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Article by DailyStocks_admin    (12-27-07 04:11 AM)

The Daily Magic Formula Stock for 12/27/2007 is COMSYS IT Partners Inc. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is > 100%.

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BUSINESS OVERVIEW

Unless otherwise indicated or the context otherwise requires, all references in this report to “COMSYS,” the “Company,” “us,” “our” or “we” are to COMSYS IT Partners, Inc., a Delaware corporation formed in July 1995, and its consolidated subsidiaries. Except as otherwise specified, references to “Old COMSYS” are to COMSYS Holding, Inc., its subsidiaries and their respective predecessors prior to its merger with VTP, Inc., a wholly owned subsidiary of Venturi Partners, Inc., on September 30, 2004, which we refer to as the merger. Venturi Partners, Inc. was the surviving entity in the merger and changed its name to “COMSYS IT Partners, Inc.” Since former Old COMSYS stockholders owned a majority of our common stock upon consummation of the merger, Old COMSYS is deemed the acquirer of Venturi for accounting and financial reporting purposes. References to “Venturi” are to Venturi Partners, Inc., its subsidiaries and their respective predecessors prior to the merger, except those subsidiaries relating to Venturi’s commercial staffing business, which were sold on September 30, 2004.
Company Overview
We are a leading information technology, or IT, services company and provide a full range of specialized staffing and project implementation services and products. Our comprehensive service offerings allow our clients to focus their resources on their core businesses rather than on recruiting, training and managing IT professionals. In using our staffing services, our clients benefit from:
• our extensive recruiting channels, providing our clients ready access to highly skilled and specialized IT professionals, often within 48 hours of submitting a placement request;

• access to a flexible workforce, allowing our clients to manage their labor costs more effectively without compromising their IT goals; and

• our knowledge of the market for IT resources, providing our clients with qualified candidates at competitive prices.
We contract with our customers to provide both short- and long-term IT staffing services at client locations throughout the United States. Our consultants possess a wide range of skills and experience, including website development and integration, application programming and development, client/server development, systems software architecture and design, systems engineering and systems integration.
In addition to our core IT staffing business, we also offer our customers services that complement our staffing activities, such as:
• vendor management, in which we assist our clients in quantifying, consolidating, rationalizing and monitoring their procurement of temporary staffing and other services from multiple suppliers;

• project solutions, including custom software development and maintenance, packaged software development and network design and management; and

• recruitment and permanent placement of IT professionals.
These additional services provide us opportunities to build relationships with new clients and enhance our service offerings to our existing clients.
We had approximately 5,000 consultants on assignment at December 31, 2006. We recruit our consultants through our internal proprietary database that contains information about more than 400,000 candidates, and also through the Internet, local and national advertising and trade shows. We have a specialized selection, review and reference process for our IT consultant candidates. This process is an integral part of maintaining the delivery of high quality service to our clients.
We serve a broad and diversified customer base with over 800 corporate and government clients, including some of the largest users of IT services in the United States. These clients operate across a wide range of industry sectors, including financial services, telecommunications, manufacturing, information technology, government, pharmaceutical, transportation and health care. Our customer base includes approximately 30% of the Fortune 500 companies and approximately 68% of the Fortune 50 companies. We have long-standing relationships with many of our clients, including relationships of more than a decade with many of our large customers. We believe our diverse customer base limits the risk associated with customer concentration. In fiscal 2006, for example, none of our customers represented more than 6% of our revenues and our 15 largest customers represented approximately 39% of our revenues.

Our operations have a coast-to-coast presence in the United States, with 44 offices in 25 states and offices in Canada and the United Kingdom. This coverage allows us to meet the needs of our clients on a national basis and provides us with a competitive advantage over certain regional and local IT staffing providers.
Our History
We completed the merger of Venturi and Old COMSYS on September 30, 2004, and created one of the leading IT staffing and consulting companies in the United States. The combined company has achieved cost savings by reducing corporate overhead and other expenses. The combined company also enjoys the benefits of a broader geographic footprint and offers an expanded range of technology service offerings that we expect will make us more competitive.
Prior to the merger, Old COMSYS was one of the largest providers of IT staffing services in the United States, and its consultants provided services to a diverse customer base that included commercial clients and federal and state governmental entities. Headquartered in Houston, Texas, it operated a network of 30 offices in 20 states. Prior to the merger, Venturi was a leading provider of technology and commercial staffing services to businesses and professional and government organizations. Its technology business operated through 27 offices in 20 states. Venturi’s IT service offerings, which were similar to those offered by Old COMSYS, included technology consulting, IT staffing, IT permanent placement and vendor management services.
In connection with the merger, we changed the name of our corporation from “Venturi Partners, Inc.” to “COMSYS IT Partners, Inc.” Concurrent with the merger, we also completed the sale of Venturi’s commercial staffing services division, Venturi Staffing Partners, Inc., to CBS Personnel Services, Inc. (formerly known as Compass CS Inc.) for approximately $30.3 million in cash and the assumption of approximately $0.7 million in liabilities.
Services
Our core business is providing IT staffing services. We also strive to differentiate ourselves from our competitors by offering additional services that complement our IT staffing services, including vendor management, project solutions and recruitment and permanent placement of IT professionals.
IT Staffing Services
We provide a wide range of IT staffing services to companies in diversified vertical markets, including financial services, telecommunications, manufacturing, information technology, federal, state and local government, pharmaceutical, transportation and health care. We deliver qualified consultants and project managers for contract assignments and full-time employment across most technology disciplines. In light of the time- and location-sensitive nature of our core IT staffing services, offshore application development and maintenance centers have not to date proven critical to our operations or our competitive position.
Our staffing services are generally provided on a time-and-materials basis, meaning that we bill our clients for the number of hours worked in providing services to the client. 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. Alternatively, the bill rates for some assignments are based on a mark-up over compensation and other direct and indirect costs. Assignments generally range from 30 days to over a year, with an average duration of five months. Certain of our contracts are awarded on the basis of competitive proposals, which can be periodically re-bid by the client.
We maintain a variable cost model in which we compensate most of our consultants only for those hours that we bill to our clients. The consultants who perform IT services for our clients consist of our consultant employees as well as independent contractors and subcontractors. With respect to our consultant employees, we are responsible for all employment-related costs, including medical and health care costs, workers’ compensation and federal social security and state unemployment taxes.
Vendor Management Services
Vendor management services, or VMS, are services that allow our clients to automate and manage their procurement of and expenditures for temporary IT, clerical, finance, accounting and light-industrial personnel. The largest users of contingent workers may rely on dozens of suppliers to meet their labor needs. VMS provides a mechanism for clients to reduce their expenditures for temporary personnel services by consolidating management of the contracting processes, standardizing pay rates for similar positions and reducing the number of suppliers providing these services. VMS gives our clients the ability to leverage their purchasing power for these temporary personnel services by standardizing their requisition, contract and procurement processes. Clients also benefit from contracting with only one supplier, receiving a consolidated invoice and having a single point of contact while retaining access to a full range of resources offered by a diverse portfolio of suppliers.
We operate VMS under the brand name vWorx SM . vWorx SM provides a structured approach consisting of process management and a web-based software tool to quantify, rationalize and monitor the expenditures that a client makes for its contracted services. We use third-party software products and a proprietary software program to provide our VMS. Our VMS implementation processes have been ISO 9001:2000 certified, which means that our processes comply with a comprehensive set of international quality standards. We believe that we are one of the few companies in our industry providing vendor management services to have this ISO certification.
Project Solutions
We complement our core competency in IT staffing and consulting services by offering our clients specialized project services that include project managers, project teams and turn-key deliverable-based solutions in the application development, application integration and re-engineering, application maintenance and application testing practice areas. We have a number of specialty practice areas, including business intelligence, statistical analysis applications (SAS), enterprise resource applications (ERP), infrastructure data solutions and globalization and localization services. We provide these solutions through a defined IT implementation methodology. We deliver these solutions through teams deployed at a client’s site, offsite at development centers located in Kalamazoo, Michigan; Richmond, Virginia; Somerset, New Jersey and Portland, Oregon and, through a strategic alliance, offshore at technology centers located in India. Most of our project solutions work is also on a time-and-materials basis, but we do provide services from time to time on a fixed-price basis.
Permanent Placement
We also assist our clients in locating IT professionals for full-time positions within their organizations. We assist in recruitment efforts and screening potential hires. If a customer hires our candidate, we are generally compensated based on a percentage of the candidate’s first-year cash compensation. Billing is contingent on our filling the position and our fees are often subject to a 90-day guarantee period.
Industry Overview
We believe that the demand for IT staffing in the United States is highly correlated to economic conditions and overall employment trends and that demand will increase with an improving economy. After contraction in the IT staffing industry from late 2000 to 2002 caused by corporate overspending on IT initiatives during the late 1990s and subsequent poor economic conditions, the industry has expanded since the later half of 2003, growing by approximately 10% in both 2004 and 2005 according to an August 2006 report by Staffing Industry Analysts, Inc., or SIA, an independent, industry-recognized research group. In the August 2006 report, SIA estimated 9% growth in 2006 IT staffing services. Gartner, Inc., another independent, industry recognized research and analysis firm, forecasted a 3% growth in IT services in 2006. Vendor management services are expected to grow at a much faster pace.
SIA estimates North America IT staffing revenue in 2006 to be approximately $19.1 billion. The IT staffing industry is fragmented and highly competitive. Based on SIA data for 2005, no single provider accounted for more than 10% of total IT staffing industry revenues. The top five IT staffing providers accounted for approximately 34% of total industry revenues, up from 27% of total industry revenue in 2004. We believe the larger competitors in our industry are better positioned to increase their respective market share due, in part, to the fact that many large companies increasingly source their IT staffing and service needs from a list of preferred service providers that meet specific criteria. The criteria typically include the service provider’s (i) geographic coverage relative to the client’s locations, (ii) size and market share, which is often measured by total revenues, (iii) proven ability to quickly fill client requests with qualified candidates, and (iv) pricing structure, including discounts and rebates. As a result, we believe that further consolidation of our industry will continue.
We believe that key elements of successfully competing in the industry include maintaining a strong base of qualified IT professionals to enable quick responses to client requests (often within 48 hours) and ensuring that the candidates are an appropriate fit with the cultural and technical requirements of each assignment. Other key success factors include accurate evaluation of candidates’ technical skills, strong account management to develop and maintain client relationships and efficient and consistent administrative processes to assist in the delivery of quality services.

Competitive Strengths
We believe our competitive strengths differentiate us from our competitors and have allowed us to successfully create a sustainable and scalable national IT staffing services business. Our competitive strengths include:
Proven Track Record with a National Footprint. We believe our brand name, high quality consultant base and broad geographic presence give us a competitive advantage as corporate and governmental clients continue to consolidate their use of IT staffing providers. At December 31, 2006, we had engaged approximately 5,000 consultants. We offer a wide range of IT staffing expertise, including website development and integration, application programming and development, client/server development, systems software architecture and design, systems engineering and systems integration. Our coast-to-coast presence of 44 offices in 25 states allows us to meet the needs of our clients on a national basis, as well as build local relationships. For our large customers that have multiple IT centers in the United States, our geographic coverage allows us to provide consistent high quality service through a single point of contact.
Focus on IT Staffing Services . We believe the IT staffing industry offers a greater opportunity for higher profitability than many other commercial staffing segments because of the value-added nature of IT personnel. Unlike many of our competitors that offer several types of staffing services such as IT, finance, accounting, light industrial and clerical, we are focused on the IT sector. As a result, we are able to commit our resources and capital towards our goal of building the leading IT staffing services business in the U.S. We will; however, consider diversifying into other high-value staffing segments on an opportunistic basis.
Diversified Revenue Base With Long-Term Customer Relationships. We have over 800 corporate and government clients, including approximately 30% of the Fortune 500 companies and approximately 68% of the Fortune 50 companies. During fiscal 2006, no single client represented more than 6% of our revenues and our 15 largest clients represented approximately 39% of our revenues. Our clients operate across a broad spectrum of vertical markets, with our four largest end markets consisting of financial services, telecommunications, healthcare, and information technology. We have long-standing relationships with many of our clients, including relationships of more than a decade with many of our large customers.
Extensive Recruiting Channels and Effective Hiring Process. We believe our recruiting tools and processes and our depth of knowledge of the markets in which we operate provide us with a competitive advantage in meeting the demanding time-to-market requirements for placement of IT consultants. The placement of highly skilled personnel requires operational and technical knowledge to effectively recruit and screen personnel, match them to client needs, and develop and manage the resulting relationships. To find and place the best candidate with the applicable skill-set, we maintain a proprietary database that contains information about more than 400,000 candidates. We also recruit through the internet, local and national advertising and trade shows and we maintain two national recruiting centers. All of these resources assist us in locating qualified candidates quickly, often within 48 hours of a client placement request.
Complementary Service Offerings. We believe our complementary service offerings help us to build and enhance our relationships with new and existing clients by providing us with cross-selling opportunities for all of our service offerings. In addition to our core business of IT staffing, we offer our customers vendor management services, project solutions and permanent placement of IT professionals. We began offering vendor management services in 2000 and now provide these services to 32 clients. We believe we are one of the leading vendor management businesses in the United States. We also evaluate opportunities to expand our service offerings based on customer demand and technology needs.
Scalable Infrastructure. We have a scalable information technology and transaction processing infrastructure. 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 exchange (FOX), which facilitates the identification, qualification and placement of consultants in a timely manner. In addition, we maintain a centralized call center for scheduling sales appointments and a centralized proposals and contract services department. We believe this infrastructure will facilitate our internal growth strategy and allow us to continue to integrate acquisitions rapidly.
Business Strategy
Our goal is to become the leading provider of IT staffing and consulting services in the United States and to expand our complementary service offerings. We believe the following are key elements of our business strategy:

Expand Our Services to Our Existing Client Base. We are focused on expanding our market share in IT staffing services through greater penetration of our existing client base through cross-selling of our various service lines. We believe our brand name and proven track record with our clients will allow us to become an increasingly significant preferred IT staffing provider to our clients. In order to facilitate our cross-selling opportunities, in 2006, we implemented our “storefront model” across our existing branch network wherein each branch offers all of our service lines. We believe that the storefront model will accelerate our ability to provide additional services, such as vendor management and project solutions, to our existing clients.
Increase Our Customer Base within Our Existing Markets. We are focused on increasing our customer base by capitalizing on our broader geographic footprint and expanded range of services resulting from our merger with Venturi. We also plan to continue developing new customer relationships by leveraging our national and local sales forces through our 44 branch offices in the United States. We believe our reputation as a high quality provider of IT staffing services in our existing markets positions us to grow our share in certain of these markets with limited incremental fixed costs.
Expand Our Geographic Presence. We opened three new offices in 2006 and seek opportunities to expand our national presence by adding additional offices in 2007. New office expansion will enable us to reach new clients or provide our services to existing clients in other locations where we have not previously served them. In particular, we continue to evaluate expansion to other cities in the United States where we believe the competitive dynamics would be favorable and we could enter with limited investment.
Focus on Managed Solutions and Higher-Skills Staffing Opportunities. We plan to continue focusing on the practice areas in our managed solutions group and on placements that require more highly skilled IT professionals, which typically generate higher bill rates and margins. We also remain committed to identifying emerging information technology applications that have the potential to generate substantial demand and yield high margins.
Attract and Retain Highly Skilled Consultants. We believe one of the keys to our success is our ability to attract and retain highly skilled consultants. To achieve this, we seek projects that provide our consultants the opportunity to work on complex applications or to learn new technologies. Our client profile, including approximately 30% of the Fortune 500, is also attractive to professionals with more advanced skill sets. We monitor the IT consultant market continuously and offer competitive compensation and benefits. In addition, we continue to expand our online training offerings to our consultants and also provide consultant resource managers, who assist our consultants in their career development and help maintain a positive work environment.
Further Improve Operating Efficiency. We strive to continuously improve our efficiency in key business processes, especially in our sales and recruiting areas and our front and back office systems infrastructure. We also believe we can further improve our management of working capital. We believe that improvement in our business processes can contribute to further operating leverage while improving our service delivery to our clients.
Capitalize on Strategic Acquisition Opportunities. We look for acquisition targets that provide us the opportunity to expand our services to new geographic markets, add new clients to our existing customer base or add new IT practice areas to our existing capabilities. In addition, we believe strategic acquisitions can enhance our internal growth through cross-selling opportunities that can expand our market share and enhance our profitability by capitalizing on our scalable infrastructure. More recently, we have begun to consider entering into other high-value staffing segments through acquisitions. We believe our operating platform enables us to integrate acquisitions efficiently while reducing corporate overhead and other expenses.
Sales and Marketing
We employ a centralized sales and marketing strategy that focuses on both national and local accounts. The marketing strategy is implemented on both national and local levels through each of our branch offices. At the national level, we focus on attaining preferred supplier status with Fortune 500 companies, a status that would make us one of a few approved service providers to those companies. An integral part of our marketing strategy at the national level is the use of our account management professionals who generally have over five years of experience in our industry. Their industry experience makes them capable of understanding our clients’ business strategies and IT staffing requirements. We are also supported by:
• centralized proposals and contract services departments;

• a strategic accounts group;

• a candidate sourcing operation for larger, high-volume clients that obtain contract IT professionals primarily through procurement departments;

• a centralized outbound call center for scheduling sales appointments with key contacts at prospective clients;

• a project solutions sales force;

• a vendor management sales force; and

• national recruiting centers for sourcing IT professionals located in the United States.
All of these assist in the development of responses to requests for proposals from large accounts and support our efforts in new client development activity.
Local accounts are targeted through account managers at the branch office level, permitting us to capitalize on the established local expertise and relationships of our branch office employees. These accounts are solicited through personal sales presentations, telephone and e-mail marketing, direct mail solicitation, referrals and advertising in a variety of local and national media. Although local offices retain flexibility with regard to local customer and employee issues, these offices adhere to company-wide policies and procedures and a set of best practices designed to ensure quality standards throughout the organization. Local employees are encouraged to be active in civic organizations and industry trade groups to facilitate the development of new customer relationships and develop local contacts with technology user groups for referral of specific technology skills.
Local office employees report to a managing director who is responsible for day-to-day operations and the profitability of the office. Managing directors report to regional vice presidents. Regional vice presidents have substantial autonomy in making decisions regarding the operations in their respective regions, although sales activities directed toward strategic accounts are coordinated at a national level.
Our company-wide compensation program for account managers and recruiters is intended to provide incentives for higher margin business. A significant component of compensation for account managers and recruiters is commissions, which increase significantly for placements with higher gross profit contribution.
Employees and Consultants
Of our approximately 5,000 consultants on assignment at December 31, 2006, approximately 70% were employee consultants and approximately 30% were subcontractors and independent contractors. In addition, as of December 31, 2006, we had 797 permanent staff employees consisting primarily of management, administrative staff, account managers and recruiters. None of our employees are covered by collective bargaining agreements, and management believes that our relationships with our employees are good.
We recruit our consultants through both centralized and decentralized recruiting programs. Our recruiters use our internal proprietary database (FOX), the internet, local and national advertisements and trade shows. FOX is an integrated, web-based sales and recruiting application that we developed. The interactive system maintains a current database containing information about more than 400,000 candidates, including their skills, education, desired work location and other employment-related information. The system enables us to scan, process and store thousands of resumes, making it easier for recruiters to identify, qualify and place consultants in a timely manner. FOX also allows billable consultants to electronically review and apply for job openings. In addition, we use our national recruiting center in Houston, Texas for sourcing IT professionals located in the U.S. This center enhances our local recruitment effort by providing additional resources to meet clients’ critical timeframes and broadening our capability to deliver resources in areas of the country where no local office exists. We also recruit qualified candidates through our candidate referral program, which pays a referral fee to eligible individuals responsible for attracting new recruits that are successfully placed by us on an assignment.
We have a specialized selection, review and reference process for our IT consultant candidates that is an integral part of maintaining the delivery of high quality service to our clients. This process includes interviewing each candidate to allow us to assess whether that individual will be an appropriate match for a client’s business culture and performing reference checks. We also conduct a technical competency review of each candidate to determine whether the consultant candidate has the technical capabilities to successfully complete the client assignment. Our technical assessment will often include a formal technology skills assessment through an automated software product. We also undertake additional reviews, including more detailed background checks, at the request of our clients.
In an effort to attract a broad spectrum of qualified billable consultants, we offer a wide variety of employment options and training programs. Through our training and development department, we offer an online training platform to our consultants. This program includes over 900 self-paced IT and business-related courses and eight technical certification paths in course areas such as software development, enterprise data systems, internet and network technologies, web design, project management, operating systems, server technologies and business-related skills. We believe these training initiatives improve consultant recruitment and retention, increase the technical skills of our personnel and result in better service for our clients.

We also provide consultant resource managers to assist our consultants in their career development and help maintain a positive work environment.
Competition
We operate in a highly competitive and fragmented industry. There are relatively few barriers to entry into our markets, and the IT staffing industry is served by thousands of competitors, many of which are small, local operations. There are also numerous large national and international competitors that directly compete with us, including TEKsystems, Inc., Ajilon Consulting, MPS Group, Inc., Kforce Inc., Spherion Corporation, CDI Corp. and Analysts International Corp. Some of our competitors may have greater marketing and financial resources than us.
The competitive factors in obtaining and retaining clients include, among others, an understanding of client-specific job requirements, the ability to provide appropriately skilled information technology consultants in a timely manner, the monitoring of job performance quality and the price of services. The primary competitive factors in obtaining qualified candidates for temporary IT assignments are wages, the technologies that will be utilized, the challenges that an assignment presents, the timing of availability of assignments and the types of clients and industries that will be serviced. We believe our nationwide presence, strength in recruiting and account management and the broad range of customers and industries to which we provide services make us highly competitive in obtaining and retaining clients and recruiting highly qualified consultants.
Regulation
IT staffing firms are generally subject to one or more of the following types of government regulation: (1) regulation of the employer/employee relationship between a firm and its employees, including tax withholding or reporting, social security or retirement, benefits, workplace compliance, wage and hour, anti-discrimination, immigration and workers’ compensation; (2) registration, licensing, record keeping and reporting requirements; and (3) federal contractor compliance.
Trademarks
We believe the COMSYS ® name is extremely valuable and important to our business. We endeavor to protect our intellectual property rights and maintain certain trademarks, trade names, service marks and other intellectual property rights, including vWorx SM . We also license certain other proprietary rights in connection with our businesses. We are not currently aware of any infringing uses or other conditions that would be reasonably likely to materially and adversely affect our use of our proprietary rights.
Seasonality
Our business can be affected by the seasonal fluctuations in corporate IT expenditures. Generally, expenditures are lowest during the first quarter of the year when our clients are finalizing their IT budgets. In addition, our quarterly results may fluctuate depending on, among other things, the number of billing days in a quarter and the seasonality of our clients’ businesses. Our business is also affected by the timing of holidays and seasonal vacation patterns, generally resulting in lower revenues and gross margins in the fourth quarter of each year. Extreme weather conditions may also affect demand in the first and fourth quarters of the year as certain of our clients’ facilities are located in geographic areas subject to closure or reduced hours due to inclement weather. In addition, we experience an increase in our cost of sales and a corresponding decrease in gross profit and gross margin in the first fiscal quarter of each year as a result of resetting certain state and federal employment tax rates and related salary limitations.

CEO BACKGROUND

Larry L. Enterline, age 54. Mr. Enterline was re-appointed as our Chief Executive Officer effective February 2, 2006. Mr. Enterline had previously served as our Chief Executive Officer from December 2000, when our Company was known as Venturi Partners, Inc., until September 30, 2004, when we completed our merger with COMSYS Holding, Inc. He has served as a member of our Board of Directors since December 2000 and served as Chairman of the Board of Directors from December 2000 until the merger. Prior to joining our Company, Mr. Enterline served in a number of senior management positions at Scientific-Atlanta, Inc. from 1989 to 2000, the last of which was Corporate Senior Vice President for Worldwide Sales and Service. He also held management positions in the marketing, sales, engineering and products areas with Bailey Controls Company and Reliance Electric Company from 1974 to 1989. Mr. Enterline also serves on the boards of directors of Raptor Networks Technology, Inc. and Concurrent Computer Corporation.
Frederick W. Eubank II, age 43. Mr. Eubank has served as a director since the completion of the merger in September 2004 and as Chairman of the Board of Directors since November 2006. Mr. Eubank joined Wachovia Capital Partners (formerly First Union Capital Partners), an affiliate of Wachovia Investors and Wachovia Corporation, in 1989 and currently serves as its Chief Investment Officer. Prior to joining Wachovia Capital Partners, Mr. Eubank was a member of Wachovia’s specialized industries group. Mr. Eubank also serves on the board of directors of CapitalSource Inc.
Robert Fotsch, age 48. Mr. Fotsch has served as a director since July 2006. From 1996 to 2005, Mr. Fotsch served as Chief Executive Officer of Strategic Outsourcing, Inc., a professional employer organization company. Mr. Fotsch’s prior experience also included service as Chief Executive Officer (from 1992 until 1995) and Chief Operating Officer (from 1988 until 1992) of Home Innovations, Inc., a textile company. Prior to joining Home Innovations, Inc., Mr. Fotsch held management positions with Electronic Data Systems, Inc. and General Motors Corporation.
Robert Z. Hensley, age 49. Mr. Hensley has served as a director since November 2006. Mr. Hensley served from 1990 to 2002 as an audit partner, and from 1997 to 2002 as office managing partner, for the Nashville office of Arthur Andersen LLP. From 2002 to 2003, he was an audit partner in the Nashville office of Ernst & Young LLP. He currently serves on the boards of directors and audit committees of HealthSpring, Inc., Advocat, Inc. and Spheris, Inc.
Victor E. Mandel, age 42. Mr. Mandel has served as a director since April 2003. Since 2001, Mr. Mandel has served as founder and managing member of Criterion Capital Management, an investment company. Mr. Mandel also serves as a senior consultant to The Corporate Library (a leading provider of corporate governance information and analytics) integrating investment analysis with corporate governance research. From May 1999 to November 2000, Mr. Mandel was Executive Vice President-Finance and Development of Snyder Communications, Inc., with operating responsibility for its publicly-traded division Circle.com. From June 1991 to May 1999, Mr. Mandel was a Vice President in the Investment Research department at Goldman Sachs & Co. covering emerging growth companies.
Courtney R. McCarthy, age 31 . Ms. McCarthy has served as a director since July 2006. Prior to joining our Board of Directors, Ms. McCarthy served as a Board observer from the completion of the merger in September 2004 to July 2006. Ms. McCarthy joined Wachovia Capital Partners in 2000, where she currently serves as a Vice President, focusing on investments in the financial services and healthcare industries. From 1997 to 2000, Ms. McCarthy served as an associate and analyst in Wachovia’s Leveraged Capital Group where she focused on mezzanine and equity investments and on “one-stop” financings for leveraged transactions.

Elias J. Sabo, age 36. Mr. Sabo has served as a director since April 2003. Since 1998, Mr. Sabo has served as a founding partner at The Compass Group International LLC. Prior to joining Compass, Mr. Sabo worked in the acquisition department for Colony Capital, a Los Angeles-based real estate private equity firm, from 1992 to 1996 and as a healthcare investment banker for CIBC World Markets (formerly Oppenheimer & Co.) from 1996 to 1998.

SHARE OWNERSHIP

Larry L. Enterline owns 380,949 shares
Joseph C. Tusa, Jr owns 190,094 shares
David L. Kerr owns 185,678 shares
Michael H. Barker owns 135,572 shares
Ken R. Bramlett, Jr. owns 98,500 shares
Robert Z. Hensley owns 5,000 shares
Victor E. Mandel owns 9,000 shares
Elias J. Sabo owns 1,147,637 shares


COMPENSATION

Robert Fotsch has given compensation of $ 96,000 in 2006
Ted A. Gardner has given compensation of $ 46,000 in 2006
Robert Z. Hensley has given compensation of $ 105,067 in 2006
Victor E. Mandel has given compensation of $ 76,484 in 2006
Kevin M. McNamara has given compensation of $ 78,483 in 2006

MANAGEMENT DISCUSSION FROM LATEST 10K

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report. 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 “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this report. For accounting purposes, the merger of Old COMSYS with Venturi was treated as a reverse merger in which Old COMSYS was deemed to be the acquirer. The financial data and discussion and analysis set forth below relating to all periods prior to the merger on September 30, 2004 reflect the historical results of Old COMSYS. The financial data and discussion and analysis set forth below relating to periods subsequent to September 30, 2004 reflect financial results of COMSYS after giving effect to the merger and include Venturi’s results of operations from the effective date of the merger. The historical data presented below is not indicative of future results.
Our Business
Our mission is to become the leading provider of IT staffing services in the United States. We intend to continue pursuing 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 budgets;

• penetration of IT staffing in the general workforce;

• outsourcing of the IT workforce; and

• consolidation of supplier bases.
We anticipate our growth will be primarily generated from greater penetration of our service offerings with our current clients, introducing new service offerings to our customers and obtaining new clients. Our strategy for achieving this growth includes expanding our geographic presence, cross-selling our vendor management solutions and project solutions services to existing IT staffing customers, aggressively marketing our services to new clients, expanding our range of value-added services, enhancing brand recognition and making strategic acquisitions.
The success of our business depends primarily on the volume of assignments we secure, the bill rates for those assignments, the costs of the consultants that provide the services and the quality and efficiency of our recruiting, sales and marketing and administrative functions. Our brand name, our proven track record, our recruiting and candidate screening processes, our strong account management team and our efficient and consistent administrative processes are factors that we believe are key to the success of our business. Factors outside of our control, such as the demand for IT services, general economic conditions and the supply of qualified IT professionals, will also affect our success.
Our revenue is primarily driven by bill rates and billable hours. Most of our billings for our staffing and project solutions services are on a time-and-materials basis, which means we bill our customers based on pre-agreed bill rates for the number of hours that each of our consultants works on an assignment. Hourly bill rates are typically determined based on the level of skill and experience of the consultants assigned and the supply and demand in the current market for those qualifications. General economic conditions, macro IT 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 70% 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 IT 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 exchange (FOX) 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.
Historically, Old COMSYS’ fiscal year ended on December 31 st , while Venturi’s fiscal year ended on the Sunday closest to December 31 st . In connection with the merger, we adopted Venturi’s fiscal year-end. Accordingly, our fiscal year-end for 2006, 2005 and 2004 was December 31, 2006, January 1, 2006 and January 2, 2005, respectively.
Overview of 2006 Results
Our three stated priorities for 2006 were internal growth, focus on our balance sheet and pursuit of selected acquisitions. We made the following progress against each during the year.
Our revenues grew 11.3% in 2006 from 2005. 2006 includes a full year of revenue from our fourth quarter 2005 acquisition of Pure Solutions. Revenue per billing day increased approximately $0.3 million, from $2.6 million in 2005 to $2.9 million in 2006. Growth was strong in all of our service lines. In our staffing service line, our average headcount grew and we improved billing rates and spreads, all of which contributed to revenue and gross margin growth. We ended the year at approximately 5,000 billable consultants, which was unchanged from the end of 2005. This was due to greater than expected seasonal fall-off at several of our larger clients related to budget constraints and holiday shut-downs.
Our managed solutions service line had strong growth during 2006, and we now have over $1 billion of annualized spend in our vendor management service line. We continue to emphasize our SAP and SAS service offerings and were selected as a SAP Services Partner in the fourth quarter of 2006.
Although permanent placement revenues were strong in 2006, this remains a smaller service line for us by design. We do believe the strength in the permanent placement portion of the market supports the expectation that the current economic expansion has some longevity.
In addition to strong revenue growth, we increased our gross margin from 23.6% in 2005 to 24.3% in 2006, or $22.6 million, due to the increased spreads in staffing, the addition of Pure Solutions, and the growth in managed solutions and permanent placement activity. Selling, general and administrative expenses increased by $15.3 million from 2005 to 2006, but as a percentage of revenues rose only from 18.1% to 18.4%. Approximately one-third of the dollar increase was in commissions paid out due to the revenue growth. The remainder was primarily due to compensation costs, including payments under incentive-based plans primarily for our operations management and Company officers, severance for our former CEO and General Counsel and stock-based compensation. We implemented SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), in the beginning of 2006, and the impact of the adoption of this pronouncement is discussed herein and in the footnotes to our financial statements included elsewhere in this report.

Our second priority was to continue our focus on the balance sheet, with a view towards streamlining operations, improving working capital management and improving our financial flexibility. We were successful in completing the transition of our long-term debt into a traditional lower cost asset-based arrangement. The details of the changes in our financings are discussed below under Liquidity and Capital Resources. The interest savings these transactions will generate are significant. We increased cash flow from operating activities from $14.8 million in 2005 to $46.5 million in 2006 due to the increase in net income and improved working capital management. Our net income for 2006 included a tax refund and related interest of $6.4 million, which was used to pay down debt. Under the terms of our credit facilities, all cash flow generated by our operations net of approved capital spending levels and acquisition costs are used to pay down our debt balances. Our total debt at the end of the year was $98.5 million, down from $142.3 million at the end of 2005 and $148.1 million at our seasonal peak at the end of the first quarter of 2006. There are seasonal increases in our debt levels during the first quarter of each year; however, we expect to make further reductions against our debt in 2007. Management of accounts receivable was the driver in our improved working capital. We decreased our days sales outstanding from 48 days at the end of 2005 to 43 days at the end of 2006 due primarily to the collection of old balances and improved timeliness and accuracy of billings. Our vendor management services have grown and our accounts receivable related to this service line at the end of the year was approximately $73.0 million. The associated revenue is recorded on a net basis and was approximately $6.0 million in the fourth quarter of 2006.
Our third priority was to continue to pursue selected acquisitions. Our sector is still highly fragmented, and we expect to use the acquisition process to add market share or extend our service lines. We did not complete any acquisitions during 2006 as we continued to be very selective in choosing the opportunities we might pursue. We are continuing to look for opportunities that will allow us to expand our scale, add complementary service offerings to our managed solutions group or potentially diversify into other high-value staffing markets.
2007 Outlook
As we enter 2007, we plan on keeping our priorities straightforward. We will continue to keep internal growth at the top of our list, and will focus on sales, marketing and recruiting to our core customer base and on adding new customers throughout the year. We are also evaluating several new markets for one or more additional new offices in 2007. Continuing improvements in efficiency will also be a priority, and we expect to devote considerable attention to process improvements, especially in sales and recruiting and in our front and back offices, and on achieving improvements in working capital management. And lastly, we will continue to look for acquisitions that meet our criteria, which may include entering into other high-value staffing segments.
We have benefited from low book tax rates and minimal cash income tax related payments for some time now, and we do not expect them to last indefinitely if we continue to be profitable.
The Merger
On September 30, 2004, Old COMSYS completed a merger transaction with Venturi, a publicly traded IT and commercial staffing company, in which COMSYS Holding, Inc. was merged with a wholly owned subsidiary of Venturi. Concurrent with the merger, we sold Venturi’s commercial staffing business for $30.3 million in cash and the assumption of approximately $0.7 million in liabilities. At the effective time of the merger, we changed our name to COMSYS IT Partners, Inc. and issued new shares of our common stock to the stockholders of Old COMSYS, resulting in such stockholders owning approximately 55.4% of our outstanding common stock at that time on a fully diluted basis. Since former Old COMSYS stockholders owned a majority of our outstanding common stock upon consummation of the merger, Old COMSYS was deemed the acquiring company for accounting and financial reporting purposes. We have completed the integration of the legacy businesses of Old COMSYS and Venturi.

Year Ended December 31, 2006 Versus Year Ended January 1, 2006
We recorded operating income of $34.7 million and net income of $21.0 million in 2006 compared to operating income of $22.2 million and net income of $2.1 million in 2005. The increase in operating income was due primarily to an increase in gross margin and our acquisition of Pure Solutions in October 2005, partially offset by increases in cost of services and selling, general and administrative expenses, as discussed above in “ Overview of 2006 Results .”
Revenues. Revenues for 2006 and 2005 were $736.6 million and $661.7 million, respectively, representing an increase of 11.3%. The increase was due to increased demand for IT services, which led to higher levels of billable consultant placements and utilization. Vendor management related fee revenue increased 76.2% to $25.0 million in 2006 from $14.2 million in 2005 due to the expansion and implementation of vendor management programs in response to increasing demand for such services among Fortune 500 companies. Average bill rates were slightly higher in 2006 than in 2005 reflecting the easing of bill rate pressures, particularly among smaller clients, as economic conditions continued to improve. Bill rate pressures continue to exist, particularly among Fortune 500 clients. Our revenue growth was driven primarily by our clients in the financial services and telecommunications industry sectors, which were our two largest sectors. Revenues from the financial services sector increased by 13.4% in 2006 from 2005. Revenues from the telecommunications sector increased by 25.6% over the same period.
Cost of Services . Cost of services for 2006 and 2005 were $557.6 million and $505.2 million, respectively, representing an increase of 10.4%. The increase was due to increases in labor costs and related expenses, which increased as a result of growth in the business. Cost of services as a percentage of revenue decreased slightly from 76.4% in 2005 to 75.7% in 2006. The decrease in cost of services as a percentage of revenue was primarily due to revenues increasing at a faster rate than the costs related to various labor expenses such as pay rates for consultants, state unemployment taxes and health care expenses.
Selling, General and Administrative Expenses . Selling, general and administrative expenses in 2006 and 2005 were $135.7 million and $120.4 million, respectively, representing an increase of 12.7%. Included in these amounts are $3.3 million and $1.8 million of stock-based compensation, respectively. The increase in total selling, general and administrative expenses was due primarily to: (i) certain investments we made in new staff positions to expand our sales and delivery efforts and higher levels of accruals for performance incentives and commissions as our financial performance improved; (ii) a $1.9 million charge for severance payments related to the departure of two executive officers; (iii) a charge of approximately $0.6 million related to the transition of our internal IT staff to our customer service center in Phoenix, AZ; and (iv) a charge of approximately $0.3 million related to the effect of a change in accounting for our commissions and certain employer related payroll taxes in connection with adopting Securities and Exchange Commission Staff Accounting Bulletin No. 108. As a percentage of revenue, selling, general and administrative expenses increased slightly to 18.4% in 2006 from 18.1% in 2005.
Stock-based compensation expense in 2006 was $3.3 million. At December 31, 2006, we had two types of stock-based employee compensation: stock options and restricted stock. Prior to January 2, 2006, we accounted for these awards under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“Opinion 25”) and related Interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). No stock-based compensation expense related to stock options was recorded in periods prior to January 2, 2006, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. All stock-based compensation expense recorded prior to January 2, 2006, related to restricted stock grants. We measure the fair value of restricted shares based upon the closing market price of our 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. Effective January 2, 2006, we adopted the fair value recognition provisions of SFAS 123(R) using the modified-prospective transition method. Under that transition method, compensation cost recognized in 2006 included: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The straight-line recognition method is used to recognize compensation expense associated with share-based payments that are subject to graded vesting based on service conditions. Results for prior periods have not been restated.
Restructuring and Integration Costs . Restructuring and integration costs for 2005 were $4.8 million. The expenses represent integration, restructuring and transition costs associated with the merger with Venturi, comprised primarily of expenses related to duplicative leases, redundant headcount, severance arrangements, asset write-offs and integration services provided by third parties.

Depreciation and Amortization . Depreciation and amortization expense consists primarily of depreciation of our fixed assets and amortization of our customer base intangible assets. For 2006 and 2005, depreciation and amortization expense was $8.7 million and $9.1 million, respectively, representing a decrease of 3.9% between periods. The decline was the result of a lower asset amortization base as a result of an intangible asset that became fully amortized during the first half of 2005.
Interest Expense. Interest expense was $15.5 million and $17.3 million in 2006 and 2005, respectively, a decrease of 10.1% that was due to a reduction in interest payments due to our overall debt reduction during 2006 and a reduction in our mandatorily redeemable preferred stock dividends. SFAS 150 requires that dividends on mandatorily redeemable preferred stock be recorded as interest expense. As a result, interest expense includes dividends and amortization of stock issuance costs in the amount of $0 in 2006 and $3.5 million in 2005. This stock was fully redeemed in December 2005 with proceeds from the sale of our common stock.
Net interest expense on borrowings under our credit facilities, which includes amortization of related debt issuance costs, was $15.5 million in 2006 compared to $14.3 million in 2005. The increase was due to higher interest rates on our variable rate debt and an increase in borrowings under higher rate term loans, partially offset by interest income of $0.6 million related to a federal income tax refund received. See “Liquidity and Capital Resources.”
Provision for Income Taxes . Income tax expense in 2006 includes taxes that would have been paid absent the utilization of acquired net deferred tax assets from the Venturi merger and a provision for income taxes related to our United Kingdom operation. As of December 31, 2006, we had combined state and federal net operating loss carryforwards of approximately $290.8 million and had recorded a reserve against the assets for net operating loss carryforwards due to the
uncertainty related to the realization of these amounts. In 2006, we received a $6.4 million income tax refund related to the carryback of 2002 net operating losses and related interest that we did not previously anticipate and resulting from a change in legislation that allowed us to carry back a portion of our 2002 net operating loss to prior years. As a result, the valuation allowance for deferred tax assets was reduced and a $5.8 million income tax benefit was recognized in the consolidated statement of operations. The remaining $0.6 million was recorded as interest income in the statement of operations.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

We recorded operating income of $32.8 million and net income of $24.7 million in the nine months ended September 30, 2007, compared to operating income of $25.6 million and net income of $15.9 million in the nine months ended October 1, 2006. The increase in operating income was due primarily to increases in revenues and gross margin and a decrease in depreciation and amortization.
Revenues. Revenues for the nine months ended September 30, 2007, and the nine months ended October 1, 2006, were $560.0 million and $551.9 million, respectively, representing an increase of 1.5%. Reimbursable expense revenue declined from $11.7 million in the nine months ended October 1, 2006, to $7.8 million in the nine months ended September 30, 2007, primarily due to lower consultant-related expenses at one major customer. This decline had no impact on gross margin dollars as the related reimbursable expense was recognized in the same period. Although average staffing headcount was down in the first nine months of 2007 as compared to the 2006 period, increases in bill rates raised staffing revenue up slightly. We do continue to see bill rate pressures from our customers, particularly among Fortune 500 clients. Vendor management related fee revenue increased 4.3% to $20.8 million in the nine months ended September 30, 2007, from $19.9 million in the nine months ended October 1, 2006, due to the expansion and implementation of vendor management programs in response to increasing demand for such services. Revenues from the pharmaceutical and biotechnology sector increased by 22% in the nine months ended September 30, 2007, from the nine months ended October 1, 2006. This increase was partially offset by a 42% decrease in revenues from the telecommunications sector over the same period.
Cost of Services . Cost of services for the nine months ended September 30, 2007, and the nine months ended October 1, 2006, were $420.9 million and $418.2 million, respectively, representing an increase of 0.6%. The increase was due to increases in labor costs and related expenses, which increased as a result of growth in our business. We have seen an increase in our average pay rates in 2007 over 2006; however our bill rates have increased slightly more than the increase in our pay rates. Reimbursable expenses declined as noted in the Revenues section. In addition, we started to realize system fee expense reduction as a result of our Econometrix acquisition in March 2007. This reduction in cost of services from the system fee savings is partially offset by higher depreciation costs on the Econometrix software, which is recorded in depreciation and amortization. Cost of services as a percentage of revenue decreased to 75.2% in the nine months ended September 30, 2007, from 75.8% in the nine months ended October 1, 2006. The decrease in cost of services as a percentage of revenue was primarily due to the increase in revenues in our vendor management service line and permanent placement fees.
Selling, General and Administrative Expenses . Selling, general and administrative expenses in the nine months ended September 30, 2007, and the nine months ended October 1, 2006, were $101.6 million in each period. Included in these amounts are $3.8 million and $2.6 million of stock-based compensation, respectively. Additionally, the nine months ended October 1, 2006, included $1.9 million in severance-related expenses to two former officers. As a percentage of revenue, selling, general and administrative expenses decreased slightly to 18.1% in the nine months ended September 30, 2007, from 18.4% in the nine months ended October 1, 2006.
Depreciation and Amortization . Depreciation and amortization expense consists primarily of depreciation of our fixed assets and amortization of our customer base intangible assets. For the nine months ended September 30, 2007, and the nine months ended October 1, 2006, depreciation and amortization expense was $4.7 million and $6.5 million, respectively, representing a decrease of 28.1% between periods. The reduction in depreciation and amortization expense was the result of a large asset becoming fully depreciated at the end of 2006 along with lower levels of capital expenditures, partially offset by the depreciation of the Econometrix software and the amortization of the Plum Rhino customer list intangible.
Interest Expense, Net. Interest expense, net was $6.7 million and $12.4 million in the nine months ended September 30, 2007, and October 1, 2006, respectively, a decrease of 45.8%. The decrease was due to our overall debt reduction during 2006 and the interest rate reductions.
Provision for Income Taxes. Income tax expense in the nine months ended September 30, 2007, is the result of the release of part of the valuation allowance on Venturi’s acquired net deferred tax assets from the merger, a provision for alternative minimum tax on U.S. taxable income and foreign income taxes on our profitable foreign operations, net of an income tax benefit due to a change in tax law related to the Texas margin tax. The income tax benefit for the nine months ended October 1, 2006, is the result of a federal income tax refund of $5.8 million, net of the impact of release of the valuation allowance on acquired net deferred tax assets from the merger and a provision for foreign income taxes related to our profitable foreign operations. The federal income tax refund resulted from legislation that allowed us to carry back a portion of our 2002 net operating loss to prior years. The refund resulted from a loss carryback to periods prior to the current ownership of the Company.
As of September 30, 2007, we had combined state and federal net operating loss carryforwards of approximately $217.7 million and had recorded a reserve against the assets for net operating loss carryforwards due to the uncertainty related to the realization of these amounts. As a result of our Section 382 analysis related to the merger of Old COMSYS and Venturi, which may have been an ownership change as defined by the Internal Revenue Code, our federal and state net operating losses were reduced by approximately $0.7 million and $44.4 million, respectively, during the first quarter of 2007.

Liquidity and Capital Resources
Overview
We have historically financed our operations through cash from operations, the issuance of common stock and borrowings under our credit facilities. Due to the requirements of our revolving credit facility, as discussed in more detail below under the “Cash Flows” section, we do not maintain a significant cash balance. Excess borrowing availability under our revolving credit facility at September 30, 2007, was $78.2 million. We believe our cash flow provided by operating activities coupled with existing cash balances and availability under our revolving credit facility will be sufficient to fund our working capital, debt service and purchases of fixed assets through fiscal 2007. In the event that we make acquisitions, we may need to seek additional capital from our lenders or the capital markets; there can be no assurance that additional capital will be available when we need it, or, if available, that it will be available on favorable terms.
The performance of our business is dependent on many factors and subject to risks and uncertainties. See “Risks Related to Our Business” and “Risk Related to Our Indebtedness” under “Risk Factors” included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
Credit Agreements and Related Covenants
On December 14, 2005, we entered into a senior credit agreement with Merrill Lynch Capital and a syndicate of lenders to replace the senior credit facility and the second lien term loan. The senior credit agreement provided for a two-year term loan of $10.0 million, which was funded on December 14, 2005, and which was scheduled to be repaid in eight equal quarterly principal installments commencing on March 31, 2006, and a revolving credit facility of up to $120.0 million, maturing on March 31, 2010. At the same time, we borrowed $100.0 million under a second lien term loan credit agreement with Merrill Lynch Capital and a syndicate of lenders, which was scheduled to mature on October 31, 2010. Our total funded debt under these credit agreements on December 14, 2005, was approximately $150.9 million, consisting of: (i) $10.0 million under the senior term loan; (ii) approximately $40.9 million under the revolving credit facility; and (iii) $100.0 million under the second lien term loan. The proceeds from these borrowings were used to repay all outstanding borrowings under the prior credit facilities with Merrill Lynch Capital and the syndicate of lenders. We recorded a $2.2 million loss on early extinguishment of debt in the fourth quarter of 2005 related to this transaction that resulted from the write-off of certain unamortized deferred financing costs.
We made the first scheduled principal payment on the senior term loan in the first quarter of 2006. In May 2006, we received a federal income tax refund, which, with interest, totaled $6.4 million. We used all of this cash to pay down the principal balance of the senior term loan. Under the terms of the senior credit agreement, this principal payment reduced the scheduled quarterly payments to $0.3 million, and we paid the first of these reduced payments in the second quarter of 2006.
On September 15, 2006, the senior credit agreement and second lien term loan credit agreement were amended. Among other things, the amendments provided for (i) an increase in our borrowing capacity under our revolving credit facility to $145.0 million from $120.0 million and (ii) an increase in the senior term loan to $10.0 million from $2.1 million, which was the principal balance prior to the amendments. We used borrowings under the amended senior credit agreement to prepay $70.0 million of the outstanding principal amount of the $100.0 million second lien term loan. The amendments also included a provision allowing us to prepay the $30.0 million balance of the second lien term loan with the proceeds from an offering of common stock completed on or before December 31, 2007. We incurred charges of approximately $2.6 million in the third quarter of 2006 related to the early repayment on the second lien term loan, the write-off of certain deferred financing costs and certain expenses incurred in connection with this refinancing, of which $2.5 million was recorded as a loss on early extinguishment of debt and $0.1 million was included in interest expense. In addition, we capitalized certain costs of this refinancing of approximately $0.5 million in the third quarter of 2006.
On December 15, 2006, the senior credit agreement was further amended. Among other things, the amendments provided for (i) an increase in our borrowing capacity under our revolving credit facility to $160.0 million from $145.0 million and (ii) the early payoff of the remaining $30.0 million balance of the second lien term loan. We incurred charges of approximately $0.9 million in the fourth quarter of 2006 related to the early repayment of the second lien term loan, the write-off of certain deferred financing costs and certain expenses incurred in connection with this refinancing, of which $0.7 million was recorded as a loss on early extinguishment of debt and $0.2 million was included in interest expense. In addition, we capitalized approximately $0.1 million of costs associated with this refinancing in the fourth quarter of 2006.

In connection with our Econometrix acquisition in March 2007, we further amended the senior credit facility to add Econometrix as an additional credit party under the agreement.
In connection with our purchase of the issued and outstanding membership interest of Plum Rhino in May 2007, we further amended the senior credit facility to add Plum Rhino as an additional credit party under the agreement and to increase the aggregate amount permitted for acquisitions from $10 million to $50 million.
The term loan and revolving credit loans bear interest at the prime rate plus a margin that can range from 0.75% to 1.00%, or, at our option, LIBOR plus a margin that can range from 1.75% to 2.00%, each depending on our total debt to adjusted EBITDA ratio. We pay a quarterly commitment fee of 0.5% per annum of the unused portion of the revolving credit facility and fees for each letter of credit issued under the facility. We and certain of our subsidiaries guarantee the loans and other obligations under the senior credit agreement. The obligations under the senior credit agreement and the related guaranties 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. Prior to our December 15, 2006, refinancing, our interest rates for the revolving credit facility were the prime rate plus a margin that could range from 1.25% to 1.50%, or, at our option, LIBOR plus a margin that could range from 2.25% to 2.50%, each depending on our total debt to adjusted EBITDA ratio. The senior term loan interest rates were the prime rate plus a margin that could range from 1.75% to 2.00%, or, at our option, LIBOR plus a margin that could range from 2.75% to 3.00%, each depending upon our total debt to adjusted EBITDA ratio.
Borrowings under the revolving credit facility are limited to 85% of eligible accounts receivable, as defined in the senior credit agreement and related amendments, reduced by the amount of outstanding letters of credit and designated reserves. At September 30, 2007, these designated reserves were comprised of a minimum availability reserve of $5.0 million, a $2.7 million reserve for outstanding letters of credit and a reserve for the Pure Solutions acquisition of $2.5 million. At September 30, 2007, we had outstanding borrowings under the revolving credit facility of $66.5 million at interest rates ranging from 7.51% to 8.50% per annum (weighted average rate of 7.62%) and excess borrowing availability of $78.2 million for general corporate purposes. Fees paid on outstanding letters of credit are equal to the LIBOR margin then applicable to the revolver, which at September 30, 2007, was 1.75%. The principal balance of the senior term loan on that date was $6.25 million with an interest rate of 6.99%. The senior term loan is scheduled to be repaid in eight equal quarterly principal installments, the third of which was made on September 28, 2007.
Debt Compliance
Our ability to continue operating is largely dependent upon our ability to maintain compliance with the financial covenants of our credit facilities. The senior credit agreement contains customary covenants, including the maintenance of a fixed charge coverage ratio and a total debt to adjusted EBITDA ratio, as defined in the senior credit agreement and related amendments. The senior credit agreement also places restrictions on our ability to enter into certain transactions without the approval of the lenders, such as the payment of dividends, disposition and acquisition of assets and the assumption of contingent obligations. The senior credit agreement provides for mandatory prepayments under certain circumstances. We have not paid cash dividends in the past and currently have no intention of paying them in the future. As of September 30, 2007, we were in compliance with all covenant requirements and we believe we will be able to comply with these covenants throughout 2007.
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. If an event of default occurs, 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 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 these credit facilities is automatic.

Interest Rate Swap and Cap
We have historically been subject to market risk on all or a part of our borrowings under bank credit lines, which have variable interest rates. Effective February 22, 2005, we entered into an interest rate swap and an interest rate cap, which we terminated October 6, 2006. The swap agreement and cap agreement were contracts to effectively exchange variable interest rate payments for fixed rate payments over the life of the instruments. The notional amount was used to measure interest to be paid or received and did not represent the exposure to credit loss. The purpose of the swap and cap was to limit exposure to increases in interest rates on the notional amount of bank borrowings over the term of the swap and cap. The swap was based on a $20.0 million notional amount at a rate of 4.59% and the cap was based on a $20.0 million notional amount at a rate of 4.50%.
At January 1, 2006, the interest rate swap and cap were recorded at fair value, based on an amount estimated by Merrill Lynch Capital, which represents the amount that Merrill Lynch Capital would have paid us at January 1, 2006, if the swap and cap had been terminated at that date. The combined net fair value at January 1, 2006, was $0.5 million, which was included in our consolidated balance sheet in noncurrent assets. Effective with the repayment of our debt on December 14, 2005, the expected cash flows that the swap and cap were designated to hedge against were no longer probable. As a result, the swap and the cap were no longer designated as cash flow hedges for accounting purposes. As a result, amounts previously recorded in accumulated other comprehensive income associated with changes in fair value of the hedges were reversed to interest expense. Changes in fair value of the swap and cap were recorded in the statement of operations subsequent to December 14, 2005. We recorded $0.5 million as a reduction of interest expense in the fourth quarter of 2005. On October 6, 2006, we cancelled the swap and cap agreements and received a cash settlement of $0.5 million, which was recorded as a reduction to interest expense in the consolidated statement of operations.

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