spending as companies chose to ensure a return on the IT investments made in preparation for the year 2000. ARC Technology Management Solutions revenue decreased by $25.8 million or 24.8% from $104.0 million in 1999 to $78.2 million in 2000. The Company's traditional staffing business decreased by $42.0 million or 18.7% from $225.6 million in 1999 to $183.6 million in 2000.

        Gross profit.    Gross profit decreased by $24.7 million or 24.1% from $102.1 million in 1999 to $77.5 million in 2000. The decrease was primarily attributable to the reduction in revenue. As a percentage of revenues, gross profit decreased by 1.4% from 31.0% in 1999 to 29.6% in 2000 due to a significant decrease in utilization of technical resources on a major project with one customer coupled with lower overall utilization of technical resources caused by reduced business volumes. The major project situation was identified in late 1999 and rectified in early 2000, restoring margins for the customer to closer to historical levels.

        Selling, general and administrative expenses.    Selling, general and administrative expenses consist of salaries and benefits, sales costs, recruiting, retention and training costs and management and administrative costs. Selling, general and administrative expenses decreased by $9.7 million or 10.4% from $93.0 million in 1999 to $83.3 million in 2000. The selling, general and administrative expense decrease was attributable to the restructuring actions taken in 1999, which is reflected in reduced office space and lower headcount. The Company took further restructuring actions in late 2000, which is reflected in the 2000 restructuring and other charges. In the latter part of 2000, the Company reduced

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headcount by 95 people, which realigned the field operations and eliminated certain redundant corporate staff. As a percentage of revenues, selling, general and administrative expenses increased by 3.6% from 28.2% in 1999 to 31.8% in 2000, primarily as a result of the decline in revenues.

        Restructuring and other charges.    Restructuring and other charges increased by $31.4 million or 600.6% from $5.2 million in 1999 to $36.6 million in 2000. As a percentage of revenues, restructuring and other charges increased by 12.4% from 1.6% in 1999 to 14.0% in 2000. The increases were primarily due to the write-off of various impaired assets in 2000 related to the 1997 acquisition of CGI.

        Income (loss) from operations.    Income (loss) from operations decreased by $46.3 million from income of $3.9 million in 1999 to a loss of $42.4 million in 2000. Included in the 2000 loss was the restructuring charge of $36.6 million, as previously discussed. Excluding the restructuring charge, the loss was $5.8 million. The loss was primarily attributable to the reduction in revenue caused by the Company's elimination of the branch model as well as the overall slowdown in IT spending.

LIQUIDITY AND CAPITAL RESOURCES

        On January 31, 2002, the Company replaced its existing bank line with a $30.0 million senior secured revolving credit facility with Fleet Capital, a subsidiary of the FleetBoston Financial Corporation and $10.0 million principal amount of Senior Subordinated Convertible Notes sold to Wynnchurch Capital Partners, a private equity investor. The $30.0 million dollar revolver is secured by the assets of the Company, principally consisting of accounts receivable. The agreement has a three-year term and bears interest at LIBOR plus 325 basis points or the bank's base rate plus 100 basis points. As of February 28, 2002, the applicable rate is 5.75% which represents the bank's base rate plus 100 basis points.

        The Senior Subordinated Convertible Notes bear interest at 15% and are due January 31, 2009. These notes are 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 may be deferred during the first four years, subject to certain conditions. In conjunction with the sale of these notes, the Company issued 10,000,000 warrants to purchase shares of the Company's common stock at $0.55 per share, which are exercisable at anytime, 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 year and expire on the occurrence of certain events.

        Current assets exceed current liabilities by $12.9 million at December 31, 2001. Net cash provided by operations was $19.4 million, a significant increase from $8.8 million in 2000 and $2.6 million in 1999. Net cash flow from operations in 2001 was principally impacted by a decrease in accounts receivable of approximately $21.0 million and the collection of $5.6 million in taxes receivable. Net cash flow from operations in 2000 was impacted by a decrease in accounts receivable of approximately $14.1 million due to reduced revenue, and increases of payroll and related expenses and accrued expenses and liabilities of $3.8 million and $3.2 million, respectively. Net cash flow from operations in 1999 was impacted by approximately $5.0 million of estimated income tax payments made during the first half of the year that were refunded in the first half of 2000.

        Capital spending was approximately $1.9 million in both 2001 and 2000, a significant reduction from $12.0 million in 1999, as the Company had completed all the necessary major capital spending relative to the new business model in 1999. The Company does not anticipate that its capital requirements going forward will be significantly greater than $2.0 million to $3.0 million per annum.

        The Company believes its cash balances and funds from operations together with funds available under its new credit facility will be sufficient to meet all of its anticipated cash requirements for at least the next 12 months.

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QUARTERLY FINANCIAL RESULTS

        The following tables set forth certain unaudited quarterly results of operations of the Company for 2001 and 2000. The quarterly operating results are not necessarily indicative of future results of operations.