SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

For the quarterly period ending June 29, 2003

OR

For the transition period from          to          

Commission file number 001-13956

VENTURI PARTNERS, INC.

(Exact name of Registrant as specified in its charter)

Five LakePointe Plaza
2709 Water Ridge Parkway, 2^nd Floor
Charlotte, North Carolina 28217
(Address, including zip code, of
Registrant’s principal executive offices)

(704) 442-5100

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [  ] No [ X ]

     As of August 4, 2003, 47,821,637 shares (before reverse stock split) of the registrant’s Common Stock, $.01 par value, were outstanding.

VENTURI PARTNERS, INC.
TABLE OF CONTENTS

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Venturi Partners, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
For the Periods Ended June 29, 2003 and June 30, 2002
(in thousands, except per share data)

The accompanying notes are an integral part of these statements.

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Venturi Partners, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
June 29, 2003 and December 29, 2002
(in thousands, except per share data)

The accompanying notes are an integral part of these balance sheets.

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Venturi Partners, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity (Deficit)
For the Period Ended June 29, 2003
(in thousands)

The accompanying notes are an integral part of these statements.

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Venturi Partners, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
For the Periods Ended June 29, 2003 and June 30, 2002
(in thousands)

The accompanying notes are an integral part of these statements.

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VENTURI PARTNERS, INC.
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)

(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 generally accepted accounting principles; 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 the Company for the interim periods presented. These interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2002. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year.

     Certain amounts in prior periods have been reclassified to conform to the 2003 presentation, including reclassifying professional fees paid in connection with the financial restructuring from restructuring and rationalization charges to gain (loss) on financial restructuring, net.

(2)

Name Change and Reverse Stock Split

     On August 5, 2003, the Company amended and restated its charter as contemplated in its recently completed financial restructuring. See Note 3, “Comprehensive Financial Restructuring.” Among other provisions, the charter amendment changed the Company’s corporate name to Venturi Partners, Inc., and effected a 1-for-25 reverse split of the Company’s common stock. The par value remained at $0.01 per share. Shareholder’s equity has been restated by reclassifying the reduction in par value arising from the reverse stock split from common stock to additional paid-in capital. All references in the accompanying consolidated financial statements to the number of common shares, except for authorized, and per share amounts have been restated to reflect the reverse stock split.

(3)

Comprehensive Financial Restructuring

     On April 14, 2003, the Company completed a comprehensive financial restructuring with its senior lenders and the holders of approximately $109,661 of its outstanding 5.75% Convertible Subordinated Notes due 2004 (the “5.75% Notes”) in which it issued shares of the Company’s Common Stock and Series B Preferred Stock to the participating noteholders in exchange for their 5.75% Notes (the “Exchange Transaction”). In the Exchange Transaction, which was privately negotiated, the Company exchanged newly issued equity with the participating noteholders and issued the following consideration for each $1 in principal amount of notes exchanged:

	•		$28.75 in cash (not in thousands);
	•		7.6382 shares (190.9560 shares before reverse split) of newly issued shares of the Company’s Common Stock; and
	•		9.5242 shares of Series B Preferred Stock of the Company, each share of which is convertible into 4 shares (100 shares before reverse split) of Common Stock upon any amendment to the Company’s charter increasing the authorized number of shares of Common Stock or effecting a reverse split of outstanding shares of Common Stock that increases the number of authorized but unissued shares. The holders of Series B Preferred Stock vote on all matters with the Common Stock as if converted, have a liquidation preference of $.01 per share, and otherwise have no greater rights or privileges than the Common Stock. With the reverse stock split

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complete, the Company intends to convert all of the Series B Preferred Stock into Common Stock in accordance with its terms.

     In connection with the Exchange Transaction, the Company entered into an agreement with each of the former noteholders participating in the exchange to provide them with registration rights with respect to the shares of Common Stock issued in the exchange or acquired upon conversion of the Series B Preferred Stock.

     As a result of the Exchange Transaction, the participating noteholders in the aggregate were issued 837,617 shares of Common Stock (20,940,425 shares before reverse split) and 1,044,433 shares of Series B Preferred Stock, which together represent approximately 82% of the Company’s outstanding Common Stock (assuming for this purpose that all shares of the Series B Preferred Stock issued to the participating noteholders have been converted). The existing shareholders retained ownership of their outstanding 1,075,248 shares of Common Stock (26,881,212 shares before reverse split), which represent approximately 18% of the outstanding Common Stock (on the same, as-converted, basis). In connection with this ownership change, the Company also reconstituted its Board of Directors to provide for a seven-person Board and the designation of two representatives of the new major shareholders to serve as new Board members, together with the Company’s Chief Executive Officer, one incumbent independent Board member who was designated by the Company with the consent of the participating noteholders and three other independent Board members, two of whom are incumbents who were designated by the participating noteholders.

     In order to permit the closing of the Exchange Transaction contemplated in the financial restructuring and to provide for the terms on which the existing senior lenders would continue to finance the Company’s working capital needs, the Company and its existing senior lenders also executed definitive loan agreements for the Credit Facility, which provided for certain amendments and maturity date extensions to the revolving credit facility and eliminated the Equity Appreciation Right (the “EAR”) held by the senior lenders (the “Senior Debt Restructuring”). The Senior Debt Restructuring provided for the forgiveness of indebtedness in the amount of $10,300. As a result of the Exchange Transaction and the Senior Debt Restructuring, the Company used substantially all of its cash on hand, after payment of transaction expenses, to repay approximately $37,985 of its outstanding credit facility and eliminated an additional $119,961 of its outstanding indebtedness, which will result in substantial reductions in the Company’s interest expense in future periods. No provision or benefit for income taxes was recorded in the second quarter of 2003 since the gain from financial restructuring will not be subject to income tax and the Company has incurred operating losses which can be carried forward to offset future taxable income.

     The Credit Facility provides for a $70,700 revolving line of credit due May 1, 2004 and is subject to certain maturity date extensions, assuming the Company is in compliance with its covenants, in six-month increments up through May 1, 2005. Availability of borrowings under the Credit Facility is subject to a borrowing base calculated as specified percentages of the Company’s eligible accounts receivable (as defined) in the aggregate. The Credit Facility contains covenants, including financial covenants that require monthly maintenance of cumulative EBITDA levels (as defined in the amended agreement) and an interest and subordinated indebtedness coverage ratio. The Credit Facility also contains restrictions on the payment of cash dividends on the Company’s capital stock and places additional limitations on share repurchases, acquisitions and capital expenditures. Finally, in lieu of the EAR included as part of the revolving credit facility that was in effect in 2002, the Company has issued common stock purchase warrants to the lenders under the Credit Facility entitling them to purchase a total of 768,997 shares of Common Stock (19,224,916 shares before reverse split), or 10% of the outstanding Common Stock on a fully diluted basis. These warrants are exercisable in whole or part over a 10-year period and the exercise price thereunder is $7.8025 per share ($0.3121 per share before reverse split), which was based on a stated equity valuation for the Company of $60,000. The exercise price for these warrants exceeded the estimated fair value of the underlying equity at the issuance date. Interest rates payable under the Credit Facility were set at prime plus 325 basis points through June 2003, with increases during each six-month period through May 1, 2005. The Company’s interest rate is currently set at prime plus 375 basis points through December 2003.

     In connection with the financial restructuring the Company agreed to seek shareholder approval at the

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2003 Annual Meeting of Shareholders to amend and restate its certificate of incorporation, and on July 24, 2003, the shareholders approved each of the proposed amendments. In addition to the name change and reverse stock split described in Note 2 above, the amendments to the certificate of incorporation included the following:

	•		elimination of provisions that separate the Board of Directors into three classes and that prohibit action by consent of shareholders without a meeting;
	•		an election by the Company not to be governed by Section 203 of the Delaware General Corporation Law, which restricts the ability of the Company to engage, directly or indirectly, in a business combination transaction with a holder of 15% or more of its voting stock;
	•		addition of provisions requiring a supermajority vote of the Board of Directors or shareholders to adopt changes to the certificate of incorporation or bylaws; and
	•		addition of a provision to protect minority shareholders in connection with certain transactions with a shareholder (a “Significant Holder”) that beneficially owns 20% or more of the shares of the Company’s capital stock that are entitled to vote on matters submitted to a vote of the shareholders.

     In connection with the financial restructuring, the Company amended and restated the shareholder rights agreement that governs the terms of preferred share purchase rights that currently accompany the Common Stock. The amendments included, among other things, exemptions preventing the following from triggering separation of the rights from the Common Stock: (i) beneficial ownership of capital stock by the participating noteholders acquired in the financial restructuring; (ii) beneficial ownership by any Significant Holder of capital stock of the Issuer acquired in accordance with the amended and restated certificate of incorporation; and (iii) beneficial ownership by any third party of capital stock of the Company acquired in a transfer from a Significant Holder pursuant to a transaction that complies with the amended and restated certificates of incorporation. In addition, the shareholder rights plan was amended to include a tag-along right for the benefit of any holder (including certain holders of more than 2% acting together as a group) of 5% or more of the voting stock of the Company pursuant to which such holder (or group) will be entitled to participate pro rata, for the same amount and form of consideration and otherwise on substantially the same terms and conditions, in any transfer by any Significant Holders of capital stock of the Company of 20% or more of the voting stock of the Company.

     In connection with the Company’s financial restructuring, the Company terminated its 1995 Stock Option Plan. Additionally, a number of the Company’s employees, including each of the Company’s executive officers at the end of 2002 and all but one of the Company’s Board of Directors, irrevocably cancelled any and all rights that they had to exercise any and all stock options that were previously granted and agreed that all such options would be forfeited to the Company. These directors and employees held in the aggregate 87,601 of the stock options (2,190,030 stock options before reverse split) that were outstanding under the 1995 Stock Option Plan as of December 29, 2002. As a result of these voluntary forfeitures, only 16,683 stock options (417,080 options before reverse split) remained outstanding under the 1995 Stock Option Plan, and these options have a weighted average exercise price of $232.33 per share ($9.29 per share before reverse split). Although the 1995 Stock Option Plan has been terminated and no future issuances thereunder will be made, these remaining outstanding stock options will continue to be exercisable in accordance with their terms.

     The Company’s Board of Directors adopted the 2003 Equity Incentive Plan (the “2003 Equity Plan”) simultaneously with the completion of the Company’s financial restructuring. The 2003 Equity Plan authorizes grants of stock options, stock appreciation rights (or “SARs”), restricted stock, deferred stock awards and performance awards (and dividend equivalent rights relating to options, SARs, deferred stock and performance awards), in the case of stock or option awards, for up to 794,835 shares (19,870,873 shares before reverse split), or 10.3%, of the Company’s fully diluted Common Stock. Awards under the 2003 Equity Plan are to be made to key employees, directors and consultants as selected by the Board of Directors or the

9

Compensation Committee. The duration of any option or SAR granted under the 2003 Equity Plan will not exceed ten years. Awards will generally vest monthly on a pro rata basis at an annual rate of 25% unless either the Board of Directors or Compensation Committee approves or a participant’s employment agreement provides otherwise. Following a termination of employment, vested options and/or SARs must be exercised within 3 months (12 months in the case of death or disability), except that options and SARs terminate immediately upon a termination for cause as defined in the relevant participant’s employment agreement, or as determined in the discretion of the Board of Directors or the Compensation Committee if no employment agreement exists. Any non-vested option, SARs or other awards issued under the 2003 Equity Plan will be forfeited upon any termination. The Board of Directors and Compensation Committee retain the discretion to extend the post-employment exercise period of an option or SAR and to accelerate vesting of awards under the 2003 Equity Plan.

     At the time of the restructuring, the Board of Directors approved the granting of stock options for 503,400 shares (12,585,000 shares before reverse split), representing 6.5% of the Company’s fully diluted Common Stock, to certain executive officers. Of these initial grants, 348,000 options (8,700,000 options before reverse split) have an exercise price of $7.8025 per share ($0.3121 per share before reverse split), and the other 155,400 options (3,885,000 options before reverse split) have an exercise price of $11.7025 per share ($0.4681 per share before reverse split). The initial stock option grants to these officers vest monthly at an annual rate of 25%, and each will have 12 months following the termination of his employment (other than for cause) to exercise vested stock options held as of the termination date. The exercise price of a portion of these options is based on an aggregate stated equity value of the Company of $60,000, and for the remaining options the exercise price is based on an aggregate stated equity value of $90,000. The exercise price for these stock options exceeded the estimated fair value of the underlying equity at the issuance date. Following these initial grants, 291,435 shares (7,285,873 shares before reverse split), or 3.8%, of the Company’s fully diluted Common Stock remained authorized for issuance under the 2003 Equity Plan and are reserved for future grants. The majority of the options granted at the time of the restructuring will be subject to variable accounting because they were granted within six months after the date the options under the 1995 Stock Option Plan were cancelled. This may result in non-cash compensation expense in future periods to the extent the fair value of the stock price exceeds the option exercise price.

Accounting for Financial Restructuring Transactions

     The Company recorded the issuance of its equity securities in exchange for outstanding 5.75% Notes at the fair value of the newly issued equity securities, with the excess of the debt carrying value over the fair value of equity securities recorded as a gain. The forgiveness of $10,300 in Senior Debt will reduce future interest expense over the term of the amended Credit Facility, and the $1,110 of fees paid to the senior lenders will be reflected as a reduction in the principal balances outstanding as required under accounting for troubled debt restructuring. The Company engaged an independent valuation firm to assist in the determination of fair value of the warrants issued in connection with the Senior Debt Restructuring and recorded this amount as additional shareholders’ equity with a corresponding reduction in the outstanding Senior Debt, with such amount recognized as a component of interest expense over the term of the Senior Debt. The net gain on financial restructuring is not classified as an extraordinary item in accordance with the recently issued SFAS No. 145.

Management’s Plans for Liquidity and Debt Compliance

     The Company experienced declining revenue and significant operating losses in 2001 and 2002, and weak economic conditions have continued in the first half of 2003. In response to the declining operating performance, the Company undertook several initiatives beginning in 2001, including the following:

•

Execution of the Exchange Transaction and the Senior Debt Restructuring discussed above, which resulted in the Company repaying approximately $37,985 of its outstanding credit facility and eliminating an additional $119,961 of its outstanding indebtedness, which will result in a substantial reduction in prospective annual interest expense;

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	•		Filing for and receiving substantial income tax refunds by carrying back current period tax losses to recover income taxes previously paid, with a substantial portion of such refunds used to reduce outstanding indebtedness;
	•		Restructuring and rationalization actions, including the reduction of approximately 12% of its permanent workforce in the first half of 2003 (17.5% for the year 2002) and ongoing rationalization of office space; and
	•		Reduction in accounts receivable with resulting cash flow used to reduce outstanding indebtedness.

     The Company’s ability to continue operating is largely dependent upon its ability to maintain compliance with the financial covenants of the Credit Facility. The financial covenants include a cumulative monthly EBITDA requirement (as defined) and a monthly interest and subordinated indebtedness coverage ratio. The amended Credit Facility defines consolidated EBITDA as consolidated net income before interest expense, income taxes, depreciation and amortization, non-cash impairment charges, restructuring and rationalization charges, professional fees relating to the debt restructuring and non-cash compensation expense for the stock options, if any. These covenants require the Company to generate EBITDA, as defined, measured on a cumulative monthly basis in the aggregate amount of $5,946 from April through December 2003. For the period through June 29, 2003, the Company has exceeded the level of earnings required in the bank covenant. Based on the Company’s fiscal 2003 and 2004 projections, which reflect declining demand for the Company’s services, offset by reductions in costs associated with the reduced revenues and resulting from personnel and office space rationalization, management believes the Company will be able to maintain compliance with the financial covenants for the remaining initial term of the Credit Facility. The Company also believes that the operating trends in the first half of 2003 support the key assumptions in its 2003 and 2004 operating plans. However, there can be no assurance that the economy or the Company will perform as expected or that further economic declines will not adversely impact the Company’s ability to comply with the financial covenants. In addition, the interest coverage ratio adjusts from an interest coverage ratio to an interest and subordinated indebtedness coverage ratio on May 31, 2004, and there can be no assurance that the Company will be able to satisfy this enhanced financial covenant if the revolving credit facility is extended beyond its current term. If the Company does violate future covenants, it would seek waivers and amendments from its lenders, but can give no assurance that any such waivers and amendments would be available at all or on acceptable terms. If the Company were unable to obtain a waiver of future covenant violations, the lenders would be entitled to require immediate repayment of all amounts outstanding under the Credit Facility. An acceleration of outstanding amounts under the Credit Facility would also cause a default under, and permit acceleration of, the Company’s remaining 5.75% Notes. In the event of one or more such defaults, the Company’s ongoing viability would be seriously threatened, and it would be forced to evaluate a number of strategic alternatives, including a further debt restructuring or other reorganization, the closure of certain operating locations or the sale of certain or all of its assets in order to continue to fund its operations. In the current economic environment, management believes that any such sale of assets would be at depressed prices that could be significantly lower than the net book value of assets sold and may not be sufficient to satisfy the Company’s liabilities.

(4)

Stock Options

     The Company has adopted Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” The Company plans to continue using the intrinsic-value method of accounting for stock-based awards granted to employees and, accordingly, does not currently recognize compensation expense for its stock-based awards to employees in the Consolidated Statements of Operations.

     The following disclosures are presented to reflect the Company’s pro forma net income (loss) for the periods ended June 29, 2003 and June 30, 2002 as if the fair value method of accounting had been used. In

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preparing these disclosures, the Company has determined the value of all stock options granted under the 1995 Stock Option Plan, which has been terminated, and the Company’s newly adopted 2003 Equity Plan using the Black-Scholes model and based on the following weighted average assumptions used for grants:

     The fair value of the stock options granted under the 2003 Equity Plan in the first half of 2003 was approximately $1,274, and no options were granted under the 1995 Stock Option Plan in the first half of 2003 as the plan was terminated. The fair value of the stock options granted under the 1995 Stock Option Plan and the Stock Purchase Plan issuances in the first half of 2002 was approximately $20. Had compensation expense been determined consistent with the fair value method, utilizing the assumptions set forth above and the straight-line amortization method over the vesting period, the Company’s net income (loss) would have been reduced to the following pro forma amounts:

(5)

Restructuring and Rationalization Charges

     The Company incurred additional restructuring and rationalization charges of $2,016 and $2,115 for the three month and six month periods ended June 29, 2003, respectively, relating principally to lease abandonment costs on closed facilities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(6)

Goodwill and Other Intangible Assets

     Effective at the beginning of 2002, the Company adopted SFAS 142. The provisions of SFAS 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require that goodwill and indefinite-lived intangibles assets be tested at least annually for impairment. In the second quarter of 2002, the Company completed its initial valuation as of the adoption date, December 31, 2001, and in the fourth quarter of 2002 completed its annual test for impairment. In order to assess the fair value of its goodwill, the Company engaged an independent valuation firm to assist in determining the fair value. The fair value of each of the Company’s two reporting units was calculated as of December 31, 2001 and December 29, 2002, on an enterprise value basis using the market multiple approach and discounted cash flow approach. Under the market multiple approach, market ratios and performance fundamentals relating to similar public companies’ stock prices or enterprise values were applied to the reporting units to determine their enterprise value. Under the discounted cash flow (“DCF”) approach, the indicated enterprise value was determined using the present value of the projected future cash flows to be generated considering appropriate discount rates. The discount rates used in the calculation reflected all associated risks of realizing the projected future cash flows. Certain of the valuation assumptions were based on management’s expectations for future performance of the Technology Services and Staffing Services reporting units. These assumptions include expected time frame of technology spending and broader economic recoveries as well as future growth rates in the Technology Services and Staffing Services businesses. A relatively high discount rate of 17% was utilized in the discounted cash flow valuation approach due principally to the inherent uncertainties associated with these assumptions.

     Based upon the results of the initial valuation, which was completed in the second quarter of 2002, the

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Company recorded a goodwill impairment charge of $284,695 ($242,497 net of an income tax benefit of $42,198) as a cumulative effect of the change in accounting principle.

     In the fourth quarter of 2002, the Company performed its annual impairment test and recorded an impairment charge of $89,935 for goodwill associated with its Technology Services operations. The Company experienced lower than expected operating profits and cash flows in 2002 for the Technology Services reporting unit. As a result of this trend and the overall industry expectations, the projected operating profits and cash flows for Technology Services operations were reduced for the next five years resulting in a reduction in the fair value of the Company’s goodwill. These projections reflect expectation of further declines in corporate information technology spending levels through 2003 with recovery beginning in 2004. The decrease in fair value resulted in the recognition of the $89,935 impairment loss. The Company’s impairment assessment as of December 29, 2002 and related impairment provision for the Technology Services division reflected the decline in the business and outlook as of that date and contemplated the completion of the financial restructuring originally agreed upon in November 2002. As the financial restructuring was completed as planned in April 2003 and the business environment in which we operate has not changed significantly from December 29, 2002, the Company presently does not expect an updated formal impairment analysis will be performed until the annual test required in the fourth quarter.

     A reconciliation of goodwill for the periods ended June 29, 2003 and December 29, 2002 is as follows:

     The following table sets forth a reconciliation of intangible assets subject to amortization, which are included in other assets on the Consolidated Balance Sheets, by intangible asset class as of June 29, 2003 and December 29, 2002:

    Non-compete agreements are amortized over a period of five years and trade names are amortized over a period of 10 years. Amortization expense for the six months ended June 29, 2003 and June 30, 2002 was $140 and $250, respectively.

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(7)

Long-term Debt

     Long-term debt consisted of the following at June 29, 2003 and December 29, 2002:

     The remaining 5.75% Notes not exchanged are due July 2004. Interest on the 5.75% Notes is payable semi-annually. The 5.75% Notes are convertible into Common Stock of the Company at any time before maturity at an initial conversion price of $445.31 per share. Beginning in July 2000, the Company was permitted to redeem the 5.75% Notes initially at 103.29% and at decreasing prices thereafter to 100% at maturity, in each case together with accrued interest. The 5.75% Notes are subordinated to all present and future senior indebtedness of the Company (as defined), including indebtedness under the Company’s Credit Facility.

     As a result of the recent completion of the Company’s financial restructuring and the execution of amendments and maturity date extensions, the Credit Facility provides for a $70,700 revolving line of credit due May 1, 2004 and is subject to certain maturity date extensions through May 1, 2005. The Company believes it will satisfy the requirements for extension beyond June 2004; therefore, the outstanding balance under the Credit Facility, which was $53,715 at June 29, 2003, was classified as long-term in the consolidated balance sheet.

     The deferred gain on financial restructuring, net is comprised of the $10,300 senior debt forgiven, offset by certain fees paid and common stock purchase warrants issued to the senior lenders. See Note 3, “Comprehensive Financial Restructuring.” The Company accounted for this transaction in accordance with Statement of Financial Accounting Standards No. 15 (“SFAS 15”), “Accounting by Debtors and Creditors for Troubled Debt Restructurings,” which requires the deferred gain on financial restructuring, net to be amortized, reducing future interest expense, over the term of the amended Credit Facility. For the quarter ended June 29, 2003, interest expense was $744, which is net of amortization of deferred gain on financial restructuring of $824. Interest rates payable under the revolving credit facility are currently set at prime plus 375 basis points through December 31, 2003.

     Four former noteholders, now significant shareholders, also are senior lenders under the Credit Facility.

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(8)

Earnings Per Share

     The following table reconciles net income (loss) and weighted average shares outstanding to the amounts used to calculate basic and diluted earnings per share for each of the periods ended June 29, 2003 and June 30, 2002:

     Net income (loss) per common share is based on the weighted average number of common and common equivalent shares (including the assumed conversion of the Company’s preferred shares) outstanding in each period. The gain on financial restructuring, net of $84,634 and $83,132 for the three months and six months ended June 29, 2003, respectively, had a $15.91 and $26.00 per share impact, respectively.

     Stock options to purchase 526,083 and 167,812 shares of Common Stock were outstanding under the 2003 Equity Plan and the 1995 Stock Option Plan during the quarters ended June 29, 2003 and June 30, 2002, respectively, but were excluded from the computation of earnings per diluted share because their effect was antidilutive. The conversion of the 5.75% Notes into 11,989 common shares was also excluded from the computation of earnings per diluted share because their effect was not material.

(9)

Segment Information:

     The Company is organized in two segments: Technology Services and Staffing Services. Technology Services provides technical staffing, training and information technology consulting services and technology tools for human capital management. Staffing Services provides temporary staffing services, placement of full-time employees and on-site management of temporary employees. The Company evaluates segment performance based on income from operations before unallocated corporate expenses, restructuring and rationalization charges, amortization of intangible assets, interest and income taxes. Because of the Company’s substantial goodwill, management does not consider total assets by segment an important management tool and, accordingly, the Company does not report this information separately. The table below presents segment information for Technology Services and Staffing Services for the periods ended June 29, 2003 and June 30, 2002:

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     The following table sets forth identifiable assets by segment at June 29, 2003 and December 29, 2002: