UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
__
/X / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For The Three Months Ended January 30, 2005.
Or
__
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________________ to
Commission File No. 1-9232
VOLT INFORMATION SCIENCES, INC.
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(Exact name of registrant as specified in its charter)
New York 13-5658129
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 704-2400
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
---
Indicate by check mark whether Registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes X No
---
The number of shares of the Registrant's common stock, $.10 par value,
outstanding as of March 4, 2005 was 15,323,555.
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Three Months Ended January 30, 2005 and February 1, 2004 3
Condensed Consolidated Balance Sheets -
January 30, 2005 and October 31, 2004 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended January 30, 2005 and February 1, 2004 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
Item 4. Controls and Procedures 43
PART II - OTHER INFORMATION
Item 6. Exhibits 45
SIGNATURE 45
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
------------------------------
January 30, February 1,
2005 2004(a)
------------ ------------
(Restated)
(In thousands, except
per share amounts)
NET SALES $497,835 $413,959
COSTS AND EXPENSES:
Cost of sales 468,173 389,848
Selling and administrative 20,824 18,905
Depreciation and amortization 7,500 6,155
-------- --------
496,497 414,908
-------- --------
OPERATING INCOME (LOSS) 1,338 (949)
OTHER INCOME (EXPENSE):
Interest income 560 229
Other expense-net (1,016) (745)
Foreign exchange (loss) gain-net (162) 24
Interest expense (512) (457)
-------- --------
Income (loss) before minority interest and income
taxes 208 (1,898)
Minority interest (1,494) -
-------- --------
Loss before income taxes (1,286) (1,898)
Income tax benefit 478 745
-------- --------
NET LOSS ($808) ($1,153)
======== ========
Per Share Data
--------------
Basic and Diluted:
Net loss per share ($0.05) ($0.08)
======== ========
Weighted average number of shares 15,291 15,222
======== ========
(a) As previously announced, the Company has restated its previously issued
financial statements for fiscal years 2000 through the second quarter of
fiscal 2004 as a result of inappropriate application of accounting
principles for revenue recognition by its telephone directory publishing
operation in Uruguay. The restatement involved only the timing of when
certain advertising revenue and related costs and expenses are recognized,
and the cumulative results of the Company did not change. Accordingly,
sales have been increased by $1.3 million and the net loss has been reduced
by $0.4 million, or $0.02 per share, for the first fiscal quarter of 2004.
See accompanying notes to condensed consolidated financial statements.
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January October
30, 2005 31, 2004(a)
------------ ------------
ASSETS (Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents including restricted
cash of $32,544 (2005) and $43,722 (2004) $86,164 $88,031
Short-term investments 3,943 4,248
Trade accounts receivable less allowances of
$10,587 (2005) and $10,210 (2004) 389,887 409,130
Inventories 32,736 32,676
Recoverable income taxes 2,563 -
Deferred income taxes 9,488 9,385
Prepaid expenses and other assets 13,352 14,847
------------ ------------
TOTAL CURRENT ASSETS 538,133 558,317
Investment in securities 131 100
Property, plant and equipment-net 83,742 85,038
Deposits and other assets 1,486 1,439
Goodwill 29,144 29,144
Other intangible assets-net of accumulated
amortization of $564 (2005) and $288 (2004) 15,722 15,998
------------ ------------
TOTAL ASSETS $668,358 $690,036
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $7,384 $7,955
Current portion of long-term debt 408 399
Accounts payable 179,287 192,163
Accrued wages and commissions 49,053 54,200
Accrued taxes other than income taxes 22,236 17,729
Other accruals 32,024 36,036
Deferred income and other liabilities 36,766 36,909
Income tax payable - 4,270
------------ ------------
TOTAL CURRENT LIABILITIES 327,158 349,661
Accrued insurance 79 86
Long-term debt 15,511 15,588
Deferred income taxes 11,258 11,764
Minority interest 37,914 36,420
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--
500,000 shares; issued--none
Common stock, par value $.10; Authorized--
30,000,000 shares; issued-- 15,319,430 shares
(2005) and 15,282,625 shares (2004) 1,532 1,528
Paid-in capital 43,273 42,453
Retained earnings 231,906 232,714
Accumulated other comprehensive loss (273) (178)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 276,438 276,517
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $668,358 $690,036
============ ============
(a) The balance sheet at October 31, 2004 has been derived from the audited
financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
------------------------------
January 30, February 1,
2005 2004
------------ ------------
(Restated)
(Dollars in thousands)
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES
Net loss ($808) ($1,153)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation and amortization 7,500 6,155
Accounts receivable provisions 1,516 1,017
Minority interest 1,494
Loss (gain) on dispositions of fixed assets 27 (110)
Loss on foreign currency translation 42 16
Deferred income tax (benefit) provision (573) 96
Changes in operating assets and liabilities:
Accounts receivable 28,536 26,172
Reduction in securitization of accounts receivable (10,000) (5,000)
Inventories (60) 2,798
Prepaid expenses and other current assets 1,554 1,881
Other assets (46) 255
Accounts payable (13,180) (19,097)
Accrued expenses (4,716) 1,703
Deferred income and other liabilities (245) 1,932
Income taxes payable (6,834) (1,275)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,207 15,390
------------ ------------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Three Months Ended
------------------------------
January 30, February 1,
2005 2004
------------ ------------
(Restated)
(Dollars in thousands)
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES
Sales of investments $600 $314
Purchases of investments (176) (154)
Proceeds from disposals of property, plant and
equipment 919 314
Purchases of property, plant and equipment (6,798) (7,956)
------------ ------------
NET CASH APPLIED TO INVESTING ACTIVITIES (5,455) (7,482)
------------ ------------
CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (95) (90)
Exercise of stock options 824 43
(Decrease) increase in notes payable to banks (767) 8
------------ ------------
NET CASH APPLIED TO FINANCING ACTIVITIES (38) (39)
------------ ------------
Effect of exchange rate changes on cash (581) 315
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,867) 8,184
Cash and cash equivalents, including restricted
cash, beginning of period 88,031 62,057
------------ ------------
CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED
CASH, END OF PERIOD $86,164 $70,241
============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $528 $461
Income taxes $6,791 $681
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X and, therefore, do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Company's consolidated financial position at January 30, 2005 and consolidated
results of operations and consolidated cash flows for the three months ended
January 30, 2005 and February 1, 2004.
As previously reported, the Company has restated its previously issued financial
statements for fiscal years 2000 through the second quarter of fiscal 2004 as a
result of inappropriate application of accounting principles for revenue
recognition by its telephone directory publishing operation in Uruguay. The
operation in Uruguay printed and distributed its Montevideo directory each year
during the October - November time frame, and the Company has determined that
revenue should have been recognized in the first six months of each year instead
of in the fourth quarter of the prior fiscal year. The restatement involves only
the timing of when certain advertising revenue and related costs and expenses
are recognized, and the cumulative results of the Company do not change. All
prior year information included in these financial statements has been restated
to reflect the corrected information.
The Company has elected to follow Accounting Principles Board ("APB") Opinion
25, "Accounting for Stock Issued to Employees," to account for its Non-Qualified
Stock Option Plan under which no compensation cost is recognized because the
option exercise price is equal to at least the market price of the underlying
stock on the date of grant. Had compensation cost for these plans been
determined at the grant dates for awards under the alternative accounting method
provided for in Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123," net income and earnings per share, on a
pro forma basis, would have been:
Three Months Ended
------------------
January 30, 2005 February 1, 2004
---------------- ----------------
(Restated)
(In thousands, except per share amounts)
Net loss as reported ($808) ($1,153)
Pro forma compensation expense, net of taxes (31) (39)
-------- --------
Pro forma net loss ($839) ($1,192)
======== ========
Pro forma net loss per share-basic and diluted ($0.05) ($0.08)
======== ========
The fair value of each option grant is estimated using the Multiple
Black-Scholes option pricing model, with the following weighted-average
assumptions used for grants in the first quarter of fiscal 2004: risk-free
interest rates of 2.5%; expected volatility of .51; an expected life of the
options of five years; and no dividends. The weighted-average fair value of
stock options granted during first quarter of fiscal 2004 was $11.49. There were
no options granted in the first quarter of fiscal 2005.
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R, "Share-Based Payment," which replaces the superseded SFAS No. 123,
"Accounting for Stock-Based Compensation." This Statement requires that all
entities apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees and suppliers when the entity
acquires goods or services. The provisions of this Statement are effective as of
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note A--Basis of Presentation--Continued
the beginning of the first interim or of this Statement are effective as of the
beginning of the first interim or annual reporting period that begins after June
15, 2005, with early adoption of this Statement permitted for any interim period
whose financial statements are not yet issued. The Company is currently
assessing the impact that the adoption will have on the Company's consolidated
financial position and results of operations.
These statements should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended October 31, 2004. The accounting policies used in preparing these
financial statements are the same as those described in that Report. The
Company's fiscal year ends on the Sunday nearest October 31.
Note B--Securitization Program
The Company has a $150.0 million accounts receivable securitization program
("Securitization Program"), which matures in April 2006. Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A. and unaffiliated with the Company, an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company (subject to a maximum purchase by TRFCO in the
aggregate of $150.0 million). The Company retains the servicing responsibility
for the accounts receivable. At January 30, 2005, TRFCO had purchased from Volt
Funding a participation interest of $60.0 million out of a pool of approximately
$231.2 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company. Accounts
receivable are only reduced to reflect the fair value of receivables actually
sold. The Company entered into this arrangement as it provided a low-cost
alternative to other financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors. TRFCO has no recourse to
the Company (beyond its interest in the pool of receivables owned by Volt
Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the condensed consolidated balance sheet (no debt is recorded) and the proceeds
from the sale are reflected as cash provided by operating activities. Losses and
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note B--Securitization Program--Continued
expenses associated with the transactions, primarily related to discounts
incurred by TRFCO on the issuance of its commercial paper, are charged to the
consolidated statement of operations.
The Company incurred charges, related to the Securitization Program, of $0.5
million and $0.4 million in the first quarters of fiscal 2005 and fiscal 2004
respectively, which are included in Other Expense on the condensed consolidated
statement of operations. The equivalent cost of funds in the Securitization
Program were 3.8% per annum and 2.3% per annum in the first quarters of fiscal
2005 and fiscal 2004, respectively. The Company's carrying retained interest in
the receivables approximated fair value due to the relatively short-term nature
of the receivable collection period. In addition, the Company performed a
sensitivity analysis, changing various key assumptions, which also indicated
that the retained interest in receivables approximated fair values.
At January 30, 2005 and October 31, 2004, the Company's carrying retained
interest in a revolving pool of receivables of approximately $231.2 million and
$248.7 million, respectively, net of a service fee liability was approximately
$170.7 million and $178.2 million, respectively. The outstanding balance of the
undivided interest sold to TRFCO was $60.0 million and $70.0 million at January
30, 2005 and October 31, 2004, respectively. Accordingly, the trade accounts
receivable, included on the January 30, 2005 and October 31, 2004 balance sheets
have been reduced to reflect the participation interest sold of $60.0 million
and $70.0 million, respectively.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold or the Company failing to maintain a long-term
debt rating of "B" or better, or the equivalent thereof, from a nationally
recognized rating organization. At January 30, 2005, the Company was in
compliance with all requirements of the Securitization Program.
Note C--Inventories
Inventories of accumulated unbilled costs and materials by segment are as
follows:
January 30, October 31,
2005 2004
----------- -----------
(Dollars in thousands)
Telephone Directory $10,296 $11,313
Telecommunications Services 15,978 14,505
Computer Systems 6,462 6,858
------- -------
Total $32,736 $32,676
======= =======
The cumulative amounts billed under service contracts at January 30, 2005 and
October 31, 2004 of $20.0 million and $13.9 million, respectively, are credited
against the related costs in inventory.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE D--Short-Term Borrowings
In April 2004, the Company amended its $40.0 million, secured, syndicated,
revolving credit agreement ("Credit Agreement") which was to expire in April
2004, to, among other things, extend the term for 364 days (to now expire in
April 2005) and reduce the line to $30.0 million, as a result of the increase in
its Securitization Program (see Note B). Additionally, in July 2004, this
program was further amended to release Volt Delta Resources, LLC ("Volt Delta")
as a guarantor and collateral grantor under the Credit Agreement due to the
previously announced agreement between Volt Delta and Nortel Networks Inc.
("Nortel Networks"). At January 30, 2005, the Company had credit lines with
domestic and foreign banks which provided for borrowings and letters of credit
up to an aggregate of $41.7 million, including $30.0 million under the Credit
Agreement.
The Credit Agreement established a credit facility ("Credit Facility") in favor
of the Company and designated subsidiaries, of which up to $15.0 million may be
used for letters of credit. Borrowings by subsidiaries are limited to $25.0
million in the aggregate. The administrative agent for the secured Credit
Facility is JP Morgan Chase Bank. The other banks participating in the Credit
Facility are Mellon Bank, NA, Wells Fargo, NA and Lloyds TSB Bank PLC.
Borrowings and letters of credit under the Credit Facility are limited to a
specified borrowing base, which is based upon the level of specified
receivables, generally at the end of the fiscal month preceding a borrowing. At
January 30, 2005, $28.5 million was available under the borrowing base formula
of which $2.8 million was borrowed.
Borrowings under the Credit Facility are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the Company's long-term debt rating provided by a
nationally recognized rating agency. Based upon the Company's leverage ratio and
debt rating at January 30, 2005, if a three-month U.S. Dollar LIBO rate were the
interest rate option selected by the Company, borrowings would have borne
interest at the rate of 3.3% per annum. At January 30, 2005, the facility fee
was 0.3% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock repurchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ending as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At January 30, 2005, the Company was in compliance with all
covenants in the Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are now guarantors of
all loans made to the Company or to subsidiary borrowers under the Credit
Facility. At January 30, 2005, four of those guarantors have pledged
approximately $49.1 million of accounts receivable, other than those in the
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE D--Short-Term Borrowings--Continued
receivable, other than those in the Securitization Program, as collateral for
the guarantee obligations. Under certain circumstances, other subsidiaries of
the Company also may be required to become guarantors under the Credit Facility.
At January 30, 2005, the Company had total outstanding foreign currency bank
borrowings of $7.4 million, $2.8 million of which were under the Credit
Agreement. These bank borrowings provide a hedge against devaluation in foreign
currency denominated assets.
NOTE E--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
January 30, October 31,
2005 2004
----------- -----------
(Dollars in thousands)
8.2% term loan (a) $14,033 $14,130
Payable to Nortel Networks(b) 1,886 1,857
------- -------
15,919 15,987
Less amounts due within one year 408 399
------- -------
Total long-term debt $15,511 $15,588
======= =======
(a) In September 2001, a subsidiary of the Company entered into a $15.1 million
loan agreement with General Electric Capital Business Asset Funding
Corporation. Principal payments have reduced the loan to $14.0 million at
January 30, 2005. The 20-year loan, which bears interest at 8.2% per annum
and requires principal and interest payments of $0.4 million per quarter,
is secured by a deed of trust on certain land and buildings that had a
carrying amount at January 30, 2005 of $10.4 million. The obligation is
guaranteed by the Company.
(b) Represents the present value of a $2.0 million payment due to Nortel
Networks in February 2006, discounted at 6% per annum, as required in an
agreement closed on August 2, 2004.
NOTE F--Stockholders' Equity
Changes in the major components of stockholders' equity for the three months
ended January 30, 2005 are as follows:
Common Paid-In Retained
Stock Capital Earnings
-------- -------- --------
(In thousands)
Balance at October 31, 2004 $1,528 $42,453 $232,714
Stock options exercised - 36,805 shares 4 820
Net loss for the three months (808)
-------- -------- --------
Balance at January 30, 2005 $1,532 $43,273 $231,906
======== ======== ========
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE F--Stockholders' Equity--Continued
Another component of stockholders' equity, the accumulated other comprehensive
loss, consists of cumulative unrealized foreign currency translation losses, net
of taxes, of $328,000 and $214,000 at January 30, 2005 and October 31, 2004,
respectively, and an unrealized gain, net of taxes, of $55,000 and $36,000 in
marketable securities at January 30, 2005 and October 31, 2004, respectively.
Changes in these items, net of income taxes, are included in the calculation of
comprehensive loss as follows:
Three Months Ended
--------------------------------
January 30, February 1,
2005 2004
----------- -----------
(Restated)
(In thousands)
Net loss ($808) ($1,153)
Foreign currency translation adjustments-net (114) 40
Unrealized gain (loss) on marketable securities-net 19 (15)
-------- --------
Comprehensive loss ($903) ($1,128)
======== ========
NOTE G--Per Share Data
In calculating basic earnings per share, the dilutive effect of stock options is
excluded. Diluted earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding and the assumed exercise of
dilutive outstanding stock options based on the treasury stock method.
Three Months Ended
--------------------------------
January 30, February 1,
2005 2004
----------- -----------
Denominator for basic and diluted earnings per share -
Weighted average number of shares 15,291,166 15,221,626
Options to purchase 490,373 and 571,773 shares of the Company's common stock
were outstanding at January 30, 2005 and February 1, 2004, respectively but were
not included in the computation of diluted earnings per share because the effect
of inclusion would have been antidilutive.
NOTE H--Segment Disclosures
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the three months ended January 30,
2005 and February 1, 2004, included on page 27 of this Report, is an integral
part of these condensed consolidated financial statements. During the three
months ended January 30, 2005, consolidated assets decreased by $21.7 million
primarily due to a decrease in receivables of the Staffing Service and
Telecommunication Service segments offset by a decrease in the amount of the
receivable interest sold under the Securitization Program.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE I--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts, foreign currency options and exchange contracts, are recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting, and
if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are
recorded in income along with the portions of the changes in the fair values of
the hedged items that relate to the hedged risks. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in other comprehensive income, net of deferred taxes.
Changes in fair values of derivatives not qualifying as hedges are reported in
the results of operations. At January 30, 2005, the Company had outstanding
foreign currency option and forward contracts in the aggregate notional amount
equivalent to $5.8 million, which approximated its net investment in foreign
operations and is accounted for as a hedge under SFAS No. 52.
Included in cash and cash equivalents at January 30, 2005 and October 31, 2004
were approximately $32.5 million and $43.7 million, respectively, restricted to
cover obligations that were reflected in accounts payable at such dates. These
amounts primarily relate to contracts with customers in which the Company
manages the customers' alternative staffing requirements, including the payment
of associate vendors.
NOTE J--Acquisition and Sales of Businesses and Subsidiaries
On August 2, 2004, Volt Delta, a wholly-owned subsidiary of the Company, closed
a Contribution Agreement (the "Contribution Agreement") with Nortel Networks
under which Nortel Networks contributed certain of the assets (consisting
principally of a customer base and contracts, intellectual property and
inventory) and certain specified liabilities of its directory and operator
services ("DOS") business to Volt Delta in exchange for a 24% minority equity
interest in Volt Delta. Together with subsidiaries, Volt Delta is reported as
the Company's Computer Systems segment. Volt Delta is using the assets acquired
from Nortel Networks to enhance the operation of its DOS business. The
acquisition allows Volt Delta to provide the newly combined customer base with
new solutions, an expanded suite of products, content and enhanced services. As
a result of this transaction, approximately 155 DOS business employees in North
America joined VoltDelta.
In addition, the companies entered into a ten-year relationship agreement to
maintain the compatibility and interoperability between future releases of
Nortel Networks' Traffic Operator Position System ("TOPS") switching platform
and Volt Delta's IWS/MWS operator workstations and associated products. Nortel
Networks and Volt Delta will work together developing feature content and
release schedules for, and to ensure compatibility between, any TOPS changes
that require a change in Volt Delta's products or workstations.
Also, on August 2, 2004, the Company and certain subsidiaries entered into a
Members' Agreement (the "Members' Agreement") with Nortel Networks which defined
the management of Volt Delta and the respective rights and obligations of the
equity owners thereof. The Members' Agreement provides that commencing two years
from the date thereof, Nortel Networks may exercise a put option or Volt Delta
may exercise a call option, in each case to affect the purchase by Volt Delta of
Nortel Networks' minority interest in Volt Delta ("Contingent Liability"). If
either party exercises its option between the second and third year from the
date of the Members' Agreement, the price paid to Nortel Networks for its 24%
minority equity interest will be the product of the revenue of Volt Delta for
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE J--Acquisition and Sales of Businesses and Subsidiaries--Continued
the twelve-month period ended as of the fiscal quarter immediately preceding the
date of option exercise (the "Volt Delta Revenue Base") multiplied by 70% of the
enterprise value-to-revenue formula index of specified comparable companies
(which index shall not exceed 1.8), times Nortel Networks' ownership interest in
Volt Delta (the amount so calculated would not exceed 30.24% of the Volt Delta
Revenue Base), with a minimum payment of $25.0 million and a maximum payment of
$70.0 million. Based on the pro forma financial results of Volt Delta for the
year ended January 30, 2005, the Contingent Liability for this put/call would be
$47.7 million at January 30, 2005. If the option is exercised after three years
from the date of the Members' Agreement, the price paid will be a mutually
agreed upon amount.
The Company engaged an independent valuation firm to assist in the determination
of the purchase price (the value of the 24% equity interest in Volt Delta) of
the acquisition and its allocation. The preliminary allocation was completed in
the fourth quarter of fiscal 2004, subject to finalization of certain
adjustments.
The assets and liabilities of the acquired business are accounted for under the
purchase method of accounting at the date of acquisition, recorded at their fair
values, with the recognition of a minority interest to reflect Nortel Networks'
24% investment in Volt Delta. The results of operations have been included in
the Consolidated Statements of Operations since the acquisition date.
Preliminary Purchase Allocation
Fair Value of Assets Acquired and Liabilities Assumed
-----------------------------------------------------
(In thousands)
Cash $3,491
Inventories 1,551
Deposit and other assets 404
Goodwill 20,162
Intangible assets 15,900
-------
Total assets $41,508
=======
Accrued wages and commissions $700
Other accrued expenses 2,189
Other liabilities 2,791
Long-term debt 1,828
Minority interest 34,000
-------
Total liabilities $41,508
=======
The other intangible assets represent the fair value of customer relationships
($15.1 million) and product technology ($0.8 million), and are being amortized
over 16 years and 10 years, respectively. Since the members' interests in Volt
Delta are treated as partnership interests, the tax deduction for amortization
will not commence until the Contingent Liability is final and determined.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE K--Goodwill and Other Intangibles
Goodwill and other intangibles with indefinite lives are no longer amortized,
but are subject to annual testing using fair value methodology. An impairment
charge is recognized for the amount, if any, by which the carrying value of an
indefinite-life intangible asset exceeds its fair value. The test for goodwill,
which is performed in the Company's second fiscal quarter, primarily uses
comparable multiples of sales and EBITDA and other valuation methods to assist
the Company in the determination of the fair value of the goodwill and the
reporting units measured.
The following table represents the balance of other intangible assets subject to
amortization:
January 30, October 31,
2005 2004
----------- -----------
(Dollars in thousands)
Other intangible assets $16,286 $16,286
Accumulated amortization 564 288
------- -------
Net Carrying Value $15,722 $15,998
======= =======
Note L--Primary Insurance Casualty Program
The Company is insured with a highly rated insurance company under a program
that provides primary workers' compensation, employer's liability, general
liability and automobile liability insurance under a loss sensitive program. In
certain mandated states, the Company purchases workers' compensation insurance
through participation in state funds and the experience-rated premiums in these
state plans relieve the Company of additional liability. In the loss sensitive
program, initial premium accruals are established based upon the underlying
exposure, such as the amount and type of labor utilized, number of vehicles,
etc. The Company establishes accruals utilizing actuarial methods to estimate
the undiscounted future cash payments that will be made to satisfy the claims,
including an allowance for incurred-but-not-reported claims. This process also
includes establishing loss development factors, based on the historical claims
experience of the Company and the industry, and applying those factors to
current claims information to derive an estimate of the Company's ultimate
premium liability. In preparing the estimates, the Company also considers the
nature and severity of the claims, analyses provided by third party actuaries,
as well as current legal, economic and regulatory factors. The insurance
policies have various premium rating plans that establish the ultimate premium
to be paid. Adjustments to premium are made based upon the level of claims
incurred at a future date up to three years after the end of the respective
policy period. At January 30, 2005 and October 31, 2004, the Company's liability
for the outstanding plan years was $4.5 and $8.3 million, respectively.
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
--------------------------
This report and other reports and statements issued by the Company and its
officers from time to time contain certain "forward-looking statements." Words
such as "may," "should," "likely," "could," "seek," "believe," "expect,"
"anticipate," "estimate," "project," "intend," "strategy," "design to," and
similar expressions are intended to identify forward-looking statements about
the Company's future plans, objectives, performance, intentions and
expectations. These forward-looking statements are subject to a number of known
and unknown risks and uncertainties including, but are not limited to, those set
forth below under "Factors That May Affect Future Results." Such risks and
uncertainties could cause the Company's actual results, performance and
achievements to differ materially from those described in or implied by the
forward-looking statements. Accordingly, readers should not place undue reliance
on any forward-looking statements made by or on behalf of the Company. The
Company does not assume any obligation to update any forward-looking statements
after the date they are made.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY'S BUSINESS IS DEPENDENT UPON GENERAL ECONOMIC, COMPETITIVE AND OTHER
BUSINESS CONDITIONS INCLUDING THE EFFECTS OF THE UNITED STATES AND EUROPEAN
ECONOMIES AND OTHER GENERAL CONDITIONS, SUCH AS CUSTOMERS OFF-SHORING ACTIVITIES
TO OTHER COUNTRIES.
The demand for the Company's services in all segments is dependent upon general
economic conditions. Accordingly, the Company's business tends to suffer during
economic downturns. In addition, in the past few years major United States
companies, many of which are customers of the Company, have increasingly
outsourced business to foreign countries with lower labor rates, less costly
employee benefit requirements and fewer regulations than the United States.
There could be an adverse effect on the Company if customers and potential
customers move manufacturing and servicing operations off-shore, reducing their
need for temporary workers within the United States. It is also important for
the Company to diversify its pool of available temporary personnel to offer
greater support to the service sector of the economy and other businesses that
have more difficulty in moving off-shore. In addition, the Company's other
segments may be adversely affected if they are required to compete from the
Company's United States based operations against competitors based in such other
countries. Although the Company has begun to expand its operations to certain
additional countries, in a limited manner and to serve existing customers, in
such countries, and has established subsidiaries in some foreign countries,
there can be no assurance that this effort will be successful or that the
Company can successfully compete with competitors based overseas or who have
established foreign operations.
The Company's business is dependent upon the continued financial strength of its
customers. Customers that experience economic downturns or other negative
factors are less likely to use the Company's services.
In the staffing services segment, a weakened economy results in decreased demand
for temporary and permanent personnel. When economic activity slows down, many
of the Company's customers reduce their use of temporary employees before they
reduce the number of their regular employees. There is less need for contingent
workers by all potential customers, who are less inclined to add to their costs.
Since employees are reluctant to risk changing employers, there are fewer
openings and reduced activity in permanent placements as well. In addition,
while in many fields there are ample applicants for available positions,
variations in the rate of unemployment and higher wages sought by temporary
workers in certain technical fields particularly characterized by labor
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
--------------------------------------
shortages, could affect the Company's ability to meet its customers' demands in
these fields and the Company's profit margins. The segment has also experienced
margin erosion caused by increased competition, electronic auctions and
customers leveraging their buying power by consolidating the number of vendors
with whom they deal. In addition, increased payroll and other taxes, some of
which the Company is unable to pass on to customers, place pressure on margins.
Customer use of the Company's telecommunications services is similarly affected
by a weakened economy in that some of the Company's customers reduce their use
of outside services in order to provide work to their in-house departments and,
in the aggregate, because of the current downturn in the telecommunications
industry and continued overcapacity, there is less available work. In addition,
the reduction in telecommunications companies' capital expenditure projects
during the current economic climate has significantly reduced the segment's
operating margins and minimal improvement can be expected until the industry
begins to increase its capital expenditures. Recent actions by major
long-distance telephone companies regarding local residential service and
consolidation in the telecommunications industry could also negatively impact
both sales and margins of the segment. Despite an emphasis on cost controls, the
results of the segment continue to be affected by the decline in capital
spending by telephone companies caused by the depressed conditions within the
segment's telecommunications industry customer base which has also increased
competition for available work, pressuring pricing and gross margins throughout
the segment. The continued delay in telecommunications companies' capital
expenditure projects has significantly reduced the segment's revenue and
resulted in continuing operating losses. A return to material profitability will
be difficult until the industry begins to increase its capital expenditures.
Additionally, the degree and timing of customer acceptance of systems and of
obtaining new contracts and the rate of renewals of existing contracts, as well
as customers' degree of utilization of the Company's services, could adversely
affect the Company's businesses.
MANY OF THE COMPANY'S CONTRACTS EITHER PROVIDE NO MINIMUM PURCHASE REQUIREMENTS
OR ARE CANCELABLE DURING THE TERM.
In all segments, many of the Company's contracts, even those master service
contracts whose duration spans a number of years, provide no assurance of any
minimum amount of work that will actually be available under any contract. Most
staffing services contracts are not sole source, so the segment must compete for
each placement at the customer. Similarly many telecommunications master
contracts require competition in order to obtain each individual work project.
In addition, many of the Company's long-term contracts contain cancellation
provisions under which the customer can cancel the contract, even if the Company
is not in default under the contract. Therefore, these contracts do not give the
assurances that long-term contracts typically provide.
THE COMPANY'S STAFFING SERVICES BUSINESS AND ITS OTHER SEGMENTS SUBJECT IT TO
EMPLOYMENT-RELATED AND OTHER CLAIMS.
The Company's staffing services business employs individuals on a temporary
basis and places them in a customer's workplace. The Company's ability to
control the customer workplace is limited, and the Company risks incurring
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
--------------------------------------
liability to its employees for injury or other harm that they suffer at the
customer's workplace. Although the Company has not historically suffered
materially for such harm suffered by its employees, there can be no assurance
that future claims will not materially adversely affect the Company.
Additionally, the Company risks liability to its customers for the actions of
the Company's temporary employees that may result in harm to the Company's
customers. Such actions may be the result of negligence or misconduct on the
part of the Company's employees. These same factors apply to all of the
Company's business units, although the risk is reduced where the Company itself
controls the workplace. Nevertheless, the risk is present in all segments.
The Company may incur fines or other losses and negative publicity with respect
to any litigation in which it becomes involved. Although the Company maintains
insurance for many such actions, there can be no assurance that its insurance
will cover future actions or that the Company will continue to be able to obtain
such insurance on acceptable terms, if at all.
NEW AND INCREASED GOVERNMENT REGULATION COULD HAVE A MATERIAL ADVERSE EFFECT ON
THE COMPANY'S BUSINESS, ESPECIALLY ITS CONTINGENT STAFFING BUSINESS.
Certain of the Company's businesses are subject to licensing and regulation in
many states and certain foreign jurisdictions. Although the Company has not had
any difficulty complying with these requirements in the past, there can be no
assurance that the Company will continue to be able to do so, or that the cost
of compliance will not become material. Additionally, the jurisdictions in which
we do or intend to do business may:
o create new or additional regulations that prohibit or restrict the types of
services that we currently provide;
o impose new or additional employee benefit requirements, thereby increasing
costs that may not be able to be passed on to customers or which would
cause customers to reduce their use of the Company's services, especially
in its staffing services segment, which would adversely impact the
Company's ability to conduct its business;
o require the Company to obtain additional licenses to provide its services;
or
o increase taxes (especially payroll and other employment related taxes) or
enact new or different taxes payable by the providers of services such as
those offered by the Company, thereby increasing costs, some of which may
not be able to be passed on to customers or which would cause customers to
reduce their use of the Company's services, especially in its staffing
services segment, which would adversely impact the Company's ability to
conduct its business.
In addition, certain private and governmental entities have focused on the
contingent staffing industry in particular and, in addition to their potential
to impose additional requirements and costs, they and their supporters could
cause changes in customers' attitudes toward the use of outsourcing and
temporary personnel in general. This could have an adverse effect on the
Company's contingent staffing business.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
--------------------------------------
THE COMPANY IS DEPENDENT UPON ITS ABILITY TO ATTRACT AND RETAIN CERTAIN
TECHNOLOGICALLY QUALIFIED PERSONNEL.
The Company's future success is dependent upon its ability to attract and retain
certain classifications of technologically qualified personnel for its own use,
particularly in the areas of research and development, implementation and
upgrading of internal systems, as well as in its staffing services segment. The
availability of such personnel is dependent upon a number of economic and
demographic conditions. The Company may in the future find it difficult or more
costly to hire such personnel in the face of competition from other companies.
THE INDUSTRIES IN WHICH THE COMPANY DOES BUSINESS ARE VERY COMPETITIVE.
The Company operates in very competitive industries with, in most cases, limited
barriers to entry. Some of the Company's principal competitors are larger and
have substantially greater financial resources than the Company. Accordingly,
these competitors may be better able than the Company to attract and retain
qualified personnel and may be able to offer their customers more favorable
pricing terms than the Company. In many businesses, small competitors can offer
similar services at lower prices because of lower overheads.
The Company, in all segments, has experienced intense price competition and
pressure on margins and lower renewal markups for customers' contracts than
previously obtained. While the Company has and will continue to take action to
meet competition in its highly competitive markets with minimal impact on
margins, there can be no assurance that the Company will be able to do so.
The Company, in certain businesses in all segments, must obtain or produce
products and systems, principally in the IT environment, to satisfy customer
requirements and to remain competitive. While the Company has been able to do so
in the past, there can be no assurance that in the future the Company will be
able to foresee changes and to identify, develop and commercialize innovative
and competitive products and systems in a timely and cost effective manner and
to achieve customer acceptance of its products and systems in markets
characterized by rapidly changing technology and frequent new product
introductions. In addition, the Company's products and systems are subject to
risks inherent in new product introductions, such as start-up delays, cost
overruns and uncertainty of customer acceptance, the Company's dependence on
third parties for some product components and in certain technical fields
particularly characterized by labor shortages, the Company's ability to hire and
retain such specialized employees, all of which could affect the Company's
ability to meet its customers' demands in these fields and the Company's profit
margins.
In addition to these general statements, the following information applies to
the specific segments identified below.
The Company's Staffing Services segment is in a very competitive industry with
few significant barriers to entry. There are many temporary service firms in the
United States and Europe, many with only one or a few offices that service only
a small market. On the other hand, some of this segment's principal competitors
are larger and have substantially greater financial resources than Volt and
service the multinational accounts whose business the Company solicits.
Accordingly, these competitors may be better able than Volt to attract and
retain qualified personnel and may be able to offer their customers more
favorable pricing terms than the Company. Furthermore, all of the staffing
industry is subject to the fact that contingent workers are provided to
customers and most customers are more protective of their full time workforce
than contingent workers.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
--------------------------------------
The results of the Company's Computer Systems segment are highly dependent on
the volume of calls to this segment's customers which are processed by the
segment under existing contracts, the segment's ability to continue to secure
comprehensive listings from others at acceptable pricing, its ability to obtain
additional customers for these services and on its continued ability to sell
products and services to new and existing customers. The volume of transactions
with this segment's customers is subject to reduction as consumers utilize
listings offered on the Internet. This segment's position in its market depends
largely upon its reputation, quality of service and ability to develop, maintain
and implement information systems on a cost competitive basis. Although Volt
continues its investment in research and development, there is no assurance that
this segment's present or future products will be competitive, that the segment
will continue to develop new products or that present products or new products
can be successfully marketed.
The Company's Telecommunications Services segment faces substantial competition
with respect to all of its telecommunications services from other suppliers and
from in-house capabilities of present and potential customers. Since many of our
customers provide the same type of services as the segment, the segment faces
competition from its own customers and potential customers as well as from third
parties. The telecommunications service segment performs much of its services
outdoors, and its business can be adversely affected by the degree and effects
of inclement weather. Some of this segment's significant competitors are larger
and have substantially greater financial resources than Volt. There are
relatively few significant barriers to entry into certain of the markets in
which the segment operates, and many competitors are small, local companies that
generally have lower overhead. Volt's ability to compete in this segment depends
upon its reputation, technical capabilities, pricing, quality of service and
ability to meet customer requirements in a timely manner. Volt believes that its
competitive position in this segment is augmented by its ability to draw upon
the expertise and resources of other Volt segments.
THE COMPANY MUST CONTINUE TO SUCCESSFULLY INTEGRATE THE PURCHASED DIRECTORY AND
OPERATOR SERVICES BUSINESS INTO THE COMPANY'S COMPUTER SYSTEMS SEGMENT
On August 2, 2004, Volt Delta Resources, LLC ("Volt Delta"), a wholly-owned
subsidiary of the Company, acquired from Nortel Networks, Inc. ("Nortel
Networks") certain of the assets (consisting principally of customer base and
contracts, intellectual property and inventory) and certain specified
liabilities of Nortel Networks directory and operator services ("DOS") business,
in exchange for a 24% minority equity interest in Volt Delta. Together with its
subsidiaries, Volt Delta is reported as the Company's Computer Systems Segment.
The Company's results in this segment are dependent upon the Company's ability
to continue the successful integration of the acquisition into Volt Delta's
business with minimal interference with the segment's business.
THE COMPANY MUST STAY IN COMPLIANCE WITH ITS SECURITIZATION PROGRAM AND OTHER
LOAN AGREEMENTS
The Company is required to maintain a sufficient credit rating to enable it to
continue its $150 million Securitization Program and other loan agreements and
maintain its existing credit rating in order to avoid any increase in interest
rates and any increase in fees under these credit agreements, as well as to
comply with the financial and other covenants applicable under the credit
agreements and other borrowing instruments. While the Company was in compliance
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
--------------------------------------
with all such requirements at the end of the fiscal year and believes it will
remain in compliance throughout the remainder of the 2005 fiscal year, there can
be no assurance that will be the case or that waivers may not be required.
THE COMPANY'S PRINCIPAL SHAREHOLDERS OWN A SIGNIFICANT PERCENTAGE OF THE COMPANY
AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER THE COMPANY AND THEIR
INTERESTS MAY DIFFER FROM THOSE OF OTHER SHAREHOLDERS.
As of February 15, 2005, the Company's principal shareholders controlled
approximately 46% of the Company's outstanding common stock. Accordingly, these
shareholders are able to control the composition of the Company's board of
directors and many other matters requiring shareholder approval and will
continue to have significant influence over the Company's affairs. This
concentration of ownership also could have the effect of delaying or preventing
a change in control of the Company or otherwise discouraging a potential
acquirer from attempting to obtain control of the Company.
THE COMPANY'S STOCK PRICE COULD BE EXTREMELY VOLATILE AND, AS A RESULT,
INVESTORS MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID
FOR THEM.
Among the factors that could affect the Company's stock price are:
o while the Company's stock is traded on the New York Stock Exchange, there
is limited float and a low average daily trading volume;
o industry trends and the business success of the Company's customers;
o loss of a key customer;
o fluctuations in the Company's results of operations;
o the Company's failure to meet the expectations of the investment community
and changes in investment community recommendations or estimates of the
Company's future results of operations;
o strategic moves by the Company's competitors, such as product announcements
or acquisitions;
o regulatory developments;
o litigation;
o general market conditions; and
o other domestic and international macroeconomic factors unrelated to our
performance.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
--------------------------------------
The stock market has and may in the future experience extreme volatility that
has often been unrelated to the operating performance of particular companies.
These broad market fluctuations may adversely affect the market price of the
Company's common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. If a
securities class action suit is filed against the Company, it would incur
substantial legal fees and management's attention and resources would be
diverted from operating its business in order to respond to the litigation.
Critical Accounting Policies
----------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments.
Staffing Services:
Staffing: In the first quarter of fiscal 2005, this revenue comprised
approximately 77% of net consolidated sales. Sales are derived from the
Company's Staffing Solutions Group supplying its own temporary personnel to
its customers, for which the Company assumes the risk of acceptability of
its employees to its customers, and has credit risk for collecting its
billings after it has paid its employees. The Company reflects revenues for
these services on a gross basis in the period the services are rendered.
Managed Services: In the first quarter of fiscal 2005, this revenue
comprised approximately 1% of net consolidated sales. Sales are generated
by the Company's E-Procurement Solutions subsidiary, ProcureStaff, and for
certain contracts, sales are generated by the Company's Staffing Solutions
Group's managed services operations. The Company receives an administrative
fee for arranging for, billing for and collecting the billings related to
other staffing companies ("associate vendors") who have supplied personnel
to the Company's customers. The administrative fee is either charged to the
customer or subtracted from the Company payment to the associate vendor.
The customer is typically responsible for assessing the work of the
associate vendor, and has responsibility for the acceptability of its
personnel, and in most instances the customer and associate vendor have
agreed that the Company does not pay the associate vendor until the
customer pays the Company. Based upon the revenue recognition principles
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
----------------------------
prescribed in Emerging Issues Task Force ("EITF") 99-19, "Reporting Revenue
Gross as a Principal versus Net as an Agent," revenue for these services,
where the customer and the associate vendor have agreed that the Company is
not at risk for payment, is recognized net of associated costs in the
period the services are rendered.
Outsourced Projects: In the first quarter of fiscal 2005, this revenue
comprised approximately 6% of net consolidated sales. Sales are derived
from the Company's Information Technology Solutions operation providing
outsource services for a customer in the form of project work, for which
the Company is responsible for deliverables. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period the services are rendered when on a time and material basis, and
when the Company is responsible for project completion, revenue is
recognized when the project is complete and the customer has approved the
work.
Shaw & Shaw: In the first quarter of fiscal 2005, this revenue comprised
less than 1% of net consolidated sales, due to the Company's reporting of
these revenues on a net basis. Sales are generated by the Company's Shaw &
Shaw subsidiary, where the Company provides professional employer
organizational services ("PEO") to certain customers. Generally, the
customers transfer their entire workforce or employees of specific
departments or divisions to the Company, but the customers maintain control
over the day-to-day job duties of the employees.
Telephone Directory:
Directory Publishing: In the first quarter of fiscal 2005, this revenue
comprised approximately 2% of net consolidated sales. Sales are derived
from the Company's sales of telephone directory advertising for books it
publishes as an independent publisher in the United States and Uruguay. The
Company's employees perform the services and the Company has credit risk
for collecting its billings. Revenue for these services is recognized on a
gross basis in the period the books are printed and delivered.
Ad Production and Other: In the first quarter of fiscal 2005, this revenue
comprised approximately 1% of net consolidated sales. Sales are generated
when the Company performs design, production and printing services, and
database management for other publishers' telephone directories. The
Company's employees perform the services and the Company has credit risk
for collecting its billings. Revenue for these services is recognized on a
gross basis in the period the Company has completed its production work and
upon customer acceptance.
Telecommunications Services:
Construction: In the first quarter of fiscal 2005, this revenue comprised
approximately 3% of net consolidated sales. Sales are derived from the
Company supplying aerial and underground construction services. The
Company's employees perform the services, and the Company takes title to
all inventory, and has credit risk for collecting its billings. The Company
relies upon the principles in AICPA Statement of Position 81-1 ("SOP
81-1"), "Accounting for Performance of Construction-Type Contracts," using
the completed-contract method, to recognize revenue on a gross basis upon
customer acceptance of the project.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
----------------------------
Non-Construction: In the first quarter of fiscal 2005, this revenue
comprised approximately 3% of net consolidated sales. Sales are derived
from the Company performing design, engineering and business systems
integrations work. The Company's employees perform the services and the
Company has credit risk for collecting its billings. Revenue for these
services is recognized on a gross basis in the period in which services are
performed, and if applicable, any completed units are delivered and
accepted by the customer.
Computer Systems:
Database Access: In the first quarter of fiscal 2005, this revenue
comprised approximately 6% of net consolidated sales. Sales are derived
from the Company granting access to its proprietary telephone listing
databases to telephone companies, inter-exchange carriers and non-telco
enterprise customers. The Company uses its own databases and has credit
risk for collecting its billings. The Company recognizes revenue on a gross
basis in the period in which the customers access the Company's databases.
IT Maintenance: In the first quarter of fiscal 2005, this revenue comprised
approximately 1% of net consolidated sales. Sales are derived from the
Company providing hardware maintenance services to the general business
community, including customers who have our systems, on a time and material
basis or a contract basis. The Company uses its own employees and inventory
in the performance of the services, and has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which the services are performed, contingent upon customer
acceptance when on a time and material basis, or over the life of the
contract, as appropriate.
Telephone Systems: In the first quarter of fiscal 2005, this revenue
comprised less than 1% of net consolidated sales. Sales are derived from
the Company providing telephone operator services-related systems and
enhancements to existing systems, equipment and software to customers. The
Company uses its own employees and has credit risk for collecting its
billings. The Company relies upon the principles in AICPA Statement of
Position 97-2 ("SOP 97-2"), "Software Revenue Recognition" and EITF 00-21,
"Revenue Arrangements with Multiple Deliverables" to recognize revenue on a
gross basis upon customer acceptance of each part of the system based upon
its fair value.
The Company records provisions for estimated losses on contracts when losses
become evident. Accumulated unbilled costs on contracts are carried in inventory
at the lower of actual cost or estimated realizable value.
Allowance for Uncollectable Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for accounts receivable are maintained based
upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company believes that its allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required and a related charge or credit to earnings.
Goodwill - Under Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill is no longer amortized, but is
subject to annual impairment testing using fair value methodologies. The
impairment test for goodwill is a two-step process. Step one consists of a
comparison of a reporting unit with its carrying amount, including the goodwill
allocated to the reporting unit. Measurement of the fair value of a reporting
unit is based on one or more fair value measures including present value
techniques of estimated future cash flows and estimated amounts at which the
unit as a whole could be bought or sold in a current transaction between willing
parties. If the carrying amount of the reporting unit exceeds the fair value,
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
----------------------------
step two requires the fair value of the reporting unit to be allocated to the
underlying assets and liabilities of that reporting unit, resulting in an
implied fair value of goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
equal to the excess is recorded in net earnings (loss). The Company performs its
impairment testing using comparable multiples of sales and EBITDA and other
valuation methods to assist the Company in the determination of the fair value
of the reporting units measured.
Long-Lived Assets - Property, plant and equipment are recorded at cost, and
depreciation and amortization are provided on the straight-line and accelerated
methods at rates calculated to depreciate the cost of the assets over their
estimated useful lives. Intangible assets, other than goodwill, and property,
plant and equipment are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No.
144, these assets are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; the accumulation of costs
significantly in excess of the amount originally expected for the acquisition of
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and a current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life. Recoverability is assessed based on the carrying amount of the asset and
the sum of the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset or asset group. An impairment loss is recognized
when the carrying amount is not recoverable and exceeds the fair value of the
asset or asset group. The impairment loss is measured as the amount by which the
carrying amount exceeds fair value.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with AICPA Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent to the preliminary project planning and approval
stage, all appropriate costs are capitalized until the point at which the
software is ready for its intended use. Subsequent to the software being used in
operations, the capitalized costs are transferred from costs-in-process to
completed property, plant and equipment, and are accounted for as such. All
post-implementation costs, such as maintenance, training and minor upgrades that
do not result in additional functionality, are expensed as incurred.
Securitization Program - The Company accounts for the securitization of accounts
receivable in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A, was $60.0 million at
January 30, 2005 and $70.0 million at October 31, 2004. Accordingly, the trade
receivables included on the January 30, 2005 and October 31, 2004 balance sheets
have been reduced to reflect the participation interest sold. TRFCO has no
recourse to the Company (beyond its interest in the pool of receivables owned by
Volt Funding Corp., a wholly owned special purpose subsidiary of the Company)
for any of the sold receivables.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
----------------------------
Primary Casualty Insurance Program - The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Adjustments to premiums are made based upon the
level of claims incurred at a future date up to three years after the end of the
respective policy period. For the policy year ended March 31, 2003, a maximum
premium was predetermined and accrued. For subsequent policy years, management
evaluates the accrual, and the underlying assumptions, regularly throughout the
year and makes adjustments as needed. The ultimate premium cost may be greater
or less than the established accrual. While management believes that the
recorded amounts are adequate, there can be no assurances that changes to
management's estimates will not occur due to limitations inherent in the
estimation process. In the event it is determined that a smaller or larger
accrual is appropriate, the Company would record a credit or a charge to cost of
services in the period in which such determination is made.
Medical Insurance Program - Beginning in April 2004, the Company became
self-insured for the majority of its medical benefit programs. The Company
remains insured for a portion of its medical program (primarily HMOs) as well as
the entire dental program. The Company provides the self-insured medical
benefits through an arrangement with a third party administrator. However, the
liability for the self-insured benefits is limited by the purchase of stop loss
insurance. Contributed and withheld funds and related liabilities for the
self-insured program together with unpaid premiums for the insured programs,
other than the current provision, are held in a 501(c)9 employee welfare benefit
trust and do not appear on the balance sheet of the Company. In order to
establish the self-insurance reserves, the Company utilized actuarial estimates
of expected losses based on statistical analyses of historical data. The
provision for future payments is initially adjusted by the enrollment levels in
the various plans. Periodically, the resulting liabilities are monitored and
will be adjusted as warranted by changing circumstances. Should the amount of
claims occurring exceed what was estimated or medical costs increase beyond what
was expected, liabilities might not be sufficient, and additional expense may be
recorded.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 30, 2005 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 1, 2004
The information, which appears below, relates to current and prior periods, the
results of operations for which periods are not indicative of the results which
may be expected for any subsequent periods.
Three Months Ended
------------------
January 30, February 1,
2005 2004
----------- -----------
(Restated)
(Dollars in thousands)
Net Sales:
----------
Staffing Services
Traditional Staffing $414,094 $342,676
Managed Services 297,432 238,098
-------- --------
Total Gross Sales 711,526 580,774
Less: Non-recourse Managed Services (291,193) (233,133)
-------- --------
Net Staffing Services Sales 420,333 347,641
Telephone Directory 15,704 15,849
Telecommunications Services 25,204 29,896
Computer Systems 41,194 24,095
Elimination of intersegment sales (4,600) (3,522)
-------- --------
Total Net Sales $497,835 $413,959
======== ========
Segment Operating Profit (Loss):
--------------------------------
Staffing Services $2,453 $1,391
Telephone Directory 2,107 2,599
Telecommunications Services (2,429) (1,902)
Computer Systems 7,514 4,523
-------- --------
Total Segment Operating Profit 9,645 6,611
General corporate expenses (8,307) (7,560)
-------- --------
Total Operating Profit (Loss) 1,338 (949)
Interest income and other expense (456) (516)
Foreign exchange (loss) gain-net (162) 24
Interest expense (512) (457)
-------- --------
Income (Loss) Before Minority Interest and
Income Taxes $208 ($1,898)
======== ========
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 30, 2005 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 1, 2004--Continued
EXECUTIVE OVERVIEW
------------------
Volt Information Sciences, Inc. ("Volt") is a leading national provider of
staffing services and telecommunications and information solutions with a
material portion of its revenue coming from Fortune 100 customers. The Company
operates in four segments and the management discussion and analysis addresses
each. A brief description of these segments and the predominant source of their
sales follow:
Staffing Services: This segment is divided into three major functional
areas and operates through a network of over 300 branch offices.
o Staffing Solutions fulfills IT and other technical, commercial and
industrial placement requirements of its customers, on both a
temporary and permanent basis, managed staffing, and professional
employer organization services.
o E-Procurement Solutions provides global vendor neutral procurement and
management solutions for supplemental staffing using web-based tools
through the Company's ProcureStaff subsidiary.
o Information Technology Solutions provides a wide range of information
technology consulting and project management services through the
Company's VMC Consulting subsidiary.
Telephone Directory: This segment publishes independent telephone
directories, provides telephone directory production services, database
management, printing and computer-based projects to public utilities and
financial institutions.
Telecommunications Services: This segment provides a full spectrum of
telecommunications construction, installation, and engineering services in
the outside plant and central offices of telecommunications and cable
companies as well as for large commercial and governmental entities.
Computer Systems: This segment provides directory and operator systems and
services primarily for the telecommunications industry, and provides IT
maintenance services.
Several historical seasonal factors usually affect the sales and profits of the
Company. The Staffing Services segment's sales are always lowest in the
Company's first fiscal quarter due to the Thanksgiving, Christmas and New Year
holidays, as well as certain customer facilities closing for one to two weeks.
During the third and fourth quarters of the fiscal year, this segment benefits
from a reduction of payroll taxes when the annual tax contributions for higher
salaried employees have been met, and customers increase the use of the
Company's administrative and industrial labor during the summer vacation period.
In addition, the Telephone Directory segment's DataNational division publishes
more directories during the second half of the fiscal year.
Numerous non-seasonal factors impacted sales and profits in the current fiscal
quarter. The sales and profits of the Staffing Services segment, in addition to
the factors noted above, were positively impacted by a rebound in the use of
temporary staffing, partially offset by the continued pressure on margins caused
by increases in payroll taxes, particularly in the Administrative and Industrial
division.
The sales and operating results of the Telecommunications segment decreased in
the first quarter of fiscal 2005 compared to the comparable prior year quarter
due to a 23% sales decline in the Business Systems division, a 46% decline in
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 30, 2005 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 1, 2004--Continued
EXECUTIVE OVERVIEW --Continued
------------------
the Central Office division sales and reduced margins. The Company has continued
to carefully monitor the overhead within the segment in order to partially
mitigate the effect of the reduced segment margins.
The Computer Systems segment's sales and profits continue to be positively
impacted by the increase in the segment's ASP directory assistance outsourcing
business, in which there continues to be a sequential increase in transaction
revenue, as well as revenue and operating profit from the business acquired from
Nortel Networks.
The Company has, and will continue to focus on aggressively increasing its
market share while attempting to maintain margins in order to increase profits.
All segments have emphasized cost containment measures, along with improved
credit and collections procedures designed to improve the Company's cash flow.
The Company continues its effort to streamline its processes to manage the
business and protect its assets through the continued deployment of its Six
Sigma initiatives, upgrading its financial reporting systems, its compliance
with the Sarbanes-Oxley Act, and the standardization and upgrading of IT
redundancy and business continuity for corporate systems and communications
networks. To the extent possible, the Company has been utilizing, and will
continue to utilize, internal resources supplemented with temporary staff to
comply with the Sarbanes-Oxley Act by the end of fiscal year 2005. To-date,
outside costs of compliance with this Act, including software licenses,
equipment, temporary staff, consultants and professional fees amounted to $0.6
million and it is anticipated that a similar amount, excluding audit fees, will
be expended in the remainder of fiscal year 2005.
RESULTS OF OPERATIONS - SUMMARY
-------------------------------
In the first quarter of fiscal 2005, consolidated net sales increased by $83.9
million, or 20%, to $497.8 million, from the comparable period in fiscal 2004.
The primary increase in fiscal 2005 net sales resulted from increases in
Staffing Services of $72.7 million and Computer Systems of $17.1 million,
partially offset by decreases in Telecommunications Services of $4.7 million and
Telephone Directory of $0.1 million.
The net loss for the first three months of fiscal 2005 was $0.8 million compared
to $1.2 million in the comparable 2004 first quarter. The Company reported a
pre-tax profit before minority interest for the first quarter of fiscal 2005 of
$0.2 million, compared to a loss of $1.9 million in the prior year's first
quarter.
The Company's operating segments reported an operating profit of $9.6 million in
the fiscal 2005 quarter, an increase of $3.0 million, or 46%, from the
comparable 2004 quarter. Contributing to the increase were increases in the
operating profit of the Computer Systems segment of $3.0 million and the
Staffing Services segment of $1.1 million, partially offset by decreases in the
operating profit of the Telephone Directory segment of $0.5 million, and an
increase in the operating loss of the Telecommunications Services segment of
$0.5 million.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 30, 2005 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 1, 2004--Continued
RESULTS OF OPERATIONS - SUMMARY --Continued
-------------------------------
General corporate expenses increased by $0.7 million, or 10%, due to costs
incurred to meet the disaster recovery requirements of redundancy and business
continuity for corporate systems and communication networks, as well as salary
and professional fee increases. In addition, the Company incurred costs related
to compliance with the Sarbanes-Oxley Act.
RESULTS OF OPERATIONS - BY SEGMENT
----------------------------------
STAFFING SERVICES
-----------------
Three Months Ended
------------------
January 30, 2005 February 1, 2004
---------------- ----------------
% of % of Favorable Favorable
Staffing Services Net Net (Unfavorable) (Unfavorable)
----------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) * $414.1 $342.7 $71.4 20.8%
------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) * $297.4 $238.1 $59.3 24.9%
------------------------------------------------------------------------------------------------------------------
Sales (Net) $420.3 $347.6 $72.7 20.9%
------------------------------------------------------------------------------------------------------------------
Gross Profit $61.7 14.7% $51.6 14.8% $10.1 19.6%
------------------------------------------------------------------------------------------------------------------
Overhead $59.2 14.1% $50.2 14.4% ($9.0) (18.0%)
------------------------------------------------------------------------------------------------------------------
Operating Profit $2.5 0.6% $1.4 0.4% $1.1 76.3%
------------------------------------------------------------------------------------------------------------------
*Included in Sales (Gross) are billings for associate vendors which are
substantially all excluded from Sales (Net).
The sales increase of the Staffing Services segment in the fiscal 2005 first
quarter from the comparable fiscal 2004 quarter was due to increased staffing
business in both the Technical Placement and the Administrative and Industrial
divisions and in the VMC Consulting business of the Technical Placement
division.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 30, 2005 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 1, 2004--Continued
STAFFING SERVICES --Continued
-----------------
The increase in operating profit in the segment was derived from the staffing
and managed service operations of the Technical Placement division.
Three Months Ended
------------------
January 30, 2005 February 1, 2004
---------------- ----------------
Technical Placement % of % of Favorable Favorable
Division Net Net (Unfavorable) (Unfavorable)
-------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------
Sales (Gross) $543.2 $438.2 $105.0 24.0%
------------------------------------------------------------------------------------------------------------------
Sales (Net) $257.9 $209.2 $48.7 23.2%
------------------------------------------------------------------------------------------------------------------
Gross Profit $41.5 16.1% $33.8 16.1% $7.7 22.9%
------------------------------------------------------------------------------------------------------------------
Overhead $36.1 14.0% $29.5 14.1% ($6.6) (22.3%)
------------------------------------------------------------------------------------------------------------------
Operating Profit $5.4 2.1% $4.3 2.0% $1.1 27.2%
------------------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in gross sales in the first quarter
of fiscal 2005 from the comparable fiscal 2004 quarter was due to a 20% sales
increase in traditional alternative staffing, a 21% increase in ProcureStaff
volume due to new accounts and increased business from existing accounts, and a
28% increase in higher margin VMC Consulting project management and consulting
sales. However, substantially all of the ProcureStaff billings are deducted in
arriving at net sales due to the use of associate vendors who have contractually
agreed to be paid only upon receipt by the Company of the customers' payment.
The increase in the operating profit was the result of the increase in sales, as
margins remained constant and overhead as a percentage of sales decreased
slightly.
Three Months Ended
------------------
January 30, 2005 February 1, 2004
---------------- ----------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
------------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------
Sales (Gross) $168.3 $142.6 $25.7 18.0%
------------------------------------------------------------------------------------------------------------------
Sales (Net) $162.4 $138.4 $24.0 17.4%
------------------------------------------------------------------------------------------------------------------
Gross Profit $20.2 12.4% $17.8 12.9% $2.4 13.2%
------------------------------------------------------------------------------------------------------------------
Overhead $23.1 14.2% $20.7 15.0% ($2.4) (11.9%)
------------------------------------------------------------------------------------------------------------------
Operating Loss ($2.9) (1.8%) ($2.9) (2.1%) - -
------------------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in gross sales in the
first quarter of fiscal 2005 resulted from both revenue from new accounts and
increased business from existing accounts. The operating loss remained the same
as a 0.5 percentage point decrease in gross margin partially offset the increase
in sales. The decrease in gross margin was due to higher payroll taxes and
benefit costs. Overhead as a percentage of sales decreased by 0.8 percentage
points.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 30, 2005 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 1, 2004--Continued
STAFFING SERVICES --Continued
-----------------
Although the markets for the segment's services include a broad range of
industries throughout the United States and Europe, general economic
difficulties in specific geographic areas or industrial sectors have in the past
and could, in the future, affect the profitability of the segment.
TELEPHONE DIRECTORY
-------------------
Three Months Ended
------------------
January 30, 2005 February 1, 2004
---------------- ----------------
% of % of Favorable Favorable
Telephone Directory Net Net (Unfavorable) (Unfavorable)
------------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
------------------------------------------------------------------------------------------------------------------
Sales (Net) $15.7 $15.8 ($0.1) (0.9%)
------------------------------------------------------------------------------------------------------------------
Gross Profit $8.3 53.0% $8.9 56.3% ($0.6) (6.8%)
------------------------------------------------------------------------------------------------------------------
Overhead $6.2 39.6% $6.3 39.9% $0.1 1.8%
------------------------------------------------------------------------------------------------------------------
Operating Profit $2.1 13.4% $2.6 16.4% ($0.5) (18.9%)
------------------------------------------------------------------------------------------------------------------
The major components of the Telephone Directory segment's slight sales decrease
for the first quarter of fiscal 2005 compared to the comparable 2004 quarter
were a decrease of $1.5 million, or 10%, in publishing and other sales,
partially offset by an increase of $1.4 million in systems revenue. The
publishing decrease was mainly due to the community telephone directory
operation of DataNational, whose sales decreased by $1.1 million, or 10%, from
the prior year due to a decrease in the number of directories printed and
delivered. The segment's decreased operating profit was the result of the sales
decrease and a 3.3 percentage point decrease in gross margins, primarily due to
the mix of directories published by DataNational in the period, partially offset
by a decrease in overhead of 0.4 percentage points.
Other than the DataNational division, which accounted for 59% of the segment's
fiscal 2005 first quarter sales, the segment's business is obtained through
submission of competitive proposals for production and other contracts. These
short and long-term contracts are re-bid after expiration. Many of this
segment's long-term contracts contain cancellation provisions under which the
customer can cancel the contract, even if the segment is not in default under
the contract and generally do not provide for a minimum amount of work to be
awarded to the segment. While the Company has historically secured new contracts
and believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurance that contracts will be renewed or extended, or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms. In addition, this segment's sales and profitability are
highly dependent on advertising revenue for DataNational's directories, which
could be affected by general economic conditions.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 30, 2005 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 1, 2004--Continued
TELECOMMUNICATIONS SERVICES
---------------------------
Three Months Ended
------------------
January 30, 2005 February 1, 2004
---------------- ----------------
% of % of Favorable Favorable
Telecommunications Net Net (Unfavorable) (Unfavorable)
------------------ Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------
Sales (Net) $25.2 $29.9 ($4.7) (15.7%)
------------------------------------------------------------------------------------------------------------------
Gross Profit $4.5 17.7% $7.1 23.9% ($2.6) (37.5%)
------------------------------------------------------------------------------------------------------------------
Overhead $6.9 27.3% $9.0 30.2% $2.1 23.8%
------------------------------------------------------------------------------------------------------------------
Operating Loss ($2.4) (9.6%) ($1.9) (6.3%) ($0.5) (27.7%)
------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales decrease in the first quarter of
fiscal 2005 over the comparable 2004 quarter was due to decreased business in
the Business Systems and Central Office divisions. The increase in the operating
loss was due to the sales decrease, a decrease in gross margins of 6.2
percentage points, partially offset by a decrease in overhead as a percentage of
net sales of 2.9 percentage points (including a previously reported $1.3 million
charge in the first quarter of fiscal 2004 related to a domestic consulting
contract for services). Despite an emphasis on cost controls, the results of the
segment continue to be affected by the decline in capital spending by telephone
companies caused by the depressed conditions within the segment's
telecommunications industry customer base. This factor has also increased
competition for available work, pressuring pricing and gross margins throughout
the segment. In the Central Office division, sales decreased by 46% and margins
decreased by 5.3 percentage points from the comparable 2004 quarter. Sales in
the Business Systems division decreased by 23%, due to decreased business from
two large customers, and margins decreased by 10.9 percentage points from the
comparable 2004 quarter. In the Construction and Engineering division, sales
remained constant, but margins decreased by 1.3 percentage points. Recent
actions by major long-distance telephone companies regarding local residential
service have negatively impacted sales and continue to impact margins of the
segment.
A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically expire within
one to three years and are re-bid. Many of this segment's long-term contracts
contain cancellation provisions under which the customer can cancel the
contract, even if the segment is not in default under the contract and generally
do not provide for a minimum amount of work to be awarded to the segment. While
the Company believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurances that contracts will be renewed or extended or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 30, 2005 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 1, 2004--Continued
COMPUTER SYSTEMS
----------------
Three Months Ended
------------------
January 30, 2005 February 1, 2004
---------------- ----------------
% of % of Favorable Favorable
Computer Systems Net Net (Unfavorable) (Unfavorable)
---------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------
Sales (Net) $41.2 $24.1 $17.1 71.0%
------------------------------------------------------------------------------------------------------------------
Gross Profit $21.9 53.1% $13.4 55.9% $8.5 62.6%
------------------------------------------------------------------------------------------------------------------
Overhead $14.4 34.9% $8.9 37.1% ($5.5) (60.8%)
------------------------------------------------------------------------------------------------------------------
Operating Profit $7.5 18.2% $4.5 18.8% $3.0 66.1%
------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the first quarter of fiscal
2005 over the comparable 2004 quarter was primarily due to improvements in the
segment's operator services business, including ASP directory assistance, which
reflected a 106% growth in sales during the quarter, a sales increase of 84% in
DataServ's directory assistance services which are provided to non-telco
enterprise customers, a 14% sales growth in the Maintech division's IT
maintenance services, and a 123% increase in product revenue recognized. The
sales increases noted above included $8.1 million of DOS Business acquired from
Nortel Networks, which represented 20% of the segment's sales for the 2005
quarter. The growth in operating profit from the comparable 2004 fiscal quarter
was the result of the increase in sales, a decrease in overhead of 2.2
percentage points, partially offset by a decrease in margins of 2.8 percentage
points. Volt Delta, the entity which operates the Computer Systems segment,
acquired certain assets and liabilities of the DOS Business of Nortel Networks
on August 2, 2004. This acquisition permits Volt Delta to provide the newly
combined customer base with new solutions and an expanded suite of products,
content and enhanced services. At January 30, 2005, the Company owned 76% of
Volt Delta.
This segment's results are highly dependent on the volume of calls to the
segment's customers that are processed by the segment under existing contracts
with telephone companies, the segment's ability to continue to secure
comprehensive telephone listings from others, its ability to obtain additional
customers for these services and its continued ability to sell products and
services to new and existing customers.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 30, 2005 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 1, 2004--Continued
RESULTS OF OPERATIONS -- OTHER
------------------------------
Three Months Ended
------------------
January 30, 2005 February 1, 2004
---------------- ----------------
% of % of Favorable Favorable
Other Net Net (Unfavorable) (Unfavorable)
----- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------
Selling & Administrative * $20.8 4.2% $18.9 4.6% ($1.9) (10.2%)
------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $7.5 1.5% $6.2 1.5% ($1.3) (21.9%)
------------------------------------------------------------------------------------------------------------------
Interest Income $0.6 0.1% $0.2 0.1% $0.4 144.5%
------------------------------------------------------------------------------------------------------------------
Other Expense ($1.0) 0.2% ($0.7) (0.2%) ($0.3) (36.4%)
------------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.2) - - - ($0.2) -
------------------------------------------------------------------------------------------------------------------
Interest Expense ($0.5) (0.1%) ($0.5) (0.1%) - -
------------------------------------------------------------------------------------------------------------------
*The first quarter of fiscal 2004 amount has been restated.
Other items, discussed on a consolidated basis, affecting the results of
operations for the fiscal years were:
The increase in selling and administrative expenses in the first quarter of
fiscal 2005 from the comparable 2004 quarter was a result of increased selling
expenses to support the increased sales levels throughout the Company, in
addition to increased corporate general and administrative expenses related to
costs to meet the disaster recovery requirements of redundancy and business
continuity for corporate systems and communications networks. In addition, the
Company incurred increased salaries, professional fees and costs related to
compliance with the Sarbanes-Oxley Act.
The increase in depreciation and amortization for the first quarter of fiscal
2005 from the comparable 2004 quarter was attributable to increases in fixed
assets, primarily in the Computer Systems segment.
Interest income increased due to higher interest rates together with additional
funds available for investment.
Other expense in both fiscal years is primarily the charges related to the
Company's Securitization Program as well as sundry expenses.
The Company's effective tax benefit rate on its financial reporting pre-tax
income from continuing operations was 37.2% in the first fiscal quarter of 2005
compared to an effective tax benefit rate of 39.3% in the comparable fiscal 2004
quarter. The effective benefit rate was lower in 2005 due to higher foreign
losses for which no tax benefit was provided.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 30, 2005 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 1, 2004--Continued
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents, including restricted cash held in escrow for
ProcureStaff and Viewtech clients of $32.5 million and $43.7 million at January
30, 2005 and October 31, 2004, respectively, decreased by $1.9 million to $86.2
million in the three months ended January 30, 2005. Unrestricted cash and cash
equivalents increased to $53.7 million at January 30, 2005 from $44.3 million at
October 31, 2004.
Operating activities provided $4.2 million of cash in the first three months of
fiscal 2005 compared to $15.4 million in the first three months of fiscal 2004.
Operating activities in the first three months of fiscal 2005, exclusive of
changes in operating assets and liabilities, produced $9.2 million of cash, as
the Company's net loss of $0.8 million included non-cash charges primarily for
depreciation and amortization of $7.5 million, accounts receivable provisions of
$1.5 million, minority interest of $1.5 million and a deferred tax benefit of
$0.6 million. In the first three months of fiscal 2004, operating activities,
exclusive of changes in operating assets and liabilities, produced $6.0 million
of cash, as the Company's net loss of $1.2 million included non-cash charges
primarily for depreciation and amortization of $6.2 million and accounts
receivable provisions of $1.0 million.
Changes in operating assets and liabilities used $5.0 million of cash, net, in
the first three months of fiscal 2005 principally due to a decrease in the level
of accounts payable of $13.2 million, a reduction in securitization of
receivables of $10.0 million, a decrease in income taxes payable of $6.8 million
and a decrease in accrued expenses of $4.7 million partially offset by a
decrease in the level of accounts receivable of $28.5 million. In the first
three months of fiscal 2004, changes in operating assets and liabilities
produced $9.4 million of cash, net, principally due to a decrease in the level
of accounts receivable of $26.2 million, an increase in the level of deferred
income and other liabilities of $1.9 million, partially offset by a decrease in
the level of accounts payable of $19.1 million.
The principal factor in the $5.5 million and $7.5 million of cash applied to
investing activities for the first three months of fiscal 2005 and 2004,
respectively, was expenditures of $6.8 million and $8.0 million, respectively
for property, plant and equipment. The increase principally resulted from
purchases of equipment for the Computer Systems' ASP outsourcing business and
the Staffing Services segment.
The principal factors in the $38,000 of cash applied to financing activities in
the first three months of fiscal 2005 were cash provided from exercises of stock
options totaling $0.8 million partially offset by a decrease in notes payable to
banks of $0.8 million. The principal factors in the $39,000 of cash applied to
financing activities in the first three months of fiscal 2004 were repayments of
long-term debt totaling $90,000, partially offset by cash provided from
exercises of stock options totaling $43,000.
Commitments
-----------
There has been no material change through January 30, 2005 in the Company's
contractual cash obligations and other commercial commitments from that reported
in the Company's Annual Report on Form 10-K for the fiscal year ended October
31, 2004.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Off-Balance Sheet Financing
---------------------------
The Company has no off-balance sheet financing arrangements, as that term has
meaning in Item 303(a) (4) of Regulation S-K.
Securitization Program
----------------------
The Company has a $150.0 million accounts receivable securitization program
("Securitization Program"), which matures in April 2006. Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A., an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $150.0 million). The
Company retains the servicing responsibility for the accounts receivable. At
January 30, 2005, TRFCO had purchased from Volt Funding a participation interest
of $60.0 million out of a pool of approximately $231.2 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors (subject also, as described
above, to the security interest that the Company granted in the common stock of
Volt Funding in favor of the lenders under the Company's Credit Facility). TRFCO
has no recourse to the Company (beyond its interest in the pool of receivables
owned by Volt Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts incurred by
TRFCO on the issuance of its commercial paper, are charged to the consolidated
statement of operations.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Securitization Program --Continued
----------------------
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, among other things, the default rate, as
defined, on receivables exceeding a specified threshold, the rate of collections
on receivables failing to meet a specified threshold, the Company failing to
maintain a long-term debt rating of "B" or better or the equivalent thereof from
a nationally recognized rating organization or a default occurring and
continuing on indebtedness for borrowed money of at least $5.0 million. At
January 30, 2005, the Company was in compliance with all requirements of its
Securitization Program.
Credit Lines
------------
In April 2004, the Company amended its $40.0 million secured, syndicated,
revolving credit agreement ("Credit Agreement") which was to expire in April
2004, to, among other things, extend the term for 364 days and reduce the line
to $30.0 million, because of the increase in its Securitization Program
(discussed above). Additionally, in July 2004, this program was further amended
to release Volt Delta as a guarantor and collateral grantor under the Credit
Agreement due to the previously announced agreement between Volt Delta and
Nortel Networks. At January 30, 2005, the Company had credit lines with domestic
and foreign banks that provide for borrowings and letters of credit up to an
aggregate of $41.7 million, including $30.0 million under the Credit Agreement,
which will expire in April 2005.
The Credit Agreement established a credit facility ("Credit Facility") in favor
of the Company and designated subsidiaries, of which up to $15.0 million may be
used for letters of credit. Borrowings by subsidiaries are limited to $25.0
million in the aggregate. The administrative agent arranger for the secured
Credit Facility is JP Morgan Chase Bank. The other banks participating in the
Credit Facility are Mellon Bank, NA, Wells Fargo, NA and Lloyds TSB Bank PLC.
Borrowings and letters of credit under the Credit Facility are limited to a
specified borrowing base, which is based upon the level of specified
receivables, generally at the end of the fiscal month preceding a borrowing. At
January 30, 2005, $28.5 million was available under the borrowing base formula.
Borrowings under the Credit Facility bear interest at various rate options
selected by the Company at the time of each borrowing. Certain rate options,
together with a facility fee, are based on a leverage ratio, as defined.
Additionally, interest and the facility fees can be increased or decreased upon
a change in the Company's long-term debt rating provided by a nationally
recognized rating agency. At January 30, 2005, the Company borrowed 1.5 million
British Pounds ($2.8 million) under the Credit Facility at an interest rate of
5.7% per annum. At January 30, 2005, the facility fee was 0.3% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined, a limitation on cash
dividends, capital stock repurchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ending as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Credit Lines - Continued
------------
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At January 30, 2005, the Company was in compliance with all
covenants in the Credit Agreement.
The Company is liable for all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are guarantors of all
loans made to the Company or to subsidiary borrowers under the Credit Facility.
At January 30, 2005, five of those guarantors have pledged approximately $49.1
million of accounts receivable, other than those in the Securitization Program,
as collateral for the guarantee obligations. Under certain circumstances, other
subsidiaries of the Company also may be required to become guarantors under the
Credit Facility.
The Company is in discussion with its banks to extend the term of the Credit
Facility beyond April 2005.
Summary
-------
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program will be sufficient to fund its presently contemplated
operations and satisfy its obligations through, at least, the end of fiscal
2005.
New Accounting Pronouncements to be Effective in Fiscal 2005
------------------------------------------------------------
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an Amendment of
ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and spoilage. This Statement
requires that these items be recognized as period costs even if the amounts are
not considered to be abnormal. The provisions of this Statement are effective
for inventory costs incurred in fiscal years beginning after June 15, 2005. The
Company does not believe that the adoption of this Statement in fiscal 2006 will
have a material impact on the Company's consolidated financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets-an Amendment of APB Opinion No. 29," to eliminate the exception for
nonmonetary exchanges of similar productive assets and replace it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. The provisions of this Statement are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005, with early
application permitted for exchanges beginning after November 2004. The Company
does not believe that the adoption of this Statement in fiscal 2005 will have a
material impact on the Company's consolidated financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," which
replaces the superseded SFAS No. 123, "Accounting for Stock-Based Compensation."
This Statement requires that all entities apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and
suppliers when the entity acquires goods or services. The provisions of this
Statement are effective as of the beginning of the first interim or annual
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements to be Effective in Fiscal 2005 --Continued
------------------------------------------------------------
reporting period that begins after June 15, 2005, with early adoption of this
Statement permitted for any interim period whose financial statements are not
yet issued. The Company is currently assessing the impact that the adoption will
have on the Company's consolidated financial position and results of operations
The American Jobs Creation Act of 2004 (the "Act") provided for a special
one-time tax deduction of 85% of certain foreign earnings that are repatriated.
The Company is currently assessing the impact the Act will have on the Company's
consolidated financial position or results of operations.
Related Party Transactions
--------------------------
During the first quarter of fiscal 2005, the Company paid or accrued $0.2
million to the law firm of which Lloyd Frank, a director, is of counsel,
primarily for services rendered. During that quarter, the Company also paid
$5,000 to the law firm of which Bruce Goodman, a director, is a partner, for
services rendered to the Company.
The Company rents approximately 2,600 square feet of office space to a
corporation owned by Steven A. Shaw, an officer and director, in the Company's
El Segundo, California facility, which the Company does not require for its own
use, on a month-to-month basis at a rental of $1,750 per month. Based on the
nature of the premises and a recent market survey conducted for the Company, the
Company believes the rent is the fair market rental for such space.
40
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The Company`s earnings, cash flows
and financial position are exposed to market risks relating to fluctuations in
interest rates and foreign currency exchange rates. The Company has cash and
cash equivalents on which interest income is earned at variable rates. The
Company also has credit lines with various domestic and foreign banks, which
provide for borrowings and letters of credit, as well as a $150 million accounts
receivable securitization program to provide the Company with additional
liquidity to meet its short-term financing needs.
The interest rates on these borrowings and financing are variable and,
therefore, interest and other expense and interest income are affected by the
general level of U.S. and foreign interest rates. Based upon the current levels
of cash invested, notes payable to banks and utilization of the securitization
program, on a short-term basis, as noted below in the tables, a hypothetical
100-basis-point (1%) increase or decrease in interest rates would increase or
decrease its annual net interest expense and securitization costs by $0.2
million, respectively.
The Company has a term loan, as noted in the table below, which consists of
borrowings at fixed interest rates, and the Company's interest expense related
to these borrowings is not affected by changes in interest rates in the near
term. The fair value of the fixed rate term loan was approximately $15.0 million
at January 30, 2005. This fair value was calculated by applying the appropriate
fiscal year-end interest rate supplied by the lender to the Company's present
stream of loan payments.
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At January 30, 2005, the total market value of these
investments was $3.9 million, all of which are being held for the benefit of
participants in a non-qualified deferred compensation plan with no risk to the
Company.
The Company has a number of overseas subsidiaries and is, therefore, subject to
exposure from the risk of currency fluctuations as the value of foreign
currencies fluctuate against the dollar, which may impact reported earnings. As
of January 30, 2005, the total of the Company's net investment in foreign
operations was $6.8 million. The Company attempts to reduce these risks by
utilizing foreign currency option and exchange contracts, as well as borrowing
in foreign currencies, to hedge the adverse impact on foreign currency net
assets when the dollar strengthens against the related foreign currency. As of
January 30, 2005, the total of the Company's foreign exchange contracts was $5.8
million, leaving a balance of net foreign assets exposed of $1.0 million. The
amount of risk and the use of foreign exchange instruments described above are
not material to the Company's financial position or results of operations and
the Company does not use these instruments for trading or other speculative
purposes. Based upon the current levels of net foreign assets, a hypothetical
weakening of the U.S. dollar against these currencies at January 30, 2005 by 10%
would result in a pretax gain of $0.7 million related to these positions.
Similarly, a hypothetical strengthening of the U.S. dollar against these
currencies at January 30, 2005 by 10% would result in a pretax loss of $0.4
million related to these positions.
41
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at January 30,
2005. For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
Interest Rate Market Risk Payments Due By Period as of January 30, 2005
------------------------- ---------------------------------------------
Less than 1-3 3-5 After 5
Total 1 year Years Years Years
------- --------- ------- ------- -------
(Dollars in thousands of US $)
Cash and Cash Equivalents
-------------------------
Money Market and Cash Accounts $86,164 $86,164
Weighted Average Interest Rate 2.0% 2.0%
------- -------
Total Cash & Cash Equivalents $86,164 $86,164
======= =======
Securitization Program
----------------------
Accounts Receivable Securitization $60,000 $60,000
Finance Rate 3.8% 3.8%
------- -------
Securitization Program $60,000 $60,000
======= =======
Debt
----
Term Loan $14,033 $408 $923 $1,086 $11,616
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Payable to Nortel Networks $1,886 $1,886
Weighted Average Interest Rate 6.0% 6.0%
Notes Payable to Banks $7,384 $7,384
Weighted Average Interest Rate 6.3% 6.3% - - -
------- ------- ------- ------- -------
Total Debt $23,303 $7,792 $2,809 $1,086 $11,616
======= ======= ======= ======= =======
42
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
Foreign Exchange Market Risk
----------------------------
Contract Values
---------------
Fair Value
Contract Less than Option
Exchange Rate Total 1 Year Premium (1)
------------- ----- ------ -----------
(Dollars in thousands of U.S. $)
Option Contracts
----------------
Euro (euro) to British Pound Sterling (pound) 0.70 $1,977 $1,977 $23
British Pound Sterling (pound) to U.S. $ 1.88 938 938 17
Canadian $ to U.S.$ 1.37 2,920 2,920 18
------ ------ ---
Total Option Contracts $5,835 $5,835 $58
====== ====== ===
(1) Represents the fair value of the foreign contracts at January 30, 2005.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company carried out an evaluation of the effectiveness of the design
and operation of its "disclosure controls and procedures," as defined in,
and pursuant to, Rule 13a-15 of the Securities Exchange Act of 1934, as of
January 30, 2005 under the supervision and with the participation of the
Company's management, including the Company's Chairman of the Board,
President and Principal Executive Officer and its Senior Vice President and
Principal Financial Officer. Based on that evaluation, the Company's
Chairman of the Board, President and Principal Executive Officer and its
Senior Vice President and Principal Financial Officer concluded that, as of
the date of their evaluation, the Company's disclosure controls and
procedures were effective to ensure that material information relating to
the Company and its subsidiaries is made known to them on a timely basis.
Changes in internal controls
Except as set forth below, there were no significant changes in the
Company's internal controls over financial reporting that materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
In mid-December 2004 the Company discovered that revenue had not been
properly recognized in accordance with the Company's policies in its
Uruguayan operation (which is part of the Directory Services segment). The
Company's business in Uruguay prints and distributes its Montevideo
telephone directory each year during the October/November time frame and
revenue recognition should have taken place in the first six months of each
fiscal year instead of in the fourth quarter of the preceding fiscal year.
This involves only the timing of when certain advertising revenue and
related costs and expenses are recognized. As a result of the discovery of
such improper revenue recognition, the Company restated in its Annual
Report on Form 10-K for the fiscal year ended October 31, 2004 its
previously issued financial results for the fiscal years 2000 through
43
CONTROLS AND PROCEDURES--Continued
2003 and the first two quarters of fiscal 2004 and also filed an amended
Annual Report on Form 10-K for the fiscal year ended November 2, 2003. This
restatement constituted a material weakness (within the standards
established by the American Institute of Certified Public Accountants and
the Public Company Accounting Oversight Board) within the Company's systems
of internal control. In addition, in the course of their audit of the
Company's financial statements as at and for the fiscal year ended October
31, 2004, the Company's internal auditors and Ernst & Young LLP, the
Company's independent registered public accounting firm, identified and
reported an additional material weakness as it relates to numerous
adjusting entries which were undetected due to deficiencies in the
Company's financial statement close process, and, as a result of the audit,
were recorded by the Company during the course of the audit to correct the
underlying books and records.
Ernst & Young LLP, the Company's independent registered public accounting
firm, issued on January 10, 2005 an unqualified opinion on the Company's
financial statements for the fiscal year ended October 31, 2004.
Management of the Company, the Company's internal auditors and Ernst &
Young LLP discussed the material weaknesses referred to above with the
Audit Committee of the Board of Directors of the Company. Management of the
Company instituted a review of the Company's internal controls in order to
correct these deficiencies and to strengthen the accounting infrastructure
as required.
As a result of the foregoing, during the first quarter of fiscal year 2005,
the Company identified and began to implement additional controls over
revenue recognition in its Uruguayan operation and the Company's financial
statement close processes. In addition, the Company has already implemented
or is in the process of developing the following key remediation
initiatives:
o Expansion of the personnel, resources and responsibilities of the
internal audit function;
o Issuance of specific guidelines for revenue recognition;
o Development of new and enhanced monitoring controls;
o Establishment of a communications program to improve awareness of the
importance of the financial close process; and
o A comprehensive review of the internal controls over financial
reporting.
In addition, in mid February 2005, the Company upgraded its enterprise
resource planning system to enable a more robust analysis of its accounts.
Internal control over financial reporting.
Beginning with our annual report on Form 10-K for fiscal 2005, the Company
will be subject to the provisions of Section 404 of the Sarbanes-Oxley Act
that require an annual management assessment of its internal control over
financial reporting and related attestation by the Company's independent
registered public accounting firm.
44
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
--------------------------------------------------------------------------------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of
Independent Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
(Registrant)
BY: /s/ JACK EGAN
-------------
Date: March 11, 2005 JACK EGAN
Vice President - Corporate Accounting
(Principal Accounting Officer)
45
EXHIBIT INDEX
-------------
Exhibit
Number Description
------- -----------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of
Independent Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002