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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   Form 10-K    x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 28, 2003 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _______________ to _____________ Commission file number    001-13956 VENTURI PARTNERS, INC.  Delaware
    
    7363
    
    56-1930691(State or other jurisdiction of
incorporation or organization)
    
    (Primary Standard
Industrial Classification
Code number)
    
    (I.R.S. employer
identification number)
 Five LakePointe Plaza
2709 Water Ridge Parkway, 2nd Floor
Charlotte, North Carolina 28217
(Address, including zip code, of
Registrants principal executive offices)   (704) 442-5100  Personnel Group of America, Inc.  SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value
(Title of Class)   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [  ] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [  ] No
[ X ] The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 27, 2003, computed by reference to the closing sale price
on such date, was $4,963,803. (For purposes of calculating this amount only,
all shareholders with more than 10% of the total voting power, all directors
and all executive officers are treated as affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. This calculation reflects the 1-for-25 reverse split of the
registrants common stock and the conversion of its outstanding Series B
preferred stock, both of which occurred after June 27, 2003.) As of March 24,
2004, 6,089,938 shares of the registrants common stock, $.01 par value, were
outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Registrants Annual Report to Stockholders for the
fiscal year ended December 28, 2003 (the Annual Report) furnished to the
Commission pursuant to Rule 14a-3(b) are incorporated by reference into Part
II. Certain portions of the Registrants definitive Proxy Statement for the
2004 Annual Meeting of Stockholders to be held May 20, 2004, which Proxy
Statement will be filed with the Commission pursuant to Regulation 14A are
incorporated by reference into Part III.




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PART I. 
 Item 1. Business. Venturi Partners, Inc. formerly known as Personnel Group of America, Inc.
(the Company or we), is a leading provider of technology and staffing
services to businesses and professional and government organizations. The
Company is organized into two divisions, the Technology Services division
(Technology Services) and the Staffing Services division (Staffing
Services), and operates in strategic markets primarily in the United States.
Certain financial information, including revenues, a measure of profit and
total assets, is reported by segment in Note 18, Segment Information, to the
consolidated financial statements included in Part II, Item 8 of this report.
The Companys services include information technology consulting, temporary
staffing, placement of full time employees, on-site management of temporary
employees and training and testing of temporary and permanent workers. We also
provide technology tools for human capital management that enable our customers
to automate portions or all of their hiring processes. At February 29, 2004,
Venturi operated through a network of 108 offices located in major metropolitan
areas throughout the United States. The Company also recently opened its first
office in Canada. Technology Services offers information technology staffing and consulting
services in a range of computer-related disciplines and technology tools for
human capital management. Staffing Services offers a variety of temporary
office, clerical, accounting and finance, light technical and light industrial
staffing services. Each division also offers permanent placement services in a
range of specialties. For the year ended December 28, 2003, Technology Services
and Staffing Services represented approximately 49% and 51%, respectively, of
the Companys total revenues. We completed the rebranding of our operations in 2002, renaming our
Technology Services operations Venturi Technology Partners, our Staffing
Services operations Venturi Staffing Partners and our commercial operations
that have a specialty in permanent placement services, Venturi Career
Partners. We also recently changed our corporate name to Venturi Partners,
Inc. We completed a comprehensive financial restructuring in April 2003 in
which we amended and restated our revolving credit facility, issued shares of
our capital stock and paid cash in exchange for approximately $109.7 million of
our outstanding 5.75% Convertible Subordinated Notes due 2004 (the 5.75%
Notes) and reduced our outstanding net debt by approximately $120.0 million.
See Note 2, Comprehensive Financial Restructuring, to the consolidated
financial statements included in Part II, Item 8 of this report. Technology Services Division Technology Services provides technology staffing and consulting services,
as well as technology tools for human capital management, through 27 offices in
20 states in the United States and one office in Canada at February 29, 2004.
Technology Services had approximately 1,940 consultants on assignment at
February 29, 2004, of which approximately 425 (or 22%) were salaried employees.
Of the balance (78% of the total), approximately 980 consultants were hourly
employees and 535 consultants were independent contractors. 3




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Service Offerings Technology Services provides skilled personnel, such as web developers and
consultants, project managers, programmers, systems designers, software
engineers, LAN administrators, systems integrators, helpdesk staff and other
technology specialists, to a wide variety of clients, typically on an as-needed
time and materials basis. A number of Technology Services offices have
developed technology specialties, and have entered into alliances with packaged
software and systems vendors and other technology partners to provide services
necessary to install, integrate and maintain their partners technologies.
Many Technology Services offices also provide software engineering, web design,
applications development and strategic consulting services. Technology Services staffing services include providing individuals or
teams of computer professionals to corporations and other organizations that
need assistance with project management, analysis, systems design, programming,
maintenance, testing and special technologies for short-term and long-term
information technology projects. The divisions service offerings encompass a
wide variety of tasks, ranging from management of all aspects of a project or
the implementation of turnkey systems to the fulfillment of temporary staffing
needs for technology projects. Selected Technology Services offices also provide complementary or
stand-alone consulting services in the information technology area, typically
on a time and materials basis. For example, certain offices work with clients
interested in alternatives to outsourcing their internal information technology
organization, as well as implementing complex systems integration solutions,
and offer a range of consulting services in areas such as systems development
and client/server networks that span mainframe, mid-range and desktop systems.
These services are provided at the clients site or at off-site development
centers. We intend to continue expanding the consulting services component of
our service offerings in Technology Services as part of our strategy to offer a
full range of technology services to our clients and have recently introduced
an offshore service offering, which provides a low cost alternative for certain
customer projects that do not require that our consultants work at the
customers location. Technology Tools and Automated Hiring Systems To complement our core staffing and consulting services offerings, we also
offer our customers a variety of technology tools and automated hiring systems
designed to streamline and automate portions or all of their human capital
management processes. These tools and systems have proven particularly
attractive to larger customers and to state governments and government
agencies. These tools and systems include vendor management systems, a career
enhancement website and internet job board, website development and hosting
services and web-based employment channels. As the trend towards vendor management and other automated hiring systems
has accelerated among larger customers in recent years, we have developed our
own dedicated sales and recruiting teams that focus on sales and marketing of
our own proprietary vendor management services (VMS) offering to our clients,
which we call vWorx. vWorx was particularly successful in 2003, and we now
have a number of larger customers using vWorx to automate the hiring processes
for portions or all of their contingent workers. In 2003, we also introduced
our MARS program, which is a service offering that provides recruiting services
for other VMS providers that are managing similar services for their clients. Sales and Marketing Technology Services has developed a sales and marketing strategy that
focuses on both national and local accounts, and is implemented in a
decentralized manner through our various branch locations. At the national
level, Technology Services has focused on attaining preferred vendor status at
large customers to provide leverage across the practice. These accounts are
typically targeted by a local Technology Services office with a presence in a
specific market, and then are sold on the basis of the strength of Technology
Services geographic presence in multiple markets. Technology Services also is
supported by centralized proposal generating and vendor management systems
sales departments, which assist in the development of responses to large
account request for proposals and support the divisions efforts to broaden our
preferred vendor relationships. 4




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Local accounts are targeted and sold by account managers at the branch
office level, permitting Technology Services to capitalize on the established
local expertise and relationships of our branch office employees. These
accounts are solicited through personal sales presentations, telephone and
e-mail marketing, direct mail solicitation, referrals and advertising in a
variety of local and national media. Advertisements appear in the Yellow
Pages, newspapers and trade publications. Local employees are encouraged to be
active in civic organizations and industry trade groups to facilitate the
development of new customer relationships. The technology services business is affected by the timing of holidays and
seasonal vacation patterns, generally resulting in lower Technology Services
revenues and lower operating margins in the fourth quarter of each year. Staffing Services Division At February 29, 2004, Staffing Services operated through 81 offices in 15
states. Staffing Services provides temporary personnel who perform general
office and administrative services, word processing and desktop publishing,
office automation, records management, production/assembly/distribution,
telemarketing, finance, accounting, light technical, light industrial and other
staffing services. In most of our Staffing Services markets, our light
industrial and light technical business accounts for less than 25% of our total
Staffing Services revenues. Some of our Staffing Services offices also provide
full-time placement services. Operations Staffing Services markets its services to local and regional clients
through a network of offices in large metropolitan markets throughout the
United States. Staffing Services strives to satisfy the needs of our customers by
providing customized services, such as on-site workforce management and
full-time placement services. The flexibility of Staffing Services
decentralized operations allows us to tailor our service offerings, reporting
and pricing to meet local client requirements. For example, we provide some
clients with customized billings, utilization reports and safety awareness and
training programs. To meet the growing demand in the staffing services business for
vendor-on-premise (VOP) capability, Staffing Services offers a VOP program
called SourcePLUS, our customized on-site temporary personnel management
system. SourcePLUS places an experienced staffing service manager at the
client facility to provide complete staffing support that is customized to meet
client-specific needs. This program facilitates client use of temporary
personnel and allows the client to outsource a portion of their personnel
responsibility to our on-site representative, who gathers and records requests
for temporary jobs from client department heads and then fulfills client
requirements. These Staffing Services representatives can also access Staffing
Services systems through on-site personal computers. Staffing Servicess full-time placement services provide traditional staff
selection and recruiting services to our clients. In addition to recruiting
employees through referrals, Staffing Services places advertisements in local
newspapers to recruit employees for specific positions at client companies.
Staffing Services utilizes our expertise and selection methods to evaluate the
applicants credentials. If the applicant receives and accepts a full-time
position at the client, Staffing Services charges the employer a one-time fee,
generally based on the annual salary of the employee. To maintain a consistent quality standard for all its temporary employees,
Staffing Services uses a comprehensive automated system to screen and evaluate
potential temporary personnel, make proper assignments and review a temporary
employees performance. Staffing Services uses the QuestPLUS System to
integrate the results of this skills testing with personal attributes and work
history and automatically matches available candidates with customer
requirements. Staffing Services also provides training to all division
employees in sales, customer service and leadership skills. 5




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Sales and Marketing Staffing Services has implemented a standardized business development
process to target potential customers with temporary staffing needs and to
maintain and expand existing customer relationships. Like Technology Services,
Staffing Services has developed a sales and marketing strategy focused on both
regional and local customer accounts. The sales efforts of Staffing Services
are decentralized and capitalize on the divisions long-standing customer
relationships and the lengthy market tenure of the divisions offices, which
have been in their existing geographic markets for more than 25 years on
average. Staffing Services obtains new clients primarily through active
participation in requests for proposals from larger customers and personal
sales presentations and referrals from other clients and supports our sales
efforts with telephone and e-mail marketing, direct mail solicitation and
advertising in a variety of local and national media, including the Yellow
Pages, newspapers, magazines and trade publications. Staffing Services also is
supported by centralized proposal generation and large account sales
departments, which assist in the development of responses to large account
requests for proposals and otherwise support the divisions efforts to broaden
our large account base. Staffing Services devotes the majority of our selling efforts to the local
and regional operations of a wide variety of businesses (including a number of
Fortune 500 companies) and to other potential customers that it has identified
as consistent users of temporary staffing services. Local and regional
accounts are characterized by shorter sales cycles and higher gross margins.
Staffing Services generally does not seek low margin national account
agreements, but does provide services to a wide variety of customers with
national and international businesses. Bids for large user accounts and the
provision of services to clients with multiple location requirements are
coordinated at our headquarters. The commercial staffing business is subject to the seasonal impact of
summer and holiday employment trends. Typically, the second half of each
calendar year is more heavily affected, as companies tend to increase their use
of temporary personnel during this period. While the commercial staffing
industry is cyclical, we believe that the broad geographic coverage of our
operations and the diversity of the services we provide (including our emphasis
on high-end white collar clerical workers) may partially mitigate the adverse
effects of economic cycles in a single industry or geographic region. Recruiting and Retention of Temporary Employees Except in the case of our MARS program, where we recruit nationally for
other VMS providers, we recruit our Staffing Services temporary associates and
Technology Services consultants through a decentralized recruiting program that
primarily utilizes the internet and local and national advertisements. In
addition, we have succeeded in recruiting qualified employees through referrals
from our existing labor force. To encourage further referrals, the Technology
Services and Staffing Services operations pay referral fees to employees
responsible for attracting new recruits. We interview, test, check references
for and evaluate the skills of applicants for temporary employment, utilizing
systems and procedures developed and enhanced over the years. In an effort to attract a broad spectrum of qualified employees, we offer
a wide variety of employment options and training programs. In addition,
Technology Services operates a number of formal and informal training programs
to provide our consultants with access to and training in new software
applications and a diverse mix of mainframe, client/server and other computer
technologies. We believe that these training initiatives have improved
consultant recruitment and retention, increased the technical skills of our
Technology Services personnel and resulted in better service for our clients. We provide competitive compensation packages and comprehensive benefits
for our Staffing Services temporary associates and Technology Services
consultants. Most of the temporary associates and Technology Services
consultants are also eligible for one of our 401(k) plans. Organizational Structure We operate through a network of decentralized offices using a shared
services model. Although local offices retain a great deal of autonomy and
flexibility with regard to issues relating to customers and employees, each
also adheres to common policies and procedures and a set of best practices
designed to ensure quality standards 6




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throughout the organization. Each office reports to a manager who is
responsible for day-to-day operations and the profitability of the office.
Depending on, among other things, the number of offices in a region, branch
managers may report to operating company presidents or general managers,
regional managers, division vice presidents or division presidents. Branch and
regional managers are given a high level of autonomy in making decisions about
the operations in their principal region. The compensation of branch and
regional managers includes bonuses primarily based on the growth and
profitability of their operations and is designed to motivate each manager to
maximize revenue and profit growth each year. Information Systems Because of the number of payroll and billing transactions we process every
week (particularly in Staffing Services), our business is systems intensive. Staffing Services uses a number of automated front office systems to keep
track of our customer orders and contacts and to measure the skills of the
temporary employee candidates that make themselves available and to match
skills with client requests. The ProficiencyPLUS program is designed to test
specific computer-related skills by allowing the candidate to operate in the
actual software program environment. The QuestPLUS system, which is our
primary contact management system, integrates the results of our skills testing
with personal attributes and work history and automatically matches available
candidates with customer requirements. QuestPLUS also allows us to track the
performance of our temporary employees and provide quality reports to customers
that document the level of our performance. In Technology Services, we use similar front office systems that were
developed primarily for the information technology staffing and consulting
industries. We utilize separate paybill systems for Technology Services and Staffing
Services. The paybill processing systems provide payroll processing and
customer invoicing. We have also installed in all of our offices common
financial and human resources systems, which support both divisions back
office operations and our financial accounting and reporting. Competition Despite significant consolidation within the United States staffing
services market, the market remains highly competitive and highly fragmented
and has limited barriers to entry. A number of publicly owned companies
specializing in professional staffing services in the United States have
greater marketing, financial and other resources than the Company. In the temporary staffing industry, competition generally is limited to
firms with offices located within a customers particular local market. In
most major markets, commercial staffing competitors generally include many of
the publicly traded companies and, in addition, numerous regional and local
full-service and specialized temporary service agencies, some of which may
operate only in a single market. In Technology Services, competition is not
limited by geography. Competitors for technology services include local
information technology staffing and consulting firms, management and strategic
consulting firms and the consulting affiliates of large accounting firms. Additionally, because many clients contract for their staffing services
locally, competition varies from market to market. In most areas, no single
company has a dominant share of the market. Many client companies use more
than one staffing services company, and it is common for large clients to use
several staffing services companies at the same time. However, in recent years
there has been a significant increase in the number of large customers
consolidating their temporary staffing purchases with a single supplier or
vendor manager, or with a smaller number of preferred vendors. The trend to
consolidate temporary staffing purchases has in some cases made it more
difficult for us to gain business from potential customers that have already
contracted to fill their staffing needs with our competitors or to retain
business with customers in local markets who have signed national agreements
with other providers. In other cases, we have been able to increase our volume
of business with certain customers that choose to purchase staffing services
primarily from us. 7




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The competitive factors in obtaining and retaining clients include an
understanding of client-specific job requirements, the ability to provide
appropriately skilled temporary personnel at the local level in a timely
manner, the monitoring of job performance quality and the price of services.
The primary competitive factors in obtaining qualified candidates for temporary
employment assignments are wages, responsiveness to work schedules and the
number of hours of work available. Management believes that we are highly
competitive in these areas due to our focus on local markets and the autonomy
given to our local management. Regulation Temporary employment service firms are generally subject to one or more of
the following types of government regulation: (1) regulation of the
employer/employee relationship between a firm and its temporary employees; (2)
registration, licensing, record keeping and reporting requirements; and (3)
substantive limitations on operations. Staffing services firms are the legal
employers of their temporary workers (other than independent contractors) and
are also governed by laws regulating the employer/employee relationship, such
as tax withholding or reporting, social security or retirement,
anti-discrimination and workers compensation. Trademarks We endeavor to protect our intellectual property rights and maintain a
number of trademarks, tradenames, service marks and other intellectual property
rights, including several that appear in this report. We also license certain
other proprietary rights in connection with our businesses. We are not
currently aware of any infringing uses or other conditions that would
materially and adversely affect our use of our proprietary rights. Employees At February 29, 2004, we had approximately 790 permanent administrative
employees. Additionally, approximately 1,405 of the information technology
consultants in Technology Services were full-time salaried or hourly employees.
None of our employees are covered by collective bargaining agreements. We
believe that our relationships with our employees are good. Except for the billable consultants in Technology who are salaried
employees, our billable workers are employed on an as-needed basis depending on
client demand. As a result, these billable employees are paid generally only
for the time they work and that we bill to our clients. Risk Factors and Forward Looking Information In addition to historical information, this report, including
Managements Discussion and Analysis of Financial Condition and Results of
Operations, contains certain statements that are forward-looking statements
regarding events and financial trends that may affect the Companys future
operating results or financial position. These statements may be identified by
words such as estimate, forecast, plan, intend, believe, should,
expect, anticipate, or variations or negatives thereof, or by similar or
comparable words or phrases. Forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those expected in such statements. These risks and uncertainties include, but
are not limited to, the following:  
    
    changes in levels of unemployment and other economic conditions in
the United States, or in particular regions or industries;
    
    changes or reductions in corporate information technology spending
levels;
    
    our ability to maintain existing client relationships and attract
new clients in the context of changing economic or competitive
conditions;
    
    the impact of competitive pressures, including any change in the
demand for our services, on our ability to maintain or improve our
operating margins;
    
    a federal, state or local government audit of our income, payroll
or other tax returns and the risk that assessments for additional
taxes, penalties and interest could be levied against the Company,
which could affect our liquidity;
    
    the entry of new competitors into the marketplace or expansion by
existing competitors; 8




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
    
    the Companys success in attracting, training and retaining
qualified management personnel and other staff employees;
    
    reductions in the supply of qualified candidates for temporary
employment or our ability to attract qualified candidates;
    
    the possibility of the Company incurring liability for the
activities of our temporary employees or for events impacting our
temporary employees on clients premises;
    
    the risk in an uncertain economic environment of increased
incidences of employment disputes, employment litigation and workers
compensation claims;
    
    the risk that further cost cutting or restructuring activities
undertaken by the Company could cause an adverse impact on certain of
our operations;
    
    further economic declines that could affect our liquidity or ability to comply with our loan covenants;
    
    the risks of defaults under the Companys credit agreements;
    
    adverse changes in credit and capital markets conditions that may
affect our ability to obtain financing or refinancing on favorable
terms;
    
    adverse changes to managements periodic estimates of future cash
flows that may affect our assessment of our ability to fully recover
our goodwill;
    
    whether governments will impose additional regulations or licensing
requirements on staffing services businesses in particular or on
employer/employee relationships in general; and
    
    other matters discussed in this report and the Companys other SEC
filings. Because long-term contracts are not a significant part of the Companys
business, future results cannot be reliably predicted by considering past
trends or extrapolating past results. We undertake no obligation to update
forward-looking information contained in this report. Item 2. Properties. Generally, the Companys offices are leased under leases of relatively
moderate duration (typically three to five years, with options to extend)
containing terms and conditions that are customary in each geographic market.
Technology Services and Staffing Services offices are typically in office or
industrial buildings, and occasionally in retail buildings, and our
headquarters facilities and regional offices are in similar facilities. Item 3. Legal Proceedings. From time to time the Company is involved in certain disputes and
litigation relating to claims arising out of our operations in the ordinary
course of business. Further, we are periodically subject to government audits
and inspections. In the opinion of the Companys management, matters presently
pending will not, individually or in the aggregate, have a material adverse
effect on the Companys results of operations or financial condition. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report. PART II. Item 5. Market for Registrants Common Equity and Related Shareholder Matters. The Companys common stock has traded since November 2002 on the Over the
Counter Bulletin Board (the OTC Bulletin Board). Prior to that time, our
common stock traded on the New York Stock Exchange (the NYSE). The NYSE
delisted the common stock in February 2003. The restructuring agreement for
the Companys financial restructuring completed in April 2003 contemplates that
the Company will use its best efforts to procure a new stock exchange listing
for the common stock and we have recently applied to list our common stock on
The NASDAQ National Market. In the meantime the common stock will continue to
trade on the OTC Bulletin Board under the symbol VPTR.OB. 9




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As of February 15, 2004, we had approximately 4,117 shareholders based on
the number of holders of record and an estimate of the number of individual
participants represented by securities position listings. The Companys policy has been to retain earnings for use in its business
and, accordingly, it has not historically paid cash dividends on the common
stock. In addition, the Companys revolving credit facility currently
prohibits the payment of dividends. In the future, our Board of Directors will
determine whether to pay cash dividends from time to time based on conditions
existing as of the time each determination is made, including our earnings,
financial condition, capital requirements, financing arrangements, the terms of
our credit agreements and any other factors deemed relevant by the Board of
Directors. The following table sets forth the high, low and closing sales prices for
the common stock as reported on the New York Stock Exchange for each quarter
during the fiscal year ended December 29, 2002, through November 20, 2002. It
also sets forth the range of high and low bids for the common stock from
November 21, 2002 through fiscal 2003 as reported by the OTC Bulletin Board.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not reflect actual transactions. Where applicable,
these amounts have been adjusted to reflect the 1-for-25 reverse split of the
common stock effected in August 2003. High
    
    Low
    
    Close2003First Quarter
    
    $
    6.00
    
    
    $
    3.25
    
    
    $
    4.25Second Quarter
    
    
    6.50
    
    
    
    3.75
    
    
    
    4.75Third Quarter
    
    
    11.00
    
    
    
    4.75
    
    
    
    10.00Fourth Quarter
    
    
    15.00
    
    
    
    9.50
    
    
    
    11.012002First Quarter
    
    $
    37.50
    
    
    $
    20.25
    
    
    $
    33.75Second Quarter
    
    
    41.00
    
    
    
    20.00
    
    
    
    22.50Third Quarter
    
    
    25.00
    
    
    
    6.00
    
    
    
    8.75Fourth Quarter (through November 20, 2002)
    
    
    9.25
    
    
    
    3.00
    
    
    
    3.50Fourth Quarter (beginning November 21, 2002)
    
    
    4.50
    
    
    
    1.50
    
    
    
    3.50
 The last reported bid price on March 15, 2004 was $12.95. Item 6. Selected Financial Data. The information required by this Item is included in the Companys Annual
Report under the caption Selected Financial Data, which information is set
forth in Exhibit 13.1 to this Form 10-K and is incorporated herein by
reference.  Item 7.
    Managements Discussion and Analysis of Financial Condition and Results
of Operations. The information required by this Item is included in the Companys Annual
Report under the caption Managements Discussion and Analysis of Financial
Condition and Results of Operations, which information is set forth in Exhibit
13.1 to this Form 10-K and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information required by this Item is included in the Companys Annual
Report under the caption Managements Discussion and Analysis of Financial
Condition and Results of Operations, Market Risk Disclosures, which
information is set forth in Exhibit 13.1 to this Form 10-K and is incorporated
herein by reference. 10




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Item 8. Financial Statements and Supplementary Data. The information required by this Item is included in the Companys Annual
Report under the captions Report of Independent Auditors, Consolidated
Balance Sheets, Consolidated Statements of Operations, Consolidated
Statements of Shareholders Equity (Deficit), Consolidated Statements of Cash
Flows and Notes to Consolidated Financial Statements, which information is
set forth in Exhibit 13.1 to this Form 10-K and is incorporated herein by
reference.  Item 9.
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. The Company has no disagreements on accounting or financial disclosure
matters with its independent public accountants to report under this Item 9. Item 9A. Controls and Procedures. Based on their evaluation as of the end of the period covered by this Form
10-K, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)) are effective to provide reasonable assurance that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. There were no changes in the Companys internal controls over financial
reporting that occurred during the Companys fourth fiscal quarter that have
materially affected, or are reasonable likely to materially affect, the
Companys internal control over financial reporting. PART III. Item 10. Directors and Executive Officers of the Registrant. Information concerning our directors and officers appearing under the
caption Management Information and information under the caption Governance
of the CompanySection 16(a) Beneficial Ownership Reporting Compliance in our
Proxy Statement is incorporated herein by reference. We have adopted a written code of business conduct and ethics that applies
to all of our directors, officers and employees, including our principal
executive officer, principal financial officer and principal accounting
officer. The code is available on our Internet site at
www.venturipartners.com. We intend to disclose on our Internet site any
substantive changes to the code. Information concerning the determination by our Board of Directors that a
financial expert serves on our Audit Committee, which appears under the caption
Governance of the CompanyBoard CommitteesAudit Committee in our Proxy
Statement, is incorporated herein by reference. Item 11. Executive Compensation. A description of the compensation of our executive officers is set forth
under the caption Executive Compensation in our Proxy Statement and is
incorporated herein by reference.  Item 12.
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters. Information appearing under the caption Security Ownership of Certain
Beneficial Owners and Management in our Proxy Statement is incorporated herein
by reference. 11




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##### 



Equity Compensation Plan Information The table below contains information about the Companys compensation
plans as of December 28, 2003 under which equity securities of the Company are
authorized for issuance. Number of securitiesremaining available forNumber of securities to be
    
    
    
    
    
    future issuance underissued upon exercise of
    
    Weighted-average exercise
    
    equity compensation plansoutstanding options, warrants
    
    price of outstanding options,
    
    (excluding securitiesand rights
    
    warrants and rights
    
    reflected in column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
(1)
    
    
    689,598
    
    
    $
    13.36
    
    
    
    118,735Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    689,598
    
    
    $
    13.36
    
    
    
    118,735
  (1)
    
    This number includes 13,498 stock options still outstanding under
our 1995 Equity Participation Plan (which will continue to be
exercisable in accordance with their terms even though that plan was
terminated in 2003) and 676,100 stock options granted under our 2003
Equity Incentive Plan. Item 13. Certain Relationships and Related Transactions. The information required by this Item is included in our Proxy Statement
under the caption Governance of the CompanyCertain Relationships and Related
Party Transactions and is incorporated herein by reference. 12




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##### 



Item 14. Principal Accountant Fees and Services. The information required by this Item is included in our Proxy Statement
under the caption Proposal 2Ratification of Selection of Independent Public
Accounting Firm and is incorporated herein by reference. PART IV. Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.  a.
    
    Documents filed as part of this report:  (1)
    
    The following Report of Independent Auditors and
financial statements of the Company are contained in Item 8
above:Consolidated Financial Statements:  Report of Independent AuditorsConsolidated Balance Sheets as of December 28, 2003 and
December 29, 2002Consolidated Statements of Operations for the years ended
December 28, 2003, December 29, 2002 and December 30, 2001Consolidated Statements of Shareholders Equity (Deficit) for
the years ended December 28, 2003, December 29, 2002 and
December 30, 2001Consolidated Statements of Cash Flows for the years ended
December 28, 2003, December 29, 2002 and December 30, 2001Notes to Consolidated Financial Statements  (2)
    
    No financial statement schedules are filed as part of
this report. All financial statement schedules for which
provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the
related instructions or are inapplicable, or the required
information is included elsewhere in the notes to the financial
statements referred to above.(3)
    
    Exhibits:The Exhibits filed with or incorporated by reference into this
annual report on Form 10-K are listed in the accompanying Exhibit
Index.  b.
    
    Reports on Form 8-K:The Company furnished a report on Form 8-K on October 31, 2003,
reporting on its financial results for the third quarter of 2003. It
did not submit any other reports on Form 8-K during the fourth
quarter. 13




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##### 



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 March 24, 2004. VENTURI PARTNERS, INC.By:
    /s/  Larry L. EnterlineLarry L. EnterlineChief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the Chief Executive Officer and Chief Financial
Officer of the Company, and by a majority of the Companys Board of Directors,
on March 24, 2004. Signature/s/ Larry L. Enterline
    
    Chief Executive Officer and DirectorLarry L. Enterline/s/ James C.Hunt
    
    President and Chief Financial OfficerJames C. Hunt/s/ William J. Simione, Jr.
    
    DirectorWilliam J. Simione, Jr./s/ Janice L. Scites
    
    DirectorJanice L. Scites/s/ Elias J. Sabo
    
    DirectorElias J. SaboDirectorChristopher R. PechockDirectorVictor E. Mandel
 14




---



##### 



EXHIBIT INDEX Documents incorporated by reference to exhibits that have been filed with our
reports or proxy statements under the Exchange Act are available to the public
over the Internet from the SECs website at http://www.sec.gov. You may also
read and copy any such document at the SECs public reference room located at
450 Fifth Street, N.W., Washington, D.C. 20549 under our SEC file number,
1-13956. Filed or FurnishedHerewith(*),orIncorporated byReference fromExhibit
    
    
    
    Previous Exhibit
    
    Company Reg. No.Number
    
    Description
    
    Number
    
    or Report3.1
    
    Restated Certificate of
Incorporation of the Company
    
    
    99.2
    
    
    8-K filed 8/5/033.2
    
    Certificate of Designation,
Preferences and Rights of Series A
Junior Participating Preferred Stock
    
    
    99.6
    
    
    8-K filed 4/25/033.3
    
    Certificate of Designation for
Series B Convertible Participating
Preferred Stock
    
    
    99.3
    
    
    8-K filed 4/25/033.4
    
    Amended and Restated Bylaws of the
Company
    
    
    99.7
    
    
    8-K filed 4/25/034.1
    
    Specimen Stock Certificate
    
    
    4.0
    
    
    10-Q for quarter
ended 6/29/034.2
    
    Amended and Restated Rights
Agreement, dated April 14, 2003,
between the Company and Wachovia
Bank, N.A. as Rights Agent
    
    
    1
    
    
    8-A12B/A filed
4/16/034.3
    
    Amendment to Amended and Restated
Rights Agreement, dated August 18,
2003, between the Company and the
Rights Agent
    
    
    1
    
    
    8-A12B/A filed
10/14/034.4
    
    Indenture between the Company and
HSBC Bank USA, as Successor Trustee
    
    
    4.2
    
    
    333-318634.5
    
    Form of Note Certificate for 5-3/4%
Convertible Subordinated Notes
    
    
    4.3
    
    
    333-3186310.1+
    
    1995 Equity Participation Plan, as amended
    
    
    10.1
    
    
    333-3186310.2+#
    
    Director and Officer Indemnification
Agreement of Victor E. Mandel
    
    
    10.2
    
    
    10-Q for quarter
ended 9/28/0310.3+
    
    Supplemental Retirement Plan for
Edward P. Drudge, Jr.
    
    
    10.7
    
    
    10K for year ended
1/2/0010.4+
    
    Amended and Restated Non-Qualified
Profit-Sharing Plan
    
    
    10.16
    
    
    10-K for year ended
12/29/9610.5+
    
    Board of Directors Deferred
Compensation Plan
    
    
    10.12
    
    
    10-K for year ended
12/28/9710.6
    
    Restructuring Agreement dated March
14, 2003
    
    
    99.2
    
    
    8-K filed 3/17/0310.7
    
    Participation Agreement dated March
14, 2003
    
    
    99.2
    
    
    8-K filed 3/17/0310.8
    
    Registration Rights Agreement dated
April 14, 2003
    
    
    99.4
    
    
    8-K filed 4/25/0310.9+
    
    2003 Equity Incentive Plan
    
    Annex C
    
    Definitive Schedule
14A filed 6/24/0310.10+
    
    Employment Agreement dated April 14,
2003 between the Company and Larry
L. Enterline
    
    
    99.10
    
    
    8-K filed 4/25/0310.11+
    
    Employment Agreement dated April 14,
2003 between the Company and James
C. Hunt
    
    
    99.11
    
    
    8-K filed 4/25/03
 15




---



##### 



Filed or FurnishedHerewith(*),orIncorporated byReference fromExhibit
    
    
    
    Previous Exhibit
    
    Company Reg. No.Number
    
    Description
    
    Number
    
    or Report10.12+
    
    Employment Agreement dated April 14,
2003 between the Company and Michael
H. Barker
    
    
    99.12
    
    
    8-K filed 4/25/0310.13+
    
    Employment Agreement dated April 14,
2003 between the Company and Ken R.
Bramlett, Jr.
    
    
    99.13
    
    
    8-K filed 4/25/0310.14+
    
    Employment Agreement dated July 24,
2003 between the Company and Thomas
E. Stafford
    
    
    10.14
    
    
    10-Q for quarter
ended 9/28/0310.15
    
    Restructure Agreement dated April 14, 2003
    
    
    99.14
    
    
    8-K filed 4/25/0310.16
    
    Second Amended and Restated Credit
Agreement
    
    
    99.15
    
    
    8-K filed 4/25/0310.17##
    
    Common Stock Purchase Warrant dated
as of April 14, 2003, issued by the
Company in favor of BNP Paribas
    
    
    99.16
    
    
    8-K filed 4/25/0312.1
    
    Ratio of Earnings to Fixed Charges
    
    
    *21.1
    
    Subsidiaries
    
    
    *23.1
    
    Consent of PricewaterhouseCoopers LLP
    
    
    *31.1
    
    Rule 13a-14(a)/15d-14(a)
Certification of Larry L. Enterline,
Chief Executive Officer of the
Company
    
    
    *31.2
    
    Rule 13a-14(a)/15d-14(a)
Certification of James C. Hunt,
Chief Financial Officer of the
Company
    
    
    *32.1
    
    Section 1350 Certification of Larry
L. Enterline, Chief Executive
Officer of the Company
    
    
    *32.2
    
    Section 1350 Certification of James
C. Hunt, Chief Financial Officer of
the Company
    
    
    *
 # This Exhibit is substantially identical to Director and Officer
Indemnification Agreements between the Company and each of the other members of
the Companys Board of Directors and also Mr. Hunt and Mr. Bramlett. ## This Exhibit is substantially identical to Common Stock Purchase Warrants
issued by the Company on the same date to each of Bank of America, N.A. and
Bank One, N.A., and to Common Stock Purchase Warrants, reflecting a transfer of
a portion of such Common Stock Purchase Warrants, issued by the Company (i) as
of the same date to each of Inland Partners, L.P., Links Partners L.P.,
MatlinPatterson Global Opportunities Partners L.P. and R2 Investments, LDC and
(ii) on August 6, 2003 to Mellon HBV SPV LLC. + Management contract or compensatory plan required to be filed under Item
15(c) of this report and Item 601 of Regulation S-K of the Securities and
Exchange Commission. 16




---



##### 



EXHIBIT 12.1 1999
    
    2000
    
    2001
    
    2002
    
    2003Fixed Charges:Interest expense including
amortization of debt issuance costs
    
    $
    16,447
    
    
    $
    20,108
    
    
    $
    18,278
    
    
    $
    17,301
    
    
    $
    5,522Interest on rent expense(1)
    
    
    3,419
    
    
    
    3,453
    
    
    
    3,564
    
    
    
    2,938
    
    
    
    2,435Total fixed charges
    
    
    19,866
    
    
    
    23,561
    
    
    
    21,842
    
    
    
    20,239
    
    
    
    7,957Earnings:Income (loss) before income taxes
    
    
    51,830
    
    
    
    6,803
    
    
    
    (76,364
    )
    
    
    (107,427
    )
    
    
    79,615Fixed charges
    
    
    19,866
    
    
    
    23,561
    
    
    
    21,842
    
    
    
    20,239
    
    
    
    7,957Income (loss) before fixed charges
    
    
    71,696
    
    
    
    30,364
    
    
    
    (54,522
    )
    
    
    (87,188
    )
    
    
    87,572Ratio of Earnings to Fixed Charges
(2)
    
    
    3.6
    
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    11.0
  (1)
    
    The Company believes one-third of rent expense represents a reasonable
approximation of the interest factor.(2)
    
    The ratio of earnings to fixed charges was negative in 2001 and 2002
primarily as the result of goodwill impairment charges of $56,779 and
$89,935, respectively. 17




---



##### 



EXHIBIT 13.1 PART II EXHIBITS FOR ITEMS 6 THROUGH 8 18




---



##### 



Item 6. Selected Financial Data. (in thousands, except per share data) 2003
    
    2002
    
    2001
    
    2000
    
    1999Results of OperationsRevenues
    
    $
    494,547
    
    
    $
    557,748
    
    
    $
    732,327
    
    
    $
    881,992
    
    
    $
    918,437Goodwill impairment
    
    
    
    
    
    
    89,935
    
    
    
    56,779
    
    
    
    11,021
    
    
    
    Restructuring and rationalization charges
    
    
    2,503
    
    
    
    4,650
    
    
    
    15,259
    
    
    
    1,960
    
    
    
    Operating income (loss)
    
    
    2,110
    
    
    
    (86,498
    )
    
    
    (57,211
    )
    
    
    26,911
    
    
    
    68,277Interest expense
    
    
    5,522
    
    
    
    17,301
    
    
    
    18,278
    
    
    
    20,108
    
    
    
    16,447Gain (loss) on financial restructuring, net
    
    
    83,027
    
    
    
    (3,628
    )
    
    
    (875
    )
    
    
    
    
    
    
    Provision (benefit) for income taxes
    
    
    (13,268
    )
    
    
    603
    
    
    
    (9,686
    )
    
    
    8,978
    
    
    
    22,077Income (loss) before cumulative effect of change in
accounting principle
    
    
    92,883
    
    
    
    (108,030
    )
    
    
    (66,678
    )
    
    
    (2,175
    )
    
    
    29,753Cumulative effect of change in accounting
principle, net of taxes(1)
    
    
    
    
    
    
    (242,497
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    92,883
    
    
    
    (350,527
    )
    
    
    (66,678
    )
    
    
    (2,175
    )
    
    
    29,753Earnings per diluted share:(2)Earnings before cumulative effect of change
in accounting principle
    
    $
    20.00
    
    
    $
    (100.95
    )
    
    $
    (62.90
    )
    
    $
    (2.25
    )
    
    $
    24.75Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (226.58
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    20.00
    
    
    
    (327.53
    )
    
    
    (62.90
    )
    
    
    (2.25
    )
    
    
    24.75Average diluted shares outstanding(2)(3)
    
    
    4,644
    
    
    
    1,070
    
    
    
    1,060
    
    
    
    1,004
    
    
    
    1,372Financial PositionWorking capital
    
    $
    25,194
    
    
    $
    17,494
    
    
    $
    72,241
    
    
    $
    82,577
    
    
    $
    86,787Goodwill
    
    
    103,532
    
    
    
    103,532
    
    
    
    478,162
    
    
    
    561,452
    
    
    
    557,421Total assets
    
    
    194,360
    
    
    
    247,406
    
    
    
    634,123
    
    
    
    743,593
    
    
    
    735,350Short- and long-term debt(3)
    
    
    60,973
    
    
    
    218,648
    
    
    
    234,882
    
    
    
    265,647
    
    
    
    254,351Shareholders equity (deficit)
    
    
    64,681
    
    
    
    (52,348
    )
    
    
    298,093
    
    
    
    364,299
    
    
    
    369,843
  (1)
    
    Effective at the beginning of 2002, the Company adopted SFAS 142, which
resulted in a goodwill impairment charge of $284,695 ($242,497 net of an
income tax benefit of $42,198). This non-cash charge was recorded as a
cumulative effect of change in accounting principle.(2)
    
    The assumed conversion of the 5.75% Notes into common stock was excluded
from the calculation of earnings per diluted share because the effect of
conversion was antidilutive. In addition, all share and per share amounts
have been restated to reflect the 1-for-25 reverse stock split completed
by the Company in August 2003 as if it had occurred at the beginning of
the periods presented.(3)
    
    The Company completed a comprehensive financial restructuring in April
2003, in which it restructured its senior revolving credit facility and
issued shares of its capital stock in exchange for $109.7 million of the
5.75% Notes. The Companys contractual liability outstanding at December
28, 2003 was $55,709. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Gain (Loss) on Financial
Restructuring, Net and Note 2, Comprehensive Financial Restructuring to
the Consolidated Financial Statements included elsewhere in this Annual
Report. 19




---



##### 



Item 7.
    Managements Discussion and Analysis of Financial Condition and Results
of Operations. The following discussion and analysis should be read in conjunction with
the Companys consolidated financial statements and related notes appearing
elsewhere in this report. Our fiscal years end on the Sunday nearest to each
December 31 and our fiscal quarters end on the Sunday nearest to the end of
each calendar quarter. FORWARD-LOOKING INFORMATION In addition to historical information, this report, including
Managements Discussion and Analysis of Financial Condition and Results of
Operations, contains certain statements that are forward-looking statements
regarding events and financial trends that may affect the Companys future
operating results or financial position. These statements may be identified by
words such as estimate, forecast, plan, intend, believe, should,
expect, anticipate, or variations or negatives thereof, or by similar or
comparable words or phrases. Forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those expected in such statements. These risks and uncertainties include, but
are not limited to, the following:  
    
    changes in levels of unemployment and other economic conditions in
the United States, or in particular regions or industries;
    
    changes or reductions in corporate information technology spending
levels;
    
    our ability to maintain existing client relationships and attract
new clients in the context of changing economic or competitive
conditions;
    
    the impact of competitive pressures, including any change in the
demand for our services, on our ability to maintain or improve our
operating margins;
    
    a federal, state or local government audit of our income, payroll
or other tax returns and the risk that assessments for additional
taxes, penalties and interest could be levied against the Company,
which could affect our liquidity;
    
    the entry of new competitors into the marketplace or expansion by
existing competitors;
    
    the Companys success in attracting, training and retaining
qualified management personnel and other staff employees;
    
    reductions in the supply of qualified candidates for temporary
employment or our ability to attract qualified candidates;
    
    the possibility of the Company incurring liability for the
activities of our temporary employees or for events impacting our
temporary employees on clients premises;
    
    the risk in an uncertain economic environment of increased
incidences of employment disputes, employment litigation and workers
compensation claims;
    
    the risk that further cost cutting or restructuring activities
undertaken by the Company could cause an adverse impact on certain of
our operations;
    
    further economic declines that could affect our liquidity or ability to comply with our loan covenants;
    
    the risks of defaults under the Companys credit agreements;
    
    adverse changes in credit and capital markets conditions that may
affect our ability to obtain financing or refinancing on favorable
terms;
    
    adverse changes to managements periodic estimates of future cash
flows that may affect our assessment of our ability to fully recover
our goodwill;
    
    whether governments will impose additional regulations or licensing
requirements on staffing services businesses in particular or on
employer/employee relationships in general; and
    
    other matters discussed in this report and the Companys other SEC
filings. Because long-term contracts are not a significant part of the Companys
business, future results cannot be reliably predicted by considering past
trends or extrapolating past results. We undertake no obligation to update
forward-looking information contained in this report. 20




---



##### 



THE COMPANY The Company is organized into two divisions: the Technology Services
division (Technology Services), which provides information technology
staffing and consulting services in a range of computer-related disciplines and
technology tools for human capital management, and the Staffing Services
division (Staffing Services), which provides a variety of temporary office,
clerical, accounting and finance, light technical and light industrial staffing
services. Approximately 49% of the Companys 2003 revenues came from
Technology Services and 51% came from Staffing Services. Each of our business lines depends in large part on our ability to recruit
skillful people and put them to work on temporary assignments for our
customers, making our primary revenue drivers billable hours and hourly bill
rates. Although we employ fewer billable employees in Technology Services and
those employees tend to work on longer assignments at higher pay rates, in each
of our businesses we generate revenue primarily by billing our customers based
on pre-agreed bill rates for the number of hours that each of our associates
works on assignment. We describe the types of business that we do for our
customers as either retail or vendor-on-premise (VOP) business. Our retail
business includes our smaller accounts and involves more local relationship
building and selling. Our VOP business tends to be our larger accounts or
business with larger customers that may have needs in multiple cities. Most of
our billings are on a time and materials basis. We also provide permanent
placement services to certain of our customers primarily in Staffing Services,
which results in fee revenue to us generally based on a percentage of the
candidates first year salary. Directs costs of services include our actual costs related to our billable
employees including the pay rate and payroll taxes, benefits and insurance
costs and other similar expenses. Gross margin is influenced by the
utilization rate for each billable employee, our business mix, seasonal trends
as we move through each calendar year and our ability to manage other
employment related costs, such as workers compensation costs. The Technology
Services business is affected by the timing of holidays and seasonal vacation
patterns, generally resulting in lower revenues and gross margins in the fourth
quarter of each year. The Staffing Services business is also subject to the
seasonal impact of summer and holiday employment trends. Typically, the
Staffing Services business is stronger in the second half of each calendar year
than in the first half. The following table sets forth the number of the Companys offices by
division at the end of each of the years indicated: 2003
    
    2002
    
    2001Technology Services
    
    
    28
    
    
    
    28
    
    
    
    33Staffing Services
    
    
    81
    
    
    
    90
    
    
    
    92Total offices
    
    
    109
    
    
    
    118
    
    
    
    125
 EXECUTIVE OVERVIEW The year 2003 was a year of transition for the staffing industry. After
an extended period of declines in both revenues and profits in 2001, 2002 and
the first half of 2003 as the industry, and our Company, suffered through the
recession, consolidated revenues and profits began to strengthen in the latter
quarters of 2003 as the result of improving economic conditions. Our Staffing
Services revenues increased sequentially during each quarter of the year and
Technology Services showed sequential increases in revenues in the third and
fourth quarters of this year. This growth was largely driven by the tendency
for companies to build their staff on a temporary basis initially when coming
out of a recession due to the uncertain environment. Another historical
expectation when coming out of a recession is a significant increase in
workers compensation costs and state unemployment taxes. We saw increases in
both of these areas in 2003 and expect the impact in 2004 to be even greater. In April 2003, we completed a comprehensive financial restructuring in
which we converted $109.7 million of outstanding 5.75% Notes to equity and
refinanced our senior revolving credit facility. The credit facility, as
amended in connection with the financial restructuring, now provides for a
$70.7 million revolving line of credit due May 1, 2004, subject to certain
maturity date extensions in six-month increments through May 1, 2005. As 21




---



##### 



the result of the debt elimination produced by the restructuring and the
accounting treatment requiring the deferred gain related to the senior debt to
be amortized into interest over the term of our credit facility, we greatly
reduced our interest expense from $17.3 million in 2002 to $5.5 million for
2003. In connection with the restructuring, we also effected a 1-for-25
reverse stock split of our common stock. All common stock share and per share
amounts contained in this report, including the number of shares of common
stock issued in connection with our financial restructuring, have been restated
to reflect this reverse stock split as if it had occurred at the beginning of
the periods presented. We received notification in November 2003 that our federal income tax
returns for the 1996 through 2002 tax years were accepted as filed. As a
result, we recorded an income tax benefit of $13.3 million in the fourth
quarter of 2003 related to certain federal tax benefits recognized after the
completion of the IRS review. As a result of certain accounting rule changes, the impact of the
recession on our expectations about the future financial performance of our
businesses and the declines in operating results in 2001 and 2002, the Company
recorded a goodwill impairment charge of $242.5 million in the second quarter
of 2002 as a cumulative effect of change in accounting principle. In the
fourth quarter of 2002, we assessed our goodwill again as required under the
new rules and recorded an additional $89.9 million of impairment for goodwill
associated with the Technology Services division. No additional impairment was
identified for either operating division in 2003. The Company evaluates its segment performance (in each of Technology
Services and Staffing Services) based on income from operations before
unallocated corporate expenses, restructuring and rationalization charges,
stock option compensation, amortization of goodwill and intangible assets,
interest expense, gain (loss) on financial restructuring, net, and income
taxes. The following table summarizes certain income statement information for
the Company for the years 2003, 2002 and 2001, both in dollars and as a
percentage of revenues: (dollars in thousands)Operating Results
    
    2003
    
    2002
    
    2001RevenuesTechnology Services
    
    $
    244,319
    
    
    
    49.4
    %
    
    $
    295,387
    
    
    
    53.0
    %
    
    $
    447,862
    
    
    
    61.2
    %Staffing Services
    
    
    250,228
    
    
    
    50.6
    %
    
    
    262,361
    
    
    
    47.0
    %
    
    
    284,465
    
    
    
    38.8
    %Total revenues
    
    
    494,547
    
    
    
    100.0
    %
    
    
    557,748
    
    
    
    100.0
    %
    
    
    732,327
    
    
    
    100.0
    %Gross profitTechnology Services
    
    
    56,852
    
    
    
    23.3
    %
    
    
    72,007
    
    
    
    24.4
    %
    
    
    114,524
    
    
    
    25.6
    %Staffing Services
    
    
    49,798
    
    
    
    19.9
    %
    
    
    57,794
    
    
    
    22.0
    %
    
    
    77,144
    
    
    
    27.1
    %Total gross profit
    
    
    106,650
    
    
    
    21.6
    %
    
    
    129,801
    
    
    
    23.3
    %
    
    
    191,668
    
    
    
    26.2
    %Segment operating incomeTechnology Services
    
    
    9,956
    
    
    
    4.1
    %
    
    
    13,457
    
    
    
    4.6
    %
    
    
    28,994
    
    
    
    6.5
    %Staffing Services
    
    
    9,785
    
    
    
    3.9
    %
    
    
    11,263
    
    
    
    4.3
    %
    
    
    18,161
    
    
    
    6.4
    %Total segment operating income, as defined
    
    
    19,741
    
    
    
    4.0
    %
    
    
    24,720
    
    
    
    4.4
    %
    
    
    47,155
    
    
    
    6.4
    %Unallocated corporate expenses
    
    
    14,356
    
    
    
    2.9
    %
    
    
    16,161
    
    
    
    2.9
    %
    
    
    16,050
    
    
    
    2.2
    %Amortization of goodwill and intangible assets
    
    
    202
    
    
    
    
    
    
    
    472
    
    
    
    0.1
    %
    
    
    16,278
    
    
    
    2.2
    %Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    89,935
    
    
    
    16.1
    %
    
    
    56,779
    
    
    
    7.8
    %Restructuring and rationalization charges
    
    
    2,503
    
    
    
    0.5
    %
    
    
    4,650
    
    
    
    0.8
    %
    
    
    15,259
    
    
    
    2.1
    %Stock option compensation expense
    
    
    570
    
    
    
    0.1
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    5,522
    
    
    
    1.1
    %
    
    
    17,301
    
    
    
    3.1
    %
    
    
    18,278
    
    
    
    2.5
    %Gain (loss) on financial restructuring, net
    
    
    83,027
    
    
    
    16.8
    %
    
    
    (3,628
    )
    
    
    -0.7
    %
    
    
    (875
    )
    
    
    -0.1
    %Income (loss) before income taxes and
cumulative effect of change in
accounting principle
    
    $
    79,615
    
    
    
    16.1
    %
    
    $
    (107,427
    )
    
    
    -19.3
    %
    
    $
    (76,364
    )
    
    
    -10.4
    %
 22




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##### 



RESULTS OF OPERATIONS Year Ended December 28, 2003 Versus Year Ended December 29, 2002 Operating Results Despite revenue improvements in each of our business lines in the second
half of the year, total revenues decreased 11.3%, to $494.5 million in 2003
from $557.7 million in 2002, due to the weak economic environment, including a
continued decline in corporate technology spending from prior year levels. Direct costs, consisting of payroll and related expenses of consultants
and temporary workers, decreased 9.4% to $387.9 million in 2003 on the lower
revenues. Gross profit decreased 17.8% to $106.7 million primarily on the
lower revenues. Gross profit as a percentage of revenue also decreased to
21.6% in 2003 from 23.3% in 2002, primarily as the result of the continued
softening in the higher margin sectors of the staffing and consulting
businesses, the significant decline in permanent placement services, continuing
downward bill rate pressure imposed by many of our larger customers and higher
payroll taxes and workers compensation costs. Operating expenses, consisting of selling, general and administrative
expenses and depreciation and amortization expense, decreased 16.6% to $101.5
million in 2003 from $121.7 million in 2002. This decrease was primarily due
to the Companys aggressive cost reduction program, including its workforce
reduction and office consolidation initiatives. Approximately 11.6% (17.5% in
2002) of the Companys permanent workforce was eliminated during the year.
Also, variable or incentive compensation declined due to lower revenues and
operating margins. As a percentage of revenues, selling, general and
administrative expenses decreased to 19.5% in 2003 from 20.5% in 2002. In
addition, depreciation and amortization expense decreased to 1.0% of revenues
in 2003 from 1.3% in 2002. Technology Services Division Although Technology Services revenues increased in the second half of 2003
compared to the first half of 2003, revenues decreased 17.3% for the year
primarily as the result of the multi-year, industry-wide slowdown in customer
demand for technology staffing services. Technology Services billable
consultants on assignment began to climb again during the year, but declined
for the year from approximately 1,970 at year-end 2002 to approximately 1,950
at year-end 2003. The following table summarizes the quarterly revenue and
billable headcount (as of the end of each period) for the Technology Services
operations for 2003 and 2002 (revenues in thousands): 2003Q1
    
    Q2
    
    Q3
    
    Q4
    
    TotalRevenues
    
    $
    60,560
    
    
    $
    59,829
    
    
    $
    60,914
    
    
    $
    63,016
    
    
    $
    244,319Billable headcount
    
    
    1,830
    
    
    
    1,800
    
    
    
    1,900
    
    
    
    1,950
    
    
    
    1,950
 2002Q1
    
    Q2
    
    Q3
    
    Q4
    
    TotalRevenues
    
    $
    82,308
    
    
    $
    77,632
    
    
    $
    70,040
    
    
    $
    65,407
    
    
    $
    295,387Billable headcount
    
    
    2,300
    
    
    
    2,200
    
    
    
    2,100
    
    
    
    1,970
    
    
    
    1,970
 While we are encouraged by the revenue trends in the second half of 2003,
we cannot assure you that Technology Services revenues will increase as the
broader economy strengthens or other uncertainties subside. Gross margin percentage in Technology Services was 23.3% for 2003, down
110 basis points from 2002. We believe our gross margins are stabilizing after
several years of margin compression from customer pressure on bill rates and a
market driven shift in mix of business away from higher margin new systems
development work. Operating income was $10.0 million, or 4.1% of revenues, for
the Technology Services operations in 2003
compared to $13.5 million, or 4.6% of revenues, in 2002 primarily as the
result of the lower revenues and gross margins. 23




---



##### 



Staffing Services Division Staffing Services revenues declined 4.6% to $250.2 million in 2003
primarily due to declines in the retail component of the Companys temporary
staffing business and permanent placement revenues, which were partially offset
by the relative strength in the Companys VOP business. Operating income was
$9.8 million, or 3.9% of revenues, for the Staffing Services operations in 2003
compared to $11.3 million, or 4.3% of revenues, in 2002. Consistent with the
historical seasonal trends, we experienced sequential increases in revenues and
billable hours in each quarter during the year. The revenue decline from the
fourth quarter of 2002 to the first quarter of 2003 was significantly impacted
by one large VOP customer that had significant growth in the fourth quarter of
2002 and returned to more historical levels in the first quarter of 2003. The
following table summarizes the quarterly revenues and billable hours for the
Staffing Services operations for 2003 and 2002 (in thousands): 2003Q1
    
    Q2
    
    Q3
    
    Q4
    
    TotalRevenues
    
    $
    60,156
    
    
    $
    62,680
    
    
    $
    63,308
    
    
    $
    64,084
    
    
    $
    250,228Billable hours
    
    
    3,574
    
    
    
    3,691
    
    
    
    3,754
    
    
    
    3,869
    
    
    
    14,888
 2002Q1
    
    Q2
    
    Q3
    
    Q4
    
    TotalRevenues
    
    $
    59,745
    
    
    $
    64,100
    
    
    $
    67,641
    
    
    $
    70,875
    
    
    $
    262,361Billable hours
    
    
    3,392
    
    
    
    3,685
    
    
    
    3,994
    
    
    
    4,352
    
    
    
    15,423
 The change in business mix discussed above also impacts the divisions
gross margins, as the VOP business typically carries higher volume and lower
margins compared to the higher margin permanent placement business. The
following table summarizes the quarterly business mix for the Staffing Services
division for 2003 and 2002: 2003Q1
    
    Q2
    
    Q3
    
    Q4
    
    TotalRetail
    
    
    60.6
    %
    
    
    60.7
    %
    
    
    62.2
    %
    
    
    61.3
    %
    
    
    61.2
    %VOP
    
    
    37.4
    %
    
    
    37.0
    %
    
    
    35.6
    %
    
    
    36.6
    %
    
    
    36.6
    %Permanent placement
    
    
    2.0
    %
    
    
    2.3
    %
    
    
    2.2
    %
    
    
    2.1
    %
    
    
    2.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 2002Q1
    
    Q2
    
    Q3
    
    Q4
    
    TotalRetail
    
    
    65.3
    %
    
    
    63.7
    %
    
    
    63.0
    %
    
    
    56.9
    %
    
    
    62.0
    %VOP
    
    
    31.4
    %
    
    
    32.3
    %
    
    
    33.9
    %
    
    
    40.8
    %
    
    
    34.8
    %Permanent placement
    
    
    3.3
    %
    
    
    4.0
    %
    
    
    3.1
    %
    
    
    2.3
    %
    
    
    3.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 The Company expects moderate improvements in demand for its services,
including our retail and permanent placement operations, in 2004 as the
employment and economic environment strengthen. Goodwill Impairment The Company performed its annual impairment analysis in the fourth quarter
of 2003 and determined that there was no additional impairment at that time.
See -Year Ended December 29, 2002 Versus Year Ended December 30, 2001-Goodwill
Impairment for a discussion of goodwill impairments recorded in 2002. 24




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##### 



Restructuring and Rationalization Charges Beginning in 2001, we implemented a plan to restructure and rationalize
certain operations. As a result, we recorded charges totaling $2.5 million and
$4.7 million in 2003 and 2002, respectively. These charges were comprised of
the following components (in thousands): 2003
    
    2002Employee severance
    
    $
    426
    
    
    $
    1,915Lease abandonment and termination costs
    
    
    1,880
    
    
    
    2,689Property abandonment charges
    
    
    130
    
    
    
    46Other
    
    
    67
    
    
    
    Total restructuring and rationalization charges
    
    $
    2,503
    
    
    $
    4,650
 Following is a summary of the accrued liability for cash restructuring and
rationalization charges for the years ended December 28, 2003 and December 29,
2002 (in thousands): Employee
    
    LeaseSeverance
    
    Costs
    
    Other
    
    TotalAccrued liability at December 30, 2001
    
    $
    42
    
    
    $
    3,109
    
    
    $
    321
    
    
    $
    3,4722002 charges
    
    
    1,915
    
    
    
    2,689
    
    
    
    
    
    
    
    4,604Cash payments
    
    
    (1,398
    )
    
    
    (1,140
    )
    
    
    (237
    )
    
    
    (2,775
    )Accrued liability at December 29, 2002
    
    
    559
    
    
    
    4,658
    
    
    
    84
    
    
    
    5,3012003 charges
    
    
    426
    
    
    
    1,880
    
    
    
    67
    
    
    
    2,373Cash payments
    
    
    (959
    )
    
    
    (1,805
    )
    
    
    (151
    )
    
    
    (2,915
    )Accrued liability at December 28, 2003
    
    $
    26
    
    
    $
    4,733
    
    
    $
    
    
    
    $
    4,759
 Employee severance-related costs included the elimination of both
administrative and income-producing employees. Under the workforce reduction
plan, approximately 11.6% (17.5% in 2002) of our permanent workforce, or 106
(194 in 2002) employees, were eliminated during the year. Lease abandonment
and termination costs related primarily to office closures, branch
consolidations and leased space reductions. Property abandonment costs
consisted of the write-down of abandoned leasehold improvements and other
equipment. These assets were written down to zero as they were abandoned. Of the remaining accrued liability at December 28, 2003, we expect to pay
approximately $1.7 million during 2004 and the balance, primarily lease
payments, over the following six years. Stock Option Compensation Expense Stock option compensation expense represents the non-cash charge
associated with certain stock options that were issued within a six-month
period after cancellation of old stock options and subsequently are accounted
for as variable stock options under FASB Interpretation No. 44 (FIN 44),
Accounting for Certain Transactions involving Stock Compensation. We expect
to continue to record adjustments to income from stock option compensation in
future periods due to subsequent changes in the price of our common stock. Interest Expense Interest expense decreased 68.1%, to $5.5 million in 2003 from $17.3
million in 2002, primarily as a result of the comprehensive financial
restructuring completed in April 2003 and the accounting treatment requiring
the deferred gain on financial restructuring, net, related to the senior debt,
to be amortized into interest over the term of the Companys senior revolving
credit facility (the Credit Facility). The reported interest expense of $5.5
million for 2003 is net of amortization of deferred gain on financial
restructuring of $2.8 million. The average interest rate on borrowings was
7.8% in 2003, up 50 basis points from 2002. See -Gain (Loss) on Financial
Restructuring, Net. 25




---



##### 



Gain (Loss) on Financial Restructuring, Net On April 14, 2003, the Company completed a comprehensive financial
restructuring with its senior lenders and the holders of $109.7 million
outstanding principal amount of its 5.75% Convertible Subordinated Notes due
2004 (the 5.75% Notes) in which it issued shares of the Companys Common
Stock and Series B Convertible Participating Preferred Stock (the Series B
preferred stock) to the participating noteholders in exchange for their 5.75%
Notes (the Exchange Transaction). In the Exchange Transaction, the
participating noteholders in the aggregate received approximately $3.2 million
in cash ($28.75 for each $1,000 in principal amount of notes exchanged) and
5,015,349 shares of common stock (after conversion of the Series B preferred
stock issued in the Exchange Transaction), which represented approximately 82%
of the Companys outstanding capital stock immediately after the Exchange
Transaction. The Companys existing shareholders retained ownership of their
outstanding 1,075,248 shares of Common Stock, which represented approximately
18% of the outstanding capital stock. To facilitate the closing of the Exchange Transaction and also to provide
for the terms on which the existing senior lenders would continue to finance
the Companys working capital needs, the Company and its existing senior
lenders also executed definitive loan agreements that provided for certain
amendments and maturity date extensions to the Credit Facility and eliminated
the Equity Appreciation Right (the EAR) then held by the senior lenders (the
Senior Debt Restructuring). The Senior Debt Restructuring provided for the
forgiveness of indebtedness in the amount of $10.3 million. As a result of the
Exchange Transaction and the Senior Debt Restructuring, the Company used
substantially all of its cash on hand, after payment of transaction expenses,
to repay $38.0 million of its outstanding credit facility and eliminated an
additional $120.0 million of its outstanding indebtedness, which has resulted
in substantial reductions in the Companys interest expense. No provision for
income taxes was recorded in 2003 since the gain from financial restructuring
will not be subject to income tax. The amended Credit Facility provides for a $70.7 million revolving line of
credit due May 1, 2004 and is subject to certain maturity date extensions,
assuming the Company is in compliance with its covenants, in six-month
increments through May 1, 2005. Availability of borrowings under the Credit
Facility is subject to a borrowing base calculated as specified percentages of
the Companys eligible accounts receivable (as defined) in the aggregate. The
Credit Facilitys financial covenants include monthly maintenance of cumulative
EBITDA levels and an interest and subordinated indebtedness coverage ratio
(both as defined in the amended agreement). The Credit Facility also contains
restrictions on the payment of cash dividends on the Companys capital stock
and places additional limitations on share repurchases, acquisitions and
capital expenditures. Finally, to replace the EAR formerly included as part of
the Credit Facility, the Company issued common stock purchase warrants to the
lenders under the Credit Facility entitling them to purchase a total of 768,997
shares of common stock, or 10% of the outstanding common stock on a fully
diluted basis as of the closing date of the financial restructuring. The
Company engaged an independent valuation firm to assist in the determination of
the fair value of these warrants and recorded $1.5 million as additional
shareholders equity with a corresponding reduction in the outstanding senior
debt. These warrants are exercisable in whole or part over a 10-year period,
and their exercise price is $7.8025 per share, which was based on an assumed
equity valuation for the Company of $60.0 million. The exercise price for
these warrants exceeded the estimated fair value of the underlying equity at
the issuance date. Interest rates payable under the Credit Facility are set at
prime plus 425 basis points through June 2004 with increases during each
six-month period through May 1, 2005. The Company entered into an agreement with each of the former noteholders
participating in the Exchange Transaction and each of its senior lenders to
provide them with registration rights with respect to the shares of common
stock issued in connection with the financial restructuring and the shares of
common stock issuable upon exercise of the warrants, as applicable. In connection with the financial restructuring, the Company agreed to seek
shareholder approval at its 2003 Annual Meeting of Shareholders of a number of
amendments to its certificate of incorporation. The shareholders approved each
of the proposed amendments at the 2003 Annual Meeting, and the Company filed an
amended and restated certificate of incorporation, which was effective in
August 2003. The amendments included the following:  
    
    a reverse stock split of the Companys common stock at a
one-for-twenty-five ratio; 26




---



##### 




    
    the elimination of provisions that separated the Board of
Directors into three classes and that prohibited action by consent
of shareholders without a meeting;
    
    an election by the Company not to be governed by Section 203
of the Delaware General Corporation Law, which restricted the
ability of the Company to engage, directly or indirectly, in a
business combination transaction with a holder of 15% or more of its
voting stock;
    
    the addition of provisions requiring a supermajority vote of
the Board of Directors or shareholders to adopt changes to the
certificate of incorporation or bylaws; and
    
    the addition of a provision to protect minority shareholders
in connection with certain transactions with a shareholder that
beneficially owns 20% or more of the shares of the Companys capital
stock that are entitled to vote on matters submitted to a vote of
the shareholders (a Significant Holder). In addition, in connection with the financial restructuring, the Board of
Directors also amended and restated the Companys bylaws and shareholder rights
agreement, terminated its 1995 Stock Option Plan, adopted its 2003 Equity
Incentive Plan, and entered into new employment agreements with certain
executive officers. The Company recorded the issuance of its equity securities in exchange for
outstanding 5.75% Notes at the fair value of the newly issued equity
securities, with the excess of the debt carrying value over the fair value of
equity securities recorded as a gain. The forgiveness of $10.3 million in
senior debt will reduce future interest expense over the term of the amended
Credit Facility, and the $1.1 million of fees paid to the senior lenders was
reflected as a reduction in the principal balances outstanding as required
under accounting for troubled debt restructuring. The Company engaged an
independent valuation firm to assist in the determination of the fair value of
the warrants issued in connection with the Senior Debt Restructuring and
recorded $1.5 million as additional shareholders equity with a corresponding
reduction in the outstanding senior debt, with such amount recognized as a
component of interest expense over the term of the senior debt. The net gain
on financial restructuring was not classified as an extraordinary item in
accordance with the recently issued Statement of Financial Accounting Standards
No. 145 (SFAS 145), Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections. Provision (Benefit) for Income Taxes The Company recorded an income tax benefit of $13.3 million in the fourth
quarter of 2003 related to certain federal tax benefits recognized after the
completion of a review by the IRS of the Companys tax returns for the years
1996 through 2002. In 2002, the Company recorded an income tax provision of
$0.6 million, comprised of an income tax benefit of $4.6 million related to its
operating losses, offset by a charge of $5.2 million related to the adoption of
Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and
Other Intangible Assets. This charge provided a valuation allowance against
certain deferred tax assets, but had no effect on the Companys cash flows. Year Ended December 29, 2002 Versus Year Ended December 30, 2001 Total revenues decreased 23.8% to $557.7 million in 2002 from $732.3
million in 2001, due to the weak economic environment, including a continued
decline in corporate technology spending. Technology Services revenues
decreased 34.0% primarily as the result of the continuing industry-wide
slowdown in customer demand for technology staffing services. Technology
Services billable consultants on assignment declined from approximately 2,500
at year-end 2001 to approximately 1,970 at year-end 2002. Staffing Services
revenues declined 7.8% to $262.4 million in 2002 primarily due to the weak
economic climate, which resulted in declines in permanent placement revenues
and the retail component of the Companys temporary staffing business.
Permanent placement revenues were 3.2% of Staffing Services revenues in 2002,
down from 6.3% in 2001, while the retail component of temporary staffing also
declined to 62.0% of Staffing Services revenues in 2002, down from 69.9% in
2001. Offsetting these declines was the increase in the VOP business. VOP
revenues totaled 34.8% in 2002 and 23.8% in 2001 of Staffing Services revenues,
respectively. 27




---



##### 



Direct costs, consisting of payroll and related expenses of consultants
and temporary workers, decreased 20.8% to $427.9 million in 2002 on the lower
revenues. Gross profit decreased 32.3% to $129.8 million on the lower
revenues. Gross profit as a percentage of revenue also decreased to 23.3% in
2002 from 26.2% in 2001. These decreases primarily were the result of the
continued softening in the higher margin sectors of the staffing and consulting
businesses, the significant decline in permanent placement services and
continuing downward bill rate pressure imposed by many of our larger customers. Operating expenses, consisting of selling, general and administrative
expenses and depreciation and amortization expense, decreased 31.2% to $121.7
million in 2002 from $176.8 million in 2001. The decrease was primarily due to
our aggressive cost reduction program, including our workforce reduction and
office consolidation initiatives. Approximately 17.5% (26% in 2001) of our
permanent workforce was eliminated during the year. Also, variable or
incentive compensation declined due to lower revenues and operating margins.
As a percentage of revenues, selling, general and administrative expenses
decreased to 20.5% in 2002 from 20.9% in 2001. In addition, depreciation and
amortization expense decreased to 1.3% of revenues in 2002 from 3.3% in 2001
primarily due to the change in accounting principle eliminating goodwill
amortization in 2002. Goodwill amortization expense was $15.4 million in 2001. Goodwill Impairment Effective at the beginning of 2002, the Company adopted SFAS 142. The
provisions of SFAS 142 prohibit the amortization of goodwill and
indefinite-lived intangible assets and require that goodwill and
indefinite-lived intangibles assets be tested at least annually for impairment.
In the second quarter of 2002, the Company completed its initial valuation as
of the adoption date, December 31, 2001, and in the fourth quarter of 2002
completed its annual test for impairment. Based upon the results of the initial valuation, which was completed in
the second quarter of 2002, the Company recorded a goodwill impairment charge
of $284.7 million ($242.5 million net of an income tax benefit of $42.2
million) as a cumulative effect of the change in accounting principle. In the fourth quarter of 2002, the Company performed its annual impairment
test and recorded an additional impairment charge of $89.9 million for goodwill
associated with its Technology Services operations. The Company experienced
lower than expected operating profits and cash flows in 2002 for the Technology
Services reporting unit. As a result of this trend and the overall industry
expectations, the projected operating profits and cash flows for the Technology
Services operations were reduced for the next five years resulting in a
reduction in the fair value of the Companys goodwill. The decrease in fair
value resulted in the recognition of the $89.9 million impairment loss. No
additional impairment was identified for the goodwill associated with the
Companys Staffing Services reporting unit. At December 29, 2002, the Company
had goodwill with a carrying value of $103.5 million of which $41.2 million
related to Technology Services and $62.3 million related to Staffing Services. Prior to the adoption of SFAS 142, the Company followed Statement of
Financial Accounting Standards No. 121 (SFAS 121), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
to test for its goodwill and intangible asset impairment. The Companys policy
included a projection of undiscounted cash flows for each operating company to
determine if the goodwill associated with that business component was
recoverable. When the Company performed its analysis in the fourth quarter of
fiscal 2001, it identified several operations, principally in the Technology
Services division, for which negative cash flows were projected in early years
and for which projected undiscounted cash flows were not sufficient to recover
the carrying amount of related goodwill. As a result, the Company recorded a
goodwill impairment charge of $56.8 million in the fourth quarter of 2001. The
impairment charges for Technology Services and Staffing Services were $41.0
million and $15.8 million, respectively. These charges related to operations
where future cash flows were projected to be negative and, accordingly, the
impairment charge represented the entire carrying amount of the related
goodwill. 28




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Restructuring and Rationalization Charges Beginning in 2001, we implemented a plan to restructure and rationalize
certain operations. As a result, we recorded charges totaling $4.7 million and
$15.3 million in 2002 and 2001, respectively. These charges were comprised of
the following components (in thousands): 2002
    
    2001Employee severance
    
    $
    1,915
    
    
    $
    1,678Lease abandonment and termination costs
    
    
    2,689
    
    
    
    3,869Property abandonment charges
    
    
    46
    
    
    
    2,568Loss on sale of business
    
    
    
    
    
    
    7,683Other
    
    
    
    
    
    
    (539
    )Total restructuring and rationalization charges
    
    $
    4,650
    
    
    $
    15,259
 Following is a summary of the accrued liability for cash restructuring and
rationalization charges for the years ended December 29, 2002 and December 30,
2001 (in thousands): Employee
    
    LeaseSeverance
    
    Costs
    
    Other
    
    TotalInitial charges
    
    $
    1,678
    
    
    $
    3,869
    
    
    $
    434
    
    
    $
    5,981Cash payments
    
    
    (1,636
    )
    
    
    (760
    )
    
    
    (113
    )
    
    
    (2,509
    )Accrued liability at December 30, 2001
    
    
    42
    
    
    
    3,109
    
    
    
    321
    
    
    
    3,4722002 charges
    
    
    1,915
    
    
    
    2,689
    
    
    
    
    
    
    
    4,604Cash payments
    
    
    (1,398
    )
    
    
    (1,140
    )
    
    
    (237
    )
    
    
    (2,775
    )Accrued liability at December 29, 2002
    
    $
    559
    
    
    $
    4,658
    
    
    $
    84
    
    
    $
    5,301
 Employee severance-related costs included the elimination of both
administrative and income-producing employees. Under the workforce reduction
plan, approximately 17.5% (26% in 2001) of our permanent workforce, or 194 (395
in 2001) employees, were eliminated during the year. Lease abandonment and
termination costs related primarily to office closures, branch consolidations
and leased space reductions. Property abandonment costs consisted of the write-down of abandoned
leasehold improvements and other equipment. These assets were written down to
zero as they were abandoned. The loss on the sale of business related to the
sale of one of our Technology Services offices in Dallas, which was completed
on December 31, 2001. Interest Expense Interest expense decreased 5.3%, to $17.3 million in 2002 from $18.3
million in 2001, due to lower borrowing levels under the Companys revolving
credit facility. The average interest rate on borrowings was 7.3% in 2002, up
10 basis points from 2001. Gain (Loss) on Financial Restructuring, Net The gain on financial restructuring that resulted from the conversion of
$109.7 million of our subordinated notes to equity is net of professional fees
incurred in connection with the financial restructuring. Fees incurred related
to the financial restructuring in 2002 and 2001 totaled $3.6 million and $0.9
million, respectively, and all prior year costs were previously classified in
restructuring and rationalization charges. These fees have been reclassified
for all periods presented. 29




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Provision (Benefit) for Income Taxes In 2002, the Company recorded an income tax provision of $0.6 million,
comprised of an income tax benefit of $4.6 million related to its operating
losses, offset by a charge of $5.2 million related to the adoption of SFAS 142.
This charge provided a valuation allowance against certain deferred tax assets,
but had no effect on the Companys cash flows. The effective tax benefit rate
of 12.7% in 2001 was lower than the U.S. federal statutory rate of 35%
primarily due to the impact of non-deductible amortization expense, valuation
allowances established during the year, and certain nondeductible restructuring
and rationalization charges, offset in part by the $1.4 million tax benefit
related to the diminution in value in the Companys investment in CareerShop,
which was sold during the second quarter of 2001. LIQUIDITY AND CAPITAL RESOURCES Overview While revenues in Technology Services and Staffing Services improved in
the second half of 2003, the Company has experienced declines in revenues over
the last two years as the result of weak economic conditions. We expect
improvements in demand for our services in 2004 in light of the improving, but
somewhat uncertain economic climate. In light of these expectations, we have
continued our focus on aggressive management of expenses, limiting capital
expenditures to only the highest priority projects and managing our accounts
receivable very closely. As a result of the reduced need for working capital
and these priorities, our cash needs were lower in 2003 than in prior years and
for 2004 should be only moderately higher. Prior to the comprehensive financial restructuring in April 2003, our
primary sources of cash were cash from operations and income tax refunds. As a
result of the completion of the financial restructuring and the related
execution of amendments and maturity date extensions to the Credit Facility,
the Companys sources of cash now also include available borrowings under the
Credit Facility. At December 28, 2003, we had $11.2 million of available
borrowings under the Credit Facility. Our principal uses of cash are to repay
debt, fund working capital and meet our diminished requirements for capital
expenditures. Additionally, the Company may use cash to fund a portion or all
of any acquisition expenditures, as described below. We believe, subject to
the conditions and contingencies described above in Forward-Looking
Information, that cash flow from operations, borrowings under our Credit
Facility and the proceeds of additional debt or equity offerings will be
adequate to meet our ongoing debt repayment objectives, diminished needs for
working capital and capital expenditures and any acquisition funding needs that
may arise. Now that our financial restructuring has been completed, we intend to
consider acquisition opportunities again in the ordinary course of our business
and believe that attractive acquisition opportunities could arise in the
staffing services sector as the economy improves. The Company intends to seek
additional capital as necessary to fund potential acquisitions through sources
that may include borrowings under the Credit Facility or additional debt or
equity offerings. Cash flow from operations, to the extent available, may also
be used to fund a portion of any acquisition expenditures. In connection with its financial restructuring, the Company used
substantially all of its cash on hand, after payment of transaction expenses,
to repay $38.0 million outstanding under its Credit Facility and eliminated an
additional $120.0 million of its outstanding indebtedness. These actions
resulted in substantial reductions in the Companys interest expense. The
Credit Facility, as amended in connection with the financial restructuring, now
provides for a $70.7 million revolving line of credit due May 1, 2004, subject
to certain maturity date extensions in six-month increments through May 1, 2005
if the Company is in compliance with its covenants. Availability of borrowings
under the Credit Facility is subject to a borrowing base calculated as
specified percentages of the Companys eligible accounts receivable (as
defined) in the aggregate. The Credit Facilitys covenants include a
requirement for monthly maintenance of cumulative EBITDA levels and an interest
and subordinated indebtedness coverage ratio (both as defined in the amended
agreement). The Credit Facility also contains restrictions on the payment of
cash dividends on the Companys capital stock and places additional limitations
on share repurchases, acquisitions and capital expenditures. Interest rates
payable under the Credit Facility are set at prime plus 425 basis points
through June 2004 with increases during each six-month period through May 1,
2005. 30




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The Company received notification in November 2003 that its federal income
tax returns for the 1996 through 2002 tax years were accepted as filed. As a
result, we recorded an income tax benefit of $13.3 million in 2003 related to
certain federal tax benefits recognized after the completion of the IRS review.
While we have received this favorable notification, the statute of limitations
is still open for certain tax years and there can be no assurance that future
audits will not be performed. The Company is subject to periodic review by
federal, state and local taxing authorities in the ordinary course of business,
and is currently engaged in certain audits that may result in assessments for
certain deficiencies. In any of these cases or in other audits of our income,
payroll or other tax returns, the appropriate authority could challenge certain
tax positions that we have taken and propose adjustments that could result in
assessments for additional taxes payable, together with penalties and interest.
The Company believes that its tax positions comply with applicable tax laws
and we would vigorously defend these positions if challenged. In addition,
although the Company believes that it has adequately accrued for any
foreseeable payments resulting from tax examinations, there can be no assurance
that any such additional taxes, penalties or interest payable would not have a
material effect on the Companys liquidity or financial condition. Year Ended December 28, 2003 Versus Year Ended December 29, 2002 The following table summarizes our cash flow activity for 2003 and 2002
(in thousands): 2003
    
    2002Net cash provided by operating activities
    
    $
    24,869
    
    
    $
    20,877Net cash provided by (used in) investing activities
    
    
    (1,008
    )
    
    
    1,994Net cash used in financing activities
    
    
    (45,976
    )
    
    
    (17,805
    )Net increase (decrease) in cash and cash equivalents
    
    $
    (22,115
    )
    
    $
    5,066
 For the year ended December 28, 2003, cash provided by operating
activities was $24.9 million compared with $20.9 million in 2002. In both years, cash from operations was
primarily the result of the large income tax refunds we received during these
years ($24.4 million
in 2003 and $19.2 million in 2002). Also in 2002 and 2003, cash was generated from accounts receivable due
to reduced business activity levels, offset somewhat in 2003 by an increase in
days sales outstanding. In the aggregate, days sales outstanding increased
to 51 days at December 28, 2003 from 48 days at December 29, 2002. Cash used
in investing activities was $1.0 million in 2003 compared to cash provided by
investing activities of $2.0 million during 2002, due primarily to the cash
proceeds received from the sale of a business in the prior year. Cash used for
investing activities related primarily to the Companys capital spending.
Capital spending in 2003 was $1.0 million, down from $1.8 million in 2002.
Cash used for financing activities was $46.0 million in 2003, up from $17.8
million in 2002, as we used substantially all of our cash on hand to pay down
the Credit Facility in connection with our financial restructuring. The Company has accrued restructuring and rationalization charges of $4.8
million at December 28, 2003 and expects to pay approximately $1.7 million
during 2004 and the balance, primarily lease payments, over the following six
years. In addition, we intend to refinance the 5.75% Notes with borrowings
under our Credit Facility and as a result, have classified the 5.75% Notes as
long-term at December 28, 2003. Debt Compliance The Companys ability to continue operating is largely dependent upon its
ability to maintain compliance with the financial covenants of the Credit
Facility. The financial covenants include a cumulative monthly EBITDA
requirement and a monthly interest and subordinated indebtedness coverage ratio
(both as defined). The amended Credit Facility defines consolidated EBITDA as
consolidated net income before interest expense, income taxes, depreciation and
amortization, non-cash impairment charges, restructuring and rationalization
charges, professional fees relating to the debt restructuring and non-cash
compensation expense for the stock options. For 2003, the Company exceeded the
level of earnings required in these covenants. Based on the Companys fiscal
2004 projections, which reflect slightly improving economic conditions,
management believes the Company will be able to maintain compliance with the
financial covenants for the next twelve months. The Company also believes that
the operating trends in 2003 support the key assumptions in its 2004 operating
plan. However, there can be no assurance that the economy or the Company will
perform as expected or that further economic declines will not
adversely impact the Companys results of operations or its ability to
comply with the financial covenants. In 31




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addition, the interest coverage ratio
changes from an interest coverage ratio to a stricter interest and subordinated
indebtedness coverage ratio on May 31, 2004. While the Company believes
financial results in 2004 will be above the actual 2003 results, in
the event that economic conditions weaken and/or the Companys
2004 results fall below actual levels in 2003, the Company may not
meet these financial covenants. The Company believes it
will be in compliance with its financial covenants at that time as
well, however, there
can be no assurance that the Company will be able to satisfy this stricter
financial covenant. If the Company does violate future covenants, it would
seek waivers and amendments from its lenders, but can give no assurance that
any such waivers and amendments would be available at all or on acceptable
terms. If the Company were unable to obtain a waiver of future covenant
violations, the lenders would be entitled to require immediate repayment of all
amounts outstanding under the Credit Facility. An acceleration of outstanding
amounts under the Credit Facility would also cause a default under, and permit
acceleration of, the Companys remaining outstanding 5.75% Notes. In the event
of one or more such defaults, the Companys ongoing viability would be
seriously threatened, and it would be forced to evaluate a number of strategic
alternatives, including a further debt restructuring or other reorganization,
the closure of certain operating locations or the sale of certain or all of its
assets in order to continue to fund its operations. In the current economic
environment, management believes that any such sale of assets would be at
depressed prices that could be significantly lower than the net book value of
assets sold and might not be sufficient to satisfy the Companys liabilities. The Companys common stock has traded since November 2002 on the Over the
Counter Bulletin Board (the OTC Bulletin Board). The restructuring agreement
for the Companys recently completed financial restructuring contemplates that
the Company will use its best efforts to procure a new stock exchange listing
for its common stock and we have recently applied to list our common stock on
The NASDAQ National Market. In the meantime the common stock will continue to
trade on the OTC Bulletin Board under the symbol VPTR.OB. As a result of the financial restructuring, the aggregate outstanding
principal amount of the 5.75% Notes was reduced to approximately $5.3 million.
As of December 28, 2003, the Company believes it was in compliance with the
indenture related to the 5.75% Notes. Failure to maintain or effect the
listing of the common stock on a national securities exchange or an established
automated over-the-counter trading market in the United States would constitute
a repurchase event under the 5.75% Notes and entitle each remaining noteholder
to demand repayment of its Notes in full. Under the terms of the Credit
Facility, the Company is prohibited from repaying any of the 5.75% Notes prior
to their scheduled maturity in July 2004. If the Company were unable to obtain
a waiver under the Credit Facility to permit repayment of any noteholder who
made such a demand following a repurchase event, and were also unable to obtain
waivers of such repurchase event from each demanding noteholder, events of
default could occur under the 5.75% Notes and the Credit Facility. The
noteholders could accelerate the payment of all of the debt obligations
evidenced by the remaining outstanding 5.75% Notes, and the Credit Facility lenders
could demand repayment of the Credit Facility in full. 32




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##### 



CONTRACTUAL AND COMMERCIAL COMMITMENTS The following table summarizes our contractual obligations and commercial
commitments at December 28, 2003 (in thousands): Payments Due by PeriodContractual Obligations
    
    Total
    
    Less than 1 Year
    
    1-3 Years
    
    3-5 Years
    
    More than 5 YearsShort- and long-term debt(1)
    
    $
    55,709
    
    
    $
    370
    
    
    $
    55,339
    
    
    $
    
    
    
    $
    Operating leases
    
    
    21,740
    
    
    
    7,478
    
    
    
    9,718
    
    
    
    3,019
    
    
    
    1,525Total contractual cash obligations
    
    $
    77,449
    
    
    $
    7,848
    
    
    $
    65,057
    
    
    $
    3,019
    
    
    $
    1,525
 Commitment Expiration per PeriodTotal AmountOther Commercial Commitments
    
    Committed
    
    Less than 1 Year
    
    1-3 Years
    
    3-5 Years
    
    More than 5 YearsLetters of credit(2)
    
    $
    9,539
    
    
    $
    
    
    
    $
    9,539
    
    
    $
    
    
    
    $
    
  (1)
    
    Contractual balance of $55,709 at December 28, 2003 excludes $5,264 of
deferred gain on debt forgiveness required by GAAP to be deferred and amortized into
interest over the term of the Credit Facility.(2)
    
    Letters of credit primarily secure the Companys self-insured workers compensation programs. MARKET RISK DISCLOSURES Our outstanding debt under the Credit Facility at February 29, 2004 was
$50.0 million. Interest on borrowings under that facility was based on the
prime rate plus a variable margin. Based on the outstanding balance at
February 29, 2004, a change of 1% in the interest rate would cause a change in
interest expense of approximately $0.5 million on an annual basis. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Companys analysis and discussion of its financial condition and
results of operations are based upon its consolidated financial statements that
have been prepared in accordance with generally accepted accounting principles
in the United States (US GAAP). The preparation of financial statements in
conformity with US GAAP requires management to make estimates and assumptions.
These estimates include the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
The Company evaluates these estimates and assumptions on an ongoing basis,
including but not limited to those related to the recoverability of goodwill,
collectibility of accounts receivable and reserves against permanent placement
revenues, workers compensation costs, restructuring and rationalization
reserves and realization of deferred tax assets. Estimates and assumptions are
based on historical and other factors believed to be reasonable under the
circumstances. The results of these estimates may form the basis of the
carrying value of certain assets and liabilities and may not be readily
apparent from other sources. Actual results, under conditions and
circumstances different from those assumed, may differ from these estimates. The Company believes the following accounting policies are critical to its
business operations and the understanding of its results of operations and
include the more significant judgments and estimates used in the preparation of
its consolidated financial statements. Recoverability of Goodwill Effective at the beginning of 2002, the Company adopted SFAS 142, which
established a new method for testing goodwill and other intangible assets for
impairment using a fair-value based approach. Under the new standard, goodwill
and other intangible assets with indefinite lives are no longer amortized as
was previously 33




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required, but are tested annually for impairment, unless an
event occurs or circumstances change during the year that reduce or may reduce
the fair value of the reporting unit below its book value, in which event an
impairment charge may be required during the year. The annual test
requires estimates and judgments by management to determine
valuations for each reporting unit. Although not required, we used
independent outside experts to assist in performing such valuations
in 2003 and 2002. Although we believe the
assumptions and estimates we have made are reasonable and appropriate,
different assumptions and estimates could materially impact our reported
financial results. Different assumptions related to future cash flows,
operating margins, growth rates and discount rates could result in an
impairment charge, which would be recognized as a non-cash charge to operating
income and a reduction in asset
values on our balance sheet. At year-end 2003 and 2002, total goodwill
was $103.5 million. At year-end 2001, total goodwill was $478.2 million. Collectibility of Accounts Receivable and Reserves Against Permanent Placement
Revenues We make ongoing estimates relating to the collectibility of our accounts
receivable and maintain allowances for estimated losses resulting from the
inability of our customers to make required payments. In determining the
amount of the allowance, we consider our historical level of credit losses and
make judgments about the creditworthiness of significant customers based on
ongoing credit evaluations, and we monitor current economic trends that might
impact the level of credit losses in the future. Since we cannot predict with
certainty future changes in the financial stability of our customers, actual
future losses from uncollectible accounts may differ from our estimates.
Additional allowances may be required if the economy or the financial condition
of our customers deteriorates. In our permanent placement businesses, we recognize revenue when
employment candidates accept offers of permanent employment. Allowances are
established, based on historical data, to estimate losses due to placed
candidates not remaining employed through the Companys guarantee period,
typically 90 days or less. Additional allowances may be required if a greater
percentage of candidates do not fulfill the guarantee period than historical
rates reflect. In the event we determined that a smaller or larger allowance was
appropriate, we would record a credit or a charge to selling, general and
administrative expense in the period in which we made such a determination. As
of year-end 2003, 2002 and 2001, the allowance for uncollectible accounts
receivable and reserves against permanent placement revenues was $3.5 million,
$3.0 million and $2.5 million, respectively. Workers Compensation Costs The Company has a combination of insurance and self-insurance programs for
workers compensation under which the Company currently bears the first
$500,000 of risk per single accident. We accrue liabilities under these
programs based on the loss and loss adjustment expenses as estimated by an
outside administrator to estimate the undiscounted future cash payments that
will be made to satisfy the claims, including an allowance for
incurred-but-not-reported claims. This process includes establishing loss
development factors, based on the historical claims experience of the Company
and the industry, and applying those factors to current claims information to
derive an estimate of our ultimate claims liability. In preparing the
estimates, we also consider the nature and severity of the claims, analyses
provided by third-party claims administrators, as well as current legal,
economic and regulatory factors. Management evaluates the accrual, and the underlying assumptions,
regularly throughout the year and makes adjustments as needed. The ultimate
cost of our workers compensation claims may be greater than or less than the
established accrual. While management believes that the recorded amounts are
adequate, there can be no assurances that changes to managements estimates
will not occur due to limitations inherent in the estimation process. In the
event we determine that a smaller or larger accrual is appropriate, we would
record a credit or a charge to direct costs of services in the period in which
we made such a determination. The accrual for workers compensation was $7.2
million, $5.8 million and $4.0 million at year-end 2003, 2002 and 2001,
respectively. Restructuring and Rationalization Reserves The Company records restructuring and rationalization reserves as a result
of its workforce reduction program and cost reduction initiatives which
resulted in the closing and consolidation of a number of our offices. The
reserve primarily relates to lease abandonment and termination costs, offset by
expected sublease income on 34




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##### 



those closed offices where we have found or are
searching for tenants. In those situations where we do not currently have a
subtenant, we use current market information to estimate the timing and amount
of sublease income. If the sublease income is less than estimated, we may be
required to record additional reserves. In the event we determine that a
smaller or larger accrual is appropriate, we would record a credit or a charge
to restructuring and rationalization charges in the period in which we made
such a determination. The accrual for restructuring and rationalization
charges was $4.8 million, $5.3 million and $3.5 million at year-end 2003, 2002
and 2001,
respectively. Income Tax Assets and Liabilities The Company records an income tax valuation allowance when it is no longer
more likely than not that certain deferred tax assets, net of operating losses
and capital loss carryforwards, will be realized. These deferred tax items
represent expenses recognized for financial reporting purposes, which will
result in tax deductions over varying future periods. The judgments,
assumptions and estimates that may affect the carrying value of the deferred
tax assets include estimates of future taxable income, availability of capital
gains in future periods, timing or amount of future reversals of existing
deferred tax liabilities, and other tax planning strategies that may be
available to the Company. The Company records an estimated tax liability or tax benefit for income
and other taxes based on what it determines will likely be paid in the various
tax jurisdictions in which it operates. Management uses its best judgment in
the determination of these amounts. However, the liabilities ultimately
realized and paid are dependent upon various matters, including resolution of
tax audits, and may differ from amounts recorded. An adjustment to the
estimated liability would be recorded as a provision or benefit to income tax
expense in the period in which it becomes probable that the amount of the
actual liability differs from the recorded amount. RECENT ACCOUNTING PRONOUNCEMENTS In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), Accounting for Stock-Based Compensation 
Transition and Disclosure. SFAS 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), 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, SFAS 148 amends the
disclosure requirements of SFAS 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. SFAS 148 is effective for financial statements for fiscal years ending
after December 15, 2002. In 2003, the Company has included the required interim
disclosures in Forms 10-Q and annual disclosures in Form 10-K. Effective January 1, 2003, the Company adopted SFAS 145. SFAS 145
rescinds SFAS No. 4, which required that all gains and losses from
extinguishment of debt be reported as an extraordinary item. See Note 2,
Comprehensive Financial Restructuring, Accounting for Financial Restructuring
Transactions. Effective July 1, 2003, the Company adopted the FASBs consensus on EITF
Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. This issue addresses how to account for arrangements that may
involve the delivery or performance of multiple products, services, and/or
rights to use assets. The final consensus of this issue is applicable to
agreements entered into in fiscal periods beginning after June 15, 2003.
Adoption of this issue had no material impact on the Companys consolidated
financial position, consolidated results of operations, or liquidity. 35




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##### 



Item 8. Financial Statements and Supplementary Data. REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of
Venturi Partners, Inc.: In our opinion, the accompanying consolidated balance sheets as of December 28,
2003, and the related consolidated statements of operations, shareholders
equity (deficit) and cash flows present fairly, in all material respects, the
financial position of Venturi Partners, Inc. and subsidiaries (collectively,
the Company) at December 28, 2003 and December 29, 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 28, 2003, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion. As disclosed in Note 8 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and indefinite-lived intangible
assets as of December 31, 2001. /s/ PricewaterhouseCoopers LLP Charlotte, North Carolina
February 10, 2004 36




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##### 



Venturi Partners, Inc. and Subsidiaries
Consolidated Balance Sheets  December 28, 2003 and December 29, 2002
(in thousands, except per share data) December 28,
    
    December 29,2003
    
    2002AssetsCurrent Assets:Cash and cash equivalents
    
    $
    508
    
    
    $
    22,623Accounts receivable, net of allowance for doubtful accounts of
$3,487 and $2,956 in 2003 and 2002, respectively
    
    
    75,702
    
    
    
    76,178Prepaid expenses and other current assets
    
    
    4,527
    
    
    
    3,940Recoverable income taxes
    
    
    35
    
    
    
    25,476Total current assets
    
    
    80,772
    
    
    
    128,217Property and equipment, net
    
    
    9,271
    
    
    
    13,240Goodwill
    
    
    103,532
    
    
    
    103,532Other assets
    
    
    785
    
    
    
    2,417Total assets
    
    $
    194,360
    
    
    $
    247,406Liabilities and Shareholders Equity (Deficit)Current liabilities:Current portion of long-term debt
    
    $
    370
    
    
    $
    38,633Accounts payable
    
    
    15,471
    
    
    
    9,887Accrued wages, benefits and other
    
    
    39,737
    
    
    
    62,203Total current liabilities
    
    
    55,578
    
    
    
    110,723Long-term debt -Convertible subordinated notes
    
    
    5,339
    
    
    
    115,000Revolving credit facility (including $5,264 of deferred gain on
debt forgiveness in 2003)
    
    
    55,264
    
    
    
    65,015Other long-term liabilities
    
    
    13,498
    
    
    
    9,016Total liabilities
    
    
    129,679
    
    
    
    299,754Commitments and contingenciesShareholders equity (deficit):Preferred stock, $.01 par value; shares authorized 5,000;
no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; shares authorized 95,000;
6,090 and 33,065 shares issued and outstanding in 2003 and
2002, respectively
    
    
    61
    
    
    
    331Additional paid-in capital
    
    
    296,281
    
    
    
    315,404Retained earnings (accumulated deficit)
    
    
    (231,661
    )
    
    
    (324,544
    )Less common stock held in treasury at cost -
no shares at December 28, 2003 and 6,184 shares at
December 29, 2002
    
    
    
    
    
    
    (43,539
    )Total shareholders equity (deficit)
    
    
    64,681
    
    
    
    (52,348
    )Total liabilities and shareholders equity (deficit)
    
    $
    194,360
    
    
    $
    247,406
 The accompanying notes are an integral part of these balance sheets. 37




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##### 



Venturi Partners, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 28, 2003, December 29, 2002 and December 30, 2001
(in thousands, except per share data) 2003
    
    2002
    
    2001Revenues
    
    $
    494,547
    
    
    $
    557,748
    
    
    $
    732,327Direct costs of services
    
    
    387,897
    
    
    
    427,947
    
    
    
    540,659Gross profit
    
    
    106,650
    
    
    
    129,801
    
    
    
    191,668Operating expenses:Selling, general and administrative
    
    
    96,287
    
    
    
    114,590
    
    
    
    152,928Depreciation and amortization
    
    
    5,180
    
    
    
    7,124
    
    
    
    23,913Goodwill impairment
    
    
    
    
    
    
    89,935
    
    
    
    56,779Restructuring and rationalization charges
    
    
    2,503
    
    
    
    4,650
    
    
    
    15,259Stock option compensation
    
    
    570
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    2,110
    
    
    
    (86,498
    )
    
    
    (57,211
    )Interest expense
    
    
    5,522
    
    
    
    17,301
    
    
    
    18,278Gain (loss) on financial restructuring, net
    
    
    83,027
    
    
    
    (3,628
    )
    
    
    (875
    )Income (loss) before income taxes and cumulative effect of
change in accounting principle
    
    
    79,615
    
    
    
    (107,427
    )
    
    
    (76,364
    )Provision (benefit) for income taxes
    
    
    (13,268
    )
    
    
    603
    
    
    
    (9,686
    )Income (loss) before cumulative effect of change in accounting principle
    
    
    92,883
    
    
    
    (108,030
    )
    
    
    (66,678
    )Cumulative effect of change in accounting principle, net of taxes
    
    
    
    
    
    
    (242,497
    )
    
    
    Net income (loss)
    
    $
    92,883
    
    
    $
    (350,527
    )
    
    $
    (66,678
    )Basic and diluted earnings per common share:Income (loss) before cumulative effect of change in accounting principle
    
    $
    20.00
    
    
    $
    (100.95
    )
    
    $
    (62.90
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (226.58
    )
    
    
    Net income (loss)
    
    $
    20.00
    
    
    $
    (327.53
    )
    
    $
    (62.90
    )Weighted average basic and diluted shares outstanding
    
    
    4,644
    
    
    
    1,070
    
    
    
    1,060
 The accompanying notes are an integral part of these statements. 38




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##### 



Venturi Partners, Inc. and Subsidiaries
Consolidated Statements of Shareholders Equity (Deficit)
For the Years Ended December 28, 2003, December 29, 2002 and December 30, 2001
(in thousands) Retained
    
    CommonAdditional
    
    Earnings
    
    StockPreferred Stock
    
    Common Stock
    
    Paid-In
    
    (Accumulated
    
    Held inShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Deficit)
    
    Treasury
    
    TotalBalance, December 31, 2000
    
    
    
    
    
    $
    
    
    
    
    33,065
    
    
    $
    331
    
    
    $
    319,910
    
    
    $
    92,661
    
    
    
    ($48,603
    )
    
    $
    364,299Stock issued for employee stock
purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,216
    )
    
    
    
    
    
    
    3,688
    
    
    
    472Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66,678
    )
    
    
    
    
    
    
    (66,678
    )Balance, December 30, 2001
    
    
    
    
    
    
    
    
    
    
    33,065
    
    
    
    331
    
    
    
    316,694
    
    
    
    25,983
    
    
    
    (44,915
    )
    
    
    298,093Stock issued for employee stock
purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,290
    )
    
    
    
    
    
    
    1,376
    
    
    
    86Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (350,527
    )
    
    
    
    
    
    
    (350,527
    )Balance, December 29, 2002
    
    
    
    
    
    
    
    
    
    
    33,065
    
    
    
    331
    
    
    
    315,404
    
    
    
    (324,544
    )
    
    
    (43,539
    )
    
    
    (52,348
    )Non-cash exchange of stock
to 5.75% noteholders
    
    
    1,044
    
    
    
    10
    
    
    
    20,940
    
    
    
    209
    
    
    
    21,823
    
    
    
    
    
    
    
    
    
    
    
    22,042Issuance of common stock
purchase warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,538
    
    
    
    
    
    
    
    
    
    
    
    1,538Cancellation of treasury shares
    
    
    
    
    
    
    
    
    
    
    (6,184
    )
    
    
    (62
    )
    
    
    (43,477
    )
    
    
    
    
    
    
    43,539
    
    
    
    1-for-25 reverse stock split
    
    
    
    
    
    
    
    
    
    
    (45,909
    )
    
    
    (459
    )
    
    
    459
    
    
    
    
    
    
    
    
    
    
    
    Cash payment for fractional shares
in reverse stock split
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    570
    
    
    
    
    
    
    
    
    
    
    
    570Conversion of preferred shares to
common shares
    
    
    (1,044
    )
    
    
    (10
    )
    
    
    4,178
    
    
    
    42
    
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92,883
    
    
    
    
    
    
    
    92,883Balance, December 28, 2003
    
    
    
    
    
    $
    
    
    
    
    6,090
    
    
    $
    61
    
    
    $
    296,281
    
    
    $
    (231,661
    )
    
    $
    
    
    
    $
    64,681
 The accompanying notes are an integral part of these statements. 39




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##### 



Venturi Partners, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 28, 2003, December 29, 2002 and December 30, 2001
(in thousands) 2003
    
    2002
    
    2001Cash flows from operating activities:Net income (loss)
    
    $
    92,883
    
    
    $
    (350,527
    )
    
    $
    (66,678
    )Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Depreciation and amortization
    
    
    5,180
    
    
    
    7,124
    
    
    
    23,913Amortization of deferred gain on financial restructuring, net
    
    
    (2,798
    )
    
    
    
    
    
    
    Stock option compensation
    
    
    570
    
    
    
    
    
    
    
    (Gain) loss on financial restructuring, net
    
    
    (83,027
    )
    
    
    3,628
    
    
    
    875Cumulative effect of change in accounting principle, net of deferred
tax benefit of $42,198
    
    
    
    
    
    
    242,497
    
    
    
    Loss on abandonment and disposals
    
    
    
    
    
    
    
    
    
    
    10,743Goodwill impairment charge
    
    
    
    
    
    
    89,935
    
    
    
    56,779Deferred income taxes on loss before cumulative effect of
change in accounting principle, net
    
    
    2,300
    
    
    
    900
    
    
    
    (2,479
    )Changes in assets and liabilities:Accounts receivable
    
    
    476
    
    
    
    10,910
    
    
    
    39,124Recoverable income taxes
    
    
    25,441
    
    
    
    19,217
    
    
    
    Accounts payable and accrued liabilities
    
    
    (16,638
    )
    
    
    (4,888
    )
    
    
    (9,565
    )Other, net
    
    
    482
    
    
    
    2,081
    
    
    
    2,878Net cash provided by operating activities
    
    
    24,869
    
    
    
    20,877
    
    
    
    55,590Cash flows from investing activities:Proceeds from sale of business
    
    
    
    
    
    
    3,825
    
    
    
    372Acquisition-related payments
    
    
    
    
    
    
    
    
    
    
    (10,120
    )Purchase of property and equipment, net
    
    
    (1,008
    )
    
    
    (1,831
    )
    
    
    (2,999
    )Net cash provided by (used in) investing activities
    
    
    (1,008
    )
    
    
    1,994
    
    
    
    (12,747
    )Cash flows from financing activities:Repayments under credit facility
    
    
    (50,700
    )
    
    
    (44,000
    )
    
    
    (53,000
    )Borrowings under credit facility
    
    
    8,000
    
    
    
    28,000
    
    
    
    22,000Credit facility amendment fees
    
    
    (1,680
    )
    
    
    (1,657
    )
    
    
    (1,227
    )Repayments of other debt, net
    
    
    (278
    )
    
    
    (234
    )
    
    
    236Restructuring payment to bondholders
    
    
    (1,314
    )
    
    
    
    
    
    
    Payment for fractional shares in reverse stock split
    
    
    (4
    )
    
    
    
    
    
    
    Proceeds from employee stock purchase plan
    
    
    
    
    
    
    86
    
    
    
    472Net cash used in financing activities
    
    
    (45,976
    )
    
    
    (17,805
    )
    
    
    (31,519
    )Net increase (decrease) in cash and cash equivalents
    
    
    (22,115
    )
    
    
    5,066
    
    
    
    11,324Cash and cash equivalents at beginning of year
    
    
    22,623
    
    
    
    17,557
    
    
    
    6,233Cash and cash equivalents at end of year
    
    $
    508
    
    
    $
    22,623
    
    
    $
    17,557Supplemental cash flow information:Cash payments during the year for Interest
    
    $
    10,484
    
    
    $
    15,194
    
    
    $
    15,942Income taxes
    
    $
    66
    
    
    $
    24
    
    
    $
    518
 The accompanying notes are an integral part of these statements. 40




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##### 



Venturi Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data) 1. Name Change and Reverse Stock Split; Conversion of Preferred Shares On August 5, 2003, Venturi Partners, Inc. and its subsidiaries
(collectively, the Company) amended and restated its charter as contemplated
in its recently completed financial restructuring. See Note 2, Comprehensive
Financial Restructuring. Among other provisions, the charter amendment
changed the Companys corporate name and effected a 1-for-25 reverse split of
the Companys common stock. The par value of the common stock remained at
$0.01 per share. Shareholders equity has been restated by reclassifying the
reduction in par value arising from the reverse stock split from common stock
to additional paid-in capital. All references in the accompanying consolidated
financial statements to the number of common shares, except for authorized
shares (which did not change as a result of the reverse stock split), and per
share amounts have been restated to reflect the reverse stock split. On September 26, 2003, all outstanding shares of the Companys Series B
Convertible Participating Preferred Stock issued in the financial restructuring
(the Series B preferred stock) were converted into shares of common stock in
accordance with their terms. All references in these Notes to shares of the
Companys common stock have been restated to reflect common shares after this
conversion. 2. Comprehensive Financial Restructuring On April 14, 2003, the Company completed a comprehensive financial
restructuring with its senior lenders and the holders of $109,661 outstanding
principal amount of its 5.75% Convertible Subordinated Notes due 2004 (the
5.75% Notes) in which it issued shares of the Companys common stock and
Series B preferred stock to the participating noteholders in exchange for their
5.75% Notes (the Exchange Transaction). In the Exchange Transaction, the
participating noteholders in the aggregate received $3,153 in cash and
5,015,349 shares of common stock (after conversion of the Series B preferred
stock issued in the Exchange Transaction), which represented approximately 82%
of the Companys outstanding capital stock immediately after the Exchange
Transaction. The Companys existing shareholders retained ownership of their
outstanding 1,075,248 shares of common stock, which represented approximately
18% of the outstanding capital stock. To facilitate the closing of the Exchange Transaction and also to provide
for the terms on which the existing senior lenders would continue to finance
the Companys working capital needs, the Company and its existing senior
lenders also executed definitive loan agreements that provided for certain
amendments and maturity date extensions to the Companys senior revolving
credit facility (the Credit Facility) and eliminated the Equity Appreciation
Right (the EAR) then held by the senior lenders (the Senior Debt
Restructuring). The Senior Debt Restructuring provided for the forgiveness of
indebtedness in the amount of $10,300. As a result of the Exchange Transaction
and the Senior Debt Restructuring, the Company used substantially all of its
cash on hand, after payment of transaction expenses, to repay $37,985 of its
outstanding credit facility and eliminated an additional $119,961 of its
outstanding indebtedness, which has resulted in substantial reductions in the
Companys interest expense. No provision for income taxes was recorded in 2003
since the gain from financial restructuring will not be subject to income tax. The Credit Facility provides for a $70,700 revolving line of credit due
May 1, 2004 and is subject to certain maturity date extensions, assuming the
Company is in compliance with its covenants, in six-month increments through
May 1, 2005. Availability of borrowings under the Credit Facility is subject
to a borrowing base calculated as specified percentages of the Companys
eligible accounts receivable (as defined) in the aggregate. The Credit
Facilitys financial covenants include monthly maintenance of cumulative EBITDA
levels and an interest and subordinated indebtedness coverage ratio (both as
defined in the amended agreement). The Credit Facility also contains
restrictions on the payment of cash dividends on the Companys capital stock
and places additional limitations on share repurchases, acquisitions and
capital expenditures. Finally, to replace the EAR previously included as part
of the Credit Facility, the Company issued common stock purchase warrants to
the lenders under the Credit Facility entitling them to purchase a total of
768,997 shares of common stock, or 10% of the outstanding common stock on a
fully diluted basis as of the closing date of the financial restructuring. The
Company engaged 41




---



##### 



an independent valuation firm to assist in the determination of the fair
value of these warrants and recorded $1,538 as additional shareholders equity
with a corresponding reduction in the outstanding senior debt. These warrants
are exercisable in whole or part over a 10-year period and the exercise price
is $7.8025 per share, which was based on an assumed equity valuation for the
Company of $60,000. The exercise price for these warrants exceeded the
estimated fair value of the underlying equity at the issuance date. Interest
rates payable under the Credit Facility are set at prime plus 425 basis points
through June 2004 with increases during each six-month period through May 1,
2005. The Company entered into an agreement with each of the former noteholders
participating in the Exchange Transaction and each of its senior lenders to
provide them with registration rights with respect to the shares of common
stock issued in the financial restructuring and the shares of common stock
issuable upon exercise of the warrants, as applicable. The Company also amended and restated the shareholder rights agreement
that governs the terms of preferred share purchase rights that currently
accompany the common stock. These amendments included, among other things, the
creation of exemptions preventing the following from triggering separation of
the rights from the common stock: (i) beneficial ownership of capital stock by
persons and entities that beneficially owned 15% or more of the Companys
capital stock as of the date of the financial restructuring or the date that
the Series B preferred stock first became convertible into shares of the
Companys common stock, and their affiliates; (ii) beneficial ownership by any
Significant Holder of capital stock of the Company acquired in accordance with
the amended and restated certificate of incorporation and with the new
tag-along rights that were also added to the rights agreement as part of the
amendment and restatement; and (iii) beneficial ownership by any third party of
capital stock of the Company acquired in a transfer from a Significant Holder
that complied with the amended and restated certificate of incorporation and
the tag-along rights. Under the tag-along rights, any holder (including
certain holders of more than 2% acting together as a group) of 5% or more of
the voting stock of the Company will be entitled to participate pro rata, for
the same amount and form of consideration and otherwise on substantially the
same terms and conditions, in any transfer by any Significant Holders of
capital stock of the Company of 20% or more of the voting stock of the Company. The Company also terminated its 1995 Stock Option Plan and adopted the
2003 Equity Incentive Plan in connection with the financial restructuring. See
Note 13, Capital Stock and Stock Options. Accounting for Financial Restructuring Transactions The Company recorded the issuance of its equity securities in exchange for
outstanding 5.75% Notes at the fair value of the newly issued equity
securities, with the excess of the debt carrying value over the fair value of
equity securities recorded as a gain. The forgiveness of $10,300 in senior
debt will reduce future interest expense over the term of the amended Credit
Facility, and the $1,110 of fees paid to the senior lenders was reflected as a
reduction in the principal balances outstanding as required under accounting
for troubled debt restructuring. The Company engaged an independent valuation
firm to assist in the determination of fair value of the warrants issued in
connection with the Senior Debt Restructuring and recorded $1,538 as additional
shareholders equity with a corresponding reduction in the outstanding senior
debt, with such amount recognized as a component of interest expense over the
term of the senior debt. The net gain on financial restructuring was not
classified as an extraordinary item in accordance with the recently issued
Statement of Financial Accounting Standards No. 145, Rescission of FASB
Statements No. 4, 44, 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Debt Compliance The Companys ability to continue operating is largely dependent upon its
ability to maintain compliance with the financial covenants of the Credit
Facility. The financial covenants include a cumulative monthly EBITDA
requirement and a monthly interest and subordinated indebtedness coverage ratio
(both as defined). The amended Credit Facility defines consolidated EBITDA as
consolidated net income before interest expense, income taxes, depreciation and
amortization, non-cash impairment charges, restructuring and rationalization
charges, professional fees relating to the debt restructuring and non-cash
compensation expense for the stock options. For 2003, the Company exceeded the
level of earnings required in these covenants. Based on the Companys fiscal
2004 42




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##### 



projections, which reflect slightly improving economic conditions,
management believes the Company will be able to maintain compliance with the
financial covenants for the next twelve months. The Company also believes that
the operating trends in 2003 support the key assumptions in its 2004 operating
plan. However, there can be no assurance that the economy or the Company will
perform as expected or that further economic declines will not adversely impact
the Companys results of operations or its ability to comply with the financial
covenants. In addition, the interest coverage ratio changes from an interest
coverage ratio to a stricter interest and subordinated indebtedness coverage
ratio on May 31, 2004. While the Company believes
financial results in 2004 will be above the actual 2003 results, in
the event that economic conditions weaken and/or the Companys
2004 results fall below actual levels in 2003, the Company may not
meet these financial covenants. The Company believes it will be in compliance
with its financial covenants, however, there can be no assurance that the Company will
be able to satisfy this stricter financial covenant. If the Company does
violate future covenants, it would seek waivers and amendments from its
lenders, but can give no assurance that any such waivers and amendments would
be available at all or on acceptable terms. If the Company were unable to
obtain a waiver of future covenant violations, the lenders would be entitled to
require immediate repayment of all amounts outstanding under the Credit
Facility. An acceleration of outstanding amounts under the Credit Facility
would also cause a default under, and permit acceleration of, the Companys
remaining outstanding 5.75% Notes. In the event of one or more such defaults,
the Companys ongoing viability would be seriously threatened, and it would be
forced to evaluate a number of strategic alternatives, including a further debt
restructuring or other reorganization, the closure of certain operating
locations or the sale of certain or all of its assets in order to continue to
fund its operations. In the current economic environment, management believes
that any such sale of assets would be at depressed prices that could be
significantly lower than the net book value of assets sold and might not be
sufficient to satisfy the Companys liabilities. 3. Basis of Presentation and Summary of Significant Accounting Policies: Basis of Presentation The consolidated financial statements include the accounts of Venturi
Partners, Inc. and its subsidiaries. All significant intercompany transactions
have been eliminated. Certain amounts in prior periods have been reclassified
to conform to the 2003 presentation, including reclassifying professional fees
paid in connection with the Companys recently completed financial
restructuring from restructuring and rationalization charges to gain (loss) on
financial restructuring, net. See Note 2, Comprehensive Financial
Restructuring. The Companys fiscal years ended December 28, 2003, December 29, 2002 and
December 30, 2001 are referred to in these financial statements as years 2003,
2002 and 2001, respectively. The Company is organized into two divisions: the Technology Services
division (Technology Services), which provides information technology
staffing and consulting services in a range of computer-related disciplines and
technology tools for human capital management, and the Staffing Services
division (Staffing Services), which provides a variety of temporary office,
clerical, accounting and finance, light technical and light industrial staffing
services. All of the Technology Services and Staffing Services branch offices
are located in the United States and Canada, and none are franchised or
licensed. Summary of Significant Accounting Policies Revenue Recognition The Company recognizes revenue at the time its services are performed.
Substantially all revenues of the Company are derived from or generated in
connection with the sale of staffing and consulting services. Permanent
placement revenues are recognized when employment candidates accept offers of
permanent employment. Allowances are established, based upon historical data,
to estimate losses due to placed candidates not remaining employed through the
Companys guarantee period, typically 90 days or less. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and highly liquid
investments with original maturities of three months or less. 43




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##### 



Property and Equipment Property and equipment are carried at cost and depreciated on a
straight-line basis over their estimated useful lives, generally three to seven
years. Computer software costs consist of costs to purchase and develop
software. The Company capitalizes internally developed software costs in
accordance with Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, whereby the costs
are capitalized only after it is probable that the project will be completed
and the software will be used for the function intended. The majority of
capitalized software costs are depreciated on a straight-line basis over a
period of six years. Leasehold improvements are stated at cost and amortized
over the shorter of the lease term or the useful life of the improvements. Goodwill and Other Intangible Assets The Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS 142), at the beginning of 2002.
Goodwill, which was previously amortized on a straight-line basis over the
periods benefited, is no longer being amortized to earnings, but instead is
subject to testing for impairment at least annually based on the fair value of
these assets compared to their carrying value. Intangible assets determined to
have finite lives are amortized over their remaining useful lives. The Companys businesses have been acquired from unrelated third parties
for cash and other consideration and have been accounted for using the purchase
method of accounting. The assets and liabilities of the entities acquired were
recorded at their estimated fair values at the dates of the acquisitions.
Goodwill has been recorded at historical cost. Other intangible assets consist
mainly of covenants not to compete. Certain of the Companys acquisitions provided for additional purchase
price consideration upon attainment of certain specified targets for various
periods after closing of the acquisition. The Company paid $10,120 in
contingent consideration in 2001 and completed its obligation to make
additional earn-out payments on the acquired businesses. All consideration was
recorded as additional purchase price when earned and increased the amount of
goodwill. Income Taxes Income taxes are accounted for under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year 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 the Consolidated Statement of Operations
in the period that includes the enactment date. A valuation allowance is
recorded to reduce the carrying amounts of deferred tax assets if it is more
likely than not that such assets will not be realized. Stock Options The Company has adopted Statement of Financial Accounting Standards No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure.
The Company plans to continue using the intrinsic-value method of accounting
for stock-based awards granted to employees and, accordingly, does not
currently recognize compensation expense for its stock-based awards to
employees in the Consolidated Statements of Operations, except primarily for
the variable options described below. In March 2000, the FASB issued Financial Accounting Interpretation No. 44
(FIN 44), Accounting for Certain Transactions involving Stock Compensation,
an interpretation of APB Opinion No. 25, Accounting for Stock Issued to
Employees. FIN 44 requires that stock options issued within six months of the
cancellation date of prior options be accounted for as variable stock options.
The majority of the options granted under the 2003 Equity Incentive Plan prior
to December 28, 2003 were granted within six months from the date that options
granted to the same recipients under the 1995 Stock Option Plan were cancelled,
and therefore, these new stock options are subject to variable accounting until
they are exercised, forfeited or expire unexercised. 44




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##### 



The following disclosures are presented to reflect the Companys pro forma
net income (loss) for 2003, 2002 and 2001 as if the Company had applied the
fair value recognition provision of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation. In preparing
these disclosures, the Company has determined the value of all stock options
granted under the 1995 Stock Option Plan, which was terminated, and the
Companys newly adopted 2003 Equity Plan using the Black-Scholes model and
based on the following weighted average assumptions used for grants: 2003
    
    2002
    
    2001Risk-free interest rate
    
    
    3.1
    %
    
    
    4.2
    %
    
    
    5.7
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life
    
    5 years
    
    4.7 years
    
    5.6 yearsExpected volatility
    
    
    84.4
    %
    
    
    80.3
    %
    
    
    68.1
    %
 The fair value of the stock options granted under the 2003 Equity Plan in
2003 was approximately $2,531 in the aggregate. No options were granted under
the 1995 Stock Option Plan in 2003 as that plan was terminated in connection
with the financial restructuring. The fair value of the stock options granted
under the 1995 Stock Option Plan and the Companys Stock Purchase Plan (which
was cancelled effective December 31, 2002) issuances in 2002 and 2001 were
approximately $35 and $459, respectively. Had compensation expense been
determined consistent with the fair value method, utilizing the assumptions set
forth above and amortized over the vesting period, the Companys net income
(loss) would have been reduced to the following pro forma amounts: 2003
    
    2002
    
    2001Net income (loss), as reported
    
    $
    92,883
    
    
    $
    (350,527
    )
    
    $
    (66,678
    )Add: Stock option compensation included
in reported net income
    
    
    570
    
    
    
    
    
    
    
    Deduct: Stock option compensation
determined under fair value based
method
for all awards
    
    
    (830
    )
    
    
    (2,597
    )
    
    
    (3,939
    )Tax effect, net
    
    
    103
    
    
    
    1,039
    
    
    
    1,576Pro forma net income (loss)
    
    $
    92,726
    
    
    $
    (352,085
    )
    
    $
    (69,041
    )Basic and diluted earnings per share, as
reported:
    
    $
    20.00
    
    
    $
    (327.53
    )
    
    $
    (62.90
    )Pro forma basic and diluted earnings per
share:
    
    $
    19.97
    
    
    $
    (328.98
    )
    
    $
    (65.12
    )
 Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions. These estimates include the reported amounts of assets and
liabilities, the 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 amounts could differ from managements
estimates. Estimates are used for, but not limited to, recoverability of
goodwill, collectibility of accounts receivable and reserves against permanent
placement revenues, workers compensation costs, restructuring and
rationalization reserves, taxes and contingencies. 4. Recent Accounting Pronouncements: In December 2002, the FASB issued SFAS 148 that amends SFAS 123 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,
SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent 45




---



##### 



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. SFAS 148 is effective for financial statements for
fiscal years ending after December 15, 2002. In 2003, the Company has included
the required interim disclosures in Forms 10-Q and annual disclosures in Form
10-K. Effective January 1, 2003, the Company adopted SFAS 145 that rescinds SFAS
No. 4, which required that all gains and losses from extinguishment of debt be
reported as an extraordinary item. See Note 2, Comprehensive Financial
Restructuring, Accounting for Financial Restructuring Transactions. Effective July 1, 2003, the Company adopted the FASBs consensus on EITF
Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. This issue addresses how to account for arrangements that may
involve the delivery or performance of multiple products, services, and/or
rights to use assets. The final consensus is applicable to agreements entered
into in fiscal periods beginning after June 15, 2003. Adoption of this
consensus had no material impact on the Companys consolidated financial
position, consolidated results of operations, or liquidity. 5. Accounts Receivable: Accounts receivable consisted of the following at December 28, 2003 and
December 29, 2002: 2003
    
    2002Trade accounts receivable
    
    $
    79,189
    
    
    $
    79,134Less  Allowance for doubtful accounts
    
    
    (3,487
    )
    
    
    (2,956
    )$
    75,702
    
    
    $
    76,178
 The following table sets forth further information on the Companys allowance
for doubtful accounts: Balance at
    
    Charged to
    
    
    
    
    
    BalanceBeginning
    
    Costs and
    
    
    
    
    
    at EndYear Ended
    
    of Year
    
    Expenses
    
    Deductions
    
    of YearDecember 28, 2003
    
    $
    2,956
    
    
    $
    2,170
    
    
    $
    (1,639
    )
    
    $
    3,487December 29, 2002
    
    
    2,451
    
    
    
    3,084
    
    
    
    (2,579
    )
    
    
    2,956December 30, 2001
    
    
    3,799
    
    
    
    7,077
    
    
    
    (8,425
    )
    
    
    2,451
 6. Property and Equipment, Net: Property and equipment, net, consisted of the following at December 28, 2003
and December 29, 2002: 2003
    
    2002Software and computer equipment
    
    $
    28,608
    
    
    $
    30,892Furniture and other equipment
    
    
    4,937
    
    
    
    5,553Leasehold improvements
    
    
    1,467
    
    
    
    2,01735,012
    
    
    
    38,462Less - Accumulated depreciation
    
    
    (25,741
    )
    
    
    (25,222
    )$
    9,271
    
    
    $
    13,240
 Depreciation expense was $4,978, $6,652 and $7,635 for 2003, 2002 and 2001, respectively. 46




---



##### 



7. Long-term Debt: Long-term debt at December 28, 2003 and December 29, 2002 was as follows: 2003
    
    20025.75% Notes due July 2004
    
    $
    5,339
    
    
    $
    115,000Revolving credit facility
    
    
    50,000
    
    
    
    103,000Deferred gain on financial restructuring, net
    
    
    5,264
    
    
    
    Other
    
    
    370
    
    
    
    64860,973
    
    
    
    218,648Less current portion
    
    
    370
    
    
    
    38,633$
    60,603
    
    
    $
    180,015
 The 5.75% Notes not exchanged in the financial restructuring are due July
2004. Interest on the 5.75% Notes is payable semi-annually. The 5.75% Notes
are convertible into common stock of the Company at any time before maturity at
an initial conversion price of $445.31 per share. Beginning in July 2000, the
Company was permitted to redeem the 5.75% Notes initially at 103.29% and at
decreasing prices thereafter to 100% at maturity, in each case together with
accrued interest. The 5.75% Notes are subordinated to all present and future
senior indebtedness of the Company (as defined), including indebtedness under
the Credit Facility. As a result of the completion of the Companys financial restructuring and
the execution of amendments and maturity date extensions, the Credit Facility
provides for a $70,700 revolving line of credit due May 1, 2004 and is subject
to certain maturity date extensions through May 1, 2005. The Company believes
it will satisfy the requirements for extension beyond December 2004; therefore,
the outstanding balance under the Credit Facility, which was $50,000 at
December 28, 2003, was classified as long-term in the consolidated balance
sheet. In addition, the Company intends to refinance the 5.75% Notes with
borrowings under its Credit Facility and, therefore, has classified the 5.75%
Notes as long-term at December 28, 2003. See Note 2, Comprehensive Financial
Restructuring. The deferred gain on financial restructuring, net is comprised of the
$10,300 senior debt forgiven, offset by certain fees paid and common stock
purchase warrants issued to the senior lenders. The Company accounted for this
transaction in accordance with Statement of Financial Accounting Standards No.
15, Accounting by Debtors and Creditors for Troubled Debt Restructurings,
which requires the deferred gain on financial restructuring, net, to be
amortized, reducing future interest expense, over the term of the amended
Credit Facility. For the year 2003, interest expense was $5,522, which was net
of amortization of deferred gain on financial restructuring of $2,798.
Interest rates payable under the Credit Facility are currently set at prime
plus 425 basis points through June 30, 2004. Four former noteholders, now significant shareholders, also are senior
lenders under the Credit Facility, and held 80% of the facility commitments as
of February 29, 2004. During 2003, the maximum aggregate outstanding borrowing under the
revolving credit facility was $103,000 and the average outstanding balance
during the year was $66,775. In addition, approximately $9,539 of the
revolving credit facility was used at December 28, 2003 for the issuance of
undrawn letters of credit primarily to secure the Companys workers
compensation program. The daily weighted average interest rate under the
revolving credit facility was 7.8% during 2003. The weighted average interest
rate for the Companys borrowings under the facility was 7.75% at December 28,
2003. As of February 29, 2004, the interest rate under the facility was 8.25%. Scheduled maturities of long-term debt at December 28, 2003 were as
follows: 2004
    
    $
    3702005
    
    
    55,339$
    55,709
 47




---



##### 



8. Goodwill Impairment: Effective at the beginning of 2002, the Company adopted SFAS 142. The
provisions of SFAS No. 142 prohibit the amortization of goodwill and
indefinite-lived intangible assets and require that goodwill and
indefinite-lived intangibles assets be tested at least annually for impairment.
In the second quarter of 2002, the Company completed its initial valuation as
of the adoption date, December 31, 2001, and in the fourth quarter of 2002
completed its annual test for impairment. In order to assess the fair value of
its goodwill, the Company engaged an independent valuation firm to assist in
determining the fair value. The fair value of each of the Companys two
reporting units was calculated as of December 31, 2001, December 29, 2002 and
December 28, 2003, on an enterprise value basis using the market multiple
approach and discounted cash flow approach. Under the market multiple
approach, market ratios and performance fundamentals relating to similar public
companies stock prices or enterprise values were applied to the reporting
units to determine their enterprise value. Under the discounted cash flow
approach, the indicated enterprise value was determined using the present value
of the projected future cash flows to be generated considering appropriate
discount rates. The discount rates used in the calculation reflected all
associated risks of realizing the projected future cash flows. Certain of the
valuation assumptions were based on managements expectations for future
performance of the Technology Services and Staffing Services reporting units.
These assumptions include expected time frame of technology spending and
broader economic recoveries as well as future growth rates in the Technology
Services and Staffing Services businesses. A relatively high discount rate of
16-17% was utilized in the discounted cash flow valuation approach due
principally to the inherent uncertainties associated with these assumptions. Based upon the results of the initial valuation, which was completed in
the second quarter of 2002, the Company recorded a goodwill impairment charge
of $284,695 ($242,497 net of an income tax benefit of $42,198) as a cumulative
effect of the change in accounting principle. In the fourth quarter of 2002, the Company performed its annual impairment
test and recorded an impairment charge of $89,935 as of December 29, 2002 for
goodwill associated with its Technology Services operations. The Company
experienced lower than expected operating profits and cash flows in 2002 for
the Technology Services reporting unit. As a result of this trend and the
overall industry expectations, the projected operating profits and cash flows
for Technology Services operations were reduced for the next five years
resulting in a reduction in the fair value of the Companys goodwill. The
decrease in fair value resulted in the recognition of the $89,935 impairment
loss. The Company performed its annual impairment analysis in the fourth
quarter of 2003 and determined there was no additional impairment at that time. A reconciliation of goodwill for the years ended December 28, 2003 and
December 29, 2002 is as follows: Technology
    
    StaffingServices
    
    Services
    
    TotalBalance, December 30, 2001
    
    $
    376,538
    
    
    $
    101,624
    
    
    $
    478,162Impairment loss resulting from SFAS 142 adoption
    
    
    (245,373
    )
    
    
    (39,322
    )
    
    
    (284,695
    )Impairment loss resulting from SFAS 142 annual test
    
    
    (89,935
    )
    
    
    
    
    
    
    (89,935
    )Balance, December 29, 2002
    
    
    41,230
    
    
    
    62,302
    
    
    
    103,5322003 activity
    
    
    
    
    
    
    
    
    
    
    Balance, December 28, 2003
    
    $
    41,230
    
    
    $
    62,302
    
    
    $
    103,532
 48




---



##### 



The
following table sets forth a reconciliation of net income (loss) and earnings
per share information for 2003, 2002 and 2001 as adjusted for the
non-amortization provisions of SFAS 142: 2003
    
    2002
    
    2001Net income (loss) before cumulative effect of accounting change,
as reported
    
    $
    92,883
    
    
    $
    (108,030
    )
    
    $
    (66,678
    )Add: Goodwill amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    11,297Adjusted net income (loss) before cumulative effect of
accounting change
    
    
    92,883
    
    
    
    (108,030
    )
    
    
    (55,381
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    (242,497
    )
    
    
    Adjusted net income (loss)
    
    $
    92,883
    
    
    $
    (350,527
    )
    
    $
    (55,381
    )Basic and diluted earnings per share:Net income (loss) before cumulative effect of accounting
change, as reported
    
    $
    20.00
    
    
    $
    (100.95
    )
    
    $
    (62.90
    )Add: Goodwill amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    10.65Adjusted net income (loss) before cumulative effect of
accounting change
    
    
    20.00
    
    
    
    (100.95
    )
    
    
    (52.25
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    (226.58
    )
    
    
    Adjusted net income (loss)
    
    $
    20.00
    
    
    $
    (327.53
    )
    
    $
    (52.25
    )
 The Companys intangible assets subject to amortization were fully
amortized and written off in 2003. At December 29, 2002, the Company had
intangible assets subject to amortization of $202, net, which are included in
other assets on the Consolidated Balance Sheets. Non-compete agreements were
amortized over a period of five years and trade names were amortized over a
period of 10 years. Amortization expense for 2003, 2002 and 2001 was $202,
$472 and $16,278, respectively. Prior to the adoption of SFAS 142, the Company followed Statement of
Financial Accounting Standards No. 121 (SFAS 121), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of to
test for its goodwill and intangible asset impairment. The Companys policy
included a projection of undiscounted cash flows for each operating company to
determine if the goodwill associated with that business component was
recoverable. When the Company performed its analysis in the fourth quarter of
2001, it identified several operations, principally in the Technology Services
division, for which negative cash flows were projected in
early years and for which projected undiscounted cash flows were not
sufficient to recover the carrying amount of related goodwill. As a result,
the Company recorded a goodwill impairment charge of $56,779 in the fourth
quarter of 2001. The impairment charges for Technology Services and Staffing
Services were $41,027 and $15,752, respectively. These charges related to
operations where future cash flows were projected to be negative and,
accordingly, the impairment charge represented the entire carrying amount of
the related goodwill. 9. Restructuring and Rationalization Charges: Beginning in 2001, the Company implemented a plan to restructure and
rationalize certain operations. As a result, the Company recorded charges
totaling $2,503, $4,650 and $15,259 in 2003, 2002 and 2001, respectively,
comprised of the following components: 2003
    
    2002
    
    2001Employee severance
    
    $
    426
    
    
    $
    1,915
    
    
    $
    1,678Lease abandonment and termination costs
    
    
    1,880
    
    
    
    2,689
    
    
    
    3,869Property abandonment charges
    
    
    130
    
    
    
    46
    
    
    
    2,568Loss on sale of business
    
    
    
    
    
    
    
    
    
    
    7,683Other
    
    
    67
    
    
    
    
    
    
    
    (539
    )Total restructuring and rationalization charges
    
    $
    2,503
    
    
    $
    4,650
    
    
    $
    15,259
 49




---



##### 



Following is a summary of the accrued liability for cash restructuring and
rationalization charges for 2003, 2002 and 2001: Employee
    
    LeaseSeverance
    
    Costs
    
    Other
    
    TotalInitial charges
    
    $
    1,678
    
    
    $
    3,869
    
    
    $
    434
    
    
    $
    5,981Cash payments
    
    
    (1,636
    )
    
    
    (760
    )
    
    
    (113
    )
    
    
    (2,509
    )Accrued liability at December 30, 2001
    
    
    42
    
    
    
    3,109
    
    
    
    321
    
    
    
    3,4722002 charges
    
    
    1,915
    
    
    
    2,689
    
    
    
    
    
    
    
    4,604Cash payments
    
    
    (1,398
    )
    
    
    (1,140
    )
    
    
    (237
    )
    
    
    (2,775
    )Accrued liability at December 29, 2002
    
    
    559
    
    
    
    4,658
    
    
    
    84
    
    
    
    5,3012003 charges
    
    
    426
    
    
    
    1,880
    
    
    
    67
    
    
    
    2,373Cash payments
    
    
    (959
    )
    
    
    (1,805
    )
    
    
    (151
    )
    
    
    (2,915
    )Accrued liability at December 28, 2003
    
    $
    26
    
    
    $
    4,733
    
    
    $
    
    
    
    $
    4,759
 Employee severance-related costs included the elimination of both
administrative and income-producing employees. Under the workforce reduction
plan, approximately 11.6%, 17.5% and 26% of the Companys permanent workforce
(or 106, 194 and 395 employees) were eliminated during 2003, 2002 and 2001,
respectively. Lease abandonment and termination costs related primarily to
office closures, branch consolidations and leased space reductions. Property
abandonment costs consisted of the write-down of abandoned leasehold
improvements and other equipment. These assets were written down to zero as
they have been abandoned. The loss on the sale of business relates to the sale
of one of the Companys Technology Services offices in Dallas in December 2001.
On the date of the sale, the net book value of this operation was $11,508 and
consideration of $3,825 was received, resulting in the write-down of $7,683 of
goodwill for the year ended December 30, 2001. This business was included in
the Technology Services segment and contributed $11,499 in revenues and $310 in
net income in 2001. Of the remaining accrued liability at December 28, 2003, the Company
expects to pay approximately $1,734 during 2004 and the balance, primarily
lease payments, over the following six years. 10. Accrued Liabilities: Accrued liabilities consisted of the following at December 28, 2003 and
December 29, 2002: 2003
    
    2002Accrued wages, benefits and other personnel costs
    
    $
    24,501
    
    
    $
    25,364Accrued interest
    
    
    689
    
    
    
    4,251Accrued workers compensation benefits
    
    
    4,794
    
    
    
    3,856Accrued restructuring and rationalization charges
    
    
    1,734
    
    
    
    3,115Income taxes
    
    
    24
    
    
    
    17,755Other
    
    
    7,995
    
    
    
    7,862$
    39,737
    
    
    $
    62,203
 See Note 14, Income Taxes, for further discussion of the
Companys income tax liabilities. 50




---



##### 



11. Other Long-term Liabilities: Other long-term liabilities consisted of the following at December 28,
2003 and December 29, 2002: 2003
    
    2002Deferred tax liabilities
    
    $
    2,642
    
    
    $
    342Employee benefit obligations
    
    
    3,435
    
    
    
    3,514Workers compensation reserves
    
    
    2,397
    
    
    
    1,928Accrued restructuring and rationalization charges
    
    
    3,024
    
    
    
    3,232Income taxes
    
    
    2,000
    
    
    
    $
    13,498
    
    
    $
    9,016
 12. Employee Benefit Plans: The Company has 401(k) profit sharing and nonqualified profit sharing
plans, which cover substantially all of its employees. Company contributions or
allocations are made on a discretionary basis for these plans (except for
matching contributions made to certain 401(k) profit sharing plans as required
by the terms of such plans). The Company suspended matching contributions to
its 401(k) plans and profit sharing allocations to its non-qualified profit
sharing plan in May 2003. Contributions charged to operating expenses were
$224, $1,507 and $2,288 in 2003, 2002 and 2001, respectively. The Company does not provide post-retirement health care or life insurance
benefits to retired employees or post-employment benefits to terminated
employees. During 1999, the Company established a Supplemental Employee Retirement
Plan (the SERP) for its then Chief Executive Officer. In connection with
such officers retirement in February 2000, the annual benefit payable under
the SERP was fixed at $150. As of December 28, 2003, the Company had accrued
approximately $1,419 for the SERP. 13. Capital Stock and Stock Options: The Companys Board of Directors adopted the 2003 Equity Incentive Plan
(the 2003 Equity Plan) simultaneously with the completion of the Companys
financial restructuring. See Note 2, Comprehensive Financial Restructuring.
The 2003 Equity Plan authorizes grants of stock options, stock appreciation
rights (or SARs), restricted stock, deferred stock awards and performance
awards (and dividend equivalent rights relating to options, SARs, deferred
stock and performance awards), in the case of stock or option awards, for up to
794,835 shares, or 10.3%, of the Companys fully diluted common stock. Awards
under the 2003 Equity Plan are to be made to key employees, directors and
consultants as selected by the Board of Directors or the Compensation
Committee, but only if and to the extent that award recipients have cancelled
all remaining stock options that they may have held under the 1995 Stock Option
Plan. The duration of any option or SAR granted under the 2003 Equity
Incentive Plan will not exceed 10 years. Following a termination of
employment, vested options and/or SARs must be exercised within three months
(12 months in the case of death or disability), except that options and SARs
terminate immediately upon a termination for cause as defined in the relevant
participants employment agreement, or as determined in the discretion of the
Board of Directors or the Compensation Committee if no employment agreement
exists. Any non-vested options, SARs or other awards issued under the 2003
Equity Plan will be forfeited upon any termination. The Board of Directors and
Compensation Committee retain the discretion to extend the post-employment
exercise period of an option or SAR and to accelerate vesting of awards under
the 2003 Equity Plan. In addition, nonemployee directors (including the directors who administer
the 2003 Equity Plan) are eligible to receive nondiscretionary grants of
nonqualified stock options (NQSOs) under the 2003 Equity Plan. The NQSOs
granted to nonemployee directors will be fully vested and exercisable upon
grant, and the term of each such option will be 10 years. NQSOs could also be
granted to an employee or consultant for any term specified by the Compensation
Committee of the Board and provide for the right to purchase common stock at a
specified price which, except with respect to NQSOs intended to qualify as
performance-based compensation, could be less than fair market value on the
date of grant (but not less than par value), and may become exercisable (at the
discretion of 51




---



##### 



the Compensation Committee) in one or more installments after the
grant date. As a condition to the completion of the financial restructuring, among
others, the Board of Directors approved the granting of stock options for
503,400 shares, representing 6.5% of the Companys fully diluted common stock,
to certain of the Companys executive officers. Of these initial grants,
348,000 options have an exercise price of $7.8025 per share, and the other
155,400 options have an exercise price of $11.7025 per share. The initial
stock option grants to these officers vest monthly at an annual rate of 25%,
and each will have 12 months following the termination of his employment (other
than for cause) to exercise vested stock options held as of the termination
date. In addition, the Company granted 1,000 stock options each to three
directors at an exercise price of $7.8025. These options are fully vested and
exercisable upon grant, and the term of each such option is 10 years. The
$7.8025 exercise price was based on an aggregate assumed equity value of the
Company of $60,000, and the $11.7025 exercise price was based on an aggregate
assumed equity value of $90,000. The exercise price for these stock options
exceeded the estimated fair value of the underlying equity at the issuance
date. Following these initial grants, 288,435 shares, or 3.8%, of the
Companys fully diluted common stock remained authorized for issuance under the
2003 Equity Plan and were reserved for future grants. In September 2003, the
Company granted an additional 169,700 options under the 2003 Equity Plan to key
employees, including one executive officer who had not previously received a
grant. These options vest 25% on each anniversary of the date of grant and
have a term of 10 years. The majority of the options granted under the 2003
Equity Plan to date are subject to variable accounting because they were
granted within six months after the date that options under the 1995 Stock
Option Plan were cancelled. As a result, the Company will record non-cash
compensation expense to the extent the fair value of the stock price exceeds
the option exercise price during any applicable period. The Company terminated its 1995 Stock Option Plan in connection with the
financial restructuring. Additionally, a number of the Companys employees,
including each of the Companys executive officers at the end of 2002 and all
but one of the Companys 2002 directors, irrevocably cancelled any and all
rights that they had to exercise any and all stock options previously granted
to each such person and agreed that all such options would be forfeited to the
Company. These directors and employees held in the aggregate 87,601 of the
stock options that were outstanding under the 1995 Stock Option Plan as of
December 29, 2002. As a result of these voluntary forfeitures, other voluntary
forfeitures by other participants and the expiration of other outstanding
options in the ordinary course of business pursuant to their terms, only 13,498
stock options remained outstanding under the 1995 Stock Option Plan as of
December 28, 2003, and these options have a weighted average exercise price of
$230.01 per share. Although the 1995 Stock Option Plan has been terminated and
no future option issuances will be made under it, these remaining outstanding
stock options will continue to be exercisable in accordance with their terms. The Companys Board of Directors adopted the 2001 Non-Qualified Employee
Stock Purchase Plan (the 2001 Stock Purchase Plan) for the purpose of
encouraging employee participation in the ownership of the Company. This plan
replaced the 1997 Employee Stock Purchase Plan (the 1997 Stock Purchase
Plan), which was terminated in the first quarter of 2001. Purchases under the
2001 Stock Purchase Plan were made monthly at the market price of the common
stock on the last day of the calendar month. Under the 1997 Stock Purchase
Plan, employees could elect to have payroll deductions made to purchase common
stock at a discount. In 2001, 16,954 shares of common stock were issued under
the 1997 Stock Purchase Plan. During 2002 and 2001, 7,486 and 3,118 shares,
respectively, of common stock were issued under the 2001 Stock Purchase Plan.
The Company terminated the 2001 Stock Purchase Plan effective December 31,
2002. 52




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##### 



A summary of stock option activity under the 2003 Equity Plan and the 1995
Stock Option Plan follows: Shares
    
    AverageUnder
    
    Price PerOption
    
    ShareOutstanding, December 31, 2000
    
    
    176,212
    
    
    $
    217.00Granted in 2001
    
    
    12,875
    
    
    
    43.75Cancelled
    
    
    13,767
    
    
    
    226.75Outstanding, December 30, 2001
    
    
    175,320
    
    
    
    203.50Granted in 2002
    
    
    2,300
    
    
    
    23.25Cancelled
    
    
    64,115
    
    
    
    264.00Outstanding, December 29, 2002
    
    
    113,505
    
    
    
    165.75Granted in 2003
    
    
    676,100
    
    
    
    9.04Cancelled
    
    
    100,007
    
    
    
    156.98Outstanding, December 28, 2003
    
    
    689,598
    
    
    $
    13.36Exercisable, December 30, 2001
    
    
    112,595
    
    
    $
    268.50Exercisable, December 29, 2002
    
    
    79,042
    
    
    $
    213.75Exercisable, December 28, 2003
    
    
    99,880
    
    
    $
    38.43
 The following table summarizes options outstanding and options exercisable
under the 2003 Equity Plan and the 1995 Stock Option Plan as of December 28,
2003, and the related weighted average remaining contractual life (years) and
weighted average exercise price: Options Outstanding
    
    Options ExercisableAverageRemaining
    
    AverageRange of
    
    Options
    
    Contractual
    
    Exercise
    
    Options
    
    AverageExercise Prices
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Exercise Price$    7.80 - $  10.00
    
    
    504,700
    
    
    
    9.4
    
    
    $
    8.13
    
    
    
    61,245
    
    
    $
    7.81$  10.01 - $  20.00
    
    
    171,400
    
    
    
    9.3
    
    
    
    11.70
    
    
    
    25,897
    
    
    
    11.70$  20.01 - $100.00
    
    
    2,994
    
    
    
    6.6
    
    
    
    63.04
    
    
    
    2,234
    
    
    
    63.11$100.01 - $576.96
    
    
    10,504
    
    
    
    4.7
    
    
    
    277.60
    
    
    
    10,504
    
    
    
    277.60689,598
    
    
    
    9.3
    
    
    $
    13.36
    
    
    
    99,880
    
    
    $
    38.43
 On February 6, 1996, the Company declared a dividend of one nonvoting
preferred share purchase right (a Right) for each outstanding share of common
stock. This dividend was paid on February 27, 1996 to the shareholders of
record on that date. In the event of an acquisition, or the announcement of an
acquisition, by a party of a beneficial interest of at least 20% of the common
stock, each right would become exercisable (the Distribution Date). Each
Right entitled the registered holder to purchase from the Company one
one-hundredth of a share of Series A Junior Participating Preferred Stock, par
value $0.01 per share, of the Company at a price of $95.00 per one
one-hundredth of a share of preferred stock, subject to adjustment. In
addition, each Right entitled the right holder to certain other rights as
specified in the Companys rights agreement. The Rights are not exercisable
prior to the Distribution Date. In March 2003, the agreement governing the
Rights was amended to permit the issuance of capital stock and warrants to
holders of the 5.75% Notes and the senior lenders in the Companys financial
restructuring without causing the Rights to become exercisable even though
certain of these holders and senior lenders received a beneficial interest in
more than 20% of the common stock as a result of the transactions. 53




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##### 



14. Income Taxes: The provision (benefit) for income taxes for 2003, 2002 and 2001 consisted
of the following: 2003
    
    2002
    
    2001Income (loss) before income taxes and cumulative
effect of change in accounting principle
    
    $
    79,615
    
    
    $
    (107,427
    )
    
    $
    (76,364
    )Provision (benefit) for income taxes:Current benefitFederal
    
    $
    (15,618
    )
    
    $
    (20,530
    )
    
    $
    (11,858
    )State
    
    
    50
    
    
    
    (235
    )
    
    
    (169
    )Total current benefit
    
    
    (15,568
    )
    
    
    (20,765
    )
    
    
    (12,027
    )Deferred provisionFederal
    
    
    4,184
    
    
    
    21,368
    
    
    
    2,235State
    
    
    (1,884
    )
    
    
    
    
    
    
    106Total deferred provision
    
    
    2,300
    
    
    
    21,368
    
    
    
    2,341Total provision (benefit) for income taxes
    
    $
    (13,268
    )
    
    $
    603
    
    
    $
    (9,686
    )
 The reconciliation of the effective tax rate is as follows: 2003
    
    2002
    
    2001Federal statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State taxes, net of federal benefit
    
    
    3.4
    
    
    
    
    
    
    
    4.3Effect of cancellation of debt instrument
    
    
    (62.8
    )
    
    
    
    
    
    
    Effect of NOL impairment
    
    
    177.3
    
    
    
    
    
    
    
    Effect of increase in valuation allowances
    
    
    (170.9
    )
    
    
    (34.3
    )
    
    
    (23.1
    )Effect of nondeductible amortization and other
    
    
    1.3
    
    
    
    (1.3
    )
    
    
    (3.5
    )Total
    
    
    (16.7
    )%
    
    
    (0.6
    )%
    
    
    12.7
    %
 The Company recorded an income tax benefit of $13,268 in the fourth
quarter of 2003 related to certain federal tax benefits recognized after the
completion of a review by the IRS of the Companys federal income tax returns
for the years 1996 through 2002. 54




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##### 



The components of the Companys net deferred tax liability were as follows
at December 28, 2003 and December 29, 2002: 2003
    
    2002Deferred income tax assets:Goodwill impairment
    
    $
    27,914
    
    
    $
    76,428Accrued workers compensation and other
    
    
    2,990
    
    
    
    2,557Allowance for doubtful accounts
    
    
    1,172
    
    
    
    964Accrued benefits
    
    
    3,480
    
    
    
    1,498Net operating loss carryforward
    
    
    5,123
    
    
    
    101,983Other
    
    
    11,493
    
    
    
    7,409Valuation allowances
    
    
    (51,070
    )
    
    
    (187,111
    )Total deferred tax assets
    
    $
    1,102
    
    
    $
    3,728Deferred tax liabilities:Property and equipment
    
    $
    3,022
    
    
    $
    3,734Other
    
    
    722
    
    
    
    336Total deferred tax liabilities
    
    $
    3,744
    
    
    $
    4,070Net deferred tax liability (included in Other
Long-term Liabilities)
    
    $
    2,642
    
    
    $
    342
 As of December 28, 2003 and December 29, 2002, the Company had deferred
income tax assets of $27,914 and $76,428, respectively, related to the goodwill
impairment charges recorded by the Company. The Company also had federal and
state net operating loss carryforwards with a tax benefit of $5,123 and
$101,983, respectively, most of which expire primarily after the year 2012.
The Company has recorded valuation allowances totaling $51,070 and $187,111 as
of December 28, 2003 and December 29, 2002, respectively, primarily related to
the goodwill impairment, net operating loss carryforwards and the loss on the
sale of one of the Companys Technology Services offices in Dallas. These
valuation allowances were recorded as the Company concluded it is more likely
than not that these deferred income tax assets would not be realized. Although
realization is not assured, the Company has concluded that it is more likely
than not that the remaining deferred tax assets will be realized based on the
scheduling of deferred tax liabilities and projected taxable income. The
amount of the net deferred tax assets actually realized, however, could vary if
there are differences in the timing or amount of future reversals of existing
deferred tax liabilities or changes in the actual amounts of future
taxable income. 55




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##### 



15. Earnings Per Share The following table reconciles net income (loss) and weighted average
shares outstanding to the amounts used to calculate basic and diluted earnings
per share for each of 2003, 2002 and 2001: 2003
    
    2002
    
    2001Basic and diluted earnings per share:Income (loss) before cumulative effect of change in
accounting principle
    
    $
    92,883
    
    
    $
    (108,030
    )
    
    $
    (66,678
    )Add: Interest expense on 5.75% Notes, net of tax
    
    
    
    
    
    
    
    
    
    
    Diluted income (loss) before cumulative effect of
change in accounting principle
    
    
    92,883
    
    
    
    (108,030
    )
    
    
    (66,678
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (242,497
    )
    
    
    Diluted net income (loss)
    
    $
    92,883
    
    
    $
    (350,527
    )
    
    $
    (66,678
    )Weighted average common shares outstanding
    
    
    4,643,598
    
    
    
    1,070,226
    
    
    
    1,060,136Add: Dilutive employee stock options
    
    
    
    
    
    
    
    
    
    
    Add: Assumed conversion of 5.75% Notes
    
    
    
    
    
    
    
    
    
    
    Diluted weighted average common shares outstanding
    
    
    4,643,598
    
    
    
    1,070,226
    
    
    
    1,060,136Basic and diluted earnings per share:Income (loss) before cumulative effect of change in
accounting principle
    
    $
    (20.00
    )
    
    $
    (100.95
    )
    
    $
    (62.90
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (226.58
    )
    
    
    Net income (loss)
    
    $
    (20.00
    )
    
    $
    (327.53
    )
    
    $
    (62.90
    )
 Stock options to purchase 689,598, 113,505 and 175,320 shares of common
stock were outstanding for 2003, 2002 and 2001, respectively, but were excluded
from the computation of earnings per diluted share because their effect was
antidilutive. The conversion of the 5.75% Notes into common shares was
excluded from the computation of earnings per diluted share in 2003, 2002 and
2001 because their effect was antidilutive. The common stock purchase warrants
issued in 2003, which entitle the lenders under the Credit Facility to purchase
a total of 768,997 shares of common stock, were also excluded from the
computation of earnings per diluted share because their effect was
antidilutive. 16. Financial Instruments: Fair Value of Financial Instruments The fair value of the Companys cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities and the 5.75% Notes
approximated the book value at December 28, 2003, due to the short-term nature
of these instruments. The fair value of the Companys borrowings under the
revolving credit facility and other long-term debt approximated the book value
at December 28, 2003 because of the variable rate associated with the
borrowings. See Note 2, Comprehensive Financial Restructuring. Concentration of Credit Risk The Company maintains cash and cash equivalents with various financial
institutions, that at times exceeds federally insured limits. Credit risk with respect to accounts receivable is dispersed due to the
nature of the business, the large number of customers and the diversity of
industries serviced. The Company performs credit evaluations of its customers
in the ordinary course of its business. 56




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##### 



17. Commitments and Contingencies: Operating Leases The Company leases facilities under operating leases, certain of which
require it to pay property taxes, insurance and maintenance costs. Total rent
expense under operating leases amounted to $7,306, $8,813 and $10,692 for 2003,
2002 and 2001, respectively. Operating leases for facilities are usually
renewable at the Companys option and include escalation clauses linked to
inflation. Future minimum annual rentals for the next five years are as follows: Gross
    
    Sublease
    
    NetRentals
    
    Income
    
    Rentals2004
    
    $
    8,753
    
    
    $
    (1,275
    )
    
    $
    7,4782005
    
    
    7,031
    
    
    
    (1,158
    )
    
    
    5,8732006
    
    
    4,568
    
    
    
    (723
    )
    
    
    3,8452007
    
    
    2,847
    
    
    
    (598
    )
    
    
    2,2492008
    
    
    1,280
    
    
    
    (510
    )
    
    
    770Thereafter
    
    
    2,013
    
    
    
    (488
    )
    
    
    1,525$
    26,492
    
    
    $
    (4,752
    )
    
    $
    21,740
 Insurance The Company maintains self-insurance programs for workers compensation
and medical and dental claims. The Company limits its exposure for workers
compensation and medical claims through stop loss arrangements with third party
insurance companies. The Company accrues liabilities under the workers
compensation program based on the loss and loss adjustment expenses as
estimated by an outside administrator. At December 28, 2003, the Company had
standby letters of credit with a bank in connection with a portion of its
workers compensation program. The Company is subject to claims and legal actions in the ordinary course
of business. The Company maintains professional liability insurance for most
of these losses. Employment Agreements The Company has agreements with several executive officers providing for
cash compensation and other benefits in the event that a change in control of
the Company occurs. Legal Proceedings The Company is involved in various legal actions and claims. In the
opinion of management, after considering appropriate legal advice, the future
resolutions of all actions and claims are not expected to have a material
adverse effect on the Companys consolidated financial position, results of
operations or cash flows. 57




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##### 



18. Segment Information: The Company is organized in two segments: Technology Services and
Staffing Services. Technology Services provides technical staffing, training
and information technology consulting services and technology tools for human
capital management. Staffing Services provides temporary staffing services,
placement of full-time employees and on-site management of temporary employees.
The Company evaluates segment performance based on income from operations
before unallocated corporate expenses, restructuring and rationalization
charges, stock option compensation, amortization of goodwill and intangible
assets, interest expense, gain (loss) on financial restructuring, net and
income taxes. Because of the Companys substantial goodwill, management does
not consider total assets by segment an important management tool and,
accordingly, the Company does not report this information separately. The
table below presents segment information for Technology Services and Staffing
Services for 2003, 2002 and 2001: 2003
    
    2002
    
    2001Operating ResultsRevenuesTechnology Services
    
    $
    244,319
    
    
    $
    295,387
    
    
    $
    447,862Staffing Services
    
    
    250,228
    
    
    
    262,361
    
    
    
    284,465Total revenues
    
    
    494,547
    
    
    
    557,748
    
    
    
    732,327Gross profitTechnology Services
    
    
    56,852
    
    
    
    72,007
    
    
    
    114,524Staffing Services
    
    
    49,798
    
    
    
    57,794
    
    
    
    77,144Total gross profit
    
    
    106,650
    
    
    
    129,801
    
    
    
    191,668Segment operating incomeTechnology Services
    
    
    9,956
    
    
    
    13,457
    
    
    
    28,994Staffing Services
    
    
    9,785
    
    
    
    11,263
    
    
    
    18,161Total segment operating income, as defined
    
    
    19,741
    
    
    
    24,720
    
    
    
    47,155Unallocated corporate expenses
    
    
    14,356
    
    
    
    16,161
    
    
    
    16,050Amortization of goodwill and intangible assets
    
    
    202
    
    
    
    472
    
    
    
    16,278Goodwill impairment
    
    
    
    
    
    
    89,935
    
    
    
    56,779Restructuring and rationalization charges
    
    
    2,503
    
    
    
    4,650
    
    
    
    15,259Stock option compensation expense
    
    
    570
    
    
    
    
    
    
    
    Interest expense
    
    
    5,522
    
    
    
    17,301
    
    
    
    18,278Gain (loss) on financial restructuring, net
    
    
    83,027
    
    
    
    (3,628
    )
    
    
    (875
    )Income (loss) before income taxes and
cumulative effect of change in
accounting principle
    
    $
    79,615
    
    
    $
    (107,427
    )
    
    $
    (76,364
    )Other Financial InformationAccounts receivable, netTechnology Services
    
    $
    49,849
    
    
    $
    46,318Staffing Services
    
    
    25,853
    
    
    
    29,860Total accounts receivable, net
    
    $
    75,702
    
    
    $
    76,178
 58




---



##### 



19. Summary of Quarterly Financial Information (Unaudited): The following table sets forth quarterly financial information for each
quarter in 2003 and 2002: 2003First
    
    Second
    
    Third
    
    FourthRevenues
    
    $
    120,716
    
    
    $
    122,509
    
    
    $
    124,222
    
    
    $
    127,100Gross profit
    
    
    25,075
    
    
    
    26,638
    
    
    
    27,265
    
    
    
    27,672Restructuring and rationalization charges
    
    
    (99
    )
    
    
    (2,016
    )
    
    
    (236
    )
    
    
    (152
    )Stock option compensation expense
    
    
    
    
    
    
    
    
    
    
    (267
    )
    
    
    (303
    )Operating income (loss)
    
    
    (1,806
    )
    
    
    (844
    )
    
    
    2,282
    
    
    
    2,478Gain (loss) on financial restructuring, net
    
    
    (1,501
    )
    
    
    84,634
    
    
    
    (28
    )
    
    
    (78
    )Net income (loss)
    
    
    (7,699
    )
    
    
    83,046
    
    
    
    2,058
    
    
    
    15,478Diluted earnings per share
    
    $
    (7.16
    )
    
    $
    15.61
    
    
    $
    0.33
    
    
    $
    2.54
 2002First
    
    Second
    
    Third
    
    FourthRevenues
    
    $
    142,053
    
    
    $
    141,732
    
    
    $
    137,681
    
    
    $
    136,282Gross profit
    
    
    33,761
    
    
    
    33,349
    
    
    
    31,716
    
    
    
    30,975Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (89,935
    )Restructuring and rationalization charges
    
    
    (258
    )
    
    
    (668
    )
    
    
    (452
    )
    
    
    (3,272
    )Operating income (loss)
    
    
    1,500
    
    
    
    1,687
    
    
    
    2,131
    
    
    
    (91,816
    )Gain (loss) on financial restructuring, net
    
    
    (5
    )
    
    
    (680
    )
    
    
    (549
    )
    
    
    (2,394
    )Cumulative effect of change in accounting
principle, net of taxes
    
    
    (242,497
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (249,631
    )
    
    
    (2,721
    )
    
    
    (2,159
    )
    
    
    (96,016
    )Diluted earnings per share
    
    $
    (233.75
    )
    
    $
    (2.55
    )
    
    $
    (2.02
    )
    
    $
    (89.44
    )
 59