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.
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.
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
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.
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.
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
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 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.
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
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.
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.
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.
(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.
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
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
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.
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
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
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.
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.
QUARTERLY FINANCIAL RESULTS
The following tables set forth certain unaudited quarterly results of operations of the Company for 2002 and 2001. The quarterly operating results are not necessarily indicative of future results of operations.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are impacted by the accounting policies used, and the estimates and assumptions made by management. The most significant accounting policies and management estimates that affect the presentation of the consolidated financial statements include revenue recognition, allowance for doubtful accounts, analysis of goodwill impairment and valuation allowance for deferred tax assets.
Revenue Recognition
The Company recognizes revenues as services are performed, utilizing four different billing methodologies, as follows: (1) time and material billing, whereby the client is billed by the hour on a weekly basis for past services performed; (2) project-based billing, for which fees are fixed and are based on specific contracts; (3) per-incident billing, whereby the Company charges a fee for each specific task related to certain services; (4) and fee-based billing, which is used for candidate placement/recruiting fees and vendor management fees. The Company typically provides discounts on staffing services to its largest clients in exchange for the opportunity to sell more volume, as well as the opportunity to sell its higher-margin, value-added services. All revenues are recognized net of such discounts and after services have been completed.
The Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," in the fourth quarter of 2000. This Bulletin provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The implementation of SAB 101 did not have a material effect on the financial position or results of operations of the Company.
Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customers' current credit worthiness. The Company continuously monitors collections and payments from its customer base and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. The Company specifically reviews outstanding account balances that are overdue 90 days or more in making its assessment of the provision for bad debt expense in each period. While the Company has historically had sufficient coverage of allowances for credit losses, it cannot guarantee that it will continue to experience the same credit loss rates as in past periods.
Goodwill Impairment
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets ("SFAS 142")." This Statement requires that goodwill and intangible assets with indefinite useful lives should be tested and written down for impairment at least annually, instead of being amortized on an ongoing basis. The Company has terminated its policy of amortizing goodwill on a monthly basis and will perform an annual analysis of goodwill impairment, using a discounted future cash flows methodology. Since the Company wrote off the significant majority of its goodwill balance in 2000 due to impairment, it anticipates that the adoption of this standard will not have a significant impact on its financial statements.
Valuation Allowance for Deferred Tax Asset
The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. A valuation allowance was established for the net deferred tax asset given the uncertainty with respect to the future realization of deferred tax assets. This valuation allowance is required given that the net operating losses have no remaining carryback
potential and the lack of ability to accurately forecast taxable income over the 20 year net operating loss carryforward period. When a valuation allowance is deemed necessary, the Company records an adjustment to the deferred tax asset, with a corresponding charge to the statement of operations. In the event that the Company determines that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income, or reduce a net loss, in the period such determination was made.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, which supersedes APB Opinion No. 17, "Intangible Assets." SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. SFAS 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of SFAS 142 are required to be applied starting with fiscal years beginning after December 15, 2001. SFAS 142 is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. As of the date of adoption, the Company had unamortized goodwill in the amount of approximately $2.7 million, which was subject to the transition provisions of SFAS 142 and will not be amortized going forward. In 2001, amortization expense was approximately $76,000. As such, management has deemed that the implementation of this change was not material.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141"), which supersedes APB Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS 141 addresses financial accounting and reporting for business combinations and requires that all business combinations within the scope of SFAS 141 be accounted for using only the purchase method. SFAS 141 is required to be adopted for all business combinations initiated after June 30, 2001. As the Company has not had any business combinations subsequent to June 30, 2001, management has assessed that there is no impact to date of the adoption of SFAS 141 on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," it retains many of the fundamental provisions of that Statement. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occuring Events and Transactions," for the disposal of a segment of a business. However, it retains the requirement in APB Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. SFAS 144 is effective for the fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Management has assessed the impact of the adoption of SFAS 144 on its consolidated financial statements and the impact was not material.
In December 2001, the FASB staff issued Topic No. D-103, "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred" ("Topic D-103"), subsequently recharacterized as Emerging Issues Task Force "EITF" No. 01-14, which is effective for fiscal years beginning after December 15, 2001. EITF No. 01-14 requires that certain out-of-pocket expenses rebilled to customers be recorded as revenue versus an offset to the related expense. Comparative financial statements for prior periods must be conformed to this presentation. The Company historically recorded rebilled out-of-pocket expenses as an offset to the related expense. Effective January 1, 2002,
the Company changed its presentation to reflect rebilled expenses as revenue and also conformed the presentation for prior periods. The impact of adopting this pronouncement resulted in the reclassification of $6.6 million, $7.3 million and $9.6 million of expenses to revenue with a corresponding decrease of approximately 1.2%, 1.0% and 1.0% in gross margin for the years ended December 31, 2002, 2001 and 2000, respectively. Cost of services were increased by an equal amount with no impact on gross profit dollars.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with an Exit or Disposal Activity," which supercedes EITF No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," which is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 requires that a company record a liability when that liability is incurred and can be measured at fair value. Incurred is defined as when an event obligates the entity to transfer or use assets. The recognition of termination benefits to employees will depend on whether additional service is required of the employee. If the employee must continue to provide service for a period of at least a minimum of sixty days in order to be eligible for the benefits (called a "minimum retention period"), the fair value of the benefits should be accrued over the time the employee renders the service. If future service beyond a minimum retention period is not required, the liability for the fair value of the benefits should be recognized at the time the company communicates the arrangement to the employees. The Company will adopt this statement in the year beginning January 1, 2003 and it is not anticipated to have a material effect on the Company's consolidated financial position or results of operations for any restructuring activity initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness to Others." This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under guarantee. In general, FIN 45 applies to contracts or indemnification agreements that contingently require that the guarantor make payments to the guaranteed party. The disclosure requirements of FIN 45 are effective as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The Company does not have any guarantees and does not believe that the requirements of FIN 45 will have a material impact on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As of December 31, 2002, we have elected not to change to the fair value based method of accounting for stock-based employee compensation. We account for employee stock options under Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees, under which no compensation cost was recognized by us.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" to provide new guidance with respect to the consolidation of certain previously unconsolidated entities, including special purpose entities. We believe that the adoption of this interpretation, required
in 2003, will not have a material impact on the Company's consolidated financial position or results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The market risk that the Company is exposed to primarily relates to changes in interest rates on its borrowings. At December 31, 2002, the Company had $18.5 million in floating-rate debt. An adverse change in interest rates during any period that the loan is outstanding would cause an increase in interest expense. A 100 basis point increase in the bank's base rate would increase the annual amount of interest paid by $0.2 million.
The Company does not currently have any derivative financial instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the financial statements, financial statement schedule and notes thereto included elsewhere in this report and listed under Item 15.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
a.Directors of the Company
The information required by this Item is set forth in the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 12, 2003, under the caption "Election of Directors," which information is hereby incorporated herein by reference.
b.Executive Officers of the Company
Reference is made to "Executive Officers of the Registrant" in Part I of this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth in the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 12, 2003, under the captions "Executive Compensation" and "Board of Directors," which information is hereby incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Certain of the information required by this Item is set forth in the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 12, 2003, under the caption "Securities Beneficially Owned by Principal Stockholders and Management," which information is hereby incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On January 31, 2002, the Company issued to Wynnchurch Capital Partners, L.P. and Wynnchurch Capital Partners Canada L.P. (the "Wynnchurch Companies") $10.0 million principal amount of 15% 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. In conjunction with the sale of these notes, the Company issued 10,000,000 warrants (immediately exercisable) 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 warrants and, accordingly, these warrants have become exercisable. The Company paid Wynnchurch Capital Ltd., an affiliate of the Wynnchurch Companies, a $250,000 commitment fee and a $50,000 closing fee in connection with these transactions. Wynnchurch was granted the right to have two designees appointed to the Company's seven person board, with a right, upon request, to have the board increased by up to two members, and to appoint those additional directors. The Wynnchurch Companies designated Messrs. John A. Hatherly and Frank G. Hayes, who were elected to the Company's board on February 4, 2002. Messrs. Michael J. Hering and Richard J. Renaud were elected to the Company's board as a matter of vote at the Company's annual meeting held on June 13, 2002. Mr. Hatherly is the president of the general partner of each of the Wynnchurch Companies and has a financial interest in the Wynnchurch Companies.
On April 14, 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, the Wynnchurch Companies executed a guaranty to Fleet Capital, of the overadvance amounts. In consideration, the Wynnchurch Companies and the Company amended their agreements, 15% Senior Subordinated Convertible Notes and warrants to reduce the conversion price per share of the notes to $1.50, reduce the exercise price of all outstanding warrants to an average price of the Company's stock for the 10-day period preceding the execution of the agreement plus $0.02, provide that any draw on the guaranties could be satisfied by a purchase by the Wynnchurch Companies 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 Companies in the event of a draw upon their guaranty, payable through the issue of additional 15% Senior Subordinated Convertible Notes.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities and Exchange Act of 1934. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 15, 2003.
ALTERNATIVE RESOURCES CORPORATION
By
/s/ GEORGE W. WATTS George W. Watts,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 15, 2003.
Signature
Title
/s/ ROBERT P. STANOJEV Robert P. Stanojev
Chairman of the Board
/s/ GEORGE W. WATTS George W. Watts
President and Chief Executive Officer (Principle Executive Officer)
/s/ STEVEN PURCELL Steven Purcell
Senior Vice President, Chief Financial Officer, Secretary, Treasurer and Director (Principal Financial and Accounting Officer)
/s/ JOANNE BRANDES Joanne Brandes
Director
/s/ SYD N. HEATON Syd N. Heaton
Director
/s/ JOHN A. HATHERLY John A. Hatherly
Director
/s/ FRANK G. HAYES Frank G. Hayes
Director
/s/ RICHARD J. RENAUD Richard J. Renaud
Director
/s/ MICHAEL J. HERING Michael J. Hering
Director
CERTIFICATIONS
I, George W. Watts, certify that:
1. I have reviewed this annual report on Form 10-K of Alternative Resources Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ GEORGE W. WATTS George W. Watts
Chief Executive Officer
CERTIFICATIONS
I, Steven Purcell, certify that:
1. I have reviewed this annual report on Form 10-K of Alternative Resources Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ STEVEN PURCELL Steven Purcell
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number
Description
3.1
Amended and Restated Certificate of Incorporation, as amended. Incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1998. (File No. 0-23940)
3.2
Amended and Restated By-Laws. Incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-Q for the period ended June 30, 2002. (File No. 0- 23940)
4.1
Rights Agreement dated October 15, 1998 between the Company and Harris Trust and Savings Bank, incorporated herein by reference to Exhibit 1 to the Company's Form 8-A dated October 20, 1998. (File No. 0-23940)
4.2
Credit agreement dated November 7, 1997, incorporated herein by reference to Exhibit 4 to the Company's Form 8-K dated November 7, 1997. (File No. 0-23940)
4.3
Third amendment to credit agreement dated September 30, 1998 incorporated herein by reference to Exhibit 4.1 to the Company's Form 10-Q for the period ended March 31, 2000. (File No. 0-23940)
4.4
Fourth amendment to credit agreement dated December 27, 1999, incorporated herein by reference to Exhibit 4.2 to the Company's Form 10-Q for the period ended March 31, 2000. (File No. 0-23940)
4.5
Fifth amendment to credit agreement dated March 24, 2000 incorporated herein by reference to Exhibit 4.3 to the Company's Form 10-Q for the period ended March 31, 2000. (File No. 0-23940)
4.6
Sixth amendment to credit agreement dated August 31, 2000 incorporated herein by reference to Exhibit 4.3 to the Company's Form 10-K for the period ended December 31, 2000. (File No. 0-23940)
4.7
Seventh amendment to credit agreement dated December 4, 2000 incorporated herein by reference to Exhibit 4.4 to the Company's Form 10-K for the period ended December 31, 2000. (File No. 0-23940)
4.8
Eighth amendment to credit agreement dated December 29, 2000 incorporated herein by reference to Exhibit 4.5 to the Company's Form 10-K for the period ended December 31, 2000. (File No. 0-23940)
4.9
Ninth amendment to credit agreement dated April 30, 2001 incorporated herein by reference to Exhibit 4.1 to the Company's Form 10-Q for the period ended March 31, 2001. (File No. 0-23940)
4.10
Tenth amendment to credit agreement dated May 4, 2001 incorporated herein by reference to Exhibit 4.2 to the Company's Form 10-Q for the period ended March 31, 2001. (File No. 0-23940)
4.11
Eleventh amendment to credit agreement dated May 18, 2001 incorporated herein by reference to Exhibit 4.1 to the Company's Form 10-Q for the period ended June 30, 2001. (File No. 0-23940)
4.12
Twelth amendment to credit agreement dated June 30, 2001 incorporated herein by reference to Exhibit 4.2 to the Company's Form 10-Q for the period ended June 30, 2001. (File No. 0-23940)
4.13
Thirteenth amendment to credit agreement dated July 2, 2001 incorporated herein by reference to Exhibit 4.3 to the Company's Form 10-Q for the period ended June 30, 2001. (File No. 0-23940)
4.14
Fourteenth amendment to credit agreement dated November 30, 2001 incorporated herein by reference to Exhibit 4.14 to the Company's Form 10-K for the period ended December 31, 2001. (File No. 0-23940)
4.15
Credit and Security Agreement dated January 31, 2002 among Alternative Resources Corporation, ARC Services Inc., ARC Solutions, Inc., ARC Midholding, Inc. and Writers Inc. as joint and several co-borrowers, and Fleet Capital Corporation as lender. Incorporated herein by reference to Exhibit 4.1 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.16
$30,000,000 Revolving Credit Note under the Credit and Security Agreement. Incorporated herein by reference to Exhibit 4.2 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.17
Securities Purchase Agreement dated January 31, 2002, among Alternative Resources Corporation, Wynnchurch Capital Partners, L.P. and Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference to Exhibit 4.3 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.18
15% Senior Subordinated Convertible Promissory Note dated January 31, 2002 and due January 31, 2009 in the principal amount of $4,920,208 issued to Wynnchurch Capital Partners, L.P. Incorporated herein by reference to Exhibit 4.4 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.19
15% Senior Subordinated Convertible Promissory Note dated January 31, 2002 and due January 31, 2009 in the principal amount of $5,079,792 issued to Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference to Exhibit 4.5 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.20
Stock Purchase Warrant for 4,920,208 shares of Alternative Resources Corporation common stock, dated January 31, 2002 and issued to Wynnchurch Capital Partners, L.P. Incorporated herein by reference to Exhibit 4.6 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.21
Stock Purchase Warrant for 5,079,792 shares of Alternative Resources Corporation common stock, dated January 31, 2002 and issued to Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference to Exhibit 4.7 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.22
Contingent Stock Purchase Warrant for 492,021 shares of Alternative Resources Corporation common stock, dated January 31, 2002 and issued to Wynnchurch Capital Partners, L.P. Incorporated herein by reference to Exhibit 4.8 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.23
Contingent Stock Purchase Warrant for 507,979 shares of Alternative Resources Corporation common stock, dated January 31, 2002 and issued to Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference to Exhibit 4.9 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.24
Registration Rights Agreement dated January 31, 2002, among Alternative Resources Corporation, Wynnchurch Capital Partners, L.P. and Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference to Exhibit 4.10 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.25
Subordination and Intercreditor Agreement dated as of January 31, 2002, among Wynnchurch Capital Partners, L.P., Wynnchurch Capital Partners Canada, L.P., Alternative Resources Corporation, ARC Service, Inc., ARC Solutions, Inc., ARC Midholding, Inc., Writers, Inc., and Fleet Capital Corporation. Incorporated herein by reference to Exhibit 4.11 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.26
Pledge Agreement dated January 31, 2002, among Alternative Resources Corporation, ARC Service, Inc., ARC Solutions, Inc., ARC Midholding, Inc., Writers Inc. and Fleet Capital Corporation. Incorporated herein by reference to Exhibit 4.12 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.27
Pledge Agreement dated January 31, 2002, among Alternative Resources Corporation, Wynnchurch Capital Partners, L.P., and Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference to Exhibit 4.13 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.28
Company Security Agreement dated January 31, 2002, among Alternative Resources Corporation, Wynnchurch Capital Partners, L.P. and Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference to Exhibit 4.14 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.29
Guarantor Security Agreement dated January 31, 2002, among ARC Service, Inc., ARC Solutions, Inc., ARC Midholding, Inc., Writers Inc., Wynnchurch Capital Partners, L.P. and Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference to Exhibit 4.15 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.30
Guaranty dated January 31, 2002, made by ARC Service, Inc., ARC Solutions, Inc., ARC Midholding, Inc. and Writers Inc., for the benefit of Wynnchurch Capital Partners, L.P. and Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference to Exhibit 4.16 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
4.31
First amendment to credit and security agreement dated August 7, 2002, incorporated herein by reference to Exhibit 4.1 to the Company's Form 10-Q for the period ended June 30, 2002. (File No. 0-23940)
4.32
Second amendment to credit and security agreement dated August 30, 2002, incorporated herein by reference to Exhibit 4.1 to the Company's Form 10-Q for the period ended September 30, 2002. (File No. 0-23940)
4.33
Third amendment to credit and security agreement dated November 14, 2002, incorporated herein by reference to Exhibit 4.2 to the Company's Form 10-Q for the period ended September 30, 2002. (File No. 0-23940)
4.34
First amendment to the Securities Purchase Agreement dated August 7, 2002, incorporated herein by reference to Exhibit 4.2 to the Company's Form 10-Q for the period ended June 30, 2002. (File No. 0-23940)
4.35
Fourth amendment to credit and security agreement dated December 27, 2002.
4.36
Second amendment to securities purchase agreement dated August 30, 2002.
4.37
Third amendment to securities purchase agreement dated November 14, 2002.
4.38
Fourth amendment to securities purchase agreement dated December 27, 2002.
Exhibits 10.1 through 10.10 are management contracts or compensatory plans or arrangements.
Exhibit
Number
Description
10.1
Amended and Restated Stock Option Plan. Incorporated herein by reference to Exhibit 10 to the Company's Form 10-Q for the period ended June 30, 1997. (File No. 0-23940)
10.2
Form of Indemnity Agreement between Alternative Resources Corporation and its officers. Incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, as amended, Registration No. 33-76584.
10.3
Executive Employment Agreement between Alternative Resources Corporation and Raymond R. Hipp dated July 23, 1998. Incorporated herein by reference to the Exhibit 10.1 to the Company's Form 10-Q for the period ended September 30, 1998. (File No. 0-23940).
10.4
Executive Employment Agreement between Alternative Resources Corporation and Steven Purcell dated August 1, 1998. Incorporated herein by reference to the Exhibit 10.2 to the Company's Form 10-Q for the period ended September 30, 1998. (File No. 0-23940).
10.5
Stock Option Agreement between Alternative Resources Corporation and Raymond R. Hipp dated July 23, 1998. Incorporated herein by reference to the Exhibit 10.8 to the Company's Form 10-K for the period ended December 31, 1999. (File No. 0-23940).
10.6
Stock Option Agreement between Alternative Resources Corporation and Steven Purcell dated August 3, 1998. Incorporated herein by reference to the Exhibit 10.9 to the Company's Form 10-K for the period ended December 31, 1999. (File No. 0-23940).
10.7
Executive Employment Agreement between Alternative Resources Corporation and Miner Smith dated July 16, 2001. Incorporated herein by reference to the Exhibit 10.7 to the Company's Form 10-K for the period ended December 31, 2001. (File No. 0-23940).
10.8
Stock Option Agreement between Alternative Resources Corporation and Miner Smith dated July 16, 2001. Incorporated herein by reference to the Exhibit 10.8 o the Company's Form 10-K for the period ended December 31, 2001. (File No. 0-23940).
10.9
Executive Employment Agreement between Alternative Resources Corporation and Sharon McKinney dated November 1, 2000. Incorporated herein by reference to the Exhibit 10.9 to the Company's Form 10-K for the period ended December 31, 2000. (File No. 0-23940).
10.10
Executive Employment Agreement between Alternative Resources Corporation and Victor Fricas dated November 1, 2000. Incorporated herein by reference to the Exhibit 10.10 to the Company's Form 10-K for the period ended December 31, 2000. (File No. 0-23940).
10.11
Indemnification Agreement between Alternative Resources Corporation and individual members of the Board of Directors dated February 4, 2002. Incorporated herein by reference to the Exhibit 10.11 of the Company's Form 10-K for the period ended December 31, 2001. (File No. 0-23940).
10.12
Executive Employment Agreement between Alternative Resources Corporation and George W. Watts dated July 1, 2002. Incorporated herein by reference to the Exhibit 10.1 to the Company's Form 10-Q for the period ended June 30, 2002. (File No. 0-023940)
10.13
Executive Separation Agreement between Alternative Resources Corporation and Raymond R. Hipp dated June 13, 2002. Incorporated herein by reference to the Exhibit 10.2 to the Company's Form 10-Q for the period ended June 30, 2002. (File No. 0-023940)
10.14
Director Agreement between Alternative Resources Corporation and Robert Stanojev dated August 5, 2002. Incorporated herein by reference to the Exhibit 10.3 to the Company's Form 10-Q for the period ended June 30, 2002. (File No. 0-023940)
10.15
Executive Employment Agreement between Alternative Resources Corporation and Bill McLendon dated September 16, 2002. Incorporated herein by reference to the Exhibit 10.1 to the Company's Form 10-Q for the period ended September 30, 2002. (File No. 0-023940)
10.16
Executive Separation Agreement between Alternative Resources Corporation and Miner Smith dated August 2, 2002. Incorporated herein by reference to the Exhibit 10.2 to the Company's Form 10-Q for the period ended September 30, 2002. (File No. 0-023940)
Subsidiaries of Alternative Resources Corporation
Consent of KPMG LLP
99.1
Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ALTERNATIVE RESOURCES CORPORATION:
We have audited the accompanying consolidated balance sheets of Alternative Resources Corporation and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alternative Resources Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002.
/s/ KPMG LLP
Chicago, Illinois
April 15, 2003
ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements.
ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
See accompanying notes to consolidated financial statements.
ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
ALTERNATIVE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Alternative Resources Corporation ("ARC" or the "Company") was incorporated in Delaware on March 8, 1988, and 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, which 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.
Principles of Consolidation
The operations of the Company are conducted through a parent holding company and three operating subsidiaries. The accompanying financial statements include the consolidated financial position and results of operations of the Company and its subsidiaries with all intercompany transactions eliminated.
Segment Information
Management has considered the requirements of Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," and has determined that the Company has one operating segment. ARC provides its services through two primary service lines called ARC Staffing Management Solutions and ARC Technology Management Solutions. These service lines do not meet the definition of a "segment" within the meaning of SFAS No. 131, as discrete financial information is unavailable. To date, discrete information by service line has not been considered relevant by management for purposes of making decisions about allocations of resources, as both service lines share the same pool of technical resources and client base, as well as the same distribution model.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents include all deposits in banks and highly liquid investments with original maturities of three months or less.
Goodwill
Through December 31, 2001, goodwill representing the excess of purchase price over fair market value of net assets acquired, was amortized on a straight-line basis over 40 years. Adjustments to the carrying value of goodwill were made when the sum of expected future discounted cash flows from the business acquired was less than book value.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company ceased amortization of goodwill effective January 1, 2002. Goodwill is now reviewed for impairment on an annual basis, or more frequently if events or circumstances indicate that the carrying value may not be recoverable. The review is a two-step process beginning with an estimation of the fair value of the reporting unit. The first step is a screen for impairment and the second step measures the amount of any impairment. The fair value amounts are determined by discounting future cash flows of the reporting unit as developed by management.
The following table illustrates the pro-forma impact of the goodwill amortization on the Company's 2001 and 2000 net loss:
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets ranging from three to seven years. Software includes development costs for internal IT projects currently in progress and will be amortized upon completion over three to seven years. Leasehold improvements are amortized using the straight-line method over the life of the related leases, generally three to five years.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment in accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If the carrying amount of the assets are less then the sum of the future undiscounted cash flows such assets are considered to be impaired. The impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the discounted cash flows of the assets. The discount rate used is the Company's expected rate of return. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Deferred Financing Costs
Included in other assets are deferred financing costs associated with the Company's long-term debt. These financing costs are being amortized using a straight-line method over the lives of the respective agreements.
Translation of Foreign Currencies
Assets and liabilities of the Company's Canadian operations are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the weighted average rates of exchange prevailing during the year. The related translation adjustments are reflected as a foreign
currency translation adjustment in stockholders' equity. Foreign currency transaction gains and losses for the years presented were not material.
Revenue Recognition
Revenues are recognized as services are performed, utilizing four different billing methodologies, as follows: (1) time and material billing, whereby the client is billed by the hour on a weekly basis for past services performed; (2) project-based billing, for which fees are fixed and are based on specific contracts; (3) per-incident billing, whereby the Company charges a fee for each specific task related to certain services; (4) and fee-based billing, which is used for candidate placement/recruiting fees and vendor management fees. The Company typically provides discounts on staffing services to its largest clients in exchange for the opportunity to sell more volume, as well as the opportunity to sell its higher-margin, value-added services. All revenues are recognized net of such discounts and after services have been completed.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." This bulletin provides guidance from the staff on applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted SAB 101 in the fourth quarter of 2000. The implementation of SAB 101 did not have a material effect on the financial position or results of operations of the Company.
In December 2001, the FASB staff issued Topic No. D-103, "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred" ("Topic D-103"), subsequently recharacterized as Emerging Issues Task Force "EITF" No. 01-14, which is effective for fiscal years beginning after December 15, 2001. EITF No. 01-14 requires that certain out-of-pocket expenses rebilled to customers be recorded as revenue versus an offset to the related expense. Comparative financial statements for prior periods must be conformed to this presentation. The Company historically recorded rebilled out-of-pocket expenses as an offset to the related expense. Effective January 1, 2002, the Company changed its presentation to reflect rebilled expenses as revenue and also conformed the presentation for prior periods. The impact of adopting this pronouncement resulted in the reclassification of $6.6 million, $7.3 million and $9.6 million of expenses to revenue with a corresponding decrease of approximately 1.2%, 1.0% and 1.0% in gross margin for the years ended December 31, 2002, 2001 and 2000, respectively.
Concentration of Credit Risk
The Company provides services to clients including systems integrators, telecommunications companies, banking and financial services entities, manufacturers, distributors, health care providers, and utilities throughout the United States. In 2002, 2001 and 2000, the largest client accounted for approximately 25%, 20% and 18%, the second largest client accounted for approximately 17%, 17% and 15% and the third largest client accounted for 5%, 5% and 5% of the Company's total revenues, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Stock Options
The Company accounts for its stock options in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations. Under APB 25, no compensation cost has been recognized for the Company's stock-based compensation plans. The Company continues to apply the provisions of APB 25 and provides the pro forma disclosures required by SFAS No. 123.
The following data reflect the pro forma effects of the stock-based compensation cost for the Company's stock option transactions in accordance with SFAS No. 123:
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2002, 2001 and 2000, respectively: risk-free interest rates of 4.3%, 4.6%, and 5.0%; expected lives of 7, 4 and 4 years; expected volatility of 112%, 101% and 134%; and no dividends expected to be paid.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, except for long-term debt, approximate their fair values due to the short maturity of these instruments. The carrying amount of long-term debt approximates its fair value given its interest rate is comparable to a similar rate that could be obtained on other long-term debt instruments.
Computation of Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding for the year. Diluted earnings per share is based on the weighted average number of common shares outstanding and includes the dilutive effect of unexercised vested stock options using the treasury stock method. Dilutive securities have not been included in the weighted average shares used for the calculation of earnings per share in periods of net loss because the effect of such securities would be anti-dilutive. At December 31, 2002, potentially dilutive securities consisted of options to purchase 3.3 million shares of common stock, respectively. In addition, the Company issued 11.0 million warrants to purchase common stock in connection with its debt refinancing described in note 3. These warrants are also potentially dilutive securities as of December 31, 2002.
Reclassification
Certain prior year balances have been reclassified in order to conform to the current year presentation.
2. RESTRUCTURING AND OTHER CHARGES
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 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 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 intangibles relating to the 1997 acquisition of CGI Systems, Inc. ("CGI") for any impairment based on current factors. After giving effect to purchase price adjustments, escrow refunds, acquisition costs, amortization and the write-down of goodwill in 1998, the remaining unamortized goodwill balance as of September 30, 2000 was $37.7 million, which consisted of goodwill allocated to the following three components of CGI's acquired business (in millions):
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 also 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. This charge was a continuation of the 1998 restructuring, which was designed to optimize the branch field model. 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.
3. LONG-TERM BORROWINGS
The principal portion of long-term debt becomes due as follows:
During 1997, the Company entered into a $53.5 million revolving credit facility. As of December 31, 2001, borrowings under the revolving credit facility were $26.9 million. As part of this agreement, cash receipts into the Company's bank accounts were directly applied against the outstanding bank line of credit balance. Advances from the line of credit were determined on a daily basis to minimize the Company's average debt balance. The revolving credit facility expired on January 31, 2002. The Company did not extend this credit facility and successfully refinanced the debt on a long-term basis as described below.
On January 31, 2002, the Company entered into a Senior Secured Revolving Credit facility with a lending institution, that provides for up to $30.0 million of revolving credit based on the Company's available collateral base. This facility was reduced to $28.0 million in August 2002 as discussed below. The credit facility has a three-year term and bears interest at LIBOR plus 3.25% or the lenders' base rate plus 1.00%. As of December 31, 2002, the applicable rates are as follows: $17.0 million at 4.67%, which represents LIBOR plus 3.25%, and $1.5 million at 5.25%, which represents the bank's base rate plus 100 basis points. The initial proceeds of this facility together with the net proceeds from the sale of convertible subordinated notes described below were used to repay the Company's existing credit facility. Advances from the revolving credit facility are determined on a daily basis to minimize the Company's average debt balance. As of December 31, 2002, the Company has $3.1 million in excess availability and $18.5 million outstanding.
On January 31, 2002, the Company also entered into a Securities Purchase Agreement with a private equity investor, pursuant to which the Company sold $10 million principal amount of 15% 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.
At December 31, 2002, the Company has long-term debt of $27.1 million. This is comprised of $18.5 in Senior Secured Revolving Credit with Fleet Capital and $8.6 million of long-term debt related to the Securities Purchase Agreement with Wynnchurch Capital Partners, L.P.
At December 31, 2002, the total contractual obligation to Wynnchurch Capital Partners, L.P. is $11.3 million. This is comprised of $10.0 million in original principal and $1.3 million in accrued interest. $6.9 million of the principal is included in long-term debt while the remaining $3.1 million is
classified as equity, representing the value assigned to the warrants. The $8.6 million of this obligation recorded as long-term debt is comprised of the following:
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 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. A fair value was required to be ascribed to these warrants and recorded as a decrease in the debt and an increase to additional-paid-in-capital. This value is then amortized over the seven-year life of the debt by a non-cash interest charge. The fair value of these warrants was determined to be approximately $3.1 million and resulted in a non-cash interest charge of approximately $409,000 in 2002. The valuation of the warrants was determined based on advice from third-party valuation specialists who utilized a valuation model with the following inputs: measurement date of Janaury 31, 2002; fair value of $0.80; exercise price of $0.55 ($0.73 for contingent warrants); contractual term of 10 years; dividend rate of zero; volatility rate of 101%; risk-free interest rate of 5.49%; and probability of 100% (for contingent warrants only).
In conjunction with the Securities Purchase Agreement on January 31, 2002, the Company's Board of Directors redeemed all of the rights issued under its stockholder rights plan. Each share of the Company's common stock carried with it one right to purchase a fraction of a share of the Company's preferred stock in certain circumstances described in the Stockholder Rights Plan. The rights were attached to, and could not be separated from, shares of the Company's common stock. 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.
Throughout 2002, ARC 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 Partners 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 Wynnchurch Capital Partners in the event of a draw upon their guaranty, payable through the issuance of additional 15% Senior Subordinated Convertible Notes.
As of December 31, 2002, the Company has two irrevocable standby letters of credit for $1,625,000, which expire on December 31, 2003.
4. LEASES
The Company leases its office facilities under noncancelable operating leases. Rental expense for operating leases during 2002, 2001 and 2000 was $2.5 million, $2.8 million and $3.5 million, respectively.
Future minimum lease payments and sublease income under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2002, are:
5. OTHER INCOME (EXPENSE), NET
Other income (expense), net, for the years ended December 31, 2002, 2001 and 2000 is comprised of the following:
6. INCOME TAXES
Income tax expense (benefit) is summarized as follows for the years ended December 31, 2002, 2001 and 2000:
The reasons for the difference between the effective tax rate and the corporate federal income tax rate for the years ended December 31, 2002, 2001 and 2000 are as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2002 and 2001 are as follows:
The income tax benefit for tax deductions relating to the exercise of nonqualified stock options in excess of the tax benefits on the amount reflected as amortization of deferred stock compensation has been recorded as additional paid-in-capital.
At December 31, 2002, the Company had gross federal and state net operating losses of $3.3 million and $15.6 million, respectively, which are available to offset taxable income through 2022.
Prior to 2001, no valuation allowance for deferred tax assets had been recorded as the Company believed it was more likely than not the deferred tax assets would be realized in the future. Beginning in 2001, a valuation allowance was established for the net deferred tax asset given the uncertainty with respect to the future realization of deferred tax assets. This valuation allowance is required given that the net operating losses have no remaining carryback potential (except for a portion thereof in 2002 as a result of a change in income tax law) and the lack of ability to accurately forecast taxable income over the 20 years net operating loss carryforward period.
7. EMPLOYEE SAVINGS PLAN
The Company sponsors a 401(k) plan ("the Plan"). The Plan covers each employee who has completed 1,000 hours of service in a 12-month period commencing with the start of employment. The Company, in an amount to be determined at the Company's discretion, bases contributions to the Plan on percentages of employee salaries, plus a matching contribution. Vesting in the Company's contributions is based on length of service over a five-year period. Contributions by the Company on behalf of all employees approximated $0.2 million, $0.6 million and $0.5 million during 2002, 2001 and 2000, respectively. Effective March 31, 2002 the Company discontinued the employer matching contribution.
8. STOCK OPTIONS
During 1994, the Company amended and restated the stock option plan adopted in 1992. Under the amended and restated Incentive Stock Option Plan ("Option Plan"), officers and key employees may be granted non-qualified stock options, incentive stock options, performance units, and stock appreciation rights. The Option Plan also provides for automatic annual grants to each non-affiliate director of non-qualified stock options to purchase up to 5,000 shares of common stock. The purchase price per share for such options will be equal to the fair market value of a share of common stock on the date of grant. As such, there has been no compensation cost recognized in operations. Any such options will be exercisable one year after the date of grant and will terminate upon the earlier of 90 days following the date on which such director ceases to serve on the Board or 10 years after the date of grant.
The exercise price of incentive stock options granted under the Option Plan must be equal to at least 100% of the fair market value of the Company's common stock subject to the option on the date of the grant. The incentive stock options granted by the Company may not be exercised during the first six months from the date granted and, thereafter, generally become exercisable at a rate of 2.38% of the total shares subject to the option on and after the first day of each calendar month. The maximum term of a stock option under the Option Plan is 10 years.
In the event employment is terminated for any reason other than gross and willful misconduct, death or disability, vested options are exercisable within 30 days after such termination of employment. Termination due to gross and willful misconduct terminates the option as of the date of the misconduct. Upon death or disablement, vested options are exercisable within six months after the date of death or disablement by the executors, administrators or applicable guardian of optionee.
During 2000, the Company issued 1,240,000 restricted shares of the Company's stock pursuant to the Option Plan. The shares were issued with certain restrictions relating to each employee remaining employed with the Company. The restrictions lapsed in April and July of 2001, with a remaining portion lapsing in July 2002. In connection with the issuance of the restricted stock, 945,000 previously issued stock options were cancelled. Total deferred compensation related to the restricted stock issuance was $378,000; of which, $97,000, $221,000 and $60,000 was amortized as an operating expense in 2002, 2001 and 2000, respectively.
During 2001, the Company issued 83,000 and 175,000 stock options and non-qualified stock options, respectively, pursuant to the Option Plan. These options were granted at fair market value and thus, the Company did not record compensation expense as a result of these option grants.
During 2002, the Company issued 1,550,000 non-qualified stock options outside the Option Plan in connection with executive management and director changes. These options were issued at the fair market value as of the time of the grant. The terms and conditions of these grants are similar to the terms and conditions of options granted under the Option Plan with the exception that they provide for accelerated vesting upon a change in control of the Company. In addition to the non-qualified stock options issued outside of the Option Plan, the Company issued 615,000 non-qualified stock options, pursuant to the Option Plan.
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2002, 2001 and 2000, respectively: risk-free interest rates of 4.3%, 4.6%, and 5.0%; expected lives of 7, 4 and 4 years; expected volatility of 112%, 101% and 134%; and no dividends expected to be paid.
Stock option transactions for the years ended December 31, 2000, 2001 and 2002 are summarized as follows:
As of December 31, 2002, 2001 and 2000, there were 1.4 million, 1.7 million and 1.1 million options exercisable, respectively. As of December 31, 2002, there were 0.9 million stock options available for future grants under the Company's Incentive Stock Option Plan. The weighted-average grant-date fair values of options granted during 2002, 2001 and 2000 were $0.45, $0.51 and $1.34 per share, respectively.
The following table summarizes information about stock options outstanding as of December 31, 2002:
9. EMPLOYEE STOCK PURCHASE PLAN
In 1995, the stockholders of the Company approved the Alternative Resources Corporation Employee Stock Purchase Plan (the "Stock Purchase Plan"). An aggregate of 300,000 shares of the Company's common stock (subject to adjustment for any dividend, stock split or other relevant changes in the Company's capitalization) were originally authorized to be sold pursuant to the Stock Purchase Plan. In 1999, an additional 300,000 shares of the Company's common stock were approved by the stockholders for sale through the Employee Stock Purchase Plan. The Stock Purchase Plan covers each employee who has completed 1,000 hours of service during the last 12 calendar months preceding the enrollment date. The Stock Purchase Plan enables employees to purchase the Company's common stock at 85% of the market price. Employees may purchase the Company's common stock through the Stock Purchase Plan only by payroll deduction. Payroll deductions may not exceed 20% of the
employees' gross pay or $21,250 in any one-year. In 2001 and 2000, the Company's matching portion to the Stock Purchase Plan amounted to $0.1 million from both years and was in the form of cash contributions and direct issuance of common stock. In 2002, the Company's matching portion to the Stock Purchase Plan was in the form of direct issuance of common stock. The number of shares purchased was approximately 114,000, 296,000, and 146,000 for the years ended December 31, 2000, 2001 and 2002, respectively. Effective March 31, 2002, the Stock Purchase Plan was terminated.
10. SUBSEQUENT EVENTS
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 worth 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. 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.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001, and 2000
(in thousands)
PART I
ITEM 1. BUSINESS.
ITEM 2. PROPERTIES.
ITEM 3. LEGAL PROCEEDINGS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 14. CONTROLS AND PROCEDURES.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
SIGNATURES
CERTIFICATIONS
CERTIFICATIONS
EXHIBIT INDEX
INDEPENDENT AUDITORS' REPORT
ALTERNATIVE RESOURCES CORPORATION CONSOLIDATED BALANCE SHEETS
ALTERNATIVE RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
ALTERNATIVE RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
ALTERNATIVE RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
ALTERNATIVE RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
ALTERNATIVE RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2002, 2001, and 2000 (in thousands)