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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

for the fiscal year ended December 31, 2003

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 o    No ý

        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, 2003 (based upon an estimate that 91.34% 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 $5,013,000. 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 19, 2004, 17,117,304 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 10, 2004 (Part III).

PART I

ITEM 1.    BUSINESS.

OVERVIEW

        Alternative Resources Corporation ("ARC" or the "Company") is a leading provider of information technology 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 8 field offices with over 55 personnel in field sales, supported by 35 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 2003

        ARC participates in a market that is cyclical in nature and extremely sensitive to economic changes. The Company's 2003 operating results continued to reflect the reduced level of IT spending on applications development, systems enhancements and hardware. Many companies continue to be cautious and reduced the levels of manpower devoted to support IT infrastructure. This was evidenced by the Company's drop of about 13% in its staff augmentation business.

        In 2003, operating expenses were reduced by approximately $7.8 million based on previous restructuring actions. 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 resulted from the shift to a functional model and the efficiencies created by the Knowledge Center.

        During 2003, the Company began certain strategic initiatives in order to position itself for a return to growth and to leverage its recognized quality and customer relationships. There were four key elements to our strategy for improving the Company's long-term financial performance. First, the sales force was realigned to enable more selling of solution type sales, accomplished through increased sales and product training, and substantially upgrading of sales personnel. Second, the sales and delivery functions were more closely aligned to provide a stronger selling team to more effectively sell total solutions to the customer. Third, the Company focused on building alliances with key customers and partners. Fourth, the Company began a program to refresh all of its service offerings including the development of new technology to enhance its services.

ARC SERVICE OFFERINGS

        Since 1996, ARC has evolved from a pure IT staffing company into a solutions-based provider of IT services. ARC's service offerings are designed to help clients staff, manage, deploy, support and operate their IT programs. ARC is able to provide its clients with flexibility and expertise to address

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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 Services, 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;



•

Permanent Placement;



•

Temp-to-Perm; and



•

Managed Vendor Program.

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

•

Managed Services;



•

Deployment Services;



•

Field 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 $1.0 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 Alliances 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 support staff, which is primarily located at its headquarters in Barrington, Illinois to assist account managers in selling and delivering solution services.

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 have been strengthened 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. ARC's e-bench represents a cost-effective method for delivering quality and speed to its customers.

        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 8 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 2003, 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 2003, the Company's largest clients, Hewlett Packard and IBM, accounted for approximately 22% and 21%, 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 solutions services.

        The vast majority of the traditional Staffing business is invoiced on an hourly basis. Solutions business is invoiced on an hourly basis, fixed fee basis, or a per incident basis. 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, typically 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, 2003, the Company employed approximately 225 staff employees and approximately 1,500 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 as of March 19, 2004 are as follows:

        Mr. Robert P. Stanojev has served as President and Chief Executive Officer of the Company since November 2003 and has served as Chairman of the Board since August 2002. Prior to joining the Company, Mr. Stanojev was a partner with Cap Gemini Ernst & Young U.S. (and its predecessors, including Ernst & Young Consulting), from 1972 to 2002 where he served most recently as a Senior Partner and as Global Director of Sales and Marketing. Prior to his career with Ernst & Young, Mr. Stanojev held various technical and sales positions with RCA Corporation.

        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. Tracy Linne was named Senior Vice President of Sales and Marketing in April 2003. She is responsible for sales, marketing and alliances. Ms. Linne joined ARC in September 2002 as Sales Vice President of the Northeast Region, where she was instrumental in building a sales and account management culture that has been standardized across the organization. Ms. Linne has more than 20 years of experience in fast-growing high technology companies and will continue to focus on the development of ARC's go-to-market strategy and the execution of ARC's sales and strategic alliance initiatives. Ms. Linne has held executive and sales management positions at leading high technology companies, such as PeopleSoft, Austin-Hayne, Central Point Software and Data General Corporation.

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

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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 alleged that Bluecurrent breached its Master Services Agreement with the Company by failing to pay approximately $5.0 million of invoices for services performed (the "Illinois lawsuit"). Bluecurrent asked the court to either dismiss the action based on improper venue or transfer it to the United States District Court in Texas based on venue and convenience grounds.

        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.

        On May 29, 2003, Bluecurrent and the Company entered into an agreement providing for the settlement of the Illinois lawsuit and Texas lawsuit. Pursuant to the settlement agreement, each of the Company and Bluecurrent released the other party from its obligations under the Master Service Agreement and from all claims under the respective lawsuits. In connection with the releases, Bluecurrent agreed to pay the Company an aggregate amount of $5.3 million. Such amount was reduced by a credit of $1.5 million issued by the Company to Bluecurrent with respect to outstanding invoices. On the settlement date, Bluecurrent paid the Company $850,000 which was applied to the aggregate cash settlement balance of $3.8 million. The remaining settlement balance is payable in weekly installments of $100,000. As of December 31, 2003, the remaining receivable balance of this settlement was $550,000, which was fully collected in 2004.

        In addition to the credit issued by the Company, the Company has agreed not to develop its own integrated technically-enabled deployment tool for a period of fifteen months nor will it perform any work using such tool for a specified group of customers identified in the settlement agreement.

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 19, 2004, ARC had 218 stockholders of record and 17,117,304 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, 2003 and 2002:

        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 were originally 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. During 2003, the 15.0% Senior Subordinated Convertible Notes conversion price was reduced from $2.50 to $1.50 per share of common stock. The reduction in conversion price was made in connection with a $2.0 million overadvance guarantee agreement between Wynnchurch Capital Partners, L.P. and Fleet Capital Corporation as discussed in Note 3 of the Company's consolidated financial statements.

        In conjunction with the sale of these notes, the Company issued 10.0 million 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 1.0 million 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 1.0 million 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. During 2003, the exercise price of all outstanding warrants was reduced to $0.26 per share. The reduction in exercise price was made in connection with a $2.0 million overadvance guarantee agreement between Wynnchurch Capital Partners, L.P. and Fleet Capital Corporation as discussed in Note 3 of the Company's consolidated financial statements.

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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 2003 include a pre-tax charge for restructuring and other charges of $4.8 million.

(2)

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.

(3)

Results for 2000 include a pre-tax charge for restructuring, other charges, and goodwill impairment totaling $36.6 million.

(4)

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

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

EXECUTIVE SUMMARY

        Alternative Resources Corporation ("ARC" or the "Company") is a leading provider of IT services to large and mid-size customers that allow clients to staff, manage, deploy, support and operate their IT infrastructure. The IT industry is cyclical in nature and sensitive to changes in capital spending and systems development. Over the last several years the overall economic conditions have not been conducive to growth in IT spending. In addition, significant IT spending took place in advance of the year 2000 further reducing IT investments in the subsequent years.

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        The Company's 2003 operating results continued to reflect the reduced level of IT spending. Many companies continue to be cautious and reduced the level of manpower devoted to support IT infrastructure as a means to reduce costs in an uncertain economic environment. This was evidenced by the Company's sharp drop in its staff augmentation business, a decline of 50% since 2001.

        The Company provides its services either as staff augmentation, or as a complete solution to the customer. In terms of the staff augmentation services, the Company has access to a wide variety of IT skills through its extensive database. These skills range from computer operations, to application programming, to network engineers up to interim Chief Information Officers. These services are billed on a time and material basis as the service is rendered.

        The solutions that the Company provides consist of service desk and desktop support services, deployment services, field services and consulting services. These services are usually memorialized in a master service agreement, which addresses the terms and conditions that define the engagement. The master service agreement is further supported by a Statement of Work "SOW", which provides the technical details of the services to be provided. The SOW is a stand-alone binding document signed by the Company and the customer outlining the project objectives, describing the personnel, detailing the project phases and deliverables and stating the project pricing. Solutions type services are billed on a fixed fee basis or on a per incident basis.

        During 2003, the Company began certain strategic initiatives in order to position itself for a return to growth and to leverage its recognized quality and customer relationships. There were four key elements to our strategy for improving the Company's long-term financial performance. First, the sales force was realigned to enable more selling of solution type sales, accomplished through increased sales and product training, and substantially upgrading of sales personnel. Second, the sales and delivery functions were more closely aligned to provide a stronger selling team to more effectively sell total solutions to the customer. Third, the Company focused on building alliances with key customers and partners. Fourth, the Company began a program to refresh all of its service offerings including the development of new technology to enhance its services.

        As background, during 2001 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 revised 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 second half of 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, which resulted from the reduction of personnel, was decreased requirements for office space. 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 were reduced by approximately $7.8 million based on previous restructuring actions. Additionally, during the third quarter of 2003 the Company further reduced headcount as revenues continued to decline. The reductions were in all three functions: sales, delivery and corporate. The Company anticipates that these reductions will yield an annual savings of $2.9 million in 2004.

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RESTRUCTURING AND OTHER CHARGES—2003

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

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

        The remaining severance balance at December 31, 2003 will be paid primarily during the first quarter of 2004 with the exception of three employees. Included in this charge is the severance of three executive employees that will be paid out in accordance with their respective employment agreements through December 2007. The savings expected from this headcount reduction will be approximately $2.9 million and will be fully realized during 2004.

        Additionally, the Company recorded a charge for a debt modification and the write-off of origination fees of $4.5 million related to changes made to the terms of the Senior Subordinated Convertible Notes. This was comprised of a $3.5 million debt modification charge and $1.0 million of origination fees written off. The debt modification and origination fees expense represents a non-cash adjustment and has no impact on the amount of debt ultimately owed to Wynnchurch Capital Partners, L.P. The valuation of the notes was determined based on advice from a third-party valuation specialist who utilized a valuation model. Based on the results, the fair value of the notes was determined to be $13.2 million versus the carrying value of $9.7 million. As such, a $3.5 million charge was recognized for the debt modification to recognize the fair value of the notes in the financial statements. Additionally, origination fees of $0.9 million related to these notes and $0.1 million related to the revolving credit commitment were written off due to the modifications.

RESTRUCTURING AND OTHER CHARGES—2002

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

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

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        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, 2003 relates to an employee with an employment agreement. It is anticipated that this amount will be paid out through July 2004.

        The $1.1 million other charges related to the severance pay associated with the departure of the Company's former Chief Executive Officer. The remaining balance at December 31, 2003 is required to be paid in full by July 2004.

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

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RESULTS OF OPERATIONS

FISCAL 2003 COMPARED TO FISCAL 2002

        The following table presents year-over-year changes in revenue and gross profit from 2002 to 2003.

        Revenue.    Revenues consist of fees earned from Staffing Services and Solutions Services. Revenue decreased $20.5 million or 13.0% from $158.7 million in 2002 to $138.1 million in 2003, primarily from the slowdown in IT spending experienced industry-wide. The Company's Solutions revenue decreased by $10.1 million or 12.8% from $78.7 million in 2002 to $68.6 million in 2003. The decline in solutions revenue was driven by declines in the Technology Deployments and Field Service offerings. The decline in the Technology Deployments revenue is attributable to the loss of a major customer. The decline in Field Services was due to the Company's largest customer of these services changing to a multi-vendor strategy. The Company's traditional staffing business decreased by $10.5 million or 13.1% from $80.0 million in 2002 to $69.5 million in 2003. The decrease in the staffing business reflects the general downturn in IT spending and more particularly, the emphasis by many companies to reduce the headcount necessary to support the IT infrastructure.

        Gross profit.    Gross profit decreased by $10.0 million or 23.4% from $42.7 million in 2002 to $32.7 million in 2003. Margins decreased by $5.1 million in the staffing service offerings due to decreased revenue and overall pricing pressure from customers. Margins in the solutions service offerings decreased by $4.9 million. The most significant factor in the margin decline was the impact on Field Service margins as the Company adjusted its workforce to effect the customers shift to multiple vendors. As a percentage of revenue, gross profit decreased by 3.2% from 26.9% in 2002 to 23.7% in 2003. The percentage decline was equally split between the two 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 $7.8 million or 17.2% from $45.2 million in 2002 to $37.4 million in 2003. The decrease in selling, general and administrative expenses was primarily attributable to the restructuring actions the Company has taken in the past, which is reflected in reduced office space and lower headcount. As a percentage of revenue, operating expenses decreased from 28.5% in 2002 to 27.1% in 2003.

        Restructuring and other charges.    Restructuring and other charges were $4.8 million in 2003 and $6.1 million in 2002. As a percentage of revenue, restructuring and other charges represented 3.5% in 2003 and 3.8% in 2002. As previously discussed, the restructuring and other charges in 2003 represented a $4.5 million charge for a debt modification and write-off of origination fees and a $0.9 million charge for severance costs associated with the restructuring of the Company's sales, delivery and corporate staff. The total 2003 restructuring charge is partially offset by a reduction to the 2002 restructuring reserve of $0.6 million due to a change in various real estate cost assumptions made versus actual activity.

        Other expense, net.    Other expense, net, consists primarily of interest expense on the Company's outstanding debt. Other expense, net, was $4.3 million in 2003, as compared to $3.7 million in 2002.

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The increase in other expense, net, is primarily attributable to higher interest rates on the debt as well as fees paid for amendments.

        Income tax benefit.    In 2003 and 2002, the Company recorded an income tax benefit of $0.8 million and $1.1 million, respectively. The income tax benefits relates to refunds obtained due to a change in income tax law. In 2003, the benefit recorded is offset by taxes assessed in 2003 as the result of an IRS audit.

FISCAL 2002 COMPARED TO FISCAL 2001

        The following table presents year-over-year changes in revenue and gross profit from 2001 to 2002.

        Revenue.    Revenues consist of fees earned from Staffing Services and Solutions Services. Revenue decreased $50.3 million or 24.1% from $209.0 million in 2001 to $158.7 million in 2002. The Company's Solutions revenue increased by $8.9 million or 12.7% from $69.8 million in 2001 to $ 78.7 million in 2002. The increase was attributable to increases in the Company's traditional help desk services and its' deployment services. The Company's traditional staffing business decreased by $59.2 million or 42.5% from $139.2 million in 2001 to $80.0 million in 2002. The decrease in the staffing business reflects the general downturn in IT spending and more particularly, the emphasis by many companies to reduce the headcount necessary to support the IT infrastructure.

        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. The solutions business experienced a slight increase in gross margin while the staffing business decreased by 300 basis points due to the very competitive IT staffing environment.

        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.

        Other expense, net.    Other expense, net, consists primarily of interest expense on the Company's outstanding debt. Other expense, net, was $3.7 million in 2002, as compared to $3.6 million in 2001.

        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.

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LIQUIDITY AND CAPITAL RESOURCES

        Current liabilities exceed current assets by $12.3 million at December 31, 2003. Included in current liabilities is $11.8 million of outstanding borrowings against the revolving credit agreement that has a maturity date of January 31, 2005. The borrowings under the revolving credit agreement are classified as current in accordance with EITF Issue No. 95-22, "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock Box Arrangement." The short-term debt declined by $6.7 million in 2003 primarily through the management of receivables and tax refunds.

        Net cash provided by operations was $7.8 million in 2003. Net cash provided by operations was principally the result of a decrease in accounts receivable of approximately $12.9 million, offset partially by a net loss of $13.1 million (adjusted for depreciation and amortization of $3.6 million and a charge related to the modification of debt and write-off of origination fees of $4.5 million), as well as decreases in accrued expenses and other liabilities of $2.1 million, payroll and related expenses of $1.3 million and accounts payable of $1.0 million. The significant decrease in accounts receivable was due to a payment agent agreement entered into with IBM Credit, LLC in the first quarter of 2003. This agreement provides for an expedited receipt of outstanding IBM receivables from 45 days to 15 days in exchange for a discount of 0.76%.

        Net cash used in investing activities was $0.1 million all of which was for capital spending. Beginning with the quarter ended December 31, 2003, the Company has been restricted by its credit agreement to capital spending of $50,000 per quarter.

        Net cash used in financing activities was $7.7 million for the year ended December 31, 2003 due primarily to the payments of short-term debt during 2003.

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

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

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

        During 2003, the Company and Fleet Capital Corporation executed additional amendments to the revolving credit agreement. The Fifth Amendment addressed the fact that the Company had entered into litigation with a major customer, Bluecurrent. This action eliminated that account from the Company's borrowing base creating a borrowing overadvance. The amendment allowed for an overadvance of $2.0 million through December 31, 2003. In addition, the amendment waived the events of default relative to the fixed charge and tangible net worth covenants that occurred at December 31, 2002. The tangible net worth covenant was reset at ($1.0) million and the fixed charge shortfall was set to $1.0 million through March 31, 2003 and $1.4 million up through June 30, 2003 and a ratio of 1:1, thereafter. The Sixth Amendment eliminated the requirement that any amounts received as a result of the settlement with Bluecurrent reduce the Wynnchurch Capital Partners, L.P. guarantee as discussed

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below. The Seventh Amendment waived the events of default as of June 30, 2003 relating to the tangible net worth and fixed charge covenants. Additionally, the covenants were reset for the remainder of 2003 as follows; the tangible net worth covenant was reset to ($5.0) million with the fixed charge covenant reset to an allowable shortfall of $0.7 million for the three months ended September 30, 2003, and $1.0 million for the six months ended December 31, 2003. The fixed charge covenant will be 1:1, thereafter. In addition, the interest rate was changed effective August 1, 2003 from the bank's base rate plus 1.00% to the base rate plus 2.00%. As of December 31, 2003, the applicable rate is 6.00%, which represents the bank's base rate plus 2.00%. The Seventh Amendment also reduced the maximum revolving credit commitment from $28.0 million to $23.0 million. The Eighth Amendment waived the events of default as of September 30, 2003 relating to the tangible net worth and fixed charge covenants. Additionally, the covenants were reset for future periods as follows: the tangible net worth covenant was reset to ($8.5) million for the quarter ending December 31, 2003 and each quarter thereafter. The fixed charge covenant was reset to an allowable shortfall of $1.0 million for the three months ending December 31, 2003, $1.8 million for the six months ended March 31, 2004, and $1.9 million for the nine months ending June 30, 2004. The fixed charge covenant will be 1:1, thereafter. Capital expenditures will also be limited to $50,000 per quarter commencing with the quarter ended December 31, 2003. The Company was in compliance with its covenants as of December 31, 2003.

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

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

        In 2003, in connection with an amendment to the Company's credit agreement with Fleet Capital Corporation, Wynnchurch Capital Partners, L.P. executed a guarantee with Fleet Capital Corporation to allow overadvances of up to $2.0 million through December 31, 2003, reduced by any payments received from Bluecurrent. In consideration, Wynnchurch Capital Partners, L.P. and the Company amended their agreements. The 15% Senior Subordinated Convertible Notes conversion price was reduced from $2.50 to $1.50 per share of common stock. The exercise price of all outstanding warrants was reduced to $0.26 per share. Additionally, a provision was made that any draw on the guarantee by the Company could be satisfied with a purchase by Wynnchurch Capital Partners, L.P. of additional 15% Senior Subordinated Convertible Notes having a principal amount equal to the Company's draw and having terms equal to the outstanding 15% Senior Convertible Notes, and provided for a $0.3 million fee to Wynnchurch Capital Partners, L.P. in the event of a draw upon their guarantee. The $0.3 million fee would be payable through the issuance of additional 15% Senior Subordinated Convertible Notes. As of December 31, 2003, the Company has not been required to draw on the guarantee, and no additional Convertible Notes have been issued. In July 2003, Wynnchurch Capital

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Partners, L.P. agreed to waive the agreed requirement that their guarantee be reduced by any amounts received from Bluecurrent. Consequently, Bluecurrent's initial payment of $0.9 million did not reduce the $2.0 million guarantee. However, all subsequent payments from Bluecurrent will continue to reduce the outstanding guarantee. In consideration for this waiver, Wynnchurch Capital Partners, L.P. received a fee of $0.1 million payable as interest and added to the principal amount of the notes. Under the Sixth Amendment to the securities purchase agreements, Wynnchurch Capital Partners, L.P. waived the events of default as of June 30, 2003, relating to the tangible net worth and fixed charge covenants. Additionally, the covenants were reset for the remainder of 2003 as follows: the tangible net worth covenant was reset to ($5.3) million with the fixed charge covenant reset to an allowable shortfall of $0.7 million for the three months ended September 30, 2003 and $1.0 million for the six months ending December 31, 2003. The fixed charge covenant will be 0.95:1 thereafter. In addition, the interest rate of the Senior Subordinated Convertible Notes was changed effective July 1, 2003 from 15% to 16% per annum. In September 2003, Wynnchurch Capital Partners L.P. agreed to maintain its $2.0 million guarantee and not to reduce such guarantee by any payments received from Bluecurrent. In consideration for maintaining the guarantee, the Company agreed to pay Wynnchurch Capital Partners, L.P. $0.3 million payable as additional interest and added to the principal amount of the notes. The Company also executed a Seventh Amendment to the securities purchase agreement that waived the events of default that occurred as of September 30, 2003 and reset the financial covenants for future quarters. The covenants were reset for future quarters as follows; the tangible net worth covenant was reset to ($8.9) million for the quarter ended December 31, 2003 and each quarter thereafter. The fixed charge covenant was reset to an allowable shortfall of $1.0 million for the three months ended December 31, 2003, $1.8 million for the six months ended March 31, 2004, and $1.9 million for the nine months ended June 30, 2004. The fixed charge covenant will be 0.95:1 thereafter. Capital expenditures will also be limited to $52,500 per quarter commencing with the quarter ended December 31, 2003. In consideration for this waiver and for continuing to maintain the $2.0 million guarantee, Wynnchurch Capital Partners, L.P. will receive a monthly fee of $30,000 for each month such guarantee is in effect. This fee will be payable as additional interest and added to the principal amount of the notes. On March 29, 2004, a letter of agreement was executed to maintain the $2.0 million guarantee until June 30, 2004. The Company was in compliance with its covenants as of December 31, 2003. Wynnchurch Capital Partners, L.P. has waived compliance by the Company with respect to the financial covenants through January 1, 2005.

        Due to the change in the underlying terms of the Convertible Notes and Warrants, the original valuation of the warrants was reassessed during the second quarter of 2003. The fair value ascribed to these warrants was determined to be approximately $2.3 million prior to the price change and $2.4 million subsequent to the price change. This change in value ascribed to the price change of approximately $69,000 was amortized over the seven-month life of the guarantee as a non-cash interest charge. The valuation of the warrants was determined based on advice from a third-party valuation specialist who utilized a valuation model with the following inputs: measurement date of April 14, 2003; fair value of $0.23; exercise price of $0.55 prior to the price change ($0.73 for contingent warrants) and $0.26 subsequent to the price change; contractual term of 10 years from the original issue date; dividend rate of zero; volatility rate of 123.5%; and risk-free interest rate of 3.76%. A non-cash interest charge of approximately $0.3 million and $0.4 million was recorded for the years ended December 31, 2003 and 2002, respectively, related to the original valuation of the warrants in January, 2002, plus the amortization of the guarantee value.

        During the third quarter of 2003, the Company concluded that the change in interest rate combined with the change in conversion price of the convertible notes in the second quarter of 2003 met the criteria of an extinguishment of debt per EITF 96-19 "Debtors Accounting for a Modification or Exchange of Debt Instruments," as the change in the present value of the notes exceeded the present value prior to the modifications by more than 10%. The debt modification and origination fees write-off expense represents a non-cash adjustment and has no impact on the amount of debt

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ultimately owed to Wynnchurch Capital Partners, L.P. The valuation of the notes was determined based on advice from a third-party valuation specialist who utilized a valuation model. Based on the results, the fair value of the notes was determined to be $13.2 million versus the carrying value of $9.7 million. As such, a $3.5 million charge was recognized for the modification of debt to recognize the fair value of the notes in the financial statements. Additionally, origination fees of $0.9 million related to these notes and $0.1 million related to the revolving credit commitment were written off due to the modifications.

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

        The following summarizes the Company's contractual obligations at December 31, 2003, and the effect such obligations are expected to have on our liquidity and cash in the future periods.