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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

for the fiscal year ended December 31, 2002

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. ý

        Indicate by check mark whether the registrant (1) is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý    No 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 June 30, 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 $7,921,000. 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 28, 2003, 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 12, 2003 (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 19 field offices with over 80 personnel in field sales, supported by 40 recruiters. The majority of the Company's sales and recruiting personnel operate from home, creating a virtual network. The Company serves Fortune 1000 and mid-sized clients throughout the United States and Canada.

MAJOR DEVELOPMENTS IN 2002

        The Company's 2002 operating results continued to reflect the reduced level of IT spending on applications development, systems enhancements and hardware. Many companies also significantly reduced their level of manpower devoted to the support of their IT infrastructure. This was evidenced by the Company's sharp drop in its staff augmentation business, a decline of 42.5%, offset by a slight increase in its solutions product offerings.

        As previously disclosed in the 2001 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 has a primary goal of reducing costs while more effectively delivering the Company's service offerings. After reducing costs by $23.9 million in 2001, the first full year of the new functional model, the Company further reduced costs by another $14.2 million in 2002.

        After an extensive study and in an ongoing effort to continue cost reductions during 2002, the Company decided to restructure its service delivery function by eliminating the client support organization. This organization was primarily responsible for facilitating the administrative tasks associated with maintaining a consulting workforce. In order to more effectively deal with the administration of a nationwide workforce, the Company has developed a Knowledge Center that is responsible for inward (employee) and outward (customer) issues. These issues range from personnel matters such as employee benefits and payroll to customer matters such as billing and credit matters. This enterprise-wide service center allowed the Company to streamline its operations by centralizing virtually all administrative functions. 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. Another component of this restructuring was decreased requirements for office space resulting from the reduction of personnel. Consequently, the Company recorded a reserve for severances and unutilized office space that has resulted from the shift to a functional model and the efficiencies created by the Knowledge Center. In 2003, operating expenses are expected to be reduced by approximately $4.7 million based on the restructuring actions described above.

ARC SERVICE OFFERINGS

        During the past seven 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.

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        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 client's 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;



•

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 solutions design consultants.

        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. Solutions design consultants provide the technical support necessary to ensure that the project design meets all the customer requirements.

        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.

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        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

        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.

        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 tool used to match qualified technical skills to client requests.

        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 recruiting methodology, E-bench, for having technical resources immediately available for anticipated demand. Through the development and maintenance of multiple hot lists the Company has resources that have been recruited and qualified against specific criteria and are managed to 8 hour availability for interview and/or start by a dedicated recruiting team.

        In 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 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.

OPERATIONS

        The Company operates through a network of 19 field offices utilized primarily to accommodate the field sales organization as well as to interview potential candidates. The majority of the Company's

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sales and recruiting personnel operate from home offices, creating a virtual network. The Company's principal executive offices are located in Barrington, Illinois.

CLIENTS

        During 2002, 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 service and systems integrator clients often subcontract ARC's services to their own customers. In 2002, the Company's largest clients, Hewlett Packard and IBM, accounted for approximately 25% 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.

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, system integrators, computer system 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, system integrators, providers of outsourcing services, computer system 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, 2002, the Company employed approximately 260 staff employees and approximately 1,600 technical employees.

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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.

        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, recruiters and solutions design consultants;



•

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.

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EXECUTIVE OFFICERS OF THE REGISTRANT

        The executive officers of the Company are as follows:

        Mr. George W. Watts has been a member of the Board, President and Chief Executive Officer of the Company since July 2002. Previously he was Chief Executive Officer of Ranger Partners Group, an affiliate of Ranger Aerospace providing strategic consulting and business development services, from April 1998 until July 2001. From 1995 to 1998 Mr. Watts was Executive Vice President of PM Realty Group, one of the nation's largest business outsourcing companies in property management. From 1985 to 1995, Mr. Watts was President of Executive Visions Consulting, a firm he founded.

        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.

        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 2000, 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—Technology Solutions having responsibility for the Company's solutions business. In September 2002, Mr. Fricas assumed the responsibility for all of the Company's operations and was named Executive Vice President and Chief Operating Officer. 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.

        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.

        Mr. Bill McLendon was named Senior Vice President and Chief Information Officer in September 2002. From 1998 to September 2002, Mr. McLendon was an executive of Ranger Partners

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Group, an affiliate of Ranger Aerospace, and most recently an Executive Vice President. Prior to this, Mr. McLendon was an officer of Steven's Aviation, a national provider of high-grade technical services to general aviation, serving as General Manager of the Company's Colorado branch. From 1991 to 1994, Mr. McLendon was the Vice President of Operations of ATS Aerospace, a developer and manufacturer of state-of-the art simulation systems for civic aviation agencies worldwide. Previously, from 1981 to 1991, Mr. McLendon was an officer and F-15 pilot in the United States Air Force.

        Mr. Marino Petropoulos joined the Company as Financial Reporting Manager in March 1994. He was promoted to Vice President and Chief Accounting Officer in December 2002. During his tenure with ARC, Mr. Petropoulos has held various positions within the Finance and Tax departments of the Company. Prior to joining ARC, Mr. Petropoulos was a Senior Accountant from 1989 to 1994 with Ernst & Young, an international accounting firm. Mr. Petropoulos graduated from DePaul University with a bachelor of science degree and is also a certified public accountant.

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 to facilitate its operations.

ITEM 3.    LEGAL PROCEEDINGS.

        The Company is involved in various claims and legal actions, other than those described below, 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.

        On March 4, 2003, the Company filed a lawsuit against Bluecurrent, Inc. ("Bluecurrent"), one of its customers, captioned Alternative Resources Corporation v. Bluecurrent, Inc. (case no. 030 1603). The lawsuit was filed in the United States District Court for the Northern District of Illinois and alleges that Bluecurrent breached its Master Services Agreement with the Company by failing to pay approximately $5 million of invoices for services performed (the "Illinois lawsuit"). Bluecurrent has asked the court to either dismiss that action based on improper venue or transfer it to the United States District Court in Texas based on venue and convenience grounds. That motion is currently pending.

        Shortly thereafter, on March 10, 2003, Bluecurrent filed suit against the Company in state court in Texas, captioned Bluecurrent, Inc. v. Alternative Resources Corporation. (case no. GN30772) (the "Texas lawsuit"). Bluecurrent alleged in the Texas lawsuit that the Company breached the Master Services Agreement, submitted fraudulent invoices to Bluecurrent and interfered with Bluecurrent's prospective contractual relationships. The lawsuit seeks a credit in excess of $2 million dollars on the total balance due. The Company intends to vigorously defend that lawsuit and has removed it to the United States District Court for the Western District of Texas. The parties have agreed to stay the Texas lawsuit pending resolution of Bluecurrent's motion to dismiss or transfer the Illinois lawsuit.

        Discovery has not yet begun in either lawsuit. At this time, the Company is unable to opine regarding the likelihood of an unfavorable outcome or the range of any potential loss, if any, from the above matters.

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 $171,000.

        As of March 28, 2003, ARC had 213 stockholders of record and 17,702,819 outstanding shares of common stock. The following table represents the reported high and low sale prices of the common stock for the periods indicated, during the years ended December 31, 2002 and 2001:

        During 2002, the Company issued an aggregate of approximately 146,000 unregistered shares of common stock pursuant to its employee stock purchase plan. The shares were issued at prices ranging from $0.55 to $0.62 per share for aggregate consideration of $85,000.

        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. Effective August 8, 2002, the Company and the private equity investor agreed to defer all of the interest.

        In conjunction with the sale of these notes, the Company issued 10,000,000 warrants (immediately exercisable) to the private equity investor to purchase shares of the Company's common stock at $0.55 per share. Additionally, the Company issued 1,000,000 warrants to purchase its common stock at $0.73 per share. These warrants were not exercisable for one-year contingent on 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 1,000,000 contingent warrants and, accordingly, these warrants have become exercisable. The issuance and sale of the convertible notes and warrants 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.

Equity Compensation Plans are as follows:

        Alternative Resources Corporation currently has two equity compensation plans. Details of the Company's Incentive Stock Option Plan are contained within note 8 of the notes to the consolidated financial statements. The Incentive Stock Option Plan is approved by the Company's security holders.

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        The Company has a second equity compensation plan that is not approved by security holders. This plan is primarily utilized as a hiring incentive by the Board of Directors to recruit key executives and directors. Options are offered and issued upon acceptance of employment. The terms and provisions of the options granted under this plan are determined by the Board of Directors at the time of grant.

ITEM 6.    SELECTED FINANCIAL DATA.

(1)

As detailed in Management's Discussion and Analysis of Financial Condition and Results of Operations, results for 2002 include a pre-tax charge for restructuring and other charges of $6.1 million.

(2)

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.

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(3)

Results for 1999 include a pre-tax charge for restructuring and other charges totaling $5.2 million.

(4)

Results for 1998 include pre-tax charges for restructuring and goodwill impairment totaling $29.6 million.

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.

        The Company's 2002 operating results continued to reflect the reduced level of IT spending on applications development, systems enhancements and hardware. Many companies also significantly reduced their level of manpower devoted to the support of their IT infrastructure. This was evidenced by the Company's sharp drop in its staff augmentation business, a decline of 42.5%, offset by a slight increase in its solutions product offerings.

        As previously disclosed in the 2001 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 has a primary goal of reducing costs while more effectively delivering its service offerings. After reducing costs by $23.9 million in 2001, the first full year of the new functional model, the Company further reduced costs by another $14.2 million in 2002. In order to continue to reduce costs, the Company further reorganized its service delivery function by eliminating the client support organization during the third and fourth quarter, 2002. This organization was previously responsible for facilitating the administrative tasks associated with maintaining a consulting workforce. In order to more effectively deal with the administration of a nationwide workforce, the Company has developed a Knowledge Center that is responsible for inward (employee) and outward (customer) issues. These issues range from personnel matters such as employee benefits and payroll to billing and credit matters. This enterprise wide service center allowed the Company to streamline its operations by centralizing virtually all administrative functions. 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. Another component of this restructuring was decreased requirements for office space resulting from the reduction of personnel. Consequently, the Company recorded a reserve for severances and unutilized office space that has resulted from the shift to a functional model and the efficiencies created by the Knowledge Center. In 2003, operating expenses are expected to be reduced by approximately $4.7 million based on the restructuring actions described above.

        During the fourth quarter of 2000, the Company reviewed its intangibles 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 or 2002.

RESTRUCTURING AND OTHER CHARGES—2002

        The Company recorded restructuring and other charges in the aggregate amount of $6.1 million charge during 2002. During the second quarter of 2002, the Company recorded a charge of $1.1 million 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

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restructuring of the service delivery function. The primary components of the restructuring and other charges can be summarized as follows:

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

        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.

        The $0.6 million severance charge related to head-count 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 December 31, 2002 relates to employees with employment agreements. This amount will be paid out through July 2003.

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):

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

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September 30, 2000 was $37.7 million, which consisted of goodwill allocated to the following three components of CGI's acquired business (in millions):

        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.

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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 2002 COMPARED TO FISCAL 2001

        Revenue.    Revenues consist of fees earned from ARC Staffing Management Solutions and ARC Technology Management Solutions. Revenue decreased $50.3 million or 24.1% from $209.0 million in 2001 to $158.7 million in 2002, primarily from the slowdown in IT spending experienced industry-wide. ARC Technology Management Solutions revenue increased by $8.9 million or 12.7% from $69.8 million in 2001 to $78.7 million in 2002. The Company's traditional Staffing Management Solutions business decreased by $59.2 million or 42.5% from $139.2 million in 2001 to $80.0 million in 2002.

        Gross profit.    Gross profit decreased by $17.2 million or 28.7% from $59.9 million in 2001 to $42.7 million in 2002. As a percentage of revenue, gross profit decreased by 1.8% from 28.7% in 2001 to 26.9% in 2002 due to the very competitive IT staffing environment, which is causing some margin pressures in all service offerings.

        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 $14.2 million or 23.9% from $59.4 million in 2001 to $45.2 million in 2002. 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 continued impact of these actions was further realized during 2002 resulting in a decrease of selling, general and administrative expenses of $14.2 million. As a percentage of revenues, selling, general and administrative expenses increased by 0.1% from 28.4% in 2001 to 28.5% in 2002.

        Restructuring and other charges.    Restructuring and other charges were $6.1 million in 2002 and $0.0 in 2001. As a percentage of revenue, restructuring and other charges represented 3.8% in 2002. The expense was primarily due to the restructuring charge recorded for excess office space, the severance related to the restructuring of the service delivery function, and the severance associated with the departure of the Company's former Chief Executive Officer.

        Income (loss) from operations.    Income (loss) from operations decreased by $9.1 million from income of $0.5 million in 2001 to a loss of $8.6 million in 2002. Included in the 2002 loss was the

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restructuring charge of $6.1 million, as previously discussed. The decrease in 2002 is primarily attributable to the reduction in revenue caused by the overall slowdown in IT spending as well as the margin pressure in all service offerings.

Income tax benefit

        In 2002, the income tax benefit of $1.1 million relates to a refund obtained due to a change in income tax law. There was no benefit in 2001.

FISCAL 2001 COMPARED TO FISCAL 2000

        Revenue.    Revenues consist of fees earned from ARC Staffing Management Solutions and ARC Technology Management Solutions. Revenue decreased $62.3 million or 22.3% from $271.3 million in 2000 to $209.0 million in 2001, primarily from the slowdown in IT spending experienced industry-wide. ARC Technology Management Solutions revenue decreased by $16.6 million or 19.2% from $86.4 million in 2000 to $69.8 million in 2001. The Company's traditional staffing business decreased by $45.7 million or 24.7% from $184.9 million in 2000 to $139.2 million in 2001.

        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 28.6% in 2000 to 28.7% 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 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. 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 2.3% from 30.7% in 2000 to 28.4% 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 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. 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.

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. In August 2002, ARC and Fleet Capital executed an amendment to the revolving credit agreement. The impact of this amendment was to reduce the borrowing limit subject to pledged accounts receivable as collateral to $28.0 million in consideration for the waiver of existing financial loan covenants. Fleet Capital has previously given the Company waivers for certain covenant violations, however, there can be no

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guarantee that such waivers can be obtained in the future should existing loan covenants not be met. The agreement has a three-year term expiring in January 2005 and bears interest at LIBOR plus 325 basis points or the bank's base rate plus 100 basis points. As of March 21, 2003, the applicable rate is 5.25%, 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. Effective August 8, 2002, the Company and the private equity investor agreed to defer all of the interest. 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. Additionally, 1,000,000 warrants to purchase the Company's 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 1,000,000 contingent warrants and these warrants will not expire.

        Current assets exceed current liabilities by $8.0 million at December 31, 2002. Net cash used in operations in 2002 was $1.1 million, a significant decrease from net cash provided by operations of $19.4 million in 2001 and $8.8 million in 2000. The significant decrease in cash provided by (used in) operating activities was due to the large decrease in accounts receivable in the prior years. Days Sales Outstanding ("DSO") decreased by 6 days during 2001 while DSO decreased by only 2 days during 2002. This slowdown in collections was the direct result of the non-payment of certain invoices by a large customer. The Company has filed suit in an effort to obtain payment of the amounts owed. Further discussion is set forth in Item 3. Legal Proceedings. 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.

        Capital spending was approximately $0.6 million in 2002 and $1.9 million in both 2001 and 2000, 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 $1.0 million to $2.0 million per annum.

        Throughout 2002, ARC and Fleet Capital executed certain amendments to the revolving credit agreement. The impact of these amendments was to reduce the borrowing limit subject to pledged accounts receivable as collateral to $28.0 million in consideration for the waiver of existing financial loan covenants.

        In April 2003, ARC and Fleet Capital executed amendments to the revolving credit agreement. The impact of this amendment was to obtain a waiver of financial loan covenants existing as of December 31, 2002. Additionally, financial loan covenant calculations were redefined for future periods.

        In April 2003, in connection with an amendment to the Company's credit agreement with Fleet Capital, the Company's senior lender, to allow overadvances of up to $2,000,000 through December 31, 2003, Wynnchurch Capital Partners executed a guaranty to Fleet Capital of the overadvance amounts. In consideration, Wynnchurch Capital Partners and the Company amended their agreements, 15% Senior Subordinated Convertible Notes and warrants to reduce the conversion price of the notes to common stock to $1.50 per share, reduce the exercise price of all outstanding warrants to $0.26 per share, provide that any draw on the guaranties could be satisfied by a purchase by Wynnchurch Capital Parters of additional 15% Senior Subordinated Convertible Notes having a principal amount equal to Fleet Capital's draw and having terms equal to the outstanding 15% Senior Subordinated Convertible Notes and provide for a $250,000 fee to the Wynnchurch Capital Partners in the event of a draw upon their guaranty, payable through the issuance of additional 15% Senior Subordinated Convertible Notes.

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        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. However, 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.

        The following summarizes the Company's contractual obligations at December 31, 2002, and the effect such obligations are expected to have on our liquidity and cash in the future periods.

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