UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-27792

 

COMSYS IT PARTNERS, INC.

(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		56-1930691 (I.R.S. Employer Identification Number)

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):

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 Exchange Act). Yes o No þ

The number of shares of the registrant’s common stock outstanding as of November 2, 2009, was 21,122,544.

 

 

TABLE OF CONTENTS

		Page
Cautionary Note Regarding Forward-Looking Statements			2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures about Market Risk			27
Item 4. Controls and Procedures			28
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3. Defaults upon Senior Securities			29
Item 4. Submission of Matters to a Vote of Securities Holders			29
Item 5. Other Information			29
Item 6. Exhibits			29
Signatures			31
Exhibit 31.1
Exhibit 31.2
Exhibit 32

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:

	•		economic declines that affect our business, including our profitability, liquidity or the ability to comply with applicable loan covenants;
	•		the financial stability of our lenders and their ability to honor their commitments related to our credit agreements;
	•		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;
	•		the risk of increased tax rates;
	•		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;
	•		the financial stability of our customers and other business partners and their ability to pay their outstanding obligations or provide committed services;
	•		changes in levels of unemployment and other economic conditions in the United States, or in particular regions or industries;
	•		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;
	•		the risk in an uncertain economic environment of increased incidences of employment disputes, employment litigation and workers’ compensation claims;
	•		our success in attracting, training, retaining and motivating billable consultants and key officers and employees;
	•		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;
	•		weakness or reductions in corporate information technology spending levels;
	•		our ability to maintain existing client relationships and attract new clients in the context of changing economic or competitive conditions;
	•		the 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;
	•		increases in employment-related costs such as healthcare and unemployment taxes;
	•		the possibility of our incurring liability for the activities of our billable consultants or for events impacting our billable consultants on our clients’ premises;
	•		the risk that we may be subject to claims for indemnification under our customer contracts;
	•		the risk that cost cutting or restructuring activities could cause an adverse impact on certain of our operations; and
	•		adverse changes to management’s periodic estimates of future cash flows that may affect our assessment of our ability to fully recover our goodwill.

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 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.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COMSYS IT Partners, Inc. and Subsidiaries

Consolidated Statements of Operations
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 27,				September 28,				September 27,				September 28,
(In thousands, except per share amounts)		2009				2008				2009				2008
Revenues from services		$	157,305			$	183,663			$	476,764			$	551,110
Cost of services			118,677				138,483				361,661				416,442
Gross profit			38,628				45,180				115,103				134,668
Operating costs and expenses:
Selling, general and administrative			32,083				34,579				97,613				103,634
Restructuring costs			155				—				4,096				—
Depreciation and amortization			2,106				2,185				6,230				5,903
			34,344				36,764				107,939				109,537
Operating income			4,284				8,416				7,164				25,131
Interest expense, net			1,057				1,224				3,135				4,106
Other expense (income), net			45				40				(127	)			(185	)
Income before income taxes			3,182				7,152				4,156				21,210
Income tax expense			164				1,105				623				3,847
Net income		$	3,018			$	6,047			$	3,533			$	17,363
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
Weighted average basic and diluted shares outstanding:
Basic			19,815				19,612				19,795				19,594
Diluted			19,815				20,455				19,795				20,611

See notes to consolidated financial statements

COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 27,				September 28,				September 27,				September 28,
(In thousands)		2009				2008				2009				2008
Net income		$	3,018			$	6,047			$	3,533			$	17,363
Foreign currency translation adjustments			(29	)			(69	)			(121	)			(53	)
Total comprehensive income		$	2,989			$	5,978			$	3,412			$	17,310

See notes to consolidated financial statements

COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Balance Sheets

		September 27,				December 28,
		2009				2008
(In thousands, except share and par value amounts)		(Unaudited)				(Note 1)
Assets
Current assets:
Cash and cash equivalents		$	1,213			$	22,695
Accounts receivable, net of allowance of $3,480 and $3,232, respectively			191,266				202,297
Prepaid expenses and other			2,764				3,116
Restricted cash			2,486				2,489
Total current assets			197,729				230,597
Fixed assets, net			13,810				16,596
Goodwill			89,155				89,064
Other intangible assets, net			9,570				11,962
Deferred financing costs, net			2,733				1,175
Restricted cash			308				308
Other assets			1,104				1,478
Total assets		$	314,409			$	351,180
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	122,060			$	156,528
Payroll and related taxes			26,947				25,975
Interest payable			271				337
Other current liabilities			9,783				9,728
Total current liabilities			159,061				192,568
Long-term debt			59,170				69,692
Other liabilities			6,660				5,435
Total liabilities			224,891				267,695
Commitments and contingencies
Stockholders’ equity:
Preferred stock, no par value; 5,000,000 shares authorized; none issued			—				—
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			210				203
Common stock warrants			1,734				1,734
Accumulated other comprehensive loss			(211	)			(90	)
Additional paid-in capital			229,974				227,360
Accumulated deficit			(142,189	)			(145,722	)
Total stockholders’ equity			89,518				83,485
Total liabilities and stockholders’ equity		$	314,409			$	351,180

See notes to consolidated financial statements

COMSYS IT Partners, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Unaudited)

										Accumulated
						Common				Other				Additional								Total
		Common				Stock				Comprehensive				Paid-in				Accumulated				Stockholders’
(In thousands, except share data)		Stock				Warrants				Income (Loss)				Capital				Deficit				Equity
Balance as of December 30, 2007		$	201			$	1,734			$	57			$	223,174			$	(80,534	)		$	144,632
Net loss			—				—				—				—				(65,188	)			(65,188	)
Foreign currency translations			—				—				(147	)			—				—				(147	)
Issuance of 342,878 shares of restricted common stock			2				—				—				(2	)			—				—
Forfeiture of 25,132 shares of restricted common stock			—				—				—				(332	)			—				(332	)
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				(90	)			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

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

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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 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 third quarter-ends for 2009 and 2008 were September 27, 2009, and September 28, 2008, respectively.

The Company’s 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 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 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 Company’s 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 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 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 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. 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 Company’s business. Subsequent to the purchase, the Company integrated TWC’s operations into TAPFIN, LLC and discontinued the use of TWC’s 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 TWC’s 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 Company’s 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 ASET’s 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 Company’s revolving line of credit and interest payable approximates fair value due to the variable nature of the interest rates under the Company’s senior credit agreement. However, considerable judgment is required in interpreting data to develop the estimates of fair value.

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 Company’s 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 Company’s 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 Company’s 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.

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 Company’s 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 Company’s 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 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.

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 it’s 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 Company’s 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 Venturi’s acquired net deferred tax assets.

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 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 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 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.

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 Venturi’s 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 management’s 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 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 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 Company’s 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 Company’s 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

For additional vesting information on stock option grants issued or modified prior to 2009, see Footnote 10 in the Company’s 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 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 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 Company’s 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 Company’s 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 Company’s earnings per share (“EPS”) growth as against the BMO staffing stock index during the three-year period. The shares will fully vest if the Company’s EPS growth is in the top 25% of the index. The 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 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.

10. Related Party Transactions

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 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 Company’s 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 Company’s board of directors, are employees of Wachovia Investors, Inc., the Company’s 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 Wachovia’s 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 Company’s current practice and does not have any impact on the Company’s 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.

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 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.

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 TAPFIN’s 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.

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	%

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.

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 Venturi’s 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.

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.

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 Venturi’s 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.

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.

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	)