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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 February 1, 2004
Or
__
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
- -- Exchange Act of 1934
For the transition period from to
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Commission File No. 1-9232
VOLT INFORMATION SCIENCES, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
New York 13-5658129
- ------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
- ------------------------------------------- ---------
(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 10, 2004 was 15,222,675.
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 February 1, 2004 and February 2, 2003 3
Condensed Consolidated Balance Sheets -
February 1, 2004 and November 2, 2003 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended February 1, 2004 and February 2, 2003 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
Item 4. Controls and Procedures 37
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 38
SIGNATURE 38
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED
Three Months Ended
---------------------------------------------
February 1, February 2,
2004 2003(a)
---------------------------------------------
(In thousands, except per share
amounts)
NET SALES $412,681 $352,535
COSTS AND EXPENSES:
Cost of sales 389,630 336,006
Selling and administrative 18,459 15,946
Depreciation and amortization 6,155 5,743
---------------------------------------------
414,244 357,695
---------------------------------------------
OPERATING LOSS (1,563) (5,160)
OTHER INCOME (EXPENSE):
Interest income 229 182
Other expense-net--Note B (745) (556)
Foreign exchange gain net--Note I 24 85
Interest expense (457) (643)
---------------------------------------------
Loss before income taxes (2,512) (6,092)
Income tax benefit 991 2,289
---------------------------------------------
NET LOSS ($1,521) ($3,803)
=============================================
Per Share Data
---------------------------------------------
Basic and Diluted:
Net loss per share ($0.10) ($0.25)
=============================================
Weighted average number of shares--Note G 15,222 15,217
=============================================
(a) As previously announced, the Company has changed the method of reporting
revenues of its Professional Employer Organization ("PEO") subsidiary, Shaw &
Shaw, from gross billing to a net revenue basis during fiscal year 2003, with no
effect on operating profit or the net results of the Company.
See accompanying notes to condensed consolidated financial statements.
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
February November
1, 2004 2, 2003 (a)
------------------------
ASSETS (Dollars in
thousands)
CURRENT ASSETS
Cash and cash equivalents including restricted cash of $19,580
(2004) and $18,870 (2003)--Note I $70,241 $62,057
Short-term investments 4,155 4,149
Trade accounts receivable less allowances of $8,935 (2004) and
$10,498 (2003)
--Note B 292,548 313,946
Inventories--Note C 34,777 37,357
Recoverable income taxes 4,116 2,596
Deferred income taxes 8,842 8,722
Prepaid expenses and other assets 14,980 16,132
------------------------
TOTAL CURRENT ASSETS 429,659 444,959
Investment in securities 168 193
Property, plant and equipment-net -- Note E 85,465 82,452
Deposits and other assets 1,852 2,107
Intangible assets-net of accumulated amortization of $982 (2004) and
$1,349 (2003)-- Note J 8,982 8,982
------------------------
TOTAL ASSETS $526,126 $538,693
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks--Note D $4,252 $4,062
Current portion of long-term debt--Note E 378 371
Accounts payable 137,264 153,979
Accrued wages and commissions 42,894 45,834
Accrued taxes other than income taxes 20,935 16,741
Other accruals 15,308 14,673
Deferred income and other liabilities 31,054 27,665
------------------------
TOTAL CURRENT LIABILITIES 252,085 263,325
Accrued insurance--Note K 4,098 4,098
Long-term debt--Note E 14,001 14,098
Deferred income taxes 15,475 15,252
STOCKHOLDERS' EQUITY--Notes B, E and F
Preferred stock, par value $1.00; Authorized--500,000 shares;
issued--none
Common stock, par value $.10; Authorized--30,000,000 shares;
issued--
15,222,675 shares 1,522 1,522
Paid-in capital 41,134 41,091
Retained earnings 198,202 199,723
Accumulated other comprehensive loss (391) (416)
------------------------
TOTAL STOCKHOLDERS' EQUITY 240,467 241,920
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $526,126 $538,693
========================
(a) The balance sheet at November 2, 2003 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
---------------------------------
February 1, February 2,
2004 2003
---------------------------------
(In thousands)
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES
Net loss ($1,521) ($3,803)
Adjustments to reconcile net loss to cash provided by operating
activities:
Depreciation and amortization 6,155 5,743
Accounts receivable provisions 1,017 839
Gains on dispositions of fixed assets (110)
Loss (gain) on foreign currency translation 16 (1)
Deferred income tax provision (benefit) 96 (71)
Other (2)
Changes in operating assets and liabilities:
Decrease in accounts receivable 26,172 34,720
Reduction in securitization of accounts receivable (5,000)
Decrease in inventories 2,580 997
Decrease in prepaid expenses and other current assets 1,435 464
Decrease in other assets 255 67
Decrease in accounts payable (19,097) (17,856)
Increase (decrease) in accrued expenses 1,703 (5,916)
Increase in customer advances and other liabilities 3,210 7,747
Decrease in income taxes payable (1,521) (2,024)
---------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,390 20,904
---------------------------------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Three Months Ended
---------------------------------
February 1, February 2,
2004 2003
---------------------------------
(In thousands)
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES
Sales of investments $314 $364
Purchases of investments (154) (226)
Proceeds from disposals of property, plant and equipment 314 124
Purchases of property, plant and equipment (7,956) (4,210)
Other 3
---------------------------------
NET CASH APPLIED TO INVESTING ACTIVITIES (7,482) (3,945)
---------------------------------
CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (90) (55)
Exercise of stock options 43
Increase in notes payable to banks 8 337
---------------------------------
NET CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES (39) 282
---------------------------------
Effect of exchange rate changes on cash 315 (139)
---------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,184 17,102
Cash and cash equivalents, including restricted cash, beginning of
period 62,057 43,620
---------------------------------
CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED CASH, END OF PERIOD $70,241 $60,722
=================================
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $461 $526
Income taxes $681 $121
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 February 1, 2004 and consolidated
results of operations and consolidated cash flows for the three months ended
February 1, 2004 and February 2, 2003.
As previously reported, the Company has changed the method of reporting the
revenues of its Professional Employer Organization ("PEO") subsidiary from gross
billing to a net revenue basis. Accordingly, reported PEO revenues and related
cost of sales for the three months ended February 2, 2003 have been reduced by
$5.7 million, with no effect on operating profit or the net results of the
Company.
The Company has elected to follow 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 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
------------------------------------------
February 1, 2004 February 2, 2003
------------------------------------------
(In thousands, except per share amounts)
Net loss as reported ($1,521) ($3,803)
Pro forma compensation expense, net of taxes (39) (54)
------------------------------------------
Pro forma net loss ($1,560) ($3,857)
==========================================
Pro forma net loss per share-basic and diluted ($0.10) ($0.25)
==========================================
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 values of
stock options granted during first quarter of fiscal 2004 was $11.49. There were
no options granted in the first quarter of fiscal 2003.
In December 2003, the FASB revised FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") which provides new guidance with respect
to the consolidation of all previously unconsolidated entities, including
special purpose entities. The Company has no unconsolidated subsidiaries. The
provisions of FIN 46 that were adopted by the Company through February 1, 2004
did not have an impact on the Company's consolidated financial position or
results of operations.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note A--Basis of Presentation--Continued
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 November 2, 2003. 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
Effective April 15, 2002, the Company entered into a $100.0 million, three-year
accounts receivable securitization program ("Securitization Program"). 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 $100.0 million). The Company retains the servicing responsibility
for the accounts receivable. At February 1, 2004, TRFCO had purchased from Volt
Funding a participation interest of $65.0 million out of a pool of approximately
$180.8 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 (subject also, as described
in Note E, to the security interest that the Company has granted in the common
stock of Volt Funding in favor of the lenders under the Company's new 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 condensed 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 on
TRFCO's commercial paper, are charged to the consolidated statement of
operations.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note B--Securitization Program--Continued
The Company incurred charges, related to the Securitization Program, of $0.4
million in both the first quarters of fiscal 2004 and fiscal 2003, which are
included in Other Expense on the condensed consolidated statement of operations.
The equivalent cost of funds in the Securitization Program were 2.3% per annum
and 2.2% per annum in the first quarters of fiscal 2004 and fiscal 2003,
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 February 1, 2004 and November 2, 2003, the Company's carrying retained
interest in a revolving pool of receivables of approximately $180.8 million and
$189.3 million, respectively, net of a service fee liability was approximately
$115.5 million and $119.0 million, respectively. The outstanding balance of the
undivided interest sold to TRFCO was $65.0 million and $70.0 million at February
1, 2004 and November 2, 2003, respectively. Accordingly, the trade accounts
receivable, included on the February 1, 2004 and November 2, 2003 balance sheet
have been reduced to reflect the participation interest sold of $65.0 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. The Company's most recent long-term debt rating
was "BBB-" with a neutral rating outlook.
Note C--Inventories
Inventories of accumulated unbilled costs and materials by segment are as
follows:
February 1, November 2,
2004 2003
------------------------------------
(Dollars in thousands)
Staffing Services $114
Telephone Directory 12,339 $12,898
Telecommunications Services 17,843 18,320
Computer Systems 4,481 6,139
------------------------------------
Total $34,777 $37,357
====================================
The cumulative amounts billed under service contracts at February 1, 2004 and
November 2, 2003 of $5.8 million and $3.6 million, respectively, are credited
against the related costs in inventory.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note D--Short-Term Borrowings
At February 1, 2004, the Company had total outstanding bank borrowings of $4.3
million under credit lines. These credit lines with foreign banks that provide
for borrowings and letters of credit up to an aggregate of $11.5 million expire
during fiscal year 2004, unless renewed. Borrowings in foreign currencies
provide a hedge against devaluation in foreign currency denominated assets.
Note E--Long-Term Debt
Long-term debt consists of the following:
February 1, November 2,
2004 2003
------------------------------------
(In thousands)
Term loan (a) $14,379 $14,469
Less amounts due within one year 378 371
------------------------------------
Total long-term debt $14,001 $14,098
====================================
(2) In September 2001, a subsidiary of the Company entered into a $15.1 million
loan agreement with General Electric Capital Business Asset Funding
Corporation. 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 February 1, 2004 of $10.9 million. The obligation is
guaranteed by the Company.
Effective April 15, 2002, the Company entered into a $40.0 million, two-year,
secured, syndicated, revolving credit agreement ("Credit Agreement") which
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, N.A. 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 February 1, 2004, the
borrowing base was approximately $37.9 million. 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 February 1, 2004, if a
three-month LIBO rate was the interest rate option selected by the Company,
borrowings would have borne interest at the rate of 3.2% per annum. At February
1, 2004, the facility fee was 0.4% 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, of $220.0 million; a
limitation on cash dividends and capital stock repurchases and redemptions by
the Company in any one fiscal year to 25% of consolidated net income, as
defined, for the prior fiscal year; and a requirement that the Company to
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,
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note E--Long-Term Debt--Continued
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 February 1, 2004, the Company was in compliance with all covenants in the
Credit Agreement and believes it will be in compliance throughout its remaining
term. Subsequent to February 1, 2004, the Company borrowed three million British
pounds ($5.4 million) under this 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 guarantors of all
loans made to the Company or to subsidiary borrowers under the Credit Facility.
At February 1, 2004, four of those guarantors have pledged approximately $50.8
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 has pledged all of the stock of Volt Funding (see
Note B) as collateral security for the Company's obligations under the Credit
Facility.
Note F--Stockholders' Equity
Changes in the major components of stockholders' equity for the three months
ended February 1, 2004 are as follows:
Common Paid-In Retained
Stock Capital Earnings
-------------------------------------------------------
(In thousands)
Balance at November 2, 2003 $1,522 $41,091 $199,723
Stock options exercised- 2,260 shares 43
Net loss for the three months (1,521)
-------------------------------------------------------
Balance at February 1, 2004 $1,522 $41,134 $198,202
=======================================================
Another component of stockholders' equity, the accumulated other comprehensive
loss, consists of cumulative unrealized foreign currency translation losses, net
of taxes, of $468,000 and $508,000 at February 1, 2004 and November 2, 2003,
respectively, and an unrealized gain, net of taxes, of $77,000 and $92,000 in
marketable securities at February 1, 2004 and November 2, 2003, respectively.
Changes in these items, net of income taxes, are included in the calculation of
comprehensive loss as follows:
Three Months Ended
------------------------------------
February 1, February 2,
2004 2003
------------------------------------
(In thousands)
Net loss ($1,521) ($3,803)
Foreign currency translation adjustments-net 40 39
Unrealized loss on marketable securities-net (15) (5)
------------------------------------
Total comprehensive loss ($1,496) ($3,769)
====================================
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note G--Per Share Data
In calculating basic earnings per share, the dilutive effect of stock options
are 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
------------------------------------
February 1, February 2,
2004 2003
------------------------------------
Denominator for basic and diluted earnings per share -
Weighted average number of shares 15,221,626 15,217,415
Options to purchase 571,773 and 563,623 shares of the Company's common stock
were outstanding at February 1, 2004 and February 2, 2003, 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 February 1,
2004 and February 2, 2003, included on page 24 of this Report, is an integral
part of these condensed consolidated financial statements. During the three
months ended February 1, 2004, consolidated assets decreased by $12.6 million
primarily due to a decrease in receivables of the Staffing Services and
Telephone Directory segments offset by an increase in cash and cash equivalents
due to reduced working capital requirements of the Company.
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 February 1, 2004, the Company had outstanding
foreign currency option and forward contracts in the aggregate notional amount
equivalent to $9.4 million, which approximated its net investment in foreign
operations and is accounted for as a hedge under SFAS No. 52.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note I--Derivative Financial Instruments, Hedging and Restricted Cash--Continued
Included in cash and cash equivalents at February 1, 2004 and November 2, 2003
was approximately $19.6 million and $18.9 million, respectively, restricted to
cover obligations that were reflected in accounts payable at such dates. These
amounts primarily relate to certain contracts with customers in which the
Company manages the customers' alternative staffing requirements, including the
payment of associate vendors.
Note J--Goodwill
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
intangible asset exceeds its fair value. On an annual basis, since the second
quarter of fiscal 2002, the Company has engaged independent valuation firms, or
used Company personnel to perform such testing. The testing 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 reporting units
measured.
Note K--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. Prior to March 31, 2002, the amount of the additional or return
premium was finalized. Subsequent thereto, adjustments to premium will be 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 has been predetermined and accrued. At February 1, 2004
and November 2, 2003, the Company's liability for the plan year ended March 31,
2003 was $4.3 million ($4.1 million is due in 2006) and at such dates the
Company's prepayment for the plan year ending March 31, 2004 was $0.9 million
and $2.5 million, respectively.
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Forward-Looking Statements Disclosure
- -------------------------------------
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," "could," "seek," "believe," "expect," "anticipate,"
"estimate," "project," "intend," "strategy," "likely," 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," as well as the following:
-- variations in the rate of unemployment and higher wages sought
by temporary workers in certain technical fields particularly
characterized by labor shortages, which could affect the
Company's ability to meet its customers' demands and the
Company's profit margins;
-- the adverse effect of customers and potential customers moving
manufacturing and servicing operations off-shore, reducing
their need for temporary workers;
-- the ability of the Company to diversify its available
temporary personnel to offer greater support to the service
sector of the economy;
-- changes in customers' attitudes toward the use of outsourcing
and temporary personnel;
-- intense price competition and pressure on margins;
-- the Company's ability to meet competition in its highly
competitive markets with minimal impact on margins;
-- the Company's ability to foresee changes and to identify,
develop and commercialize innovative and competitive products
and systems in a timely and cost effective manner;
-- the Company's ability to achieve customer acceptance of its
products and systems in markets characterized by rapidly
changing technology and frequent new product introductions;
-- risks inherent in new product introductions, such as start-up
delays, cost overruns and uncertainty of customer acceptance;
-- the timing of customer acceptances of systems;
-- the Company's dependence on third parties for some product
components;
-- the degree and effects of inclement weather; and
-- the Company's ability to maintain a sufficient credit rating
to enable it to continue its securitization program and
ability to maintain its existing credit rating in order to
avoid any increase in interest rates and any increase in fees
under its revolving credit facility, as well as to comply with
the financial and other covenants applicable under its credit
facility and other borrowing instruments.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Continued
Forward-Looking Statements Disclosure--Continued
- -------------------------------------
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 WEAKENED UNITED STATES AND EUROPEAN
ECONOMIES.
The demand for the Company's services in all segments is dependent upon economic
conditions. Accordingly, the Company's business tends to suffer during economic
downturns. The Company's business is dependent upon the continued financial
strength of its customers. Certain of the Company's customers have announced
layoffs, unfavorable financial results, investigations by government agencies
and lowered financial expectations for the near term. Customers that experience
any of these events are less likely to use the Company's services.
In the staffing services segment, a weakened economy or a material increase in
productivity results in decreased demand for temporary and permanent personnel.
As 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 in 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. 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.
Customer use of the Company's telecommunications services is similarly affected
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.
The reduction in telecommunications companies' capital expenditure projects has
significantly reduced the segment's sales and minimal improvement can be
expected until the industry begins to increase its capital expenditures.
Additionally, the degree and timing 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, 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.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Forward-Looking Statements Disclosure--Continued
- -------------------------------------
In addition, many of the segments' 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. Therefore, these contracts do not give the
assurances that long-term contracts typically provide.
THE COMPANY'S STAFFING SERVICES BUSINESS SUBJECTS IT TO EMPLOYMENT-RELATED
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 workplace is limited, and the Company risks incurring liability to
its employees for injury or other harm that they suffer at the customer's
workplace.
Additionally, the Company risks liability to its customers for the actions of
the Company's temporary employees that 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.
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.
POSSIBLE NEW AND INCREASED GOVERNMENT REGULATION COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE COMPANY'S BUSINESS.
The Company's businesses are subject to licensing in many states and licensing
and regulation in 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:
-- create new or additional regulations that prohibit or restrict
the types of services that we currently provide;
-- impose new or additional employee benefit requirements,
thereby increasing costs that could adversely impact the
Company's ability to conduct its business;
-- require the Company to obtain additional licenses to provide
its services; or
-- increase taxes or enact new or different taxes payable by the
providers of services such as those offered by the Company,
some of which may not be able to be passed on to customers.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Forward-Looking Statements Disclosure--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 to hire
such personnel in the face of competition from other companies in different
industries who are capable of offering higher compensation.
ALL OF THE INDUSTRIES IN WHICH THE COMPANY DOES BUSINESS ARE VERY COMPETITIVE,
WHICH COULD ADVERSELY AFFECT THE RESULTS OF THOSE BUSINESSES.
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 Volt. 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. In many businesses, small competitors can offer similar
services at lower prices because of lower overheads. In addition to these
general statements, the following information applies to the specific segments
identified.
The Company's staffing services segment is in a very competitive industry with
limited 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 national 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.
The results of the Company's computer systems segment are highly dependent on
the volume of directory assistance calls to VoltDelta's customers which are
routed to the segment under existing contracts, the segment's ability to
continue to secure comprehensive listings from others, its ability to obtain
additional customers for these services and on its continued ability to sell
products and services to new and existing customers. 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. Some of this
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Forward-Looking Statements Disclosure--Continued
- -------------------------------------
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'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:
-- while the Company's stock is traded on the New York Stock
Exchange, there is limited float, and a relatively low average
daily trading volume;
-- industry trends and the business success of the Company's
customers;
-- loss of a key customer;
-- fluctuations in the Company's results of operations;
-- 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;
-- strategic moves by the Company's competitors, such as product
announcements or acquisitions;
-- regulatory developments;
-- litigation;
-- general market conditions; and
-- other domestic and international macroeconomic factors
unrelated to our performance.
The stock market has recently experienced 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 us, we would incur substantial
legal fees and our management's attention and resources would be diverted from
operating our business in order to respond to the litigation.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Forward-Looking Statements Disclosure--Continued
- -------------------------------------
THE COMPANY'S PRINCIPAL STOCKHOLDERS AND MEMBERS OF THEIR FAMILIES 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
STOCKHOLDERS.
As of February 16, 2004, the Company's principal officers controlled
approximately 48% of the Company's outstanding common stock. Accordingly, these
stockholders 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.
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"), entitled "Revenue
Recognition in Financial Statements," are described below in more detail for the
significant types of revenue within each of its segments.
Staffing Services:
Traditional Staffing: In the first quarter of fiscal 2004, 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 2004, 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, who has responsibility for the acceptability of its
personnel to the customer, and in most
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
- ----------------------------
instances the customer and associate vendor have agreed to the Company not
paying the associate vendor until the customer pays the Company. Based upon
the revenue recognition principles prescribed in Emerging Issues Task Force
99-19 ("EITF 99-19"), entitled "Reporting Revenue Gross as a Principal
versus Net as an Agent", revenue for these services, where the customer and
the associate vendor has agreed to this arrangement, is recognized net of
associated costs in the period the services are rendered.
Outsourced Projects: In the first quarter of fiscal 2004, 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, 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 2004, this revenue comprised
approximately 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, for which 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. Based upon the revenue
recognition principles prescribed in EITF 99-19, effective with the
Company's second fiscal quarter of 2003, the Company has changed its method
of reporting revenue from these services from a gross basis to a net basis.
The change in reporting, which is reflected in all current and prior
periods, resulted in a reduction in both reported PEO revenues and related
costs of sales, with no effect on the Company's operating results.
Telephone Directory:
Directory Publishing: In the first quarter of fiscal 2004, 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 or for a telephone company in
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: In the first quarter of fiscal 2004, this revenue comprised
approximately 1% of net consolidated sales. Sales are generated when the
Company performs design and production 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 ad production work and upon customer
acceptance.
Telecommunications Services:
Construction: In the first quarter of fiscal 2004, this revenue comprised
approximately 3% of net consolidated sales. Sales are derived from the
Company supplying aerial and underground construction services related to
telecommunications and cable operations. 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
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
in Statement of Position 81-1 ("SOP 81-1"), entitled "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.
Non-Construction: In the first quarter of fiscal 2004, this revenue
comprised approximately 4% 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 fiscal 2004, this revenue comprised
approximately 3% 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 first quarter of fiscal 2004, this revenue comprised
approximately 2% 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. 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.
Telephone Systems: In the first quarter of fiscal 2004, 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 Statement of Position
97-2 ("SOP 97-2"), entitled "Software Revenue Recognition" and Emerging
Issues Task Force 00-21 ("EITF 00-21"), entitled "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 doubtful 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.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
- ----------------------------
Goodwill and Other Intangibles - Under Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", 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 intangible
asset exceeds its fair value. On an annual basis, since the second quarter of
fiscal 2002, the Company has engaged independent valuation firms, or used
Company personnel to perform such testing. The testing 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 reporting units measured. Although
the Company believes its estimates are appropriate, the fair value measurements
of the Company's goodwill could be affected by using different estimates and
assumptions in these valuation techniques.
Property, Plant and Equipment - Property, plant and equipment is 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 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. The fair values of the assets are based upon Company estimates of
the discounted cash flows that are expected to result from the use and eventual
disposition of the assets or that amount that would be realized from an
immediate sale. An impairment charge is recognized for the amount, if any, by
which the carrying value of an asset exceeds its fair value. No impairment
charge was recognized in the first quarter of fiscal 2004, as no events or
circumstances indicated the existence of impairment. Although the Company
believes its estimates are appropriate, the fair value measurements of the
Company's long-lived assets could be affected by using different estimates and
assumptions in these valuation techniques.
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
receivables 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 $65.0 million and
$70.0 million at February 1, 2004 and November 2, 2003, respectively.
Accordingly, the trade receivables included on the February 1, 2004 and November
2, 2003 balance sheets have been reduced to reflect the $65.0 million and $70.0
million participation interest sold, respectively. 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.
22
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. Prior to March 31, 2002, the amount of the
additional or return premium was finalized. Subsequent thereto, adjustments to
premiums will be 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 ending March 31, 2003, a maximum premium has been predetermined and
accrued. For the current policy year, management evaluates the accrual, and the
underlying assumptions, regularly throughout the year and makes adjustments as
needed. The ultimate premium cost may be greater than 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.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2004 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 2, 2003
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
-------------------------------------------
February 1, February 2,
2004 2003
-------------------------------------------
(In thousands)
Net Sales:
- ------------------------------------------------
Staffing Services
Traditional Staffing $342,676 $281,586
Managed Services 238,098 235,935
-------------------------------------------
Total Gross Sales 580,774 517,521
Less: Non-recourse Managed Services (233,133) (221,045)
-------------------------------------------
Net Staffing Services Sales 347,641 296,476
Telephone Directory 14,571 12,471
Telecommunications Services 29,896 25,857
Computer Systems 24,095 20,374
Elimination of intersegment sales (3,522) (2,643)
-------------------------------------------
Total Net Sales $412,681 $352,535
===========================================
Segment Operating Profit (Loss):
- ------------------------------------------------
Staffing Services $1,391 ($1,346)
Telephone Directory 1,985 (202)
Telecommunications Services (1,902) (163)
Computer Systems 4,523 2,392
-------------------------------------------
Total Segment Operating Profit 5,997 681
General corporate expenses (7,560) (5,841)
-------------------------------------------
Total Operating Loss (1,563) (5,160)
Interest income and other expense (516) (374)
Foreign exchange gain-net 24 85
Interest expense (457) (643)
-------------------------------------------
Loss Before Income Taxes ($2,512) ($6,092)
===========================================
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2004 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 2, 2003--Continued
Overview
- --------
Volt Information Sciences, Inc. ("Volt") is a leading national provider of
staffing services and telecommunications and information solutions with a
Fortune 100 customer base. The Company operates in four segments and the
management discussion and analysis is broken down into these segments. 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 Volt Services Group branch offices.
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.
E-Procurement Solutions provides global vendor neutral procurement and
management solutions for supplemental staffing using its Consol web-based
system. 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 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.
Computer Systems: This segment provides directory assistance systems and
services primarily for the telecommunications industry, and provides IT
maintenance services.
There are several historical seasonal factors that usually affect the sales and
profits of the Company. The Staffing Services segment's sales are always lowest
in this first 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, and the segment's Uruguay
division publishes directories and produces a major portion of its sales and
most of its profits in the Company's fourth fiscal quarter. In the current
quarter, some of the high margin DataNational directories usually published in
the fourth quarter of the fiscal year were published in the current quarter.
There are numerous non-seasonal factors impacting sales and profits in the
current fiscal quarter. The sales and profits of the Staffing Services segment,
in addition to the factors noted above, was positively impacted by a rebound in
the country's use of temporary staffing, partially offset by the continued
pressure on margins caused by increases in state payroll taxes and workers'
compensation costs. The sales and profits of the Telephone Directory segment
were positively affected by an improvement in the ad backlog and the continued
positive effects of its new stringent credit policy, which has reduced bad
debts. Even though the sales of the Telecommunications Services segment
increased, profits were negatively impacted by a change in its product mix. The
Company has continued to reduce headcount within the segment to mitigate the
effect on the reduced margins and sales in the Central Office division that
should improve results in future quarters at current sales
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2004 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 2, 2003--Continued
Overview--Continued
- --------
volumes. The sales and profits of the Computer Systems segment were positively
impacted by the continued increase in the segment's ASP directory assistance
outsourcing business, in which there continues to be a sequential increase in
transaction volume.
The Company has focused on, and will continue to focus on aggressively
increasing its market share by fine-tuning its bidding process, while
maintaining strict adherence to its required margins. 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 ongoing compliance with the government's
new Sarbanes-Oxley Act, and the standardization and upgrading of the IT
redundancy and business continuity for corporate systems and communications
networks.
Results of Operations - Summary
- -------------------------------
In the three-month period of fiscal 2004, consolidated net sales increased by
$60.1 million, or 17%, to $412.7 million, from the comparable period of the
previous year. The increase in fiscal 2004 net sales resulted from increases in
all four of the Company's segments. Staffing services increased by $51.2
million, Telecommunications Services increased by $4.0 million, Computer Systems
increased by $3.7 million and the Telephone Directory segment increased by $2.1
million.
The net loss for the three months of fiscal 2004 was $1.5 million compared to a
net loss of $3.8 million in the comparable period of the previous year.
The Company's three-month fiscal 2004 loss before income taxes was $2.5 million
compared to a loss of $6.1 million in the comparable period of the previous
year. The increase in the operating profit of the Company's segments accounted
for $5.3 million of the $3.6 million improvement in results, the offset being
higher corporate general and administrative expenses. The Company's operating
segments reported an operating profit of $6.0 million for the first three months
of fiscal 2004 compared to $0.7 million in the comparable period of the previous
year. Contributing to the $5.3 million improvement were $1.4 million and $2.0
million operating profits reported by the Staffing Services and Telephone
Directory segments, respectively, compared to operating losses of $1.3 million
and $0.2 million, respectively, in the comparable period of the previous year,
an increase in operating profit by the Computer Systems segment of $2.1 million,
partially offset by a $1.8 million increased operating loss sustained by the
Telecommunications Services segment, which included a $1.3 million non-recurring
charge (see below).
The operating results for the three months of both fiscal periods were adversely
affected by a normal reduction of Staffing Services business during the holiday
season as well as the economic conditions in the telecommunications industry.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2004 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 2, 2003--Continued
Results of Operations - Summary Continued
- -------------------------------
In addition, many of the Company's Staffing customers had implemented widespread
layoffs and those in the telecommunications industry have significantly reduced
expenditures. These factors continue to adversely affect the results of the
Company's Staffing Services and Telecommunications Services segments. To
counteract these factors and strengthen the Company's future results, the
Company continues to review its cost containment programs.
Results of Operations - By Segment
- ----------------------------------
Staffing Services
Sales of the Staffing Services segment increased by $51.2 million, or 17%, to
$347.6 million in the three-month period of fiscal 2004, and the segment
reported an operating profit of $1.4 million in 2004 compared to an operating
loss of $1.3 million in the comparable period of the previous year.
The sales increase was primarily from traditional staffing in both the Technical
Placement and the Administrative and Industrial division and the VMC Consulting
business of the Technical Placement division, partially offset by reduced net
managed service sales.
The Technical Placement division reported an operating profit of $4.3 million on
net sales of $209.2 million for the three months of fiscal 2004 compared with an
operating profit of $1.8 million on net sales of $182.2 million in the
comparable period of the previous year. Gross billings in the Technical
Placement division increased 10% from $431.6 million in the first three months
of fiscal 2003 to $476.7 million in the first three months of fiscal 2004 due to
an 17% sales increase with traditional staffing customers, a 10% increase in
ProcureStaff volume due to new accounts and increased business from existing
accounts, and a 49% increase in VMC Consulting project management and consulting
sales to $22.1 million in the three months of fiscal 2004 from $14.8 million in
the comparable period of the previous year. However, substantially all of
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 of
the customers' payment to the Company. Net sales increased by 15% due to the
aforementioned increase in gross sales, along with an increase in the amount of
Company recruited employees fulfilling ProcureStaff assignments. The increase in
operating profit for the period was the result of the increase in sales and a
1.0 percentage point decrease in overhead costs.
The Administrative and Industrial division sustained an operating loss of $2.9
million on sales of $138.4 million in the first three months of fiscal 2004
compared to an operating loss of $3.1 million on sales of $114.3 million in the
comparable period of the previous year. The decrease in operating loss was the
result of the 21% increase in sales, partially offset by a decrease in gross
margin of 0.8 percentage points, due to higher taxes and workers' compensation
rates, increased competition, electronic auctions and customers leveraging their
buying power by consolidating the number of vendors with whom they deal, and an
increase of $1.9 million, or 10%, in overhead.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2004 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 2, 2003--Continued
Results of Operations - By Segment--Continued
- ----------------------------------
Staffing Services--Continued
A continued increase in profit levels depends on the timing and strength of an
increase towards previous usage levels of alternative staffing by American
industry. In addition, high unemployment and the need for state and local
governments to align their sales with expenditures will result in continued
pressure on margins as jurisdictions increase payroll and various other taxes.
Telephone Directory
The Telephone Directory segment's sales increased by $2.1 million, or 17%, to
$14.6 million in the three months of fiscal 2004. Its operating profit was $2.0
million compared to an operating loss of $0.2 million in the comparable period
of the previous year. Due to a change in the publication schedule of the
DataNational operation's community telephone directories, their sales increased
by $4.6 million, or 81%, from the comparable period in fiscal 2003. An increase
in ad sales backlog, which will produce sales in the next three fiscal quarters,
as well as an improvement in bad debt exposure as a result of improved credit
and collection procedures, provides reasonable expectations of improved
profitability in 2004. Sales declined in the segment's telephone production and
printing operations, the most significant being a $1.0 million, or 22%, decrease
in telephone production sales as compared to the comparable quarter in fiscal
2003, due to the previously reported loss of a contract with a
telecommunications company in the third quarter of fiscal 2003. The improvement
in operating results was predominantly the result of the $2.1 million increase
in sales within the segment, a 12.4 percentage point increase in gross margins,
primarily due to the mix of directories published by DataNational in the first
quarter of fiscal 2004.
Telecommunications Services
The Telecommunications Services segment's sales increased by $4.0 million, or
16%, to $29.9 million in the first three months of fiscal 2004. Its operating
loss increased by $1.7 million to $1.9 million in the first three months of
fiscal 2004 from a loss of $0.2 million in the comparable period of the previous
year. The sales increase was attributable to increased business in the Business
Systems and Construction divisions, partially offset by decreased sales in the
Central Office division. The increase in operating loss was due to a 4.6
percentage point decrease in gross margins, a previously reported $1.3 million
non-recurring charge incurred in the quarter related to a domestic consulting
contract for services, partially offset by a decrease in overhead as a
percentage of sales of 3.1 percentage points. In addition, reduced spending by
telephone companies for central office equipment resulted in a $1.2 million loss
for that division, compared to a $0.2 million operating profit in the first
quarter of fiscal 2003. A significant reduction in headcount in that division
occurred in January, as there is as yet no indication of increased business.
Despite this emphasis on cost controls, the results of the segment continue to
be affected by the decline in capital spending by telephone companies. This
factor has also increased competition for available work, pressuring pricing and
gross margins.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2004 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 2, 2003--Continued
Results of Operations - By Segment--Continued
- ----------------------------------
Computer Systems
The Computer Systems segment's growth has continued, with sales increasing by
$3.7 million, or 18%, to $24.1 million in the first three months of fiscal 2004
and its operating profit increasing by $2.1 million, or 89%, to $4.5 million
compared to the fiscal 2003 quarter. An increase in sales was reported by all of
the divisions within the segment. The segment's ASP directory assistance
out-sourcing business reflected a 10% sequential growth in business, as
transaction volume increased to 204.2 million in the first quarter of fiscal
2004 from 172.8 million in the fourth quarter of fiscal 2003. The growth in
operating profit from the comparable period of the previous year was the result
of the increase in sales and an increase in gross margins of 7.2 percentage
points.
Results of Operations - Other
Other items, discussed on a consolidated basis, affecting the results of
operations for the three-month periods were:
Selling and administrative expenses increased by $2.5 million, or 16%, to $18.5
million in the first three months of fiscal 2004 from the comparable period of
the previous year as a result of 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. Selling and administrative expenses expressed as a percentage of
sales, were 4.5% in both the three-month periods of fiscal 2004 and fiscal 2003.
Depreciation and amortization increased by $0.4 million, or 7%, to $6.2 million
in the first three months of fiscal 2004. The increase was attributable to an
increase in fixed assets over last year's comparable period.
Other Expense increased by $0.2 million, or 34%, to $0.7 million in the first
three months of fiscal 2004. In both fiscal years the expenses are primarily the
result of charges related to the Company's Securitization Program, as well as
sundry expenses.
Interest expense decreased by $0.2 million, or 29%, to $0.5 million in the first
three months of fiscal 2004. The decrease was the result of lower borrowings
levels and interest rates in Uruguay.
The Company's effective tax benefit rate on its financial reporting pre-tax
losses was 39.5% in the first three months of fiscal 2004 compared to an
effective tax rate benefit of 37.6% in comparable period of the previous year.
The increased rate was attributable to higher 2003 foreign losses for which no
tax benefit was provided.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED FEBRUARY 1, 2004 COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 2, 2003--Continued
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents, including restricted cash held in escrow for
ProcureStaff and Viewtech clients of $19.6 million and $18.9 million at February
1, 2004 and November 2, 2003, respectively, increased by $8.2 million to $70.2
million in the three months ended February 1, 2004. Unrestricted cash and cash
equivalents increased to $50.6 million at February 1, 2004 from $43.2 million at
November 2, 2003.
Operating activities provided $15.4 million of cash in the first three months of
fiscal 2004 compared to $20.9 million in the first three months of fiscal 2003.
Operating activities in the first three months of fiscal 2004, exclusive of
changes in operating assets and liabilities, produced $5.7 million of cash, as
the Company's net loss of $1.5 million included non-cash charges primarily for
depreciation and amortization of $6.2 million and accounts receivable provisions
of $1.0 million. In the first three months of fiscal 2003, operating activities,
exclusive of changes in operating assets and liabilities, produced $2.7 million
of cash, as the Company's net loss of $3.8 million included non-cash charges
primarily for depreciation and amortization of $5.7 million and accounts
receivable provisions of $0.8 million.
Changes in operating assets and liabilities produced $9.7 million of cash, net,
in the first three months of fiscal 2004, principally due to a decrease in the
level of accounts receivable of $26.2 million, an increase in the level of
customer advances and other liabilities of $3.2 million, partially offset by a
decrease in the level of accounts payable of $19.1 million. In the first three
months of fiscal 2003, changes in operating assets and liabilities produced
$18.2 million of cash, net, principally due to a decrease in the level of
accounts receivable of $34.7 million, an increase in the level of customer
advances and other liabilities of $7.7 million, partially offset by a decrease
in the level of accounts payable of $17.9 million and a decrease in the level of
accrued expenses of $5.9 million.
The principal factor in the $7.5 million and $3.9 million of cash applied to
investing activities for the first three months of fiscal 2004 and 2003,
respectively, was expenditures of $8.0 million and $4.2 million, respectively
for property, plant and equipment. The increase principally resulted from
purchases of equipment for the Computer Systems' ASP outsourcing business.
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. The principal factor in the $0.3 million of cash provided by
financing activities in the first three months of fiscal 2003 was an increase in
the level of notes payable due to banks of $0.3 million.
Commitments
- -----------
In fiscal 2000, the Company began development of a new web-enabled
front-end system designed to improve efficiency and connectivity in
the recruiting, assignment, customer maintenance and other functions
in the branch offices of the Staffing Services segment. The total
costs to develop and install this system are currently anticipated to
be approximately $12.0 million, of which approximately $8.8 million
has been incurred and capitalized to date.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Commitments--Continued
- -----------
The Company's Computer Systems segment anticipates spending approximately $10.2
million over the next twelve months to furnish systems and equipment to
customers and provide enhanced directory assistance and other information
services as a transaction-based ASP service, charging a fee per transaction. The
Company has no other material capital commitments.
There has been no material change through February 1, 2004 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 November
2, 2003.
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
- ----------------------
Effective April 15, 2002, the Company entered into a $100.0 million three-year
accounts receivable securitization program ("Securitization Program"). 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 $100.0 million). The
Company retains the servicing responsibility for the accounts receivable. On
April 15, 2002, TRFCO initially purchased from Volt Funding a participation
interest of $50.0 million out of an initial pool of approximately $162.0 million
of receivables. Of the $50.0 million cash paid by Volt Funding to the Company,
$35.0 million was used to repay the entire outstanding principal balance under
the Company's former revolving credit facility. At January 14, 2004, TRFCO had
purchased from Volt Funding a participation interest of $65.0 million out of a
pool of approximately $180.8 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 has 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.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Securitization Program--Continued
- ----------------------
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 on TRFCO's
commercial paper, are charged to the consolidated statement of operations.
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. The
Company's most recent long-term debt rating was "BBB-" with a neutral rating
outlook. At February 1, 2004, the Company was in compliance with all
requirements of its Securitization Program.
The Company has been notified by TRFCO that a request to increase the
securitization facility to $150 million in anticipation of increased sales, as
well as an extension of the term to April 2006, has been approved and will be
finalized in the near future.
Credit Lines
- ------------
At February 1, 2004, the Company had credit lines with domestic and foreign
banks that provide for borrowings and letters of credit up to an aggregate of
$51.5 million, including a $40.0 million revolving credit facility (the "Credit
Facility") in favor of the Company and designated subsidiaries under a secured
syndicated revolving credit agreement (the "Credit Agreement").
The Credit Facility of $40.0 million, which is scheduled to expire in April
2004, includes a $15.0 million letter of credit sub-facility. 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, N.A., Wells
Fargo, N.A. 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 February 1, 2004, the borrowing base was approximately
$37.9 million. Borrowings under the Credit Facility are to bear interest at
various 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 February 1, 2004, if a three-month LIBO rate was the interest
rate option selected by the Company, borrowings would have borne interest at the
rate of 3.2% per annum. At February 1, 2004, the facility fee was 0.4% per
annum.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Credit Lines - Continued
- ------------
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, of $220.0 million; a
limitation on cash dividends and capital stock repurchases and redemptions by
the Company in any one fiscal year to 25% 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 February 1, 2004, the
Company was in compliance with all covenants in the Credit Agreement and
believes it will be in compliance throughout its remaining term.
The Company is liable on all loans made to it and all letters of credit issued
at its request, 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
February 1, 2004, four of those guarantors have pledged approximately $50.8
million of accounts receivable, other than those in the Securitization Program
(discussed above), as collateral security for their guarantee obligations. Under
certain circumstances, other subsidiaries of the Company also may be required to
become guarantors under the Credit Facility. The Company has pledged all of the
stock of its Volt Funding Corp. subsidiary (discussed above) as collateral
security for its own obligations under the Credit Facility.
Subsequent to February 1, 2004, the Company borrowed three million British
pounds ($5.4 million) under the Credit Facility.
The Company has requested, and expects to obtain, from the participating banks,
an extension of the term of the Credit Facility beyond April 2004, but in
conjunction with the increase in the Securitization Program (discussed above) at
a reduced amount. The Company's intention is to use the facility for short-term
borrowings and to hedge foreign currency exposures in place of currency options
and exchange contracts, when borrowing in the foreign currency provides a
low-cost alternative.
Summary
- -------
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program are sufficient to fund its presently contemplated
operations through the remainder of fiscal 2004 and satisfy its debt
obligations.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements to be Effective in Fiscal 2004
- ------------------------------------------------------------
In December 2003, the FASB revised FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") which provides new guidance with respect
to the consolidation of all previously unconsolidated entities, including
special purpose entities. The Company has no unconsolidated subsidiaries. The
provisions of FIN 46 that were adopted by the Company through February 1, 2004
did not have an impact on the Company's consolidated financial position and
results of operations.
Related Party Transactions
- --------------------------
During the first quarter of fiscal 2004, the Company paid $0.1 million to the
law firm of which Lloyd Frank, a director and member of the Company's Audit
Committee (until April 2004), is a member, primarily for services rendered.
The Company rents approximately 2,600 square feet (previously 2,500 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 (previously $1,500 per month), effective March 1, 2004. 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.
34
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 $100 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 decrease its
annual net interest expense and securitization costs by $10,000 and $201,000,
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 $15.5 million
at February 1, 2004. 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 February 1, 2004, the total market value of these
investments was $4.2 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 February 1, 2004, the total of the Company's net investment in foreign
operations was $12.4 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
February 1, 2004, the total of the Company's foreign exchange contracts was $9.4
million, leaving a balance of net foreign assets exposed of $3.0 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 or strengthening of the U.S. dollar against these currencies at
February 1, 2004 by 10% would result in a pretax gain or loss of $0.7 million
and $0.3 million, respectively, related to these positions.
35
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -- Continued
- --------------------------------------------------------------------------------
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at February 1,
2004. For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
Interest Rate Market Risk Payments By Expected Maturity Dates as of February 1, 2004
- ----------------------------------------------------------------------------------------------
Less than 1-3 3-5 After 5
Total 1 year Years Years Years
------------------------------------------------------------
(Dollars in thousands of US$)
Cash and Cash Equivalents
- ----------------------------------
Money Market and Cash Accounts $70,241 $70,241
Weighted Average Interest Rate 0.7% 0.7%
-------------------------
Total Cash & Cash Equivalents $70,241 $70,241
=========================
Securitization Program
- ----------------------------------
Accounts Receivable Securitization $65,000 $65,000
Finance Rate 1.8% 1.8%
-------------------------
Securitization Program $65,000 $65,000
=========================
Debt
- ----------------------------------
Term Loan $14,379 $378 $856 $1,008 $12,137
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Notes Payable to Banks $4,252 $4,252
Weighted Average Interest Rate 6.1% 6.1%
------------------------------------------------------------
Total Debt $18,631 $4,630 $856 $1,008 $12,137
============================================================
36
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -- Continued
Foreign Exchange Market Risk Contract Values
- -------------------------------------------------------------------------------------------
Less than
Total 1 Year Fair Value (1)
--------------------------------------------------------------
(Dollars in thousands of US $)
Option Contracts
- -----------------------------
Euro to British Pounds
Sterling $1,879 $1,879 $28
Contractual Exchange Rate 0.69 0.69
Canadian $ to U.S.$ $2,067 $2,067 $26
---
Contractual Exchange Rate 1.45 1.45
-------------------------
Total Option Contracts $3,946 $3,946 $54
-------------------------
Spot Sales
- -----------------------------
British Pounds to U.S. $ $5,431 $5,431 $44
---
Contractual Exchange Rate 1.81 1.81
-------------------------
Total Spot Sales $5,431 $5,431
-------------------------
Total Exchange Contracts $9,377 $9,377 $98
========================= ===
(1) Represents the fair value of the foreign contracts at February 1, 2004.
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
February 1, 2004 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
There were no significant changes in the Company's internal controls over
financial reporting that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial
reporting.
37
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 Independent
Accountants' Review Report
15.02 Letter from Ernst & Young LLP regarding Rule 436(c) of the
Securities Act of 1933
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
(b) Reports on Form 8-K:
During the quarter ended February 1, 2004, the Company filed a Report on Form
8-K dated December 22, 2003 (date of earliest event reported) reporting under
Item 7, Financial Statements and Exhibits and Item 9 Regulation FD Disclosure.
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)
Date: March 9, 2004 BY: /s/ JACK EGAN
--------------
JACK EGAN
Vice President - Corporate Accounting
(Principal Accounting Officer)
38
EXHIBIT INDEX
-------------
Exhibit
Number Description
- ------ -----------
15.01 Letter from Ernst & Young LLP regarding Independent
Accountants' Review Report
15.02 Letter from Ernst & Young LLP regarding Rule 436(c) of the
Securities Act of 1933
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