UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 27, 2009.
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 000-27792
COMSYS IT PARTNERS, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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56-1930691
(I.R.S. Employer
Identification Number)
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4400 Post Oak Parkway, Suite 1800
Houston, TX 77027
(Address, including zip code, of principal executive offices)
(713) 386-1400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
The number of shares of the registrants common stock outstanding as of November 2, 2009, was
21,122,544.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this Quarterly Report on Form 10-Q, including information
incorporated by reference, contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act), and the Private Securities
Litigation Reform Act of 1995, that are subject to risks and uncertainties. Forward-looking
statements give our current expectations and projections relating to the financial condition,
results of operations, plans, objectives, future performance and business of COMSYS IT Partners,
Inc. and its subsidiaries. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. These statements may include words such as anticipate,
estimate, expect, project, intend, plan, believe and other words and terms of similar
meaning in connection with any discussion of the timing or nature of future operating or financial
performance or other events. All statements other than statements of historical facts included in,
or incorporated into, this report that address activities, events or developments that we expect,
believe or anticipate will or may occur in the future are forward-looking statements.
These forward-looking statements are largely based on our expectations and beliefs concerning
future events, which reflect estimates and assumptions made by our management. These estimates and
assumptions reflect our best judgment based on currently known market conditions and other factors
relating to our operations and business environment, all of which are difficult to predict and many
of which are beyond our control, including:
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economic declines that affect our business, including our profitability, liquidity
or the ability to comply with applicable loan covenants;
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the financial stability of our lenders and their ability to honor their commitments
related to our credit agreements;
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regulatory changes that impose additional regulations or licensing requirements in
such a manner as to increase our costs of doing business or restrict access to
qualified technology workers;
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the risk of increased tax rates;
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adverse changes in credit and capital markets conditions that may affect our ability
to obtain financing or refinancing on favorable terms or that may warrant changes to
existing credit terms;
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the financial stability of our customers and other business partners and their
ability to pay their outstanding obligations or provide committed services;
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changes in levels of unemployment and other economic conditions in the United
States, or in particular regions or industries;
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the impact of changes in demand for our services or competitive pressures on our
ability to maintain or improve our operating margins, including pricing pressures;
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the risk in an uncertain economic environment of increased incidences of employment
disputes, employment litigation and workers compensation claims;
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our success in attracting, training, retaining and motivating billable consultants
and key officers and employees;
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our ability to shift a larger percentage of our business mix into IT solutions,
project management and business process outsourcing and, if successful, our ability to
manage those types of business profitably;
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weakness or reductions in corporate information technology spending levels;
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our ability to maintain existing client relationships and attract new clients in the
context of changing economic or competitive conditions;
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the entry of new competitors into the U.S. staffing services and consulting markets
due to the limited barriers to entry or the expansion of existing competitors in that
market;
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increases in employment-related costs such as healthcare and unemployment taxes;
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the possibility of our incurring liability for the activities of our billable
consultants or for events impacting our billable consultants on our clients premises;
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the risk that we may be subject to claims for indemnification under our customer
contracts;
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the risk that cost cutting or restructuring activities could cause an adverse impact
on certain of our operations; and
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adverse changes to managements periodic estimates of future cash flows that may
affect our assessment of our ability to fully recover our goodwill.
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Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain
and involve a number of risks and uncertainties that are beyond our control. In addition,
managements assumptions about future events may prove to be inaccurate. Management cautions all
readers that the forward-looking statements contained in this report are not guarantees of future
performance, and we cannot assure any reader that those statements will be realized or that the
forward-looking events and circumstances will occur. Actual results may differ materially from
those anticipated or implied in the forward-looking statements due to various factors, including
the factors listed in this section and the Risk Factors sections contained in this report and our
most recent Annual Report on Form 10-K. All forward-looking statements speak only as of the date
of this report. We do not intend to publicly update or revise any forward-looking statements as a
result of new information, future events or otherwise, except as required by law. These cautionary
statements qualify all forward-looking statements attributable to us or persons acting on our
behalf.
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 27,
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September 28,
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September 27,
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September 28,
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(In thousands, except per share amounts)
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2009
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2008
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2009
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2008
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Revenues from services
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$
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157,305
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$
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183,663
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$
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476,764
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$
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551,110
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Cost of services
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118,677
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138,483
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361,661
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416,442
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Gross profit
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38,628
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45,180
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115,103
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134,668
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Operating costs and expenses:
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Selling, general and administrative
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32,083
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34,579
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97,613
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103,634
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Restructuring costs
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155
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4,096
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Depreciation and amortization
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2,106
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2,185
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6,230
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5,903
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34,344
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36,764
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107,939
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109,537
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Operating income
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4,284
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8,416
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7,164
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25,131
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Interest expense, net
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1,057
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1,224
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3,135
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4,106
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Other expense (income), net
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45
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40
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(127
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(185
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)
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Income before income taxes
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3,182
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7,152
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4,156
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21,210
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Income tax expense
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164
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1,105
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623
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3,847
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Net income
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$
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3,018
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$
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6,047
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$
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3,533
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$
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17,363
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Basic net income per common share
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$
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0.14
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$
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0.30
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$
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0.17
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$
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0.85
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Diluted net income per common share
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$
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0.14
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$
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0.30
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$
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0.17
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$
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0.84
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Weighted average basic and diluted shares outstanding:
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Basic
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19,815
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19,612
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19,795
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19,594
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Diluted
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19,815
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20,455
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19,795
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20,611
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See notes to consolidated financial statements
3
COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
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Three
Months Ended
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Nine
Months Ended
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September 27,
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September 28,
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September 27,
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September 28,
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(In thousands)
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2009
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2008
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2009
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2008
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Net income
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$
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3,018
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$
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6,047
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$
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3,533
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$
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17,363
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Foreign currency translation adjustments
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(29
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)
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(69
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)
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(121
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(53
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Total comprehensive income
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$
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2,989
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$
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5,978
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$
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3,412
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$
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17,310
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See notes to consolidated financial statements
4
COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Balance Sheets
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September 27,
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December 28,
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2009
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2008
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(In thousands, except share and par value amounts)
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(Unaudited)
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(Note 1)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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1,213
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$
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22,695
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Accounts receivable, net of allowance of $3,480 and $3,232, respectively
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191,266
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202,297
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Prepaid expenses and other
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2,764
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3,116
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Restricted cash
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2,486
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2,489
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Total current assets
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197,729
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230,597
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Fixed assets, net
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13,810
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16,596
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Goodwill
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89,155
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89,064
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Other intangible assets, net
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9,570
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11,962
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Deferred financing costs, net
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2,733
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1,175
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Restricted cash
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308
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308
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Other assets
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1,104
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1,478
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Total assets
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$
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314,409
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$
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351,180
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Liabilities and stockholders equity
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Current liabilities:
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Accounts payable
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$
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122,060
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$
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156,528
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Payroll and related taxes
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26,947
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25,975
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Interest payable
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271
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337
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Other current liabilities
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9,783
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9,728
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Total current liabilities
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159,061
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192,568
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Long-term debt
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59,170
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69,692
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Other liabilities
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6,660
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5,435
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Total liabilities
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224,891
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267,695
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, no par value; 5,000,000 shares authorized; none issued
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Common stock, par value $.01; 95,000,000 shares authorized and 21,120,544 shares outstanding
at September 27, 2009; 95,000,000 shares authorized and 20,465,028 shares outstanding at December 28, 2008
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210
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203
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Common stock warrants
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1,734
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1,734
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Accumulated other comprehensive loss
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(211
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)
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(90
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)
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Additional paid-in capital
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229,974
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227,360
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Accumulated deficit
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(142,189
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)
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(145,722
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)
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Total stockholders equity
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89,518
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83,485
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Total liabilities and stockholders equity
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$
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314,409
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$
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351,180
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See notes to consolidated financial statements
5
COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Statements of Shareholders Equity
(Unaudited)
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Accumulated
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Common
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Other
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Additional
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Total
|
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Common
|
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Stock
|
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Comprehensive
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Paid-in
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Accumulated
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Stockholders
|
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(In thousands, except share data)
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Stock
|
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Warrants
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Income (Loss)
|
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Capital
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Deficit
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Equity
|
|
Balance as of December 30, 2007
|
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$
|
201
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|
|
$
|
1,734
|
|
|
$
|
57
|
|
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$
|
223,174
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$
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(80,534
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)
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$
|
144,632
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|
Net loss
|
|
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|
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(65,188
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)
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|
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(65,188
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)
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Foreign currency translations
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|
|
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(147
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)
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|
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|
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(147
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)
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Issuance of 342,878 shares of restricted common stock
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2
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(2
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)
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Forfeiture of 25,132 shares of restricted common stock
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(332
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)
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|
|
|
|
|
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(332
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)
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Options exercised for 8,200 shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
83
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,437
|
|
|
|
|
|
|
|
4,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 28, 2008
|
|
|
203
|
|
|
|
1,734
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|
|
|
(90
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)
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|
|
227,360
|
|
|
|
(145,722
|
)
|
|
|
83,485
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,533
|
|
|
|
3,533
|
|
Foreign currency translations
|
|
|
|
|
|
|
|
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
(121
|
)
|
Issuance of 667,000 shares of restricted common stock
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
Forfeiture of 10,136 shares of restricted common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
(41
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,662
|
|
|
|
|
|
|
|
2,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 27, 2009
|
|
$
|
210
|
|
|
$
|
1,734
|
|
|
$
|
(211
|
)
|
|
$
|
229,974
|
|
|
$
|
(142,189
|
)
|
|
$
|
89,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
6
COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 27,
|
|
|
September 28,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,533
|
|
|
$
|
17,363
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,230
|
|
|
|
5,903
|
|
Restructuring costs
|
|
|
2,905
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
903
|
|
|
|
406
|
|
Stock-based compensation
|
|
|
2,662
|
|
|
|
3,401
|
|
Amortization of deferred financing costs
|
|
|
766
|
|
|
|
652
|
|
Other noncash expense, net
|
|
|
762
|
|
|
|
3,847
|
|
Changes in operating assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
10,387
|
|
|
|
(46,387
|
)
|
Prepaid expenses and other
|
|
|
88
|
|
|
|
(189
|
)
|
Accounts payable
|
|
|
(31,833
|
)
|
|
|
27,500
|
|
Payroll and related taxes
|
|
|
928
|
|
|
|
278
|
|
Other
|
|
|
(1,431
|
)
|
|
|
2,363
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities
|
|
|
(4,100
|
)
|
|
|
15,137
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(889
|
)
|
|
|
(5,144
|
)
|
Acquisitions, net of cash acquired
|
|
|
(3,712
|
)
|
|
|
(7,884
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,601
|
)
|
|
|
(13,028
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Borrowings (payments) under revolving credit facility, net
|
|
|
(10,522
|
)
|
|
|
1,703
|
|
Cash paid for financing costs
|
|
|
(2,325
|
)
|
|
|
|
|
Repayments of long-term debt
|
|
|
|
|
|
|
(3,750
|
)
|
Exercise of stock options and warrants
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(12,847
|
)
|
|
|
(1,964
|
)
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
66
|
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(21,482
|
)
|
|
|
(4
|
)
|
Cash, beginning of period
|
|
|
22,695
|
|
|
|
1,594
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
1,213
|
|
|
$
|
1,590
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
7
COMSYS IT Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. General
The unaudited consolidated financial statements included herein have been prepared in accordance
with the instructions to Form 10-Q and do not include all the information and footnotes required by
accounting principles generally accepted in the U.S.; however, they do include all adjustments of a
normal recurring nature that, in the opinion of management, are necessary to present fairly the
results of operations of COMSYS IT Partners, Inc. and its subsidiaries (collectively, the
Company) for the interim periods presented. The Consolidated Balance Sheet as of December 28,
2008, and the Consolidated Statement of Shareholders Equity for the period from December 30, 2007,
through December 28, 2008, have been derived from the Companys audited financial statements, but
do not include the financial statement footnote information required for audited financial
statements. These interim financial statements should be read in conjunction with the Companys
Annual Report on Form 10-K for the fiscal year ended December 28, 2008, as filed with the
Securities and Exchange Commission (the SEC). Due to the seasonal nature of the Companys
business, the results of operations for the three and nine months ended September 27, 2009, are not
necessarily indicative of results to be expected for the entire fiscal year.
The Company is a leading IT services company with 52 offices across the U.S. and offices in Puerto
Rico, Canada and the United Kingdom and provides a full range of IT staffing and project
implementation services, including website development and integration, application programming and
development, client/server development, systems software architecture and design, systems
engineering and systems integration. The Company also provides services that complement its IT
staffing services, such as vendor management, project solutions, process solutions and permanent
placement of IT professionals. The Companys TAPFIN Process Solutions division offers total human
capital fulfillment and management solutions within three core service areas: vendor management
services, services procurement management and recruitment process outsourcing.
The Companys fiscal year ends on the Sunday closest to December 31st and its first three fiscal
quarters are 13 calendar weeks each (and each also ends on a Sunday). The fiscal third
quarter-ends for 2009 and 2008 were September 27, 2009, and September 28, 2008, respectively.
The Companys consolidated financial information is reviewed by the chief decision makers, and the
business is managed under one operating strategy, the Company operates under one reportable
segment. The Companys principal operations are located in the United States, and the results of
operations and long-lived assets in geographic regions outside of the United States are not
material. During the three and nine months ended September 27, 2009, and September 28, 2008, no
individual customer accounted for more than 10% of the Companys consolidated revenues.
Subsequent
events have been evaluated through November 5, 2009, the date of the issuance of the
financial statements. There were no recognized subsequent events requiring recognition in the
financial statements and no non-recognized subsequent events requiring disclosure.
2. Business Combinations
On September 30, 2004, COMSYS Holding, Inc. (COMSYS Holding or Old COMSYS) completed a merger
transaction with Venturi Partners, Inc. (Venturi), a publicly-held IT and commercial staffing
company, in which COMSYS Holding merged with a subsidiary of Venturi (the merger). At the
effective time of the merger, Venturi changed its name to COMSYS IT Partners, Inc. and issued new
shares of its common stock to stockholders of COMSYS Holding, resulting in former COMSYS Holding
stockholders owning approximately 55.4% of Venturis outstanding common stock on a fully-diluted
basis. Since former COMSYS Holding stockholders owned a majority of the Companys outstanding
common stock upon consummation of the merger, COMSYS Holding was deemed the acquiring company for
accounting and financial reporting purposes. References to Old COMSYS are to COMSYS Holding and
its consolidated subsidiaries prior to the merger, and references to COMSYS or the Company are
to COMSYS IT Partners, Inc. and its consolidated subsidiaries after the merger. References to
Venturi are to Venturi and its consolidated subsidiaries prior to the merger.
On October 31, 2005, the Company purchased all of the outstanding stock of Pure Solutions, Inc.
(Pure Solutions), an information technology services company with operations in California. This
acquisition was not material to the Companys business. The purchase price was comprised of a $7.5
million cash payment at closing plus up to $8.25 million of earnout payments over three years.
8
In connection with the purchase, the Company recorded a customer list intangible asset in the
amount of $6.6 million, which was valued using a discounted cash flow analysis. The fair value of
Pure Solutions net identifiable assets exceeded the initial purchase price by $1.1 million, and
this amount was recorded as a liability at the date of purchase. The final earnout period ended in
2008, and the total amount of earnout payments made was $8.25 million. The final payment of $2.0
million was made in January 2009 in accordance with the terms of the purchase agreement. These
earnouts were recorded to goodwill, except for $1.1 million, which was charged to the liability.
The operations of Pure Solutions are included in the Consolidated Statements of Operations for
periods subsequent to the purchase.
On December 12, 2007, the Company purchased all of the outstanding stock in Praeos Technologies,
Inc. (Praeos), an Atlanta-based provider of IT consulting services specializing in the business
intelligence and business analytics sectors. This acquisition was not material to the Companys
business. The purchase price was comprised of a $12.0 million cash payment at closing plus up to a
$5.5 million earnout payment based on Praeos achievement of a specified annual EBITDA target in
2008. The former owners of Praeos and the Company have agreed that the earnout target was not met
for the period. In connection with the purchase, the Company recorded $6.2 million of goodwill and
$2.4 million of tangible net assets. In addition, the Company escrowed $3.4 million of restricted
cash for a payment required to be made to employees or former shareholders in December 2008. In
December 2008, the Company paid $3.4 million out of the escrow account to former employees that
participated in the Praeos bonus plan that were still employed by the Company at the one-year
anniversary of the closing date. The Company determined that the bonus plan acquired at
acquisition was a compensatory arrangement and, accordingly, recognized compensation expense
ratably in 2008 in the amount of $3.4 million. In addition, the Company was a party to a $1.4
million escrow set up to indemnify the Company for the breach of any representation, covenant or
obligation by the seller. The entire $1.4 million, which was initially recorded with the purchase
accounting, was paid out in June 2009 to the former employees and owners of Praeos. The operations
of Praeos are included in the Consolidated Statements of Operations subsequent to the purchase.
On December 19, 2007, the Company purchased the assets and assumed specified liabilities of T.
Williams Consulting, LLC (TWC), a Philadelphia-based provider of recruitment process outsourcing
and specialty human resources consulting services. This acquisition was not material to the
Companys business. Subsequent to the purchase, the Company integrated TWCs operations into
TAPFIN, LLC and discontinued the use of TWCs name. The purchase price was comprised of a $16.5
million cash payment at closing plus up to a $7.5 million earnout payment based on TWCs
achievement of a specified annual EBITDA target in 2008. The former owners of TWC and the Company
have agreed that the earnout target was not met for the period. In connection with the purchase,
the Company recorded a customer list intangible asset in the amount of $2.8 million, which was
valued using a discounted cash flow analysis, an assembled methodology intangible asset in the
amount of $0.2 million, which was valued using an estimated development cost analysis, $11.8
million of goodwill and $1.7 million of tangible net assets. The operations of TWC are included in
the Consolidated Statements of Operations subsequent to the purchase.
On June 26, 2008, the Company purchased all of the issued and outstanding stock of ASET
International Services Corporation (ASET), a Virginia-based provider of globalization,
localization and interactive language services. This acquisition was not material to the Companys
business. The purchase price was comprised of a $5.0 million cash payment at closing, $1.0 million
in notes payable to the former owners on June 30, 2010, and up to a $1.0 million earnout payment
based on ASETs achievement of a specified EBITDA target over the 12 months following the
acquisition. As of June 28, 2009, the Company had accrued $1.0 million related to the potential
earnout payment, and this amount was charged to goodwill. The Company paid this amount in July
2009. The notes accrue interest at the rate of 6% annually. The Company paid $30,000 of accrued
interest in each of April 2009 and June 2009. Interest accrued as of December 31, 2009, will be
paid on that date, with the remaining interest payable in six-month increments. The notes are
included in other liabilities on the Consolidated Balance Sheets. In connection with the purchase,
the Company recorded a customer list intangible asset in the amount of $2.1 million, which was
valued using a discounted cash flow analysis, $1.9 million of goodwill and $2.0 million of tangible
net assets. The operations of ASET are included in the Consolidated Statements of Operations
subsequent to the purchase.
None of these acquisitions, individually or in aggregate, required financial statement filings
under Rule 3-05 of Regulation S-X.
3. Fair Value of Financial Instruments
The carrying values of cash, accounts receivable, restricted cash, accounts payable, and payroll
and related taxes approximate their fair values due to the short-term maturity of these
instruments. The carrying value of the Companys revolving line of credit and interest payable
approximates fair value due to the variable nature of the interest rates under the Companys senior
credit agreement. However, considerable judgment is required in interpreting data to develop the
estimates of fair value.
9
4. Restructuring Costs
In November 2008, the Company announced a restructuring plan designed to improve operational
efficiencies by relocating certain administrative functions primarily from the Washington, DC area
and Portland, Oregon into its Phoenix customer service center facility. Although the plan has
essentially been completed, the Company expects to continue recording restructuring charges from
this plan through the fourth quarter of 2009, including a reversal in the fourth quarter of 2009 of
a portion of previously recorded lease charges. All of these charges are expected to result in
future cash expenditures. These charges primarily will relate to miscellaneous employee
termination benefits and lease-related costs.
The change in the restructuring liability during 2008 and the nine months ended September 27, 2009,
is set forth below, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
severance
|
|
|
Lease costs
|
|
|
Total
|
|
Balance as of December 30, 2007
|
|
$
|
|
|
|
$
|
355
|
|
|
$
|
355
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges
|
|
|
453
|
|
|
|
64
|
|
|
|
517
|
|
Cash payments
|
|
|
(41
|
)
|
|
|
(177
|
)
|
|
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 28, 2008
|
|
|
412
|
|
|
|
242
|
|
|
|
654
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges
|
|
|
356
|
|
|
|
3,343
|
|
|
|
3,699
|
|
Cash payments
|
|
|
(640
|
)
|
|
|
(542
|
)
|
|
|
(1,182
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 27, 2009
|
|
$
|
128
|
|
|
$
|
3,043
|
|
|
$
|
3,171
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded additional restructuring charges related to lease abandonment costs in
the first nine months of 2009 related to its reduction in space at the Companys Washington,
DC-area and Colorado Springs, CO facilities. These lease charges will be paid from 2009 through
2014. See the subsequent event disclosure in Note 1 for additional information related to a
potential sublease on the Washington, DC-area facility.
5. Long-Term Debt
Long-term debt was $59.2 million and $69.7 million at September 27, 2009, and December 28, 2008,
respectively. These amounts were made up entirely of borrowings under our revolving credit
agreement (revolver or senior credit agreement).
In March 2009, the Company entered into a Ninth Amendment to its senior credit agreement (the
Amendment). Among other things, the Amendment provided for (i) a decrease in the Companys
borrowing capacity under its existing revolving credit facility from $160.0 million to
$110.0 million, (ii) an extension of the maturity date for the facility for an additional two years
to March 31, 2012, and (iii) increases in the applicable interest rates under the facility to LIBOR
plus a margin of 3.75% or, at the Companys option, the prime rate plus a margin of 2.75%. The
Amendment also permits the Company to make up to $10.0 million in stock redemptions and/or dividend
payments in the aggregate subject to the terms and conditions specified.
The Company pays a quarterly commitment fee of 0.75% per annum on the unused portion of the
revolver. The Company and certain of its subsidiaries guarantee the loans and other obligations
under the senior credit agreement. The obligations under the senior credit agreement are secured
by a perfected first priority security interest in substantially all of the assets of the Company
and its U.S. subsidiaries, as well as the shares of capital stock of its direct and indirect U.S.
subsidiaries and certain of the capital stock of its foreign subsidiaries. Pursuant to the terms
of the senior credit agreement, the Company maintains a zero balance in its primary domestic cash
accounts. Any excess cash in those domestic accounts is swept on a daily basis and applied to
repay borrowings under the revolver, and any cash needs are satisfied through borrowings under the
revolver.
Borrowings under the revolver are limited to 85% of eligible accounts receivable, as defined in the
senior credit agreement, as amended, reduced by the amount of outstanding letters of credit and
designated reserves. At September 27, 2009, these designated reserves were:
|
|
|
a $5.0 million minimum availability reserve, and
|
|
|
|
|
a $0.9 million reserve for outstanding letters of credit.
|
10
At September 27, 2009, the Company had outstanding borrowings of $59.2 million under the revolver
at interest rates ranging from 4.01% to 6.00% per annum (weighted average rate of 4.49%) and excess
borrowing availability under the revolver of $50.0 million. Fees paid on outstanding letters of
credit are equal to the LIBOR margin then applicable to the revolver, which at September 27, 2009,
was 3.75%. At September 27, 2009, outstanding letters of credit totaled $0.9 million.
The Companys credit facilities contain a number of covenants that, among other things, restrict
its ability to:
|
|
|
incur additional indebtedness;
|
|
|
|
|
pay more than $10 million in the aggregate for stock repurchases and dividends;
|
|
|
|
|
incur liens;
|
|
|
|
|
make certain capital expenditures;
|
|
|
|
|
make certain investments or acquisitions;
|
|
|
|
|
repay debt; and
|
|
|
|
|
dispose of property.
|
In addition, under the credit facilities, there are springing financial covenants that would
require the Company to satisfy a minimum fixed charge coverage ratio and a maximum total leverage
ratio if our excess availability falls below $25 million. A breach of any covenants governing the
Companys debt would permit the acceleration of the related debt and potentially other indebtedness
under cross-default provisions. As of September 27, 2009, the Company was in compliance with these
requirements.
The senior credit agreement contains various events of default, including failure to pay principal
and interest when due, breach of covenants, materially incorrect representations, default under
other agreements, bankruptcy or insolvency, the occurrence of specified ERISA events, entry of
enforceable judgments against the Company in excess of $2.0 million not stayed and the occurrence
of a change of control. In the event of a default, all commitments under the revolver may be
terminated and all of the Companys obligations under the senior credit agreement could be
accelerated by the lenders, causing all loans and borrowings outstanding (including accrued
interest and fees payable thereunder) to be declared immediately due and payable. In the case of
bankruptcy or insolvency, acceleration of obligations under the Companys senior credit agreement
is automatic.
6. Income Taxes
The Company recorded income tax expense of $0.2 million and $0.6 million in the three and nine
months ended September 27, 2009, respectively, for federal, state and foreign income taxes.
The Company records an income tax valuation allowance when it is more likely than not that certain
deferred tax assets will not be realized. The Company carried a valuation allowance against most
of its deferred tax assets as of September 27, 2009. These deferred tax items represent expenses
or operating losses recognized for financial reporting purposes, which will result in tax
deductions over varying future periods. The judgments, assumptions and estimates that may affect
the amount of the valuation allowance include estimates of future taxable income, 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 will evaluate quarterly its estimates of the
recoverability of its deferred tax assets based on its assessment of whether its more likely than
not that any portion of these fully reserved assets become recoverable through future taxable
income. At such time that the Company no longer has a reserve for its deferred tax assets, it will
record a deferred tax asset and related tax benefit in the period the valuation allowance is
reversed, and the Company will begin to provide for taxes at the full statutory rate.
As of September 27, 2009, the Company had $62.4 million in net deferred tax assets and had recorded
a valuation allowance against $61.6 million of those assets. The decrease in the valuation
allowance from December 28, 2008, resulted primarily from pre-tax book income and utilization of
net deferred tax assets during the nine months ended September 27, 2009.
The Companys net deferred tax assets are substantially offset with a valuation allowance as
discussed above. For the years ended December 28, 2008 and prior, a portion of its fully reserved
deferred tax assets that become realized through operating profits were recognized as a reduction
to goodwill to the extent they related to benefits acquired in the merger. This resulted in a
deferred tax expense in the year the acquired deferred tax assets were utilized. This portion of
deferred tax expense represented the consumption of pre-merger deferred tax assets that were
acquired with zero basis. The Company calculated a goodwill bifurcation ratio in the year of the
merger to determine the amount of deferred tax expense that should be offset to goodwill
prospectively. No expense will be required to be recorded when there is a release of the valuation
allowance on Venturis acquired net deferred tax assets.
11
The Company has not paid United States federal income tax on the undistributed foreign earnings of
its foreign subsidiaries as it is the Companys intent to reinvest such earnings in its foreign
subsidiaries. Pretax income attributable to the Companys profitable foreign operations amounted
to $0 in both the three months ended September 27, 2009, and September 28, 2008, and $0.1 million
and $0.2 million in the nine months ended September 27, 2009, and September 28, 2008, respectively.
The Company may, from time to time, be assessed interest or penalties by major tax jurisdictions,
although any such assessments historically have been minimal and immaterial to its financial
results. In the event the Company has received an assessment for interest and/or penalties, it has
been classified in the financial statements as selling, general and administrative expense. For
the three and nine months ended September 27, 2009, and September 28, 2008, the Company has not
recorded any interest or penalties.
7. Net Income Per Share
Basic net income per share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted net income per share
is computed on the basis of the weighted average number of shares of common stock plus the effect
of dilutive potential common shares outstanding during the period using the treasury stock method.
Potentially dilutive securities at September 27, 2009, include 248,654 warrants to purchase the
Companys common stock. The warrant holders are entitled to participate in dividends declared on
common stock as if the warrants were exercised for common stock. As a result, for purposes of
calculating basic net income per common share, income attributable to warrant holders has been
excluded from net income.
Additionally, potentially dilutive securities include 1,057,266 unvested restricted shares at
September 27, 2009. The unvested restricted stock holders are entitled to participate in dividends
declared on common stock as if the shares were fully vested. As a result, for purposes of
calculating basic net income per common share, income attributable to unvested restricted stock
holders has been excluded from net income.
The computation of basic and diluted net income per share is as follows, in thousands, except per
share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net income attributable to common stockholders basic
|
|
$
|
2,834
|
|
|
$
|
5,817
|
|
|
$
|
3,326
|
|
|
$
|
16,698
|
|
Net income attributable to unvested restricted stock holders
|
|
|
148
|
|
|
|
157
|
|
|
|
165
|
|
|
|
457
|
|
Net income attributable to warrant holders
|
|
|
36
|
|
|
|
73
|
|
|
|
42
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net income
|
|
$
|
3,018
|
|
|
$
|
6,047
|
|
|
$
|
3,533
|
|
|
$
|
17,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
19,815
|
|
|
|
19,612
|
|
|
|
19,795
|
|
|
|
19,594
|
|
Add: dilutive restricted stock, stock options and warrants
|
|
|
|
|
|
|
843
|
|
|
|
|
|
|
|
1,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
19,815
|
|
|
|
20,455
|
|
|
|
19,795
|
|
|
|
20,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.14
|
|
|
$
|
0.30
|
|
|
$
|
0.17
|
|
|
$
|
0.85
|
|
Diluted net income per common share
|
|
$
|
0.14
|
|
|
$
|
0.30
|
|
|
$
|
0.17
|
|
|
$
|
0.84
|
|
For the three months ended September 27, 2009, and September 28, 2008, 1,099,946 shares and
437,059 shares, respectively, attributable to outstanding stock options, warrants and unvested
restricted stock were excluded from the calculation of diluted net income per share because their
inclusion would have been antidilutive. For the nine months ended September 27, 2009, and
September 28, 2008, 1,153,379 shares and 588,540 shares, respectively, attributable to outstanding
stock options, warrants and unvested restricted stock were excluded from the calculation of diluted
net income per share because their inclusion would have been antidilutive.
8. Commitments and Contingencies
The Company has agreed to indemnify members of its board of directors and its corporate officers
against any threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that the individual is or was a director or officer of the Company. The individuals will be indemnified, to the fullest
extent permitted by law, against related expenses, judgments, fines and any amounts paid in
settlement. The Company also maintains directors and officers
insurance coverage in order to mitigate exposure to these indemnification obligations. There was no amount recorded for these
indemnification obligations at September 27, 2009, and December 28, 2008. Due to the nature of
these obligations, it is not possible to make a reasonable estimate of the maximum potential loss
or range of loss. No assets are held as collateral and no specific recourse provisions exist
related to these indemnifications.
12
The Company leases various office space and equipment under noncancelable operating leases expiring
through 2018. Certain leases include free rent periods, rent escalation clauses and renewal
options. Rent expense is recorded on a straight-line basis over the term of the lease. Rent
expense was $1.9 million and $2.2 million for the three months ended September 27, 2009, and
September 28, 2008, respectively, and $6.3 million and $6.0 million for the nine months ended
September 27, 2009, and September 28, 2008. Sublease income was $0.2 million for both the three
months ended September 27, 2009, and September 28, 2008, and $0.7 million and $0.5 million for the
nine months ended September 27, 2009, and September 28, 2008, respectively.
In connection with the merger and the sale of Venturis commercial staffing business in 2004, the
Company placed $2.5 million of cash and 187,556 shares of its common stock in separate escrows
pending the final determination of certain state tax and unclaimed property assessments. The
shares were released from escrow on September 30, 2006, in accordance with the merger agreement,
while the cash remains in escrow. The cash escrow account will terminate on December 31, 2009 (the
Termination Date), unless certain events occur to accelerate the Termination Date. On the
Termination Date, the Company will receive the full amount remaining in the escrow account. The
Company has recorded liabilities for amounts management believes are adequate to resolve all of the
matters these escrows were intended to cover; however, management cannot ascertain at this time
what the final outcome of these assessments will be in the aggregate and it is possible that
managements estimates could change. The escrowed cash is included in restricted cash on the
Consolidated Balance Sheets.
Chimes, a VMS company, filed for bankruptcy under Chapter 7 on January 9, 2008. The Company has
filed a proof of claim in the bankruptcy case. Like a number of other Chimes vendors, the Company
received preference letters in May 2009 from the Chimes trustee demanding the return of payments
made to the Company by Chimes during the 90 days leading up to the filing of the bankruptcy
petition. The Company believes that none of the payments it received were preferences as defined
by bankruptcy law and intends to vigorously defend itself against these claims. However, no
assurance can be made as to the outcome of this legal proceeding.
The Company has entered into employment agreements with certain of its executives covering, among
other things, base salary, incentive bonus determinations and payments in the event of termination
or a change of control of the Company.
The Company is a defendant in various lawsuits and claims arising in the normal course of business
and is defending them vigorously. While the results of litigation cannot be predicted with
certainty, management believes the final outcome of such litigation will not have a material
adverse effect on the consolidated financial position, results of operations or cash flows of the
Company. Any cost to settle litigation will be included in selling, general and administrative
expense on the Consolidated Statements of Operations.
9. Stock Compensation Plans
The Company has four stock-based compensation plans with outstanding equity awards: the 1995
Equity Participation Plan (1995 Plan), the 2003 Equity Incentive Plan (2003 Equity Plan), the
COMSYS IT Partners, Inc. 2004 Stock Incentive Plan, as amended (2004 Equity Plan) and the 2004
Management Incentive Plan (2004 Incentive Plan).
Plan Descriptions
In 2003, Venturi terminated the 1995 Plan in connection with its financial restructuring. As a
result of the merger, all outstanding options under the 1995 Plan were vested and are exercisable.
Although the 1995 Plan has been terminated and no future option issuances will be made under it,
the remaining outstanding stock options will continue to be exercisable in accordance with their
terms.
In 2003, Venturi adopted the 2003 Equity Plan under which the Company may grant non-qualified stock
options, incentive stock options and other stock-based awards in the Companys common stock to
officers and other key employees. On the date of the merger, all outstanding options under the
2003 Equity Plan at that time vested and became exercisable. Options granted under the 2003 Equity
Plan have a term of 10 years.
13
In connection with the merger, the Companys Board of Directors adopted and the stockholders
approved the 2004 Equity Plan, which was subsequently amended and restated in 2007 and amended
again in 2009. Under the 2004 Equity Plan, the Company may grant non-qualified stock options,
incentive stock options, restricted stock and other stock-based awards in its common stock to
officers, employees, directors and consultants. Options granted under this plan generally vest
over a three-year period from the date of grant and have a term of 10 years. Time-based restricted
stock awards granted under this plan generally vest over a three-year period from the date of
grant.
Effective January 1, 2004, Old COMSYS adopted the 2004 Incentive Plan. The 2004 Incentive Plan was
structured as a stock issuance program under which certain executive officers and key employees
might receive shares of Old COMSYS nonvoting Class D Preferred Stock in exchange for payment at the
then current fair market value of these shares. Effective July 1, 2004, 1,000 shares of Class D
Preferred Stock were issued by Old COMSYS under the 2004 Incentive Plan. Effective with the
merger, these shares were exchanged for a total of 1,405,844 shares of restricted common stock of
COMSYS. Of these shares, one-third vested on the date of the merger, one-third was scheduled to
vest over a three-year period subsequent to merger, and one-third was scheduled to vest over a
three-year period subject to specific performance criteria being met. Effective September 30,
2006, the Compensation Committee of the Companys Board of Directors (the Committee) made certain
modifications to the 2004 Incentive Plan after concluding that the performance vesting targets
appeared to be unattainable, as noted below. Although there will be no future restricted stock
issuances under the 2004 Incentive Plan, the remaining outstanding restricted stock awards will
continue to vest in accordance with their terms. In accordance with the terms of the 2004
Incentive Plan, any shares forfeited by participants will be distributed to certain stockholders of
Old COMSYS in 2010 after the completion of the 2009 audit.
Stock Options
A summary of the activity related to stock options granted under the 1995 Plan, the 2003 Equity
Plan and the 2004 Equity Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
1995
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
|
Exercise Price
|
|
|
|
Plan
|
|
|
Equity Plan
|
|
|
Equity Plan
|
|
|
Total
|
|
|
Per Share
|
|
Outstanding at December 30, 2007
|
|
|
1,250
|
|
|
|
445,000
|
|
|
|
330,266
|
|
|
|
776,516
|
|
|
$
|
9.75
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(8,200
|
)
|
|
|
(8,200
|
)
|
|
$
|
8.55
|
|
Forfeited
|
|
|
(527
|
)
|
|
|
(1,387
|
)
|
|
|
(18,336
|
)
|
|
|
(20,250
|
)
|
|
$
|
17.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 28, 2008
|
|
|
723
|
|
|
|
443,613
|
|
|
|
303,730
|
|
|
|
748,066
|
|
|
$
|
9.54
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Forfeited
|
|
|
|
|
|
|
(1,387
|
)
|
|
|
(14,833
|
)
|
|
|
(16,220
|
)
|
|
$
|
9.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 27, 2009
|
|
|
723
|
|
|
|
442,226
|
|
|
|
288,897
|
|
|
|
731,846
|
|
|
$
|
9.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 27, 2009
|
|
|
723
|
|
|
|
425,529
|
|
|
|
288,897
|
|
|
|
715,149
|
|
|
$
|
9.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for issuance at September 27, 2009
|
|
|
|
|
|
|
55,809
|
|
|
|
1,134,368
|
|
|
|
1,190,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information related to stock options outstanding and
exercisable under the Companys stock-based compensation plans at September 27, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Years
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Remaining
|
|
|
per Share
|
|
|
Exercisable
|
|
|
per Share
|
|
$7.80
|
|
|
219,000
|
|
|
|
3.55
|
|
|
$
|
7.80
|
|
|
|
219,000
|
|
|
$
|
7.80
|
|
$8.55 to $8.88
|
|
|
213,961
|
|
|
|
4.96
|
|
|
$
|
8.57
|
|
|
|
197,264
|
|
|
$
|
8.57
|
|
$11.05 to $11.98
|
|
|
298,162
|
|
|
|
5.11
|
|
|
$
|
11.32
|
|
|
|
298,162
|
|
|
$
|
11.32
|
|
$63.25 to $132.75
|
|
|
723
|
|
|
|
0.36
|
|
|
$
|
100.64
|
|
|
|
723
|
|
|
$
|
100.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$7.80 to $132.75
|
|
|
731,846
|
|
|
|
4.59
|
|
|
$
|
9.55
|
|
|
|
715,149
|
|
|
$
|
9.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
For additional vesting information on stock option grants issued or modified prior to 2009,
see Footnote 10 in the Companys Annual Report on Form 10-K for the fiscal year ended December 28,
2008.
Cash received from option and warrant exercises during the nine months ended September 27, 2009,
and September 28, 2008, was $0 and $83,000, respectively, and was included in financing activities
in the accompanying Consolidated Statements of Cash Flows. The total intrinsic value of options
exercised during the three months ended September 27, 2009, and September 28, 2008, was $0 and
$4,000, respectively. The total intrinsic value of options exercised during the nine months ended
September 27, 2009, and September 28, 2008, was $0 and $24,000, respectively. The Company has
historically used newly issued shares to satisfy stock option exercises and expects to continue to
do so in future periods.
Restricted Stock Awards
Restricted stock awards are grants that entitle the holder to shares of common stock as the awards
vest. The Company measures the fair value of restricted shares based upon the closing market price
of the Companys common stock on the date of grant. Restricted stock awards that vest in
accordance with service conditions are amortized over their applicable vesting period using the
straight-line method. For unvested share awards subject partially or wholly to performance
conditions, the Company is required to assess the probability that such performance conditions will
be met. If the likelihood of the performance condition being met is deemed probable, the Company
will recognize the expense using the straight-line attribution method.
A summary of the activity related to restricted stock granted under the 2004 Equity Plan and the
2004 Incentive Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested balance at December 30, 2007
|
|
|
490,635
|
|
|
$
|
18.34
|
|
Granted
|
|
|
342,878
|
|
|
$
|
11.09
|
|
Vested
|
|
|
(147,227
|
)
|
|
$
|
17.35
|
|
Forfeited
|
|
|
(79,443
|
)
|
|
$
|
17.30
|
|
|
|
|
|
|
|
|
|
Unvested balance at December 28, 2008
|
|
|
606,843
|
|
|
$
|
14.62
|
|
Granted
|
|
|
667,000
|
|
|
$
|
4.36
|
|
Vested
|
|
|
(214,911
|
)
|
|
$
|
15.55
|
|
Forfeited
|
|
|
(1,666
|
)
|
|
$
|
14.83
|
|
|
|
|
|
|
|
|
|
Unvested balance at September 27, 2009
|
|
|
1,057,266
|
|
|
$
|
7.96
|
|
|
|
|
|
|
|
|
|
The unvested shares in the table above issued to non-executive employees are subject to a
three-year time-based vesting requirement. The unvested shares issued to executive officers are
subject to either a three-year time-based vesting requirement or a three-year performance-based
vesting requirement. The compensation expense associated with these shares is amortized using the
straight-line method. For additional vesting information on restricted stock grants issued or
modified prior to 2009, see Footnote 10 in the Companys Annual Report on Form 10-K for the fiscal
year ended December 28, 2008.
Effective January 2, 2009, the Committee approved equity grants to five executive officers,
including the Companys Chief Executive Officer. These shares are 100% performance-based, and will
vest (if at all) at the end of the three-year period ending December 31, 2011, based on the
Companys earnings per share (EPS) growth as against the BMO staffing stock index during the
three-year period. The shares will fully vest if the Companys EPS growth is in the top 25% of the
index. The shares will vest 50% or 25% if the Companys EPS growth is in the second 25% or third
25% of the index, respectively. No shares will vest if the Companys EPS growth is in the bottom
25% of the index. The vesting percentages will be prorated within individual tiers, except that no
shares will vest for EPS growth in the bottom tier.
As of September 27, 2009, there was $4.8 million of total unrecognized compensation costs related
to unvested option and restricted stock awards granted under the plans, which are expected to be
recognized over a weighted-average period of 27 months. The total fair value of shares and options
that vested during the three and nine months ended September 27, 2009, was $0.1 million and $3.8
million, respectively.
15
10. Related Party Transactions
Elias J. Sabo, a member of the Companys board of directors, also serves on the board of directors
of The Compass Group, the parent company of StaffMark. StaffMark provides commercial staffing
services to the Company and its clients in the normal course of its business. During the three
months ended September 27, 2009, the Company and its clients purchased approximately $0.7 million
of staffing services from StaffMark for services provided to the Companys vendor management
clients. At September 27, 2009, the Company had approximately $0.3 million in accounts payable to
StaffMark.
Frederick W. Eubank II and Courtney R. McCarthy, members of the Companys board of directors, are
employees of Wachovia Investors, Inc., the Companys largest shareholder and a subsidiary of
Wachovia Corporation (Wachovia). The Company provides staffing services to Wachovia in the
normal course of its business. During the three months ended September 27, 2009, the Company
recorded revenue of approximately $0.5 million related to Wachovias purchase of staffing
services. At September 27, 2009, the Company had approximately $49,000 in accounts receivable from
Wachovia.
In June 2008, the Company received proceeds from Amalgamated Gadget, LP, a greater than 10%
shareholder at that time, equal to the profits realized on sales of Company stock that was
purchased and sold within a six-month or less time frame. Under Section 16(b) of the Securities
and Exchange Act, the profits realized from these transactions by the greater than 10% shareholder
must be disgorged to the Company under certain circumstances. The Company received proceeds of
approximately $164,209 related to these transactions.
11. Recent Accounting Pronouncements
In May 2009, the FASB issued ASC 855,
Subsequent Events
(ASC 855). ASC 855 defines subsequent
events as events or transactions that occur after the balance sheet date, but before the financial
statements are issued. It defines two types of subsequent events: recognized subsequent events,
which provide additional evidence about conditions that existed at the balance sheet date, and
non-recognized subsequent events, which provide evidence about conditions that did not exist at the
balance sheet date, but arose before the financial statements were issued. Recognized subsequent
events are required to be recognized in the financial statements, and non-recognized subsequent
events are required to be disclosed. The statement requires entities to disclose the date through
which subsequent events have been evaluated, and the basis for that date. ASC 855 is consistent
with the Companys current practice and does not have any impact on the Companys results of
operations, financial condition or liquidity. See Note 1 for the required disclosure.
In June 2009, the FASB approved the FASB Accounting Standards Codification (the Codification) as
the single source of authoritative nongovernmental GAAP. All existing accounting standard
documents, such as the FASB, American Institute of Certified Public Accountants, Emerging Issues
Task Force and other related literature, excluding guidance from the SEC, will be superseded by the
Codification. All non-grandfathered, non-SEC accounting literature not included in the
Codification will become non-authoritative. The Codification does not change GAAP, but instead
introduces a new structure that will combine all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for our September 27, 2009
financial statements and impacts financial statement disclosures as all references to authoritative
accounting literature are referenced in accordance with the Codification.
In October 2009, the FASB approved for issuance Emerging Issues Task Force (EITF) issue 08-01,
Revenue Arrangements with Multiple Deliverables
(currently within the scope of FASB ASC Subtopic
605-25). This statement provides principles for allocation of consideration among its
multiple-elements, allowing more flexibility in identifying and accounting for separate
deliverables under an arrangement. The EITF introduces an estimated selling price method for
valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party
evidence of selling price is not available, and significantly expands related disclosure
requirements. This standard is effective on a prospective basis for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively,
adoption may be on a retrospective basis, and early application is permitted. The Company is
currently evaluating the impact of adopting this pronouncement.
16
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the unaudited consolidated
financial statements and related notes appearing elsewhere in this report, as well as other reports
we file with the Securities and Exchange Commission. This discussion contains forward-looking
statements reflecting our current expectations and estimates and assumptions concerning events and
financial trends that may affect our future operating results or financial position. Actual
results and the timing of events may differ materially from those contained in these
forward-looking statements due to a number of factors, including those discussed in the section
entitled Cautionary Note Regarding Forward-Looking Statements included elsewhere in this report
and in the sections entitled Risk Factors included in this report and our Annual Report on Form
10-K for the fiscal year ended December 28, 2008.
Our Business
COMSYS IT Partners, Inc. and our wholly-owned subsidiaries (collectively, us, our or we)
provide a full range of specialized IT staffing and project implementation services, including
website development and integration, application programming and development, client/server
development, systems software architecture and design, systems engineering and systems integration.
We also provide services that complement our IT staffing services, such as vendor management,
project solutions, process solutions and permanent placement of IT professionals. Our TAPFIN
Process Solutions division offers total human capital fulfillment and management solutions within
three core service areas: vendor management services, services procurement management and
recruitment process outsourcing. We operate through the following wholly-owned subsidiaries:
|
|
|
COMSYS Services, LLC (COMSYS Services), an IT staffing services provider,
|
|
|
|
|
COMSYS Information Technology Services, Inc. (COMSYS IT), an IT staffing
services provider,
|
|
|
|
|
Pure Solutions, Inc. (Pure Solutions), an IT staffing services company,
|
|
|
|
|
blueRADIAN Engineering, LLC (blueRADIAN), an engineering staffing services
provider,
|
|
|
|
|
Econometrix, LLC (Econometrix), a vendor management systems software
provider,
|
|
|
|
|
Plum Rhino Consulting LLC (Plum Rhino), a specialty staffing services
provider to the financial services industry,
|
|
|
|
|
Praeos Technologies, LLC (Praeos), a business intelligence and business
analytics consulting services provider,
|
|
|
|
|
TAPFIN, LLC (TAPFIN), a provider of vendor management services, recruitment
process outsourcing services and human resources consulting, and
|
|
|
|
|
ASET International Services, LLC (ASET), a globalization, localization and
interactive language services provider.
|
Our mission is to become a leading company in the IT staffing services industry in the United
States. We intend to pursue this mission through a combination of internal growth and strategic
acquisitions that complement or enhance our business.
Industry trends that affect our business include:
|
|
|
rate of technological change;
|
|
|
|
|
rate of growth in corporate IT and professional services budgets;
|
|
|
|
|
penetration of IT and professional services staffing in the general workforce;
|
|
|
|
|
outsourcing of the IT and professional services workforce; and
|
|
|
|
|
consolidation of supplier bases.
|
We anticipate that our growth will be primarily generated from greater penetration of our service
offerings with our current clients, introducing new service offerings to our customers and
obtaining new clients. Our strategy for achieving this growth includes cross-selling our vendor
management services, project solutions services and process solutions services to existing IT
staffing customers, aggressively marketing all of our services to new clients, expanding our range
of value-added services, enhancing brand recognition and making strategic acquisitions.
The success of our business depends primarily on the volume of assignments we secure, the bill
rates for those assignments, the costs of the consultants that provide the services and the quality
and efficiency of our recruiting, sales and marketing and administrative functions. Our
experienced, tenured workforce, our proven track record, our recruiting and candidate screening
processes, our strong account management team and our efficient and consistent administrative
processes are factors that we believe are keys to the success of our business. Factors outside of
our control, such as the demand for IT and other professional services, general economic conditions
and the supply of qualified professionals, will also affect our success.
17
Our revenue is primarily driven by bill rates and billable hours. Most of our billings for our
staffing and project solutions services are on a time-and-materials basis, which means that we bill
our customers based on pre-agreed bill rates for the number of hours that each of our consultants
works on an assignment. Hourly bill rates are typically determined based on the level of skill and
experience of the consultants assigned and the supply and demand in the current market for those
qualifications. General economic conditions, macro IT and professional service expenditure trends
and competition may create pressure on our pricing. Increasingly, large customers, including those
with preferred supplier arrangements, have been seeking pricing discounts in exchange for higher
volumes of business or maintaining existing levels of business. Billable hours are affected by
numerous factors, such as the quality and scope of our service offerings and competition at the
national and local levels. We also generate fee income by providing vendor management and
permanent placement services.
Our principal operating expenses are cost of services and selling, general and administrative
expenses. Cost of services is comprised primarily of the costs of consultant labor, including
employees, subcontractors and independent contractors, and related employee benefits.
Approximately 65% of our consultants are employees and the remainder are subcontractors and
independent contractors. We compensate most of our consultants only for the hours that we bill to
our clients, which allows us to better match our labor costs with our revenue generation. With
respect to our consultant employees, we are responsible for employment-related taxes, medical and
health care costs and workers compensation. Labor costs are sensitive to shifts in the supply and
demand of professionals, as well as increases in the costs of benefits and taxes.
The principal components of selling, general and administrative expenses are salaries, selling and
recruiting commissions, advertising, lead generation and other marketing costs and branch office
expenses. Our branch office network allows us to leverage certain selling, general and
administrative expenses, such as advertising and back office functions.
Our back office functions, including payroll, billing, accounts payable, collections and financial
reporting, are consolidated in our customer service center in Phoenix, Arizona, which operates on a
PeopleSoft platform. We also have a proprietary, web-enabled front-office system that facilitates
the identification, qualification and placement of consultants in a timely manner. We maintain a
national recruiting center, a centralized call center for scheduling sales appointments and a
centralized proposals and contract services department. We believe this scalable infrastructure
allows us to provide high quality service to our customers and will facilitate our internal growth
strategy and allow us to continue to integrate acquisitions rapidly.
Depreciation and amortization expense consists primarily of depreciation of our fixed assets and
amortization of our customer base intangible assets.
Our fiscal year ends on the Sunday closest to December 31
st
and our first three fiscal
quarters each have 13 weeks and also end on a Sunday. Therefore, the fiscal third quarter-ends for
2009 and 2008 were September 27, 2009, and September 28, 2008, respectively.
2009 Priorities
COMSYS was fortunate during this recession to have the financial flexibility to focus on our
business, and we are gratified that we have been able to position ourselves with the right people
and resources to take advantage of increasing demand for our services. In addition, we have made a
number of investments in our business during this downturn. This includes recent investments in
TAPFINs executive search business, our globalization and localization business, our expansion into
new and secondary markets, an offshore services initiative and a new government business
initiative. We also formed an engineering staffing business this quarter. We continue to focus on
hiring and retaining top talent in order to provide superior service to our clients and increase
our own efficiency. We have also added sales and recruiting personnel to expand our staffing
business in a number of regions.
As we broaden our services offerings, we plan to continue to focus the majority of our attention on
our core IT staffing business, as much of our recent growth has come from new IT staffing
customers. We believe that IT demand will grow as companies continue to focus on their own
productivity initiatives.
Our balance sheet is strong, and we have the financial flexibility to continue to pursue
acquisitions. We expect to continue to review acquisitions in the normal course of our business,
and are actively looking for deals that might allow us to expand our geographic reach or broaden
our services lines. However, our primary balance sheet focus for the remainder of 2009 will be on
continuing to further reduce our debt balance.
18
Overview of Third Quarter 2009
Revenue for the third quarter of 2009 was $157.3 million, down from $183.7 million for the third
quarter of 2008. Net income in the third quarter was $3.0 million, down from $6.0 million in the
third quarter of last year. The third quarter of 2008 included the previously discussed non-cash
compensation charge of $0.8 million associated with the Praeos acquisition.
Results of Operations
Three Months Ended September 27, 2009, Compared to Three Months Ended September 28, 2008
The following table sets forth the percentage relationship to revenues of certain items included in
our unaudited Consolidated Statements of Operations, in thousands, except percentages and billable
hour amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Percent of Revenues
|
|
|
Percent Change
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
2009 $ vs.
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008 $
|
|
Revenues from services
|
|
$
|
157,305
|
|
|
$
|
183,663
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
-14.4
|
%
|
Cost of services
|
|
|
118,677
|
|
|
|
138,483
|
|
|
|
75.4
|
%
|
|
|
75.4
|
%
|
|
|
-14.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
38,628
|
|
|
|
45,180
|
|
|
|
24.6
|
%
|
|
|
24.6
|
%
|
|
|
-14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
32,083
|
|
|
|
34,579
|
|
|
|
20.4
|
%
|
|
|
18.8
|
%
|
|
|
-7.2
|
%
|
Restructuring costs
|
|
|
155
|
|
|
|
|
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
NA
|
|
Depreciation and amortization
|
|
|
2,106
|
|
|
|
2,185
|
|
|
|
1.4
|
%
|
|
|
1.2
|
%
|
|
|
-3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,344
|
|
|
|
36,764
|
|
|
|
21.9
|
%
|
|
|
20.0
|
%
|
|
|
-6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,284
|
|
|
|
8,416
|
|
|
|
2.7
|
%
|
|
|
4.6
|
%
|
|
|
-49.1
|
%
|
Interest expense, net
|
|
|
1,057
|
|
|
|
1,224
|
|
|
|
0.7
|
%
|
|
|
0.7
|
%
|
|
|
-13.6
|
%
|
Other expense, net
|
|
|
45
|
|
|
|
40
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,182
|
|
|
|
7,152
|
|
|
|
2.0
|
%
|
|
|
3.9
|
%
|
|
|
-55.5
|
%
|
Income tax expense
|
|
|
164
|
|
|
|
1,105
|
|
|
|
0.1
|
%
|
|
|
0.6
|
%
|
|
|
-85.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,018
|
|
|
$
|
6,047
|
|
|
|
1.9
|
%
|
|
|
3.3
|
%
|
|
|
-50.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billable hours during the period
|
|
|
2,071,234
|
|
|
|
2,244,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded operating income of $4.3 million and net income of $3.0 million in the third
quarter of 2009 compared to operating income of $8.4 million and net income of $6.0 million in the
third quarter of 2008. The decrease in net income was due primarily to the lower revenue.
Revenues.
Revenues for the third quarters of 2009 and 2008 were $157.3 million and $183.7 million,
respectively, a decrease of 14.4%. The decrease was due primarily to a decrease in billable hours
between periods on lower average headcount. The following table sets forth the changes in
significant components of revenues from services for the three months ended September 27, 2009 and
September 28, 2008, in thousands, except percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Percent of Revenues from Services
|
|
|
Percent Change
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
2009 $ vs.
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008 $
|
|
Staffing revenue
|
|
$
|
149,678
|
|
|
$
|
173,016
|
|
|
|
95.1
|
%
|
|
|
94.2
|
%
|
|
|
-13.5
|
%
|
Vendor management fees
|
|
|
4,884
|
|
|
|
6,049
|
|
|
|
3.1
|
%
|
|
|
3.3
|
%
|
|
|
-19.3
|
%
|
Reimburseable expense revenue
|
|
|
2,456
|
|
|
|
4,761
|
|
|
|
1.6
|
%
|
|
|
2.5
|
%
|
|
|
-48.4
|
%
|
Pass-through fees
|
|
|
1,779
|
|
|
|
1,771
|
|
|
|
1.1
|
%
|
|
|
1.0
|
%
|
|
|
0.5
|
%
|
Permanent placement fees
|
|
|
646
|
|
|
|
1,386
|
|
|
|
0.4
|
%
|
|
|
0.8
|
%
|
|
|
-53.4
|
%
|
Other non-staffing revenue
|
|
|
410
|
|
|
|
250
|
|
|
|
0.3
|
%
|
|
|
0.1
|
%
|
|
|
64.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
|
159,853
|
|
|
|
187,233
|
|
|
|
101.6
|
%
|
|
|
101.9
|
%
|
|
|
-14.6
|
%
|
Less: Discounts and rebates
|
|
|
(2,548
|
)
|
|
|
(3,570
|
)
|
|
|
-1.6
|
%
|
|
|
-1.9
|
%
|
|
|
-28.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from services
|
|
$
|
157,305
|
|
|
$
|
183,663
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
-14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
We have seen revenue improvements across all significant sectors, including a sequential
increase in revenue from the financial services sector between the second and third quarters.
Revenues from the government sector increased in the third quarter of 2009 from the third quarter
of 2008. This increase was offset by revenue decreases in the telecommunications and financial
services sectors over the same period.
Cost of Services
.
Cost of services for the third quarters of 2009 and 2008 were $118.7 million and
$138.5 million, respectively, a decrease of 14.3%. The following table sets forth the changes in
significant components of cost of services for the three months ended September 27, 2009 and
September 28, 2008, in thousands, except percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Percent of Revenues from Services
|
|
|
Percent Change
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
2009 $ vs.
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008 $
|
|
Labor costs
|
|
$
|
57,123
|
|
|
$
|
63,914
|
|
|
|
36.3
|
%
|
|
|
34.8
|
%
|
|
|
-10.6
|
%
|
Subcontractor costs
|
|
|
51,325
|
|
|
|
62,681
|
|
|
|
32.6
|
%
|
|
|
34.1
|
%
|
|
|
-18.1
|
%
|
Payroll burden costs
|
|
|
6,198
|
|
|
|
5,673
|
|
|
|
3.9
|
%
|
|
|
3.1
|
%
|
|
|
9.3
|
%
|
Reimburseable expenses
|
|
|
2,439
|
|
|
|
4,787
|
|
|
|
1.6
|
%
|
|
|
2.6
|
%
|
|
|
-49.0
|
%
|
Other costs of services
|
|
|
1,592
|
|
|
|
1,428
|
|
|
|
1.0
|
%
|
|
|
0.8
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
$
|
118,677
|
|
|
$
|
138,483
|
|
|
|
75.4
|
%
|
|
|
75.4
|
%
|
|
|
-14.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Despite a reduction in average bill rates in the third quarter of 2009 from the third quarter
of 2008, gross margin has remained consistent due to our focus throughout the recession on gross
spreads.
Selling, General and Administrative Expenses
.
Selling, general and administrative expenses in the
third quarters of 2009 and 2008 were $32.1 million and $34.6 million, respectively, a decrease of
7.2%. The following table sets forth the changes in significant components of selling, general and
administrative expenses for the three months ended September 27, 2009 and September 28, 2008, in
thousands, except percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Percent of Revenues from Services
|
|
|
Percent Change
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
2009 $ vs.
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008 $
|
|
Compensation
|
|
$
|
20,515
|
|
|
$
|
20,963
|
|
|
|
13.0
|
%
|
|
|
11.4
|
%
|
|
|
-2.1
|
%
|
Stock-based compensation
|
|
|
891
|
|
|
|
1,118
|
|
|
|
0.6
|
%
|
|
|
0.6
|
%
|
|
|
-20.3
|
%
|
Payroll burden costs
|
|
|
3,021
|
|
|
|
3,677
|
|
|
|
1.9
|
%
|
|
|
2.0
|
%
|
|
|
-17.8
|
%
|
Premises expense
|
|
|
2,050
|
|
|
|
2,445
|
|
|
|
1.3
|
%
|
|
|
1.3
|
%
|
|
|
-16.2
|
%
|
Other selling, general and administrative
|
|
|
5,606
|
|
|
|
6,376
|
|
|
|
3.6
|
%
|
|
|
3.5
|
%
|
|
|
-12.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
32,083
|
|
|
$
|
34,579
|
|
|
|
20.4
|
%
|
|
|
18.8
|
%
|
|
|
-7.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management has focused on maintaining as much infrastructure as possible during this
recession, which has resulted in selling, general and administrative expenses decreasing at a
slower rate than revenue. Consequently, selling, general and administrative expenses have
increased as a percentage of revenue. Cost savings from our restructuring activities have been
partially offset by increased spending on the initiatives described above in
2009 Priorities
.
Restructuring Costs
.
Restructuring costs for the third quarter of 2009 were $0.2 million, or 0.1%
of revenue. These employee termination benefits and lease abandonment costs related primarily to
severance charges related to the relocation of certain administrative functions into our new
Phoenix customer service center facility.
Depreciation and Amortization
.
For the third quarters of 2009 and 2008, depreciation and
amortization expense was $2.1 million and $2.2 million, respectively, a decrease of 3.6%. The
decrease in depreciation and amortization expense was primarily due to the disposal in the third
quarter of 2009 of computer hardware and furniture and fixtures that were not fully depreciated.
Interest Expense, Net.
Interest expense, net, was $1.1 million and $1.2 million in the third
quarters of 2009 and 2008, respectively, a decrease of 13.6%. The decrease was due to our overall
debt reduction, which was partially offset by an increase in interest rates and the amortization of
deferred financing costs after our March 2009 debt refinancing.
20
Provision for Income Taxes
.
The income tax expense of $0.2 million for the three months ended
September 27, 2009, includes miscellaneous state and foreign income taxes. Our net deferred tax
asset is substantially offset with a valuation allowance. Prior to 2009, a portion of our
fully-reserved deferred tax assets that became realized through operating profits was recognized as
a reduction to goodwill to the extent it related to benefits acquired in the merger. This resulted
in deferred tax expense as the assets were utilized. This portion of deferred tax expense
represented the consumption of pre-merger deferred tax assets that had a zero basis when we
acquired them. We calculated a goodwill bifurcation ratio in the year of the merger to determine
the amount of deferred tax expense that should be offset to goodwill prospectively. No expense
will be required to be recorded when there is a release of the valuation allowance on Venturis
acquired net deferred tax assets from the merger.
Our future effective tax rates could be adversely affected by changes in the valuation of our
deferred tax assets or liabilities or changes in tax laws or interpretations thereof. We continue
to evaluate quarterly our estimates of the recoverability of our deferred tax assets based on our
assessment of whether it is more likely than not any portion of these fully reserved are
recoverable through future taxable income. At such time that we no longer have a reserve for our
deferred tax assets, we will begin to provide for taxes at the full statutory rate. In addition,
we are subject to the examination of our income tax returns by the Internal Revenue Service and
other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes.
Nine Months Ended September 27, 2009, Compared to Nine Months Ended September 28, 2008
The following table sets forth the percentage relationship to revenues of certain items included in
our unaudited Consolidated Statements of Operations, in thousands, except percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Percent of Revenues
|
|
|
Percent Change
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
2009 $ vs.
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008 $
|
|
Revenues from services
|
|
$
|
476,764
|
|
|
$
|
551,110
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
-13.5
|
%
|
Cost of services
|
|
|
361,661
|
|
|
|
416,442
|
|
|
|
75.9
|
%
|
|
|
75.6
|
%
|
|
|
-13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
115,103
|
|
|
|
134,668
|
|
|
|
24.1
|
%
|
|
|
24.4
|
%
|
|
|
-14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
97,613
|
|
|
|
103,634
|
|
|
|
20.4
|
%
|
|
|
18.8
|
%
|
|
|
-5.8
|
%
|
Restructuring costs
|
|
|
4,096
|
|
|
|
|
|
|
|
0.9
|
%
|
|
|
0.0
|
%
|
|
NA
|
|
Depreciation and amortization
|
|
|
6,230
|
|
|
|
5,903
|
|
|
|
1.3
|
%
|
|
|
1.1
|
%
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,939
|
|
|
|
109,537
|
|
|
|
22.6
|
%
|
|
|
19.9
|
%
|
|
|
-1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
7,164
|
|
|
|
25,131
|
|
|
|
1.5
|
%
|
|
|
4.5
|
%
|
|
|
-71.5
|
%
|
Interest expense, net
|
|
|
3,135
|
|
|
|
4,106
|
|
|
|
0.7
|
%
|
|
|
0.7
|
%
|
|
|
-23.6
|
%
|
Other income, net
|
|
|
(127
|
)
|
|
|
(185
|
)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
-31.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
4,156
|
|
|
|
21,210
|
|
|
|
0.8
|
%
|
|
|
3.8
|
%
|
|
|
-80.4
|
%
|
Income tax expense
|
|
|
623
|
|
|
|
3,847
|
|
|
|
0.1
|
%
|
|
|
0.6
|
%
|
|
|
-83.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,533
|
|
|
$
|
17,363
|
|
|
|
0.7
|
%
|
|
|
3.2
|
%
|
|
|
-79.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded operating income of $7.2 million and net income of $3.5 million in the nine months
ended September 27, 2009, compared to operating income of $25.1 million and net income of $17.4
million in the nine months ended September 28, 2008. The decrease in net income was due primarily
to the lower revenue and $4.1 million of restructuring costs.
21
Revenues.
Revenues for the nine months ended September 27, 2009, and September 28, 2008, were
$476.8 million and $551.1 million, respectively, a decrease of 13.5%. The decrease was due
primarily to a decrease in billable hours between periods on lower average headcount. The
following table presents the most significant revenue components as percentages of revenues from
services for the nine months ended September 27, 2009 and September 28, 2008, in thousands, except
percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Percent of Revenues from Services
|
|
|
Percent Change
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
2009 $ vs.
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008 $
|
|
Staffing revenue
|
|
$
|
453,166
|
|
|
$
|
520,755
|
|
|
|
95.1
|
%
|
|
|
94.5
|
%
|
|
|
-13.0
|
%
|
Vendor management fees
|
|
|
15,553
|
|
|
|
17,275
|
|
|
|
3.3
|
%
|
|
|
3.1
|
%
|
|
|
-10.0
|
%
|
Reimburseable expense revenue
|
|
|
8,469
|
|
|
|
12,617
|
|
|
|
1.8
|
%
|
|
|
2.3
|
%
|
|
|
-32.9
|
%
|
Pass-through fees
|
|
|
4,972
|
|
|
|
4,737
|
|
|
|
1.0
|
%
|
|
|
0.9
|
%
|
|
|
5.0
|
%
|
Permanent placement fees
|
|
|
2,089
|
|
|
|
4,934
|
|
|
|
0.4
|
%
|
|
|
0.9
|
%
|
|
|
-57.7
|
%
|
Other non-staffing revenue
|
|
|
1,054
|
|
|
|
547
|
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
92.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
|
485,303
|
|
|
|
560,865
|
|
|
|
101.8
|
%
|
|
|
101.8
|
%
|
|
|
-13.5
|
%
|
Less: Discounts and rebates
|
|
|
(8,539
|
)
|
|
|
(9,755
|
)
|
|
|
-1.8
|
%
|
|
|
-1.8
|
%
|
|
|
-12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from services
|
|
$
|
476,764
|
|
|
$
|
551,110
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
-13.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continued to see bill rate pressures from our customers, particularly among Fortune 500
clients. Revenues from the government and healthcare sectors increased in the nine months ended
September 27, 2009, from the nine months ended September 28, 2008. These increases were offset by
revenue decreases in the telecommunications and financial services sectors over the same period.
Cost of Services
.
Cost of services for the nine months ended September 27, 2009, and September 28,
2008, were $361.7 million and $416.4 million, respectively, a decrease of 13.2%. The following
table sets forth the changes in significant components of cost of services for the nine months
ended September 27, 2009 and September 28, 2008, in thousands, except percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Percent of Revenues from Services
|
|
|
Percent Change
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
2009 $ vs.
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008 $
|
|
Labor costs
|
|
$
|
171,038
|
|
|
$
|
194,786
|
|
|
|
35.9
|
%
|
|
|
35.3
|
%
|
|
|
-12.2
|
%
|
Subcontractor costs
|
|
|
159,189
|
|
|
|
186,703
|
|
|
|
33.4
|
%
|
|
|
33.9
|
%
|
|
|
-14.7
|
%
|
Payroll burden costs
|
|
|
18,186
|
|
|
|
18,098
|
|
|
|
3.8
|
%
|
|
|
3.3
|
%
|
|
|
0.5
|
%
|
Reimburseable expenses
|
|
|
8,434
|
|
|
|
12,681
|
|
|
|
1.8
|
%
|
|
|
2.3
|
%
|
|
|
-33.5
|
%
|
Other costs of services
|
|
|
4,814
|
|
|
|
4,174
|
|
|
|
1.0
|
%
|
|
|
0.8
|
%
|
|
|
15.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
$
|
361,661
|
|
|
$
|
416,442
|
|
|
|
75.9
|
%
|
|
|
75.6
|
%
|
|
|
-13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
.
Selling, general and administrative expenses in
the nine months ended September 27, 2009, and September 28, 2008, were $97.6 million and $103.6
million, respectively, a decrease of 5.8%. The following table sets forth the changes in
significant components of selling, general and administrative for the nine months ended September
27, 2009 and September 28, 2008, in thousands, except percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Percent of Revenues from Services
|
|
|
Percent Change
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
2009 $ vs.
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008 $
|
|
Compensation
|
|
$
|
61,144
|
|
|
$
|
63,541
|
|
|
|
12.8
|
%
|
|
|
11.5
|
%
|
|
|
-3.8
|
%
|
Stock-based compensation
|
|
|
2,662
|
|
|
|
3,401
|
|
|
|
0.6
|
%
|
|
|
0.6
|
%
|
|
|
-21.7
|
%
|
Payroll burden costs
|
|
|
10,663
|
|
|
|
11,865
|
|
|
|
2.2
|
%
|
|
|
2.2
|
%
|
|
|
-10.1
|
%
|
Premises expense
|
|
|
6,609
|
|
|
|
6,872
|
|
|
|
1.4
|
%
|
|
|
1.2
|
%
|
|
|
-3.8
|
%
|
Other selling, general and administrative
|
|
|
16,535
|
|
|
|
17,955
|
|
|
|
3.4
|
%
|
|
|
3.3
|
%
|
|
|
-7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
97,613
|
|
|
$
|
103,634
|
|
|
|
20.4
|
%
|
|
|
18.8
|
%
|
|
|
-5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management has focused on maintaining as much infrastructure as possible during this
recession, which has resulted in selling, general and administrative expenses decreasing at a
slower rate than revenue. Consequently, selling, general and administrative expenses have
increased as a percentage of revenue.
22
Restructuring Costs
.
Restructuring costs for the nine months ended September 27, 2009, were $4.1
million, or 0.9% of revenue. These employee termination benefits and lease abandonment costs
related primarily to the relocation of certain administrative functions into our new Phoenix
customer service center facility.
Depreciation and Amortization
.
For the nine months ended September 27, 2009, and September 28,
2008, depreciation and amortization expense was $6.2 million and $5.9 million, respectively, an
increase of 5.5%. The increase in depreciation and amortization expense was primarily due to the
depreciation of our enterprise software system and the amortization of intangible assets resulting
from previous acquisitions.
Interest Expense, Net.
Interest expense, net, was $3.1 million and $4.1 million in the nine months
ended September 27, 2009, and September 28, 2008, respectively, a decrease of 23.6%. The decrease
was due to our overall debt reduction, which was partially offset by an increase in interest rates
and the amortization of deferred financing costs after our March 2009 debt refinancing.
Provision for Income Taxes
.
The income tax expense of $0.6 million for the nine months ended
September 27, 2009, includes miscellaneous state and foreign income taxes. Our net deferred tax
asset is substantially offset with a valuation allowance. Prior to 2009, a portion of our
fully-reserved deferred tax assets that became realized through operating profits was recognized as
a reduction to goodwill to the extent it related to benefits acquired in the merger. This resulted
in deferred tax expense as the assets were utilized. This portion of deferred tax expense
represented the consumption of pre-merger deferred tax assets that had a zero basis when we
acquired them. We calculated a goodwill bifurcation ratio in the year of the merger to determine
the amount of deferred tax expense that should be offset to goodwill prospectively. No expense
will be required to be recorded when there is a release of the valuation allowance on Venturis
acquired net deferred tax assets from the merger.
Our future effective tax rates could be adversely affected by changes in the valuation of our
deferred tax assets or liabilities or changes in tax laws or interpretations thereof. We continue
to evaluate quarterly our estimates of the recoverability of our deferred tax assets based on our
assessment of whether it is more likely than not any portion of these fully reserved are
recoverable through future taxable income. At such time that we no longer have a reserve for our
deferred tax assets, we will begin to provide for taxes at the full statutory rate. In addition,
we are subject to the examination of our income tax returns by the Internal Revenue Service and
other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes.
Liquidity and Capital Resources
Overview
We extended the maturity of our senior credit agreement in March 2009 through March 31, 2012, as
discussed below in
Credit Agreement
. Management felt it was important to extend the senior
credit agreement prior to its expiration in March 2010 in order to give us the financial
flexibility to make appropriate investments in our business and maintain our infrastructure through
the duration of the recession.
We typically finance our operations through cash flow from operations and borrowings under our
credit facilities. Due to the requirements of our senior credit agreement, as discussed in more
detail below under the
Cash Flows
section, we do not maintain a significant cash balance in our
primary domestic cash accounts. Excess borrowing availability under our existing revolving credit
facility at September 27, 2009, was $50.0 million. Our borrowing availability is impacted by the
timing of cash receipts and disbursements. Timing of receipts and disbursements in our vendor
management business can have a material impact on the debt levels we report at any date; therefore,
in 2008 we began reporting average daily debt for each quarter, as discussed below in
Credit
Agreement
.
We believe our cash flow provided by operating activities along with availability under our
revolving credit facility will be sufficient to fund our working capital, debt service and
purchases of fixed assets through fiscal 2009. In the event that we make future acquisitions, we
may need to seek additional capital from our lenders or the capital markets; there can be no
assurance that additional capital will be available when we need it, or, if available, that it will
be available on favorable terms.
The performance of our business is dependent on many factors and subject to risks and
uncertainties. See Risks Related to Our Business and Risk Related to Our Indebtedness under
Risk Factors included in our most recent Annual Report on Form 10-K as filed with the Securities
and Exchange Commission.
23
Working Capital
Accounts receivable are a significant component of our working capital. We monitor our accounts
receivable through a variety of metrics, including days sales outstanding (DSO). We calculate
our consolidated DSO by determining average daily revenue based on an annualized three-month
analysis and dividing it into the gross accounts receivable balance as of the end of the period.
Accounts receivable, net, were $191.3 million and $202.3 million as of September 27, 2009, and
December 28, 2008, respectively. Our consolidated DSO was 47 days and 43 days as of September 27,
2009, and December 28, 2008, respectively. As a result of the timing of vendor management receipts
and the seasonality in our operations, our consolidated DSO may materially fluctuate. In addition,
our DSO for the third quarter of 2008 was affected by the increase in our accounts receivable
balance late in the quarter, which resulted from a revenue upturn due to increasing billable hours
throughout September.
Additionally, we separately calculate DSO for vendor management services (VMS DSO) by determining
average daily vendor management service gross revenue based on an annualized three-month analysis
and dividing it into the gross vendor management accounts receivable balance as of the end of the
period. Vendor management accounts receivable were $86.9 million and $96.7 million as of September
27, 2009, and December 28, 2008, respectively. Our VMS DSO was 38 days and 35 days as of September
27, 2009, and December 28, 2008, respectively. As a result of the timing of vendor management
receipts and the seasonality in our operations, our VMS DSO may materially fluctuate.
Our total accounts payable were $122.1 million and $156.5 million as of September 27, 2009, and
December 28, 2008, respectively. Our vendor management services accounts payable and other
liabilities were $84.8 million and $104.1 million as of September 27, 2009, and December 28, 2008,
respectively.
Credit Agreement
In March 2009, we entered into a Ninth Amendment to our senior credit agreement (the Amendment).
Among other things, the Amendment provided for (i) a decrease in our borrowing capacity under our
existing revolving credit facility from $160.0 million to $110.0 million, (ii) an extension of the
maturity date for the facility of an additional two years to March 31, 2012, and (iii) increases in
the applicable interest rates under the facility to LIBOR plus a margin of 3.75% or, at our option,
the prime rate plus a margin of 2.75%. The Amendment also permits us to make up to $10.0 million
in stock repurchases and/or dividend payments in the aggregate subject to the terms and conditions
specified.
We pay a quarterly commitment fee of 0.75% per annum on the unused portion of the revolver. We and
certain of our subsidiaries guarantee the loans and other obligations under the senior credit
agreement. The obligations under the senior credit agreement are secured by a perfected first
priority security interest in substantially all of the assets of us and our U.S. subsidiaries, as
well as the shares of capital stock of our direct and indirect U.S. subsidiaries and certain of the
capital stock of our foreign subsidiaries. Pursuant to the terms of the senior credit agreement,
we maintain a zero balance in our primary domestic cash accounts. Any excess cash in those
domestic accounts is swept on a daily basis and applied to repay borrowings under the revolver, and
any cash needs are satisfied through borrowings under the revolver.
Borrowings under the revolver are limited to 85% of eligible accounts receivable, as defined in the
senior credit agreement, as amended, reduced by the amount of outstanding letters of credit and
designated reserves. At September 27, 2009, these designated reserves were:
|
|
|
a $5.0 million minimum availability reserve, and
|
|
|
|
|
a $0.9 million reserve for outstanding letters of credit.
|
At September 27, 2009, we had outstanding borrowings of $59.2 million under the revolver at
interest rates ranging from 4.01% to 6.00% per annum (weighted average rate of 4.49%) and excess
borrowing availability under the revolver of $50.0 million. Our average daily net debt balance
during the third quarter was $55.8 million. Fees paid on outstanding letters of credit are equal
to the LIBOR margin then applicable to the revolver, which at September 27, 2009, was 3.75%. At
September 27, 2009, outstanding letters of credit totaled $0.9 million.
24
Debt Compliance
Our credit facilities contain a number of covenants that, among other things, restrict our ability
to:
|
|
|
incur additional indebtedness;
|
|
|
|
|
pay more than $10 million in the aggregate for stock repurchases and dividends;
|
|
|
|
|
incur liens;
|
|
|
|
|
make certain capital expenditures;
|
|
|
|
|
make certain investments or acquisitions;
|
|
|
|
|
repay debt; and
|
|
|
|
|
dispose of property.
|
In addition, our credit facilities have springing financial covenants that would require us to
satisfy a minimum fixed charge coverage ratio and a maximum total leverage ratio if our excess
availability falls below $25 million. A breach of any covenants governing our debt would permit
the acceleration of the related debt and potentially other indebtedness under cross-default
provisions, which could harm our business and financial condition. These restrictions may place us
at a disadvantage compared to our competitors that are not required to operate under such
restrictions or that are subject to less stringent restrictive covenants. As of September 27,
2009, we were in compliance with these requirements, and we believe we will be able to comply with
these terms throughout 2009.
The senior credit agreement contains various events of default, including failure to pay principal
and interest when due, breach of covenants, materially incorrect representations, default under
other agreements, bankruptcy or insolvency, the occurrence of specified ERISA events, entry of
enforceable judgments against us in excess of $2.0 million not stayed and the occurrence of a
change of control. In the event of a default, all commitments under the revolver may be terminated
and all of our obligations under the senior credit agreement could be accelerated by the lenders,
causing all loans and borrowings outstanding (including accrued interest and fees payable
thereunder) to be declared immediately due and payable. In the case of bankruptcy or insolvency,
acceleration of our obligations under our senior credit agreement is automatic.
Cash Flows
The following table summarizes our cash flow activity for the periods indicated, in thousands:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
|
2009
|
|
|
2008
|
|
Net cash provided by (used for) operating activities
|
|
$
|
(4,100
|
)
|
|
$
|
15,137
|
|
Net cash used in investing activities
|
|
|
(4,601
|
)
|
|
|
(13,028
|
)
|
Net cash used in financing activities
|
|
|
(12,847
|
)
|
|
|
(1,964
|
)
|
Effect of exchange rates on cash
|
|
|
66
|
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
$
|
(21,482
|
)
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
Cash used for operating activities in the nine months ended September 27, 2009, was $4.1
million compared to cash provided by operating activities of $15.1 million in the nine months ended
September 28, 2008. In addition to cash provided by earnings, cash flows from operating activities
are affected by the timing of cash receipts and disbursements and the working capital requirements
of the business. The non-seasonal trends in cash provided by operating activities between 2009 and
2008 can be attributed to lower earnings and the timing of certain receipts and disbursements in a
large vendor management engagement.
Cash used in investing activities in the nine months ended September 27, 2009, was $4.6 million
compared to $13.0 million in the nine months ended September 28, 2008. Our cash flows associated
with investing activities in 2009 and 2008 included capital expenditures of $0.9 million and $5.1
million, respectively, and cash paid for acquisitions of $3.7 million and $7.9 million,
respectively. Cash paid for acquisitions consists primarily of earnout payments related to the
acquisition of Pure Solutions and the purchase of ASET International in June 2008.
Capital expenditures for the nine months ended September 27, 2009, related primarily to the
purchase of computer hardware and leasehold improvements. Capital expenditures in 2009 are
currently expected to be approximately $2.0 million to $2.5 million. This
spending level is lower than the $5.8 million spent in 2008 due to the completion of several
projects during 2008 as well as a planned reduction in capital projects.
25
Cash used in financing activities was $12.8 million in the nine months ended September 27, 2009,
compared to $2.0 million in the nine months ended September 28, 2008. Cash flows associated with
financing activities primarily represent borrowings and payments on our revolving credit facility.
Cash used in financing activities in the nine months ended September 27, 2009, also includes $2.3
million related to cash paid for debt issuance costs related to the refinance of our credit
agreement in March 2009.
Pursuant to the terms of the senior credit agreement, we maintain a zero balance in our primary
domestic cash accounts. Any excess cash in our accounts is swept on a daily basis and applied to
repay borrowings under the revolver, and any cash needs are satisfied through borrowings under the
revolver. Cash and cash equivalents recorded on our Consolidated Balance Sheet at September 27,
2009, and December 28, 2008, in the amount of $1.2 million and $22.7 million, respectively,
represented cash balances at our Toronto and United Kingdom subsidiaries and $20.0 million we had
invested in a US Treasury money market fund. We used these US Treasury funds to repay a portion of
our senior credit agreement during the first quarter of 2009.
We believe the most strategic uses of our cash and cash equivalents are repayment of our long-term
debt, making strategic acquisitions, capital expenditures and investments in revenue-producing
personnel. There are no transactions, arrangements and other relationships with unconsolidated
entities or other persons that are reasonably likely to materially affect liquidity or the
availability of our requirements for capital.
Seasonality
Our business is affected by seasonal fluctuations in corporate IT expenditures. Generally,
expenditures are lowest during the first quarter of the year when our clients are finalizing their
IT budgets. In addition, our quarterly results may fluctuate depending on, among other things, the
number of billing days in a quarter and the seasonality of our clients businesses. Our business
is also 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. Extreme weather conditions
may also affect demand in the first and fourth quarters of the year as certain of our clients
facilities are located in geographic areas subject to closure or reduced hours due to inclement
weather. In addition, we experience an increase in our cost of sales and a corresponding decrease
in gross profit and gross margin in the first fiscal quarter of each year as a result of resetting
certain state and federal employment tax rates and related salary limitations.
Off-Balance Sheet Arrangements
As of September 27, 2009, we are not involved in any off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of SEC Regulation S-K.
Related Party Transactions
Elias J. Sabo, a member of our board of directors, also serves on the board of directors of The
Compass Group, the parent company of StaffMark. StaffMark provides commercial staffing services to
us and to our clients in the normal course of its business. During the three months ended
September 27, 2009, we and our clients purchased approximately $0.7 million of staffing services
from StaffMark for services provided to our vendor management clients. At September 27, 2009, we
had approximately $0.3 million in accounts payable to StaffMark.
Frederick W. Eubank II and Courtney R. McCarthy, members of our board of directors, are employees
of Wachovia Investors Inc., our largest shareholder and a subsidiary of Wachovia Corporation
(Wachovia). We provide commercial staffing services to Wachovia in the normal course of our
business. During the three months ended September 27, 2009, we recorded revenue of approximately
$0.5 million related to Wachovias purchase of staffing services. At September 27, 2009, we had
approximately $49,000 in accounts receivable from Wachovia.
In June 2008, we received proceeds from Amalgamated Gadget, LP, a greater than 10% shareholder at
that time, equal to the profits realized on sales of our stock that was purchased and sold within a
six month or less time frame. Under Section 16(b) of the Securities and Exchange Act, the profits
realized from these transactions by the greater than 10% shareholder must be disgorged to us under
certain circumstances. We received proceeds of approximately $164,209 related to these
transactions.
26
Commitments and Contingencies
Details about our commitments and contingencies are available in Note 8 to our unaudited
consolidated financial statements included elsewhere in this report.
Contractual Obligations
There have been no material changes in our contractual obligations from what we previously
disclosed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2008.
Critical Accounting Policies and Estimates
There were no changes from the Critical Accounting Policies as previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended December 28, 2008.
Recent Accounting Pronouncements
Details about recent accounting pronouncements are available in Note 11 to our unaudited
consolidated financial statements included elsewhere in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following assessment of our market risks does not include uncertainties that are either
nonfinancial or nonquantifiable, such as political, economic, tax and credit risks.
We are exposed to market risks, primarily related to interest rate, foreign currency and equity
price fluctuations. Our use of derivative instruments has historically been insignificant and it
is expected that our use of derivative instruments will continue to be minimal.
Interest Rate Risks
Outstanding debt under our senior credit agreement at September 27, 2009, was approximately $59.2
million. Interest on borrowings under the agreement is based on the prime rate or LIBOR plus a
fixed margin. Based on the outstanding balance at September 27, 2009, a change of 1% in the
interest rate would cause a change in interest expense of approximately $0.6 million on an annual
basis.
Foreign Currency Risks
Our primary exposures to foreign currency fluctuations are associated with transactions and related
assets and liabilities related to our operations in Canada and the United Kingdom. Changes in
foreign currency exchange rates impact translations of foreign denominated assets and liabilities
into U.S. dollars and future earnings and cash flows from transactions denominated in different
currencies. Revenues and expenses denominated in foreign currencies are translated into U.S.
dollars at the monthly average exchange rates prevailing during the period. The assets and
liabilities on our non-U.S. subsidiaries are translated into U.S. dollars at the exchange rate in
effect at the end of a reporting period. The resulting translation adjustments are recorded in
Stockholders Equity, as a component of accumulated other comprehensive income (loss), in our
Consolidated Balance Sheets. These operations are not material to our overall business.
Equity Market Risks
The trading price of our common stock has been and is likely to continue to be highly volatile and
could be subject to wide fluctuations. Such fluctuations could impact our decision or ability to
utilize the equity markets as a potential source of our funding needs in the future.
As a result of the decline in our trading stock price during the fourth quarter of 2008, we
recorded a goodwill impairment charge. Further declines in our stock price could result in
additional impairment charges.
27
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management has established and maintains a system of disclosure controls and procedures
designed to provide reasonable assurance that information required to be disclosed by us in the
reports filed or submitted by us under the Securities Exchange Act of 1934, as amended (the
Exchange Act), is recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and include controls and procedures designed to provide reasonable
assurance that information required to be disclosed by us in those reports is accumulated and
communicated to our management, including our Chief Executive Officer and our Chief Accounting
Officer (our principal executive officer and principal financial officer, respectively), as
appropriate to allow timely decisions regarding required disclosure. As of September 27, 2009, our
management, including our Chief Executive Officer and our Chief Accounting Officer, conducted an
evaluation of our disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer and Chief Accounting Officer concluded that our disclosure controls and
procedures are effective.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Changes in Internal Controls over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended
September 27, 2009, that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
28
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we are 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 our management, matters presently pending
will not, individually or in the aggregate, have a material adverse effect on our results of
operations or financial condition.
ITEM 1A. RISK FACTORS
There have been no material changes from risk factors as previously disclosed in our Annual Report
on Form 10-K in response to Item 1A. to Part I of Form 10-K for the year ended December 28, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information relating to our purchase of shares of our common stock in
the third quarter of 2009. These purchases reflect shares withheld upon vesting of restricted
stock, to satisfy statutory minimum tax withholding obligations.
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
Period
|
|
Shares Purchased
|
|
|
Paid per Share
|
|
June 29, 2009 July 26, 2009
|
|
|
|
|
|
$
|
|
|
July 27, 2009 August 23, 2009
|
|
|
599
|
|
|
$
|
7.25
|
|
August 24, 2009 September 27, 2009
|
|
|
770
|
|
|
$
|
6.57
|
|
|
|
|
|
|
|
|
|
|
|
|
1,369
|
|
|
$
|
6.87
|
|
|
|
|
|
|
|
|
|
We intend to continue to satisfy minimum tax withholding obligations in connection with the
vesting of outstanding restricted stock through the withholding of shares.
On April 30, 2009, we announced that our Board of Directors authorized the repurchase of up to $5.0
million of our common stock from time to time on the open market or in privately negotiated
transactions. The timing and amount of any shares repurchased will be determined by our management
based on their evaluation of market conditions and other factors. No repurchases were made during
the third quarter of 2009. The repurchase program may be suspended or discontinued at any time
until its termination on April 27, 2010.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
|
|
|
ITEM 5.
|
|
OTHER INFORMATION
|
None.
ITEM 6. EXHIBITS
Each exhibit identified below is filed as part of this report. Exhibits designated with an * are
filed as an exhibit to this Quarterly Report on Form 10-Q. The exhibit designated with a # is
substantially identical to the Common Stock Purchase Warrant issued by us on the same date to Bank
One, N.A., and to Common Stock Purchase Warrants, reflecting a transfer of a portion of such Common
Stock Purchase Warrants, issued by us, 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.
Exhibits previously filed as indicated below are incorporated by reference.
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
Form
|
|
Number
|
|
Filing Date
|
3.1
|
|
Amended and Restated Certificate of Incorporation of COMSYS IT Partners, Inc.
|
|
8-K
|
|
|
3.1
|
|
|
October 4, 2004
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of COMSYS IT Partners, Inc.
|
|
8-K
|
|
|
3.2
|
|
|
October 4, 2004
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
First Amendment to the Amended and Restated Bylaws of COMSYS IT Partners, Inc.
|
|
8-K
|
|
|
3.1
|
|
|
May 4, 2005
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Registration Rights Agreement, dated as of September 30, 2004, between COMSYS IT Partners, Inc. and
certain of the old COMSYS Holdings stockholders party thereto
|
|
8-A/A
|
|
|
4.2
|
|
|
November 2, 2004
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Amendment No. 1 to Registration Rights Agreement dated April 1, 2005 between COMSYS IT Partners, Inc.,
and certain of the old COMSYS Holdings stockholders party thereto
|
|
10-Q
|
|
|
4.2
|
|
|
May 6, 2005
|
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
Amended and Restated Registration Rights Agreement, dated as of September 30, 2004, between COMSYS IT
Partners, Inc. and certain of the old Venturi stockholders party thereto
|
|
8-A/A
|
|
|
4.3
|
|
|
November 2, 2004
|
|
|
|
|
|
|
|
|
|
|
|
4.4
|
|
Amendment No. 1 to Amended and Restated Registration Rights Agreement dated April 1, 2005 between
COMSYS IT Partners, Inc., and certain of the old Venturi stockholders party thereto
|
|
10-Q
|
|
|
4.4
|
|
|
May 6, 2005
|
|
|
|
|
|
|
|
|
|
|
|
4.7#
|
|
Common Stock Purchase Warrant dated as of April 14, 2003, issued by the Company in favor of BNP Paribas
|
|
8-K
|
|
|
99.16
|
|
|
April 25, 2003
|
|
|
|
|
|
|
|
|
|
|
|
4.8
|
|
Specimen Certificate for Shares of Common Stock
|
|
10-K
|
|
|
4.6
|
|
|
April 1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2*
|
|
Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32*
|
|
Certification of Chief Executive Officer and Chief Accounting Officer
pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
COMSYS IT PARTNERS, INC.
|
|
Date: November 5, 2009
|
By:
|
/s/ Larry L. Enterline
|
|
|
|
Name:
|
Larry L. Enterline
|
|
|
|
Title:
|
Chief Executive Officer
|
|
|
|
|
Date: November 5, 2009
|
By:
|
/s/ Amy Bobbitt
|
|
|
|
Name:
|
Amy Bobbitt
|
|
|
|
Title:
|
Senior Vice President and Chief Accounting Officer
|
|
31
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
Form
|
|
Number
|
|
Filing Date
|
3.1
|
|
Amended and Restated Certificate of Incorporation of COMSYS IT Partners, Inc.
|
|
8-K
|
|
|
3.1
|
|
|
October 4, 2004
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of COMSYS IT Partners, Inc.
|
|
8-K
|
|
|
3.2
|
|
|
October 4, 2004
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
First Amendment to the Amended and Restated Bylaws of COMSYS IT Partners, Inc.
|
|
8-K
|
|
|
3.1
|
|
|
May 4, 2005
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Registration Rights Agreement, dated as of September 30, 2004, between COMSYS IT Partners, Inc. and
certain of the old COMSYS Holdings stockholders party thereto
|
|
8-A/A
|
|
|
4.2
|
|
|
November 2, 2004
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Amendment No. 1 to Registration Rights Agreement dated April 1, 2005 between COMSYS IT Partners, Inc.,
and certain of the old COMSYS Holdings stockholders party thereto
|
|
10-Q
|
|
|
4.2
|
|
|
May 6, 2005
|
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
Amended and Restated Registration Rights Agreement, dated as of September 30, 2004, between COMSYS IT
Partners, Inc. and certain of the old Venturi stockholders party thereto
|
|
8-A/A
|
|
|
4.3
|
|
|
November 2, 2004
|
|
|
|
|
|
|
|
|
|
|
|
4.4
|
|
Amendment No. 1 to Amended and Restated Registration Rights Agreement dated April 1, 2005 between
COMSYS IT Partners, Inc., and certain of the old Venturi stockholders party thereto
|
|
10-Q
|
|
|
4.4
|
|
|
May 6, 2005
|
|
|
|
|
|
|
|
|
|
|
|
4.7#
|
|
Common Stock Purchase Warrant dated as of April 14, 2003, issued by the Company in favor of BNP Paribas
|
|
8-K
|
|
|
99.16
|
|
|
April 25, 2003
|
|
|
|
|
|
|
|
|
|
|
|
4.8
|
|
Specimen Certificate for Shares of Common Stock
|
|
10-K
|
|
|
4.6
|
|
|
April 1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2*
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Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32*
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Certification of Chief Executive Officer and Chief Accounting Officer pursuant to 18 U.S.C.
Section 1350, as adopted, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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32
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