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COMSYS IT Partners 10-Q 2008 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 30, 2008.
OR
Commission File Number 000-27792
COMSYS IT PARTNERS, INC.
(Exact name of Registrant as specified in its charter)
4400 Post Oak Parkway, Suite 1800
Houston, TX 77027 (Address, including zip code, of principal executive offices) (713) 386-1400
(Registrant’s 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 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):
Large accelerated filer
o Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The number of shares of the registrant’s common stock outstanding as of May 5, 2008, was
20,379,867.
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this report, 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:
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, management’s 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 the
factors listed in this section, the “Risk Factors” section contained in our most recent Annual
Report on Form 10-K and elsewhere in this report. 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.
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PART I
ITEM 1. FINANCIAL STATEMENTS
COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
See notes to consolidated financial statements
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COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
See notes to consolidated financial statements
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COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Balance Sheets
See notes to consolidated financial statements
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COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity (Unaudited)
See notes to consolidated financial statements
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COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
See notes to consolidated financial statements
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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 information as of
December 30, 2007, and the consolidated statement of shareholders’ equity information for the
period from December 31, 2006, through December 30, 2007, has been derived from our audited
financial statements but does not include the financial statement footnote information required for
audited financial statements. These interim financial statements should be read in conjunction
with the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2007, as filed
with the Securities and Exchange Commission (“SEC”).
The Company provides 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. 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 COMSYS Process Solutions Group also delivers critical management solutions
across the resource spectrum from contingent workers to outsourced services.
The Company’s 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 first
quarter-ends for 2008 and 2007 were March 30, 2008, and April 1, 2007, respectively.
Due to the seasonal nature of our business, the results of operations for the three months ended
March 30, 2008, are not necessarily indicative of results to be expected for the entire fiscal
year.
The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures About
Segments of an Enterprise and Related Information. As the Company’s consolidated financial
information is reviewed by the chief decision makers, and the business is managed under one
operating and marketing strategy, the Company operates under one reportable segment. The Company’s
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 significant.
2. Mergers and Acquisitions
On September 30, 2004, COMSYS Holding, Inc. (“COMSYS Holding”) 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 Venturi’s outstanding common stock on a fully diluted basis. Since former
COMSYS Holding stockholders owned a majority of the Company’s 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 Company’s 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. In
connection with the purchase, the Company recorded a customer base 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. In June 2006, the Company made an
earnout payment of $1.25 million, of which $1.1 million was charged to the liability with the
remainder to goodwill. Additional earnout payments of $2.5 million were paid in 2007, and an
earnout payment of $1.25 million was accrued in October 2007 and paid in
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January 2008. Additional earnout payments of $2.0 million were accrued during the first quarter of
2008 for payment during the second or third quarter of 2008. These payments and any future earnout
payments are recorded to goodwill. The operations of Pure Solutions are included in the
Consolidated Statement of Operations for periods subsequent to the purchase.
From 2003 to March 2007, the Company owned a 19.9% equity interest in Econometrix, Inc.
(“Econometrix”), a California-based vendor management systems software provider. On March 16,
2007, the Company purchased the remaining 80.1% of the outstanding common stock of Econometrix.
This acquisition was not material to the Company’s business. Econometrix shareholders received
247,807 shares of the Company’s common stock in exchange for the remaining 80.1% interest. The
operations of Econometrix are included in the Consolidated Statement of Operations subsequent to
the purchase on March 16, 2007.
On May 31, 2007, the Company purchased all of the issued and outstanding membership interests in
Plum Rhino Consulting LLC (“Plum Rhino”), a specialty finance and accounting staffing services
provider with operations in Georgia, Illinois, Missouri and North Carolina. This acquisition was
not material to the Company’s business. The purchase price included the issuance of 253,606 shares
of the Company’s common stock to the Plum Rhino members, debt payments of approximately $0.2
million and up to $3.7 million of earnout payments based on Plum Rhino’s achievement of specified
annual EBITDA targets over a three-year period. As of March 30,
2008, the Company has not accrued any amounts related to the
potential earnout payments. In connection with the purchase, the Company
recorded a customer base intangible asset in the amount of $3.2 million, which was valued using a
discounted cash flow analysis, $2.2 million of goodwill and $0.6 million of tangible net assets.
The operations of Plum Rhino are included in the Consolidated Statement of Operations subsequent to
the purchase on May 31, 2007.
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 Company’s 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.
As of March 30, 2008, the Company has not accrued any amounts
related to the potential earnout payment. In connection with the
purchase, the Company recorded $6.2 million of goodwill,
$3.4 million in restricted cash relating to amounts deposited
into escrow for a payment required to be made to employees or former
shareholders in December 2008 and $2.4 million of tangible net
assets. This $3.4 million payment is required to
be paid to former employees that participated in the Praeos bonus
plan upon the one-year anniversary date of the close of the
acquisition if they are still employed by the Company. If there are
no bonus plan participants remaining, the funds will be paid to the
former shareholders of Praeos. The Company has determined that the
bonus plan acquired at acquisition is a compensatory arrangement and
accordingly will recognize compensation expense ratably in 2008 up to
the $3.4 million. If on the one-year anniversary of the closing
date the employees are no longer with the Company and the
$3.4 million is to be paid to the former shareholders, the
Company will reverse the recognized compensation expense and record
additional purchase price. In addition, the Company is 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 operations of Praeos are included in the Consolidated Statement
of Operations subsequent to the purchase on December 12, 2007.
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
Company’s business. 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 TWC’s achievement of a specified annual EBITDA
target in 2008. As of March 30, 2008, the Company has not
accrued any amounts related to the potential earnout payment. In connection with the purchase, the Company recorded a customer base 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 Statement of Operations subsequent
to the purchase on December 19, 2007.
None of these acquisitions, individually or in the aggregate, required financial statement filings
under Rule 3-05 of Regulation S-X.
3. Fair Value of Financial Instruments
The Company uses fair value measurements in areas that include, but are not limited to: the
allocation of purchase price consideration to tangible and identifiable intangible assets;
impairment testing of goodwill and long-lived assets and share-based compensation arrangements.
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 our revolving line of credit, senior term loan and interest
payable approximates fair value due to the variable nature of the interest rates under the
Company’s senior credit agreement. The Company, using available market information and appropriate
valuation methodologies, has determined the estimated fair value of its financial instruments.
However, considerable judgment is required in interpreting data to develop the estimates of fair
value.
On December 31, 2007, The Company adopted the provisions of SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which established a framework for measuring fair value and expands disclosures about
fair value measurements. The adoption of SFAS 157 did not have any impact on the Company’s
consolidated financial statements.
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4. Long-Term Debt
Long-term debt consisted of the following, in thousands:
The Company’s senior term loan and borrowings under the revolver bear interest at the prime rate
plus a margin that can range from 0.75% to 1.00%, or, at the Company’s option, LIBOR plus a margin
that can range from 1.75% to 2.00%, each depending on the Company’s total debt to adjusted EBITDA
ratio, as defined in the senior credit agreement, as amended. The Company pays a quarterly
commitment fee of 0.5% 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 March 30, 2008, these designated reserves were: a $5.0 million minimum
availability reserve, a $2.2 million reserve for outstanding letters of credit and a $3.3 million
reserve for the Pure Solutions acquisition. At March 30, 2008, the Company had outstanding
borrowings of $61.6 million under the revolver at interest rates ranging from 4.29% to 6.00% per
annum (weighted average rate of 4.67%) and excess borrowing availability under the revolver of
$75.7 million for general corporate purposes. At March 30, 2008, the Company’s debt to adjusted
EBITDA ratio resulted in a prime rate margin of 0.75% and a LIBOR margin of 1.75%. Fees paid on
outstanding letters of credit are equal to the LIBOR margin then applicable to the revolver, which
at March 30, 2008, was 1.75%. At March 30, 2008, outstanding letters of credit totaled $2.2
million. The principal balance of the senior term loan on that date was $3.8 million with an
interest rate of 4.30%. The senior term loan is scheduled to be repaid in eight equal quarterly
principal installments, the fifth of which was made on March 28, 2008.
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 Company’s 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 Company’s senior credit agreement
is automatic.
The senior credit agreement contains customary covenants, including the maintenance of a fixed
charge coverage ratio and a total debt to adjusted EBITDA ratio, as defined in the senior credit
agreement, as amended. The senior credit agreement also places restrictions on the Company’s
ability to enter into certain transactions without the approval of the lenders, such as the payment
of dividends, disposition and acquisition of assets and the assumption of contingent obligations.
As of March 30, 2008, the Company was in compliance with all covenant requirements.
5. Income Taxes
The income tax expense of $1.4 million for the three months ended March 30, 2008, contains the
following amounts: current expenses totaling $0.2 million for federal alternative minimum tax,
miscellaneous state income tax expenses and foreign income taxes
related to the Company’s profitable United Kingdom subsidiary and a deferred expense in the amount
of $1.2 million resulting from the release of a portion of the valuation allowance on Venturi’s
acquired net deferred assets from the merger.
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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 March 30, 2008. 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. If the Company continues to be profitable, the Company will continue to
evaluate each quarter its estimates of the recoverability of its deferred tax assets based on its
assessment of whether any portion of these fully reserved assets become more likely than not
recoverable through future taxable income. At such time, if any, 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 it will begin to provide for taxes at the full
statutory rate going forward.
As of March 30, 2008, the Company had $51.9 million in net deferred tax assets and had recorded a
valuation allowance against $51.0 million of those assets. The decrease in the valuation
allowance from December 30, 2007, resulted primarily from pre-tax book income earned during the
quarter. Although the Company’s net deferred tax asset is substantially offset with a valuation
allowance, a portion of its fully-reserved deferred tax assets that become realized through
operating profits are recognized as adjustments to the purchase price as a reduction to goodwill to
the extent they relate to benefits acquired in the merger. This then results in deferred tax
expense in the year the acquired deferred tax assets are utilized. This portion of deferred tax
expense represents the consumption of pre-merger deferred tax assets that were acquired with zero
basis. In accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, the Company
calculated a goodwill bifurcation ratio in the year of the merger to determine the amount of
deferred tax asset realizable expense that should be offset to goodwill prospectively.
The Company has not paid United States federal income tax on the undistributed foreign earnings of
its foreign subsidiaries as it is the Company’s intent to reinvest such earnings in its foreign
subsidiaries. Pretax income attributable to the Company’s profitable foreign operations amounted
to $0.1 million and $0.3 million in the three months ended March 30, 2008, and April 1, 2007,
respectively.
There was no amount recorded for uncertain income tax positions at March 30, 2008, or December 30,
2007.
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 it 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 months ended March 30, 2008, and April 1, 2007, the Company has not recorded any interest or
penalties.
6. Earnings Per Share
Basic earnings per share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted earnings 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.
Dilutive securities at March 30, 2008, include 248,654 warrants to purchase the Company’s 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
earnings per common share, income attributable to warrant holders has been excluded from net
income.
Additionally, dilutive securities at March 30, 2008, include 555,742 unvested restricted stock
shares. 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
earnings per common share, income attributable to unvested restricted stock holders has been
excluded from net income.
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The computation of basic and diluted earnings per share is as follows, in thousands, except per
share amounts:
For the three months ended March 30, 2008, and April 1, 2007, 350,169 and 2,029 shares,
respectively, attributable to outstanding stock options and warrants were excluded from the
calculation of diluted earnings per share because their inclusion would have been antidilutive.
7. Commitments and Contingencies
The Company has indemnified 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 are 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. The maximum amount of future payments is generally unlimited. There was no amount
recorded for these indemnifications at March 30, 2008, and December 30, 2007. Due to the nature of
these indemnifications, 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.
The Company leases various office space and equipment under noncancelable operating leases expiring
through 2017. 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 $1.8 million and $1.7 million for the three months ended March 30, 2008, and April 1,
2007, respectively. Sublease income was $0.1 million and $0 for the three months ended March 30,
2008, and April 1, 2007, respectively.
In connection with the merger and the sale of Venturi’s commercial staffing business, 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 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 reasonably possible that management’s estimates could change. The escrowed cash is
included in restricted cash on the Consolidated Balance Sheets. A final determination of one of
these liabilities was made in 2007 after the Company was able to accumulate the required data to
finalize the assessment with one of the jurisdictions. The final determination resulted in a $3.8
million reduction to goodwill and other current liabilities. The Company intends to make a claim
against the escrow account related to this settlement in the amount of $0.8 million.
In connection with the
purchase of Praeos in December 2007, the Company placed $3.4 million in an
escrow account restricted in use for a payment due to employees or
former shareholders on the one-year anniversary of the closing date
of the acquisition as more fully described in Note 2. The
disbursement of these funds in December 2008 will not affect the
Company’s cash flow from operations as this amount was part of
cash flows used in financing activities in the fourth quarter of 2007.
The Company has entered into employment agreements with certain of its executives covering, among
other things, base compensation, incentive bonus determinations and payments in the event of
termination or a change of control of the Company.
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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.
8. Stock Compensation Plans
The Company has four stock-based compensation plans with outstanding equity awards: the 1995
Equity Participation Plan (“1995 Plan”), the COMSYS Holding, Inc. 1999 Stock Option Plan (“1999
Plan”), the 2003 Equity Incentive Plan (“2003 Equity Plan”) and the COMSYS IT Partners, Inc. 2004
Stock Incentive Plan As Amended and Restated Effective April 13, 2007 (“2004 Equity Plan”).
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.
Only 1,157 stock options remained outstanding under the 1995 Plan as of March 30, 2008, and these
options have a weighted average exercise price of $175.97 per share and a weighted average
remaining contractual life of 1.4 years. Although the 1995 Plan has been terminated and no future
option issuances will be made under it, these remaining outstanding stock options will continue to
be exercisable in accordance with their terms.
In 1999, Old COMSYS adopted the 1999 Plan under which officers and other key employees were granted
stock options at or above the fair market value of the stock on the date of grant. Under the terms
of the 1999 Plan, stock options vested over a five-year period from the date of grant and would
expire after 10 years. As a result of the merger, each outstanding option under the 1999 Plan
became exercisable, when vested, for 0.0001 of one share of Venturi (now COMSYS) common stock.
Stock options for 12 shares remained outstanding under the 1999 Plan as of March 30, 2008, and
these options have a weighted average exercise price of $20,000.00 per share and a weighted average
remaining contractual life of three years. It is the Company’s intention to cancel these options
in the second quarter of 2008. No future grants will be made under this plan.
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 Company’s 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.
In connection with the merger, the Company’s board of directors adopted and the stockholders
approved the 2004 Stock Incentive Plan, which was subsequently amended and restated in 2007. 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.
A summary of the activity related to stock options granted under the 2003 Equity Plan and the 2004
Equity Plan is as follows:
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The following table summarizes information related to stock options outstanding and exercisable
under all four of the Company’s stock-based compensation plans at March 30, 2008:
For additional vesting information on stock option grants issued or modified prior to 2008, see
Footnote 10 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30,
2007.
The fair value of options modified in 2007 was estimated on the date of modification using the
Black-Scholes option pricing model based on the assumptions noted in the following table. There
were no options granted in 2007 or in the first three months of 2008.
Option valuation models, including the Black-Scholes model used by the Company, require the input
of assumptions, including expected life and expected stock price volatility. Due to the limited
number of option exercises following the merger, the expected term was estimated as the approximate
midpoint between the vesting term and the contractual term; this represents the period of time that
options granted are expected to be outstanding. The risk-free interest rate was based on U.S.
Treasury rates in effect at the date of grant with maturity dates approximately equal to the
expected life of the option at the grant date. The expected volatility assumption for stock option
modifications during 2007 was based on actual historical volatility of the Company’s common stock
from the period after the Company’s December 2005 common stock offering through 2006. The Company
does not anticipate paying a dividend, and, therefore, no expected dividend yield was used.
Cash received from option and warrant exercises during the three months ended March 30, 2008, and
April 1, 2007, was $0 and $0.6 million, 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 March 30, 2008, and April 1, 2007, was $0 and $0.5 million,
respectively. The Company has historically used newly issued shares to satisfy share option
exercises and expects to continue to do so in future periods.
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 Company’s 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 nonvested share awards subject to service and 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.
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A summary of the activity related to restricted stock granted under the 2004 Equity Plan and the
2004 Management Incentive Plan, is as follows:
The nonvested shares in the table above issued to non-executive employees are subject to a
three-year time-based vesting requirement. The nonvested 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 2008, see Footnote 10 in the Company’s Annual
Report on
Form 10-K for the fiscal year ended December 30, 2007. Effective January 2, 2008, the Committee approved equity grants to five executive officers,
including our Chief Executive Officer. One-quarter (25%) of these shares will time-vest in equal
annual installments over three years. The remaining shares will performance-vest at the end of the
three-year period based on the Company’s earnings per share (“EPS”) growth as against the BMO
staffing stock index during the three-year period. The performance shares will fully vest if the
Company’s EPS growth is in the top 25% of the index. The performance shares will vest 50% or 25%
if the Company’s EPS growth is in the second 25% or third 25% of the index, respectively. No
shares will vest if the Company’s EPS growth is in the bottom 25% of the index. The fair value of
the performance-based shares awarded was estimated assuming that performance goals will be reached.
If such goals are not met, no performance-based compensation will be recognized and any previously
recognized compensation cost will be reversed. The vesting percentages will be prorated within
individual tiers, except that no shares will vest for EPS growth in the bottom tier.
As of March 30, 2008, there was $7.9 million of total unrecognized compensation costs related to
nonvested option and restricted stock awards granted under the plans, which are expected to be
recognized over a weighted-average period of 25 months. The total fair value of shares and options
that vested during the quarter ended March 30, 2008, was $2.6 million.
9. Related Party Transactions
Related Party Accounts Receivable
Elias J. Sabo, a member of the Company’s board of directors, also serves on the board of directors
of The Compass Group, the parent company of Venturi Staffing Partners (“VSP”), a former Venturi
subsidiary. VSP provides commercial staffing services to the Company and its clients in the normal
course of its business. During the three months ended March 30, 2008, the Company and its clients
purchased approximately $1.8 million of staffing services from VSP, of which approximately $1.8
million was for services provided to the Company’s vendor management clients. At March 30, 2008,
the Company had approximately $0.8 million in accounts payable to VSP.
10. Executive Officer Resignation
Mr. Joseph C. Tusa, Jr. resigned as the Company’s Senior Vice President, Chief Financial Officer
and Assistant Secretary effective December 24, 2007. The Company entered into a separation
agreement with Mr. Tusa, whose employment with the Company terminated on January 2, 2008, pursuant
to which Mr. Tusa received an advance payment against his 2007 bonus at target levels. The balance
was paid after the completion of the 2007 audit simultaneously with the payment of bonuses to the
other executive officers. Additionally, 19,980 restricted shares scheduled to vest on January 1,
2008, which Mr. Tusa was entitled to under the terms of the Company’s 2004 Management Incentive
Plan, vested (including 6,660 shares which were eligible to vest based on the Company’s
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achievement of the 2007 bonus target). All remaining, unvested shares held by Mr. Tusa were
forfeited. Also, in accordance with Company policies, Mr. Tusa’s unused paid-time-off was paid
within 10 days after his termination date, and he became eligible for COBRA health insurance
coverage beginning after his termination date.
11. Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157, which
provides enhanced guidance for using fair value to measure assets and liabilities. SFAS 157 also
responds to investors’ requests for expanded information about the extent to which companies
measure assets and liabilities at fair value, the information used to measure fair value and the
effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair
value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and the Company adopted the new requirements in its fiscal
first quarter of 2008. The adoption of SFAS 157 did not have a material effect on the Company’s
consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2 (“FSP 157-2”). FSP 157-2
delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial statements on a
recurring basis, to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. In February 2008, the FASB also issued FSP No. 157-1 that would exclude
leasing transactions accounted for under SFAS No. 13, Accounting for Leases, and its related
interpretive accounting pronouncements. The Company does not expect the SFAS 157 related guidance
to have a material impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (“SFAS 159”). SFAS 159 provides companies with an option to report selected
financial assets and financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings at each subsequent reporting
date. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and the Company
adopted the new requirements in its fiscal first quarter of 2008. The adoption of SFAS 159 did not
have a material effect on the Company’s consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007), Business Combinations (“SFAS 141(R)”), which provides new accounting requirements for
business combinations. SFAS 141(R) defines a business combination as a transaction or other event
in which an acquirer obtains control of one of more businesses. SFAS 141(R) is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and the Company
will adopt the new requirements in its fiscal first quarter of 2009. The Company has not yet
determined the impact, if any, of adopting SFAS 141(R) on its future consolidated financial
statements.
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ITEM 2. MANAGEMENT’S 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 section entitled “Risk Factors” included in our Annual Report on Form 10-K for
the fiscal year ended December 30, 2007.
Our Business
Our mission is to become a leading company in the professional 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:
We anticipate 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 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 brand
name, 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 key 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.
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 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 60% 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 billable professionals, as well as increases in the costs of benefits and taxes.
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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.
Our fiscal first quarter-ends for 2008 and 2007 were March 30, 2008, and April 1, 2007,
respectively.
Overview of First Quarter 2008 Results
Revenue
and net income for the first quarter of 2008 were $183.4 million and $5.1 million,
respectively. First quarter revenue included $7.3 million of revenue from companies acquired
during 2007. Revenue and net income were in line with management’s expectations and gross profit
remained strong versus the prior year even as revenue declined from the prior-year period. Outside
of operations, we continued to make progress in our sales and marketing efforts, and are focused on
continuing to expand and improve our sales and recruiting talent throughout our operations. We
also won two new vendor management accounts, including one account resulting from the Chimes
bankruptcy filing in January 2008.
We ended the first quarter of 2008 with 4,758 consultants on assignment. The headcount
declines we have seen have not been concentrated in any one geography or at any one client.
Similar to the fourth quarter of 2007, most of the weakening in our business has come from our
financial services clients.
2008 Outlook
Our priorities for the balance of 2008 remain straightforward. We will continue to keep
internal growth at the top of our list, and we will focus on sales, marketing and recruiting to our
core customer base and on adding new customers. Additionally, we are continuing to improve our
balance sheet, where we feel we can generate additional cost savings through further debt
reductions and working capital management. Continuing improvements in efficiency are also a
priority, and we are devoting considerable attention to process improvements, especially in sales
and recruiting and in our front and back offices. We will complement these operational priorities
by continuing to look for acquisitions that meet our criteria.
We have benefited from low tax rates for financial reporting for some time now, but we do not
expect that to last indefinitely if we continue to be profitable. If we continue to be profitable,
we will continue to evaluate each quarter our estimates of the recoverability of our deferred tax
assets based on our assessment of whether any portion of these fully reserved assets become more
likely than not recoverable through future taxable income. At such time, if any, that we no longer
have a reserve for our deferred tax assets, we will begin to provide for taxes at the full
statutory rate. Our actual cash taxes paid are expected to remain low for the balance of 2008.
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Results of Operations
Quarter Ended March 30, 2008, Versus Quarter Ended April 1, 2007
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 headcount amounts:
We
recorded operating income of $8.1 million and net income of $5.1 million in the first
quarter of 2008 compared to operating income of $8.1 million and net income of $5.5 million in the
first quarter of 2007. The decrease in operating income was due
primarily to a decrease in revenue and an increase in depreciation
and amortization partially offset by decreases in cost of services
and selling, general and administrative expenses.
Revenues. Revenues for the first quarter of 2008 and the first quarter of 2007 were $183.4
million and $186.2 million, respectively, representing a decrease of 1.5%. The decrease was due
primarily to a decrease in average headcount between periods, partially offset by an increase in
average bill rates. Reimbursable expense revenue declined to $3.0 million in the first quarter of
2008 from $3.3 million in the first quarter of 2007. This decline had no impact on gross margin
dollars as the related reimbursable expense was recognized in the same period. We continued to see
bill rate pressures from our customers, particularly among Fortune 500 clients. Revenues from the
pharmaceutical and biotechnology sector increased by 32% in the first quarter of 2008 from the
first quarter of 2007. This increase was partially offset by revenue decreases of 15% and 16% from
the telecommunications and financial services sector, respectively, over the same period.
Cost of Services. Cost of services for the first quarter of 2008 and the first quarter of
2007 were $138.7 million and $141.2 million, respectively, representing a decrease of 1.8%. The
decrease was due primarily to decreases in reimbursable expenses, as discussed above under
Revenues. In addition, we are realizing the system fee reductions contemplated in our Econometrix
acquisition. This reduction in gross cost of services from Econometrix is partially offset by the
depreciation of the software, which is recorded in depreciation and amortization. Cost of services
as a percentage of revenue decreased slightly to 75.6% in the first quarter of 2008 from 75.8% in
the first quarter of 2007. Although we have seen an increase in our average pay rates in 2008 over
2007, our bill rates have increased slightly more than the increase in our pay rates.
Selling, General and Administrative Expenses. Selling, general and administrative expenses in
the first quarter of 2008 and the first quarter of 2007 were $34.8 million and $35.4 million,
respectively, representing a decrease of 1.9%. The decrease was due primarily to the benefits of
our efficiency improvements and targeted cost reductions, partially offset by the additional
selling, general and administrative expenses at the businesses
acquired in 2007 including the charge of approximately
$0.8 million for additional employee compensation relating to
the Praeos purchase in December 2007. Included in these
amounts is $1.1 million and $1.7 million of stock-based compensation, respectively. As a
percentage of revenue, selling, general and administrative expenses
remained consistent at 19.0% in each period.
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Depreciation and Amortization. Depreciation and amortization expense consists primarily of
depreciation of our fixed assets and amortization of our customer base intangible assets. For the
first quarter of 2008 and the first quarter of 2007, depreciation and amortization expense was $1.8
million and $1.5 million, respectively, representing an increase of 24.8% between periods. The
increase in depreciation and amortization expense was primarily due to the depreciation of the
Econometrix software, the amortization of the Plum Rhino and TWC customer list intangibles and the
TWC assembled methodology intangible.
Interest Expense, Net. Interest expense, net was $1.6 million and $2.4 million in the first
quarter of 2008 and the first quarter of 2007, respectively, a decrease of 33.8%. The decrease was
due to our overall debt reduction during 2007 as well as a reduction in our related interest rates.
Provision for Income Taxes. The 2008 income tax is lower than typical statutory rates given
that income tax expense was in large part offset by a decrease in our valuation allowance. The
2008 expense contains the following amounts: current expenses totaling $0.2 million for federal
alternative minimum tax, miscellaneous state income tax expenses and foreign income taxes related
to the Company’s profitable United Kingdom subsidiary and a
deferred expense in the amount of $1.2
million resulting from the release of a portion of the valuation allowance on Venturi’s acquired
net deferred assets from the merger. Although our net deferred tax asset is substantially offset
with a valuation allowance, a portion of our fully-reserved deferred tax assets that became
realized through operating profits are recognized as adjustments to the purchase price as a
reduction to goodwill to the extent they relate to benefits acquired in the merger. This then
results in deferred tax expense as the assets are utilized. This portion of deferred tax expense
represents the consumption of pre-merger deferred tax assets that were acquired with zero basis.
In accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, we calculated a
goodwill bifurcation ratio in the year of the merger to determine the amount of deferred tax asset
realizable expense that should be offset to goodwill prospectively.
As of March 30, 2008, we had state and federal net operating loss carryforwards of
approximately $110.0 million and $101.7 million, respectively, an alternative minimum tax credit
carryfoward of $0.4 million, and had recorded a reserve against the assets for net operating loss
carryforwards due to the uncertainty related to the realization of these amounts.
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. If we
continue to be profitable, we will continue to evaluate each quarter our estimates of the
recoverability of our deferred tax assets based on our assessment of whether any portion of these
fully reserved assets become more likely than not recoverable through future taxable income. At
such time, if any, 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 have historically financed our operations through cash from operations, the issuance of
common stock and borrowings under our credit facilities. Due to the requirements of our revolving
credit facility, as discussed in more detail below under the “Cash Flows” section, we do not
maintain a significant cash balance. Excess borrowing availability under our revolving credit
facility at March 30, 2008, was $75.7 million. We believe our cash flow provided by operating
activities coupled with existing cash balances and availability under our revolving credit facility
will be sufficient to fund our working capital, debt service and purchases of fixed assets through
fiscal 2008. In connection with the purchase of Praeos in December
2007, we placed $3.4 million in an escrow account restricted in
use for a payment due to employees or former shareholders on the
one-year anniversary of the closing date of the acquisition as more
fully described in Note 2. The disbursement of these funds in
December 2008 will not affect our cash flow from operations as this
amount was part of cash flows used in financing activities in the
fourth quarter of 2007. In the event that we make 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 (“SEC”).
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Credit Agreements and Related Covenants
Our senior term loan and borrowings under the revolver bear interest at the prime rate plus a
margin that can range from 0.75% to 1.00%, or, at our option, LIBOR plus a margin that can range
from 1.75% to 2.00%, each depending on our total debt to adjusted EBITDA ratio, as defined in our
senior credit agreement, as amended. We pay a quarterly commitment fee of 0.5% 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 and related amendments, reduced by the amount of outstanding letters
of credit and designated reserves. At March 30, 2008, these designated reserves were: a $5.0
million minimum availability reserve, a $2.2 million reserve for outstanding letters of credit and
a $3.3 million reserve for the Pure Solutions acquisition. At March 30, 2008, we had outstanding
borrowings of $61.6 million under the revolver at interest rates ranging from 4.29% to 6.00% per
annum (weighted average rate of 4.67%) and excess borrowing availability under the revolver of
$75.7 million for general corporate purposes. Our debt balance for first quarter of 2008 was
impacted by the timing of a large vendor management payment. Our average daily debt balance during
the first quarter was $91.0 million. At March 30, 2008, our debt to adjusted EBITDA ratio
resulted in a prime rate margin of 0.75% and a LIBOR margin of 1.75%. Fees paid on outstanding
letters of credit are equal to the LIBOR margin then applicable to the revolver, which at March 30,
2008, was 1.75%. At March 30, 2008, outstanding letters of credit totaled $2.2 million. The
principal balance of the senior term loan on that date was $3.8 million with an interest rate of
4.30%. The senior term loan is scheduled to be repaid in eight equal quarterly principal
installments, the fifth of which was made on March 28, 2008.
Debt Compliance
Our ability to continue operating is largely dependent upon our ability to maintain compliance
with the financial covenants of our senior credit agreement, which contains customary covenants,
including the maintenance of a fixed charge coverage ratio and a total debt to adjusted EBITDA
ratio, as defined in the senior credit agreement, as amended. The senior credit agreement also
places restrictions on our ability to enter into certain transactions without the approval of the
lenders, such as the payment of dividends, disposition and acquisition of assets and the assumption
of contingent obligations. The senior credit agreement provides for mandatory prepayments under
certain circumstances. We have not paid cash dividends in the past and currently have no intention
of paying them in the future. As of March 30, 2008, we were in compliance with all covenant
requirements and we believe we will be able to comply with these covenants throughout 2008.
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.
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Cash Flows
The following table summarizes our cash flow activity for the periods indicated, in thousands:
Cash provided by operating activities in the three months ended March 30, 2008, was $9.0
million compared to cash used in operating activities of $9.9 million in the three months ended
April 1, 2007. 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. Cash flow provided by operations in the first quarter of 2008 was impacted by the
timing of a large vendor management payment.
Cash used in investing activities in the three months ended March 30, 2008, was $2.5 million
compared to $1.2 million in the three months ended April 1, 2007. Our cash flows associated with
investing activities in 2008 and 2007 included capital expenditures of $1.1 million and $0.4
million, respectively. Additionally, in January of each year, we made an earnout payment to the
former owners of Pure Solutions in the amount of $1.25 million.
Capital expenditures for the three months ended March 30, 2008, related primarily to the
purchase of hardware and leasehold improvements. Capital expenditures in 2008 are currently
expected to be approximately $5.0 million to $6.0 million. This spending level is higher than 2007
due primarily to our planned Phoenix customer service center relocation and the upgrade of our
enterprise software system.
Cash used in financing activities was $6.5 million in the three months ended March 30, 2008,
compared to cash provided by financing activities of $10.6 million in the three months ended April
1, 2007. Cash flows associated with financing activities primarily represent borrowings and
payments on our revolving credit facility.
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 revolving credit facility, and any cash needs are satisfied
through borrowings under the revolving credit facility. Cash recorded on our Consolidated Balance
Sheets at March 30, 2008, and December 30, 2007, in the amount of $1.6 million in each period
primarily represents cash balances at our Toronto and United Kingdom subsidiaries.
Cash provided by operating activities may fluctuate in future periods as a result of several
factors, including fluctuations in our operating results, accounts receivable collections and the
timing of tax and other payments. We believe the most strategic uses of our cash 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.
Off-Balance Sheet Arrangements
We had no off-balance sheet guarantees or other off-balance sheet arrangements as of March 30,
2008.
Related Party Transactions
Related Party Accounts Receivable
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 Venturi Staffing Partners (“VSP”), a former Venturi
subsidiary. VSP provides commercial staffing services to us and to
our clients in the normal course of its business. During the three months ended March 30,
2008, we and our clients purchased
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approximately $1.8 million of staffing services from VSP, of
which approximately $1.8 million was for services provided to our vendor management clients. At
March 30, 2008, we had approximately $0.8 million in accounts payable to VSP.
Contingencies and Indemnifications
Details about our contingencies and indemnifications are available in Note 7 to our unaudited
consolidated financial statements included elsewhere in this report.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles, also referred to as GAAP. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions. These estimates
include the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the period. We evaluate these estimates and assumptions on an ongoing basis,
including but not limited to those related to revenue recognition, the recoverability of goodwill,
collectibility of accounts receivable, reserves for medical costs, tax-related contingencies and
realization of deferred tax assets. Estimates and assumptions are based on historical and other
factors believed to be reasonable under the circumstances. The results of these estimates may form
the basis of the carrying value of certain assets and liabilities and may not be readily apparent
from other sources. Actual results, under conditions and circumstances different from those
assumed, may differ materially from these 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 30, 2007.
Recent Accounting Pronouncements
Details about recent accounting pronouncements are available in Note 11 to our unaudited
consolidated financial statements included elsewhere in this report.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 credit facilities at March 30, 2008, was approximately $65.4
million. Interest on borrowings under the facilities is based on the prime rate or LIBOR plus a
variable margin. Based on the outstanding balance at March 30, 2008, a change of 1% in the
interest rate would cause a change in interest expense of approximately $0.7 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. 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.
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, or the
Exchange Act, is recorded, processed, summarized and reported within the time periods specified in
the SEC’s 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 based on the definition of
“disclosure controls and procedures” in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange
Act. In designing and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management is required to
apply judgment in evaluating our controls and procedures. As of March 30, 2008, 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 as of
March 30, 2008.
Changes in Internal Controls over Financial Reporting
There has been no change in our internal control over financial reporting during quarter ended
March 30, 2008, that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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PART II
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 30,
2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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.
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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.
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EXHIBIT INDEX
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