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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 Six Months Ended May 1, 2005.
Or
---
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the transition period from __________________ to
Commission File No. 1-9232
VOLT INFORMATION SCIENCES, INC.
--------------------------------
(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 June 3, 2005 was 15,325,080.
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 -
Six and Three Months Ended May 1, 2005 and May 2, 2004 3
Condensed Consolidated Balance Sheets -
May 1, 2005 and October 31, 2004 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended May 1, 2005 and May 2, 2004 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 47
Item 4. Controls and Procedures 49
PART II - OTHER INFORMATION
Item 6. Exhibits 53
SIGNATURE 53
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
----------------- ------------------
May 1, May 2, May 1, May 2,
2005 2004(a) 2005 2004(a)
-------- -------- -------- --------
(Restated) (Restated)
(In thousands, except per share data)
NET SALES $1,043,880 $892,438 $546,045 $478,479
COST AND EXPENSES:
Cost of sales 974,496 834,087 506,323 444,239
Selling and administrative 43,023 37,952 22,199 19,047
Depreciation and amortization 15,027 12,370 7,527 6,215
----------- ----------- ----------- -----------
1,032,546 884,409 536,049 469,501
----------- ----------- ----------- -----------
OPERATING PROFIT 11,334 8,029 9,996 8,978
OTHER INCOME (EXPENSE):
Interest income 1,122 431 562 202
Other expense - net (1,868) (1,860) (852) (1,115)
Foreign exchange loss - net (260) (70) (98) (94)
Interest expense (954) (880) (442) (423)
----------- ----------- ----------- -----------
Income from continuing operations before
minority interest and income taxes 9,374 5,650 9,166 7,548
Minority interest (3,253) - (1,759) -
----------- ----------- ----------- -----------
Income before income taxes 6,121 5,650 7,407 7,548
Income tax provision (2,402) (2,195) (2,880) (2,940)
----------- ----------- ----------- -----------
Income from continuing operations 3,719 3,455 4,527 4,608
Discontinued operations-
sale of real estate, net of taxes - 9,520 - 9,520
----------- ----------- ----------- -----------
NET INCOME $3,719 $12,975 $4,527 $14,128
=========== =========== =========== ===========
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)--Continued
Six Months Ended Three Months Ended
----------------- ------------------
May 1, May 2, May 1, May 2,
2005 2004(a) 2005 2004(a)
-------- -------- -------- --------
(Restated) (Restated)
Per Share Data
--------------
Basic:
Income from continuing operations $0.24 $0.23 $0.30 $0.31
Discontinued operations-sale of real estate 0.62 0.62
----------- ----------- ----------- -----------
Net income $0.24 $0.85 $0.30 $0.93
=========== =========== =========== ===========
Weighted average number of shares 15,307 15,223 15,324 15,224
=========== =========== =========== ===========
Diluted:
Income from continuing operations $0.24 $0.23 $0.29 $0.30
Discontinued operations-sale of real estate 0.62 0.62
----------- ----------- ----------- -----------
Net income $0.24 $0.85 $0.29 $0.92
=========== =========== =========== ===========
Weighted average number of shares 15,444 15,313 15,446 15,336
=========== =========== =========== ===========
(a) As reported, the Company has restated its previously issued financial
statements for fiscal years 2000 through the second quarter of fiscal 2004
as a result of inappropriate application of accounting principles for
revenue recognition by its telephone directory publishing operation in
Uruguay. The restatement involved only the timing of when certain
advertising revenue and related costs and expenses are recognized, and the
cumulative results of the Company did not change. Accordingly, sales have
been increased by $2.5 million and $1.2 million and the net income has been
increased by $0.7 million and $0.4 million, or $0.05 per share and $0.03
per share, for the six and three months ended May 2, 2004.
See accompanying notes to condensed consolidated financial statements.
4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
May 1, October 31,
2005 2004(a)
-------- -----------
(In thousands,
ASSETS except share data)
CURRENT ASSETS
Cash and cash equivalents including restricted cash
of $26,421 (2005) and $43,722 (2004) $88,614 $88,031
Short-term investments 3,900 4,248
Trade accounts receivable less allowances of $9,798
(2005) and $10,210 (2004) 391,868 409,130
Inventories 32,660 32,676
Recoverable income taxes 2,683 -
Deferred income taxes 9,660 9,385
Prepaid expenses and other assets 19,069 14,847
---------- ----------
TOTAL CURRENT ASSETS 548,454 558,317
Investment in securities 90 100
Property, plant and equipment-net 81,362 85,038
Deposits and other assets 2,071 1,439
Goodwill 29,144 29,144
Intangible assets-net of accumulated amortization of
$839 (2005) and $288 (2004) 15,447 15,998
---------- ----------
TOTAL ASSETS $676,568 $690,036
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $4,007 $7,955
Current portion of long-term debt 2,330 399
Accounts payable 180,541 192,163
Accrued wages and commissions 51,500 54,200
Accrued taxes other than income taxes 19,304 17,729
Other accruals 31,913 36,036
Deferred income and other liabilities 37,651 36,909
Income tax payable 4,270
---------- ----------
TOTAL CURRENT LIABILITIES 327,246 349,661
Accrued insurance 4,478 86
Long-term debt 13,518 15,588
Deferred income taxes 10,721 11,764
Minority interest 39,673 36,420
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--500,000
shares; issued--none
Common stock, par value $.10; Authorized--30,000,000
shares; issued-- 15,323,955 shares (2005) and
15,282,625 shares (2004) 1,532 1,528
Paid-in capital 43,382 42,453
Retained earnings 236,433 232,714
Accumulated other comprehensive loss (415) (178)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 280,932 276,517
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $676,568 $690,036
========== ==========
(a) The balance sheet at October 31, 2004 has been derived from the audited
financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
----------------
May 1, May 2,
2005 2004
-------- --------
(Restated)
(In thousands)
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES
Net income $3,719 $12,975
Adjustments to reconcile net income to cash provided by
(applied to) operating activities:
Minority interest 3,253 -
Income from discontinued operations-sale of real
estate - (9,520)
Depreciation and amortization 15,027 12,370
Accounts receivable provisions 1,902 1,815
Loss (gain) on foreign currency translation 40 (13)
Deferred income tax benefit (1,215) (96)
Loss (gain) on disposition of fixed assets 85 (114)
Changes in operating assets and liabilities:
Accounts receivable 5,903 (35,222)
Securitization of accounts receivable 10,000 (20,000)
Inventories 16 5,850
Prepaid expenses and other current assets (4,117) (1,490)
Other assets (631) 794
Accounts payable (11,996) 14,382
Accrued expenses (949) 13,356
Deferred income and other liabilities 601 3,211
Income taxes payable (6,953) 750
---------- ----------
NET CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES 14,685 (952)
---------- ----------
6
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--CONTINUED
Six Months Ended
----------------
May 1, May 2,
2005 2004
-------- --------
(Restated)
(In thousands)
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES
Sales of investments $814 $916
Purchases of investments (413) (881)
Proceeds from disposals of property, plant and equipment 673 147
Proceeds from sale of real estate (discontinued
operations) - 18,500
Purchases of property, plant and equipment (11,559) (16,822)
---------- ----------
NET CASH (APPLIED TO) PROVIDED BY INVESTING ACTIVITIES (10,485) 1,860
---------- ----------
CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (195) (182)
Exercise of stock options 933 100
Decrease in notes payable to bank (4,135) (158)
---------- ----------
NET CASH APPLIED TO FINANCING ACTIVITIES (3,397) (240)
---------- ----------
Effect of exchange rate changes on cash (220) 194
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 583 862
Cash and cash equivalents, including restricted cash,
beginning of period 88,031 62,057
---------- ----------
CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED CASH
END OF PERIOD $88,614 $62,919
========== ==========
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $1,108 $883
Income taxes $10,417 $1,700
See accompanying notes to condensed consolidated financial statements.
7
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 May 1, 2005 and consolidated
results of operations for the six and three months ended May 1, 2005 and May 2,
2004 and consolidated cash flows for the six months ended May 1, 2005 and May 2,
2004.
As reported, the Company has restated its previously issued financial statements
for fiscal years 2000 through the second quarter of fiscal 2004 as a result of
inappropriate application of accounting principles for revenue recognition by
its telephone directory publishing operation in Uruguay. The operation in
Uruguay printed its Montevideo directory each year during the October - November
time frame, and the Company has determined that revenue should have been
recognized based upon the distribution of the directories. The restatement
involves only the timing of when certain advertising revenue and related costs
and expenses are recognized, and the cumulative results of the Company do not
change. All prior year information included in these financial statements has
been restated to reflect the corrected information.
The Company has elected to follow Accounting Principles Board ("APB") Opinion
25, "Accounting for Stock Issued to Employees," to account for its Non-Qualified
Stock Option Plan under which no compensation cost is recognized because the
option exercise price is equal to at least the market price of the underlying
stock on the date of grant. Had compensation cost for these plans been
determined at the grant dates for awards under the alternative accounting method
provided for in Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123," net income and earnings per share, on a
pro forma basis, would have been:
Six Months Ended Three Months Ended
----------------- ------------------
May 1, May 2, May 1, May 2,
2005 2004 2005 2004
-------- -------- -------- --------
(Restated) (Restated)
(Dollars in thousands, except per share data)
Net income as reported $3,719 $12,975 $4,527 $14,128
Pro forma compensation expense, net of taxes (56) (71) (25) (32)
-------- -------- -------- --------
Pro forma net income $3,663 $12,904 $4,502 $14,096
======== ======== ======== ========
Pro forma income per share
Basic $0.24 $0.85 $0.29 $0.93
======== ======== ======== ========
Diluted $0.24 $0.84 $0.29 $0.92
======== ======== ======== ========
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 fiscal 2004: risk-free interest rates of 2.5%;
expected volatility of .51; an expected life of the options of five years; and
no dividends. The weighted-average fair value of stock options granted during
fiscal 2004 was $11.49. There were no options granted in fiscal 2005.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--CONTINUED
Note A--Basis of Presentation--Continued
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R, "Share-Based Payment," which replaces the superseded SFAS No. 123,
"Accounting for Stock-Based Compensation." This Statement requires that all
entities apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees and suppliers when the entity
acquires goods or services. The provisions of this Statement are required to be
adopted by the Company beginning October 31, 2005. The Company is currently
assessing the impact that the adoption will have on the Company's consolidated
financial position and results of operations.
These statements should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended October 31, 2004. The accounting policies used in preparing these
financial statements are the same as those described in that Report. The
Company's fiscal year ends on the Sunday nearest October 31.
Note B--Securitization Program
In April 2005, the Company amended its $150.0 million accounts receivable
securitization program ("Securitization Program") to provide that the expiration
date be extended from April 2006 to April 2007. Under the Securitization
Program, receivables related to the United States operations of the staffing
solutions business of the Company and its subsidiaries are sold from
time-to-time by the Company to Volt Funding Corp., a wholly owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A. and unaffiliated with the Company, an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company (subject to a maximum purchase by TRFCO in the
aggregate of $150.0 million). The Company retains the servicing responsibility
for the accounts receivable. At May 1, 2005, TRFCO had purchased from Volt
Funding a participation interest of $80.0 million out of a pool of approximately
$256.4 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company. Accounts
receivable are only reduced to reflect the fair value of receivables actually
sold. The Company entered into this arrangement as it provided a low-cost
alternative to other financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors. TRFCO has no recourse to
the Company (beyond its interest in the pool of receivables owned by Volt
Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--CONTINUED
Note B--Securitization Program--Continued
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
incurred by TRFCO on the issuance of its commercial paper, are charged to the
consolidated statement of operations.
The Company incurred charges, related to the Securitization Program, of $1.3
million and $0.8 million in the six and three months ended May 1, 2005,
respectively, compared to $0.9 million and $0.6 million in the six and three
months ended May 2, 2004 respectively, which are included in Other Expense on
the condensed consolidated statement of operations. The equivalent cost of funds
in the Securitization Program were 4.1% per annum and 2.9% per annum in the
six-month 2005 and 2004 fiscal periods, 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 May 1, 2005 and October 31, 2004, the Company's carrying retained interest in
a revolving pool of receivables was approximately $175.8 million and $178.2
million, respectively, net of a service fee liability, out of a total pool of
approximately $256.4 million and $248.7 million, respectively. The outstanding
balance of the undivided interest sold to TRFCO was $80.0 million and $70.0
million at May 1, 2005 and October 31, 2004, respectively. Accordingly, the
trade accounts receivable included on the May 1, 2005 and October 31, 2004
balance sheets have been reduced to reflect the participation interest sold of
$80.0 million and $70.0 million, respectively.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold or the Company failing to maintain a long-term
debt rating of "B" or better, or the equivalent thereof, from a nationally
recognized rating organization. At May 1, 2005, the Company was in compliance
with all requirements of the Securitization Program.
Note C--Inventories
Inventories of accumulated unbilled costs and materials by segment are as
follows:
May 1, October 31,
2005 2004
----------- -----------
(Dollars in thousands)
Telephone Directory $11,473 $11,313
Telecommunications Services 15,963 14,505
Computer Systems 5,224 6,858
----------- -----------
Total $32,660 $32,676
=========== ===========
The cumulative amounts billed under service contracts at May 1, 2005 and October
31, 2004 of $18.0 million and $13.9 million, respectively, are credited against
the related costs in inventory.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--CONTINUED
NOTE D--Short-Term Borrowings
In April 2005, the Company amended its secured, syndicated, revolving credit
agreement ("Credit Agreement") which was to expire in April 2005, to, among
other things, extend the term for three years to April 2008 and increase the
line from $30.0 million to $40.0 million. In July 2004, this program was amended
to release Volt Delta Resources, LLC ("Volt Delta") as a guarantor and
collateral grantor under the Credit Agreement due to the previously announced
agreement between Volt Delta and Nortel Networks Inc. ("Nortel Networks"). At
May 1, 2005, the Company had credit lines with domestic and foreign banks which
provided for borrowings and letters of credit up to an aggregate of $51.7
million, including $40.0 million under the Credit Agreement.
The Credit Agreement established a credit facility ("Credit Facility") in favor
of the Company and designated subsidiaries, of which up to $15.0 million may be
used for letters of credit. Borrowings by subsidiaries are limited to $25.0
million in the aggregate. The administrative agent for the secured Credit
Facility is JPMorgan Chase Bank. The other banks participating in the Credit
Facility are Mellon Bank, N.A., Wells Fargo Bank, N.A., Lloyds TSB Bank PLC and
Bank of America, N.A..
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. As amended, in lieu of the previous
borrowing base formulation, the Credit Agreement now requires the maintenance of
specified accounts receivable collateral in excess of any outstanding
borrowings. Based upon the Company's leverage ratio and debt rating at May 1,
2005, if a three-month U.S. Dollar LIBO rate were the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
4.0% per annum. At May 1, 2005, the facility fee was 0.3% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock repurchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ended 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 May 1, 2005, the Company was in compliance with all covenants
in the Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Under the new amendment, five subsidiaries of the
Company remain as guarantors of all loans made to the Company or to subsidiary
borrowers under the Credit Facility. At May 1, 2005, four of those guarantors
have pledged approximately $42.7 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.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--CONTINUED
NOTE D--Short-Term Borrowings--Continued
At May 1, 2005, the Company had total outstanding foreign currency bank
borrowings of $4.0 million, none of which were under the Credit Agreement. These
bank borrowings provide a hedge against devaluation in foreign currency
denominated assets.
NOTE E--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
May 1, October 31,
2005 2004
----------- -----------
(Dollars in thousands)
8.2% term loan (a) $13,934 $14,130
Payable to Nortel Networks (b) 1,914 1,857
----------- -----------
15,848 15,987
Less amounts due within one year 2,330 399
----------- -----------
Total long-term debt $13,518 $15,588
=========== ===========
(a) In September 2001, a subsidiary of the Company entered into a $15.1 million
loan agreement with General Electric Capital Business Asset Funding
Corporation. Principal payments have reduced the loan to $13.9 million at
May 1, 2005. The 20-year loan, which bears interest at 8.2% per annum and
requires principal and interest payments of $0.4 million per quarter, is
secured by a deed of trust on certain land and buildings that had a
carrying amount at May 1, 2005 of $10.3 million. The obligation is
guaranteed by the Company.
(b) Represents the present value of a $2.0 million payment due to Nortel
Networks in February 2006, discounted at 6% per annum, as required in an
agreement closed on August 2, 2004.
NOTE F--Stockholders' Equity
Changes in the major components of stockholders' equity for the six months ended
May 1, 2005 are as follows:
Common Paid-In Retained
Stock Capital Earnings
--------- --------- ---------
(In thousands)
Balance at October 31, 2004 $1,528 $42,453 $232,714
Stock options exercised - 41,330 shares 4 929 -
Net income for the six months - - 3,719
--------- --------- ---------
Balance at May 1, 2005 $1,532 $43,382 $236,433
========= ========= =========
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--CONTINUED
NOTE F--Stockholders' Equity--Continued
Another component of stockholders' equity, the accumulated other comprehensive
loss, consists of cumulative unrealized foreign currency translation losses, net
of taxes, of $445,000 and $214,000 at May 1, 2005 and October 31, 2004,
respectively, and an unrealized gain, net of taxes, of $30,000 and $36,000 in
marketable securities at May 1, 2005 and October 31, 2004, respectively. Changes
in these items, net of income taxes, are included in the calculation of
comprehensive loss as follows:
Six Months Ended Three Months Ended
----------------- ------------------
May 1, May 2, May 1, May 2,
2005 2004 2005 2004
-------- -------- -------- --------
(Restated) (Restated)
(In thousands)
Net income $3,719 $12,975 $4,527 $14,128
Foreign currency translation adjustments-net (231) (81) (117) (121)
Unrealized (loss) gain on marketable securities-net (6) 2 (25) 17
-------- -------- -------- --------
Total comprehensive income $3,482 $12,896 $4,385 $14,024
======== ======== ======== ========
NOTE G--Per Share Data
In calculating basic earnings per share, the dilutive effect of stock options is
excluded. Diluted earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding and the assumed exercise of
dilutive outstanding stock options based on the treasury stock method.
Six Months Ended Three Months Ended
----------------- ------------------
May 1, May 2, May 1, May 2,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Denominator for basic earnings per share
Weighted average number of shares 15,307,380 15,222,586 15,323,593 15,223,545
Effect of dilutive securities:
Employee stock options 136,676 90,578 122,704 112,259
------------ ------------ ------------ ------------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 15,444,056 15,313,164 15,446,297 15,335,804
============ ============ ============ ============
Options to purchase 45,250 and 102,050 shares of the Company's common stock were
outstanding at May 1, 2005 and May 2, 2004, respectively but were not included
in the computation of diluted earnings per share because the effect of inclusion
would have been antidilutive.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--CONTINUED
NOTE H--Segment Disclosures
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the six and three months ended May 1,
2005 and May 2, 2004, included on page 28 of this Report, is an integral part of
these condensed consolidated financial statements. During the six months ended
May 1, 2005, consolidated assets decreased by $13.5 million primarily due to an
increase in the use of the Company's Securitization Program.
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 May 1, 2005, the Company had outstanding foreign
currency option and forward contracts in the aggregate notional amount
equivalent to $5.5 million, which approximated its net investment in foreign
operations and is accounted for as a hedge under SFAS No. 52, "Foreign Currency
Translation."
Included in cash and cash equivalents at May 1, 2005 and October 31, 2004 were
approximately $26.4 million and $43.7 million, respectively, restricted to cover
obligations that were reflected in accounts payable at such dates. These amounts
primarily relate to contracts with customers in which the Company manages the
customers' alternative staffing requirements, including the payment of associate
vendors.
NOTE J--Acquisition and Sales of Businesses and Subsidiaries
On August 2, 2004, Volt Delta, a wholly-owned subsidiary of the Company, closed
a Contribution Agreement (the "Contribution Agreement") with Nortel Networks
under which Nortel Networks contributed certain of the assets (consisting
principally of a customer base and contracts, intellectual property and
inventory) and certain specified liabilities of its directory and operator
services ("DOS") business to Volt Delta in exchange for a 24% minority equity
interest in Volt Delta. Together with its subsidiaries, Volt Delta is reported
as the Company's Computer Systems segment. Volt Delta is using the assets
acquired from Nortel Networks to enhance the operation of its DOS business. The
acquisition enables Volt Delta to provide the newly combined customer base with
new solutions, an expanded suite of products, content and enhanced services. As
a result of this transaction, approximately 155 DOS business employees in North
America joined VoltDelta.
In addition, the companies entered into a ten-year relationship agreement to
maintain the compatibility and interoperability between future releases of
Nortel Networks' Traffic Operator Position System ("TOPS") switching platform
and Volt Delta's IWS/MWS operator workstations and associated products. Nortel
Networks and Volt Delta will work together developing feature content and
release schedules for, and to ensure compatibility between, any TOPS changes
that require a change in Volt Delta's products or workstations.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--CONTINUED
NOTE J--Acquisition and Sales of Businesses and Subsidiaries--Continued
Also, on August 2, 2004, the Company and certain subsidiaries entered into a
Members' Agreement (the "Members' Agreement") with Nortel Networks which defined
the management of Volt Delta and the respective rights and obligations of the
equity owners thereof. The Members' Agreement provides that commencing two years
from the date thereof, Nortel Networks may exercise a put option or Volt Delta
may exercise a call option, in each case to affect the purchase by Volt Delta of
Nortel Networks' minority interest in Volt Delta ("Contingent Liability"). If
either party exercises its option between the second and third year from the
date of the Members' Agreement, the price paid to Nortel Networks for its 24%
minority equity interest will be the product of the revenue of Volt Delta for
the twelve-month period ended as of the fiscal quarter immediately preceding the
date of option exercise (the "Volt Delta Revenue Base") multiplied by 70% of the
enterprise value-to-revenue formula index of specified comparable companies
(which index shall not exceed 1.8), times Nortel Networks' ownership interest in
Volt Delta (the amount so calculated would not exceed 30.24% of the Volt Delta
Revenue Base), with a minimum payment of $25.0 million and a maximum payment of
$70.0 million. Based on the pro forma financial results of Volt Delta for the
year ended May 1, 2005, the Contingent Liability for this put/call would be
$49.5 million at May 1, 2005. If the option is exercised after three years from
the date of the Members' Agreement, the price paid will be a mutually agreed
upon amount.
The Company engaged an independent valuation firm to assist in the determination
of the purchase price (the value of the 24% equity interest in Volt Delta) of
the acquisition and its allocation. The preliminary allocation was completed in
the fourth quarter of fiscal 2004, subject to finalization of certain
adjustments.
The assets and liabilities of the acquired business are accounted for under the
purchase method of accounting at the date of acquisition, recorded at their fair
values, with the recognition of a minority interest to reflect Nortel Networks'
24% investment in Volt Delta. The results of operations have been included in
the Consolidated Statements of Operations since the acquisition date.
Preliminary Purchase Allocation
Fair Value of Assets Acquired and Liabilities Assumed
-----------------------------------------------------
(In thousands)
Cash $3,491
Inventories 1,551
Deposit and other assets 404
Goodwill 20,162
Intangible assets 15,900
------
Total assets $41,508
=======
Accrued wages and commissions $700
Other accrued expenses 2,189
Other liabilities 2,791
Long-term debt 1,828
Minority interest 34,000
------
Total liabilities $41,508
=======
The intangible assets represent the fair value of customer relationships ($15.1
million) and product technology ($0.8 million), and are being amortized over 16
years and 10 years, respectively. Since the members' interests in Volt Delta are
treated as partnership interests, the tax deduction for amortization will not
commence until the Contingent Liability is final and determined.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--CONTINUED
NOTE K--Goodwill and Intangibles
Goodwill and intangibles with indefinite lives are no longer amortized, but are
subject to annual testing using fair value methodology. An impairment charge is
recognized for the amount, if any, by which the carrying value of an
indefinite-life intangible asset exceeds its fair value. The test for goodwill,
which is performed in the Company's second fiscal quarter, primarily uses
comparable multiples of sales and EBITDA and other valuation methods to assist
the Company in the determination of the fair value of the goodwill and the
reporting units measured.
The following table represents the balance of intangible assets subject to
amortization:
May 1, October 31,
2005 2004
----------- -----------
(Dollars in thousands)
Intangible assets $16,286 $16,286
Accumulated amortization (839) (288)
----------- -----------
Net Carrying Value $15,447 $15,998
=========== ===========
Note L--Primary Insurance Casualty Program
The Company is insured with a highly rated insurance company under a program
that provides primary workers' compensation, employer's liability, general
liability and automobile liability insurance under a loss sensitive program. In
certain mandated states, the Company purchases workers' compensation insurance
through participation in state funds and the experience-rated premiums in these
state plans relieve the Company of additional liability. In the loss sensitive
program, initial premium accruals are established based upon the underlying
exposure, such as the amount and type of labor utilized, number of vehicles,
etc. The Company establishes accruals utilizing actuarial methods to estimate
the undiscounted future cash payments that will be made to satisfy the claims,
including an allowance for incurred-but-not-reported claims. This process also
includes establishing loss development factors, based on the historical claims
experience of the Company and the industry, and applying those factors to
current claims information to derive an estimate of the Company's ultimate
premium liability. In preparing the estimates, the Company also considers the
nature and severity of the claims, analyses provided by third party actuaries,
as well as current legal, economic and regulatory factors. The insurance
policies have various premium rating plans that establish the ultimate premium
to be paid. Adjustments to premium are made based upon the level of claims
incurred at a future date up to three years after the end of the respective
policy period. At May 1, 2005 and October 31, 2004, the Company's liability for
the outstanding plan years was $3.0 and $8.3 million, respectively.
16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
This report and other reports and statements issued by the Company and its
officers from time to time contain certain "forward-looking statements." Words
such as "may," "should," "likely," "could," "seek," "believe," "expect,"
"anticipate," "estimate," "project," "intend," "strategy," "design to," and
similar expressions are intended to identify forward-looking statements about
the Company's future plans, objectives, performance, intentions and
expectations. These forward-looking statements are subject to a number of known
and unknown risks and uncertainties including, but are not limited to, those set
forth below under "Factors That May Affect Future Results." Such risks and
uncertainties could cause the Company's actual results, performance and
achievements to differ materially from those described in or implied by the
forward-looking statements. Accordingly, readers should not place undue reliance
on any forward-looking statements made by or on behalf of the Company. The
Company does not assume any obligation to update any forward-looking statements
after the date they are made.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY'S BUSINESS IS DEPENDENT UPON GENERAL ECONOMIC, COMPETITIVE AND OTHER
BUSINESS CONDITIONS INCLUDING THE EFFECTS OF THE UNITED STATES AND EUROPEAN
ECONOMIES AND OTHER GENERAL CONDITIONS, SUCH AS CUSTOMERS OFF-SHORING ACTIVITIES
TO OTHER COUNTRIES.
The demand for the Company's services in all segments is dependent upon general
economic conditions. Accordingly, the Company's business tends to suffer during
economic downturns. In addition, in the past few years major United States
companies, many of which are customers of the Company, have increasingly
outsourced business to foreign countries with lower labor rates, less costly
employee benefit requirements and fewer regulations than the United States.
There could be an adverse effect on the Company if customers and potential
customers continue to move manufacturing and servicing operations off-shore,
reducing their need for temporary workers within the United States. It is also
important for the Company to diversify its pool of available temporary workers
to offer greater support to the service sector of the economy and other
businesses that have more difficulty in moving off-shore. In addition, the
Company's other segments may be adversely affected if they are required to
compete from the Company's United States based operations against competitors
based in such other countries. Although the Company has begun to expand its
operations to certain additional countries, in a limited manner and to serve
existing customers in such countries, and has established subsidiaries in some
foreign countries, there can be no assurance that this effort will be successful
or that the Company can successfully compete with competitors based overseas or
who have established foreign operations.
The Company's business is dependent upon the continued financial strength of its
customers. Customers that experience economic downturns or other negative
factors are less likely to use the Company's services.
In the staffing services segment, a weakened economy results in decreased demand
for temporary and permanent personnel. When economic activity slows down, many
of the Company's customers reduce their use of temporary workers before they
reduce the number of their regular employees. There is less need for temporary
workers by all potential customers, who are less inclined to add to their costs.
Since employees are reluctant to risk changing employers, there are fewer
openings and reduced activity in permanent placements as well. In addition,
while in many fields there are ample applicants for available positions,
variations in the rate of unemployment and higher wages sought by temporary
workers in certain technical fields particularly characterized by labor
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
- --------------------------------------
shortages, could affect the Company's ability to meet its customers' demands in
these fields and the Company's profit margins. The segment has also experienced
margin erosion caused by increased competition, electronic auctions and
customers leveraging their buying power by consolidating the number of vendors
with whom they deal. In addition, increased payroll and other taxes, some of
which the Company is unable to pass on to customers, place pressure on margins.
Customer use of the Company's telecommunications services is similarly affected
by a weakened economy in that some of the Company's customers reduce their use
of outside services in order to provide work to their in-house departments and,
in the aggregate, because of the current downturn in the telecommunications
industry and continued overcapacity, there is less available work. In addition,
the reduction in telecommunications companies' capital expenditure projects
during the current economic climate has significantly reduced the segment's
operating margins and minimal improvement can be expected until the
telecommunications industry begins to increase its capital expenditures. Recent
actions by major long-distance telephone companies regarding local residential
service and consolidation in the telecommunications industry could also
negatively impact both sales and margins of the segment. Despite an emphasis on
cost controls, the results of the segment continue to be affected by the decline
in capital spending by telephone companies caused by the depressed conditions
within the segment's telecommunications industry customer base which has also
increased competition for available work, pressuring pricing and gross margins
throughout the segment. The continued delay in telecommunications companies'
capital expenditure projects has significantly reduced the segment's revenue and
resulted in continuing operating losses. Although there has been a modest
increase in customer backlog, a return to material profitability will be
difficult until the telecommunications industry begins to increase its capital
expenditures.
Additionally, the degree and timing of customer acceptance of systems and of
obtaining new contracts and the rate of renewals of existing contracts, as well
as customers' degree of utilization of the Company's services, could adversely
affect the Company's businesses.
MANY OF THE COMPANY'S CONTRACTS EITHER PROVIDE NO MINIMUM PURCHASE REQUIREMENTS
OR ARE CANCELABLE DURING THE TERM.
In all segments, many of the Company's contracts, even those master service
contracts whose duration spans a number of years, provide no assurance of any
minimum amount of work that will actually be available under any contract. Most
staffing services contracts are not sole source, so the segment must compete for
each placement at the customer. Similarly many telecommunications master
contracts require competition in order to obtain each individual work project.
In addition, many of the Company's long-term contracts contain cancellation
provisions under which the customer can cancel the contract, even if the Company
is not in default under the contract. Therefore, these contracts do not give the
assurances that long-term contracts typically provide.
THE COMPANY'S STAFFING SERVICES BUSINESS AND ITS OTHER SEGMENTS SUBJECT IT TO
EMPLOYMENT-RELATED AND OTHER CLAIMS.
The Company's staffing services business employs individuals on a temporary
basis and places them in a customer's workplace. The Company's ability to
control the customer workplace is limited, and the Company risks incurring
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
- --------------------------------------
liability to its employees for injury or other harm that they suffer at the
customer's workplace. Although the Company has not historically suffered
materially for such harm suffered by its employees, there can be no assurance
that future claims will not materially adversely affect the Company.
Additionally, the Company risks liability to its customers for the actions of
the Company's temporary employees that may result in harm to the Company's
customers. Such actions may be the result of negligence or misconduct on the
part of the Company's employees. These same factors apply to all of the
Company's business units, although the risk is reduced where the Company itself
controls the workplace. Nevertheless, the risk is present in all segments.
The Company may incur fines or other losses and negative publicity with respect
to any litigation in which it becomes involved. Although the Company maintains
insurance for many such actions, there can be no assurance that its insurance
will cover future actions or that the Company will continue to be able to obtain
such insurance on acceptable terms, if at all.
NEW AND INCREASED GOVERNMENT REGULATION COULD HAVE A MATERIAL ADVERSE EFFECT ON
THE COMPANY'S BUSINESS, ESPECIALLY ITS CONTINGENT STAFFING BUSINESS.
Certain of the Company's businesses are subject to licensing and regulation in
many states and certain foreign jurisdictions. Although the Company has not had
any difficulty complying with these requirements in the past, there can be no
assurance that the Company will continue to be able to do so, or that the cost
of compliance will not become material. Additionally, the jurisdictions in which
the Company does or intends to do business may:
o create new or additional regulations that prohibit or restrict the types of
services that the Company currently provides;
o impose new or additional employee benefit requirements, thereby increasing
costs that may not be able to be passed on to customers or which would
cause customers to reduce their use of the Company's services, especially
in its staffing services segment, which would adversely impact the
Company's ability to conduct its business;
o require the Company to obtain additional licenses to provide its services;
or
o increase taxes (especially payroll and other employment related taxes) or
enact new or different taxes payable by the providers of services such as
those offered by the Company, thereby increasing costs, some of which may
not be able to be passed on to customers or which would cause customers to
reduce their use of the Company's services, especially in its staffing
services segment, which would adversely impact the Company's ability to
conduct its business.
In addition, certain private and governmental entities have focused on the
contingent staffing industry in particular and, in addition to their potential
to impose additional requirements and costs, they and their supporters could
cause changes in customers' attitudes toward the use of outsourcing and
temporary personnel in general. This could have an adverse effect on the
Company's contingent staffing business.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
- --------------------------------------
THE COMPANY IS DEPENDENT UPON ITS ABILITY TO ATTRACT AND RETAIN CERTAIN
TECHNOLOGICALLY QUALIFIED PERSONNEL.
The Company's future success is dependent upon its ability to attract and retain
certain classifications of technologically qualified personnel for its own use,
particularly in the areas of research and development, implementation and
upgrading of internal systems, as well as in its staffing services segment. The
availability of such personnel is dependent upon a number of economic and
demographic conditions. The Company may in the future find it difficult or more
costly to hire such personnel in the face of competition from other companies.
THE INDUSTRIES IN WHICH THE COMPANY DOES BUSINESS ARE VERY COMPETITIVE.
The Company operates in very competitive industries with, in most cases, limited
barriers to entry. Some of the Company's principal competitors are larger and
have substantially greater financial resources than the Company. Accordingly,
these competitors may be better able than the Company to attract and retain
qualified personnel and may be able to offer their customers more favorable
pricing terms than the Company. In many businesses, small competitors can offer
similar services at lower prices because of lower overheads.
The Company, in all segments, has experienced intense price competition and
pressure on margins and lower renewal markups for customers' contracts than
previously obtained. While the Company has and will continue to take action to
meet competition in its highly competitive markets with minimal impact on
margins, there can be no assurance that the Company will be able to do so.
The Company, in certain businesses in all segments, must obtain or produce
products and systems, principally in the IT environment, to satisfy customer
requirements and to remain competitive. While the Company has been able to do so
in the past, there can be no assurance that in the future the Company will be
able to foresee changes and to identify, develop and commercialize innovative
and competitive products and systems in a timely and cost effective manner and
to achieve customer acceptance of its products and systems in markets
characterized by rapidly changing technology and frequent new product
introductions. In addition, the Company's products and systems are subject to
risks inherent in new product introductions, such as start-up delays, cost
overruns and uncertainty of customer acceptance, the Company's dependence on
third parties for some product components and in certain technical fields
particularly characterized by labor shortages, the Company's ability to hire and
retain such specialized employees, all of which could affect the Company's
ability to meet its customers' demands in these fields and the Company's profit
margins.
In addition to these general statements, the following information applies to
the specific segments identified below.
The Company's Staffing Services segment is in a very competitive industry with
few significant barriers to entry. There are many temporary service firms in the
United States and Europe, many with only one or a few offices that service only
a small market. On the other hand, some of this segment's principal competitors
are larger and have substantially greater financial resources than the Company
and service the multinational accounts whose business the Company solicits.
Accordingly, these competitors may be better able than the Company to attract
and retain qualified personnel and may be able to offer their customers more
favorable pricing terms than the Company. 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.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
- --------------------------------------
The results of the Company's Computer Systems segment are highly dependent on
the volume of calls to this segment's customers which are processed by the
segment under existing contracts, the segment's ability to continue to secure
comprehensive listings from others at acceptable pricing, its ability to obtain
additional customers for these services and its continued ability to sell
products and services to new and existing customers. The volume of transactions
with this segment's customers is subject to reduction as consumers utilize
listings offered on the Internet. This segment's position in its market depends
largely upon its reputation, quality of service and ability to develop, maintain
and implement information systems on a cost competitive basis. Although Volt
continues its investment in research and development, there is no assurance that
this segment's present or future products will be competitive, that the segment
will continue to develop new products or that present products or new products
can be successfully marketed.
The Company's Telecommunications Services segment faces substantial competition
with respect to all of its telecommunications services from other suppliers and
from in-house capabilities of present and potential customers. Since many of our
customers provide the same type of services as the segment, the segment faces
competition from its own customers and potential customers as well as from third
parties. The telecommunications service segment performs much of its services
outdoors, and its business can be adversely affected by the degree and effects
of inclement weather. Some of this segment's significant competitors are larger
and have substantially greater financial resources than the Company. 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. The Company'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. The Company
believes that its competitive position in this segment is augmented by its
ability to draw upon the expertise and resources of the Company's other
segments.
THE COMPANY MUST CONTINUE TO SUCCESSFULLY INTEGRATE THE PURCHASED DIRECTORY AND
OPERATOR SERVICES BUSINESS INTO THE COMPANY'S COMPUTER SYSTEMS SEGMENT
On August 2, 2004, Volt Delta Resources, LLC ("Volt Delta"), a wholly-owned
subsidiary of the Company, acquired from Nortel Networks, Inc. ("Nortel
Networks") certain of the assets (consisting principally of customer base and
contracts, intellectual property and inventory) and certain specified
liabilities of Nortel Networks directory and operator services ("DOS") business,
in exchange for a 24% minority equity interest in Volt Delta. Together with its
subsidiaries, Volt Delta is reported as the Company's Computer Systems segment.
In addition to the factors described elsewhere herein, the Company's results in
this segment are dependent upon the Company's ability to continue the successful
integration of the acquisition into Volt Delta's business with minimal
interference with the segment's business.
THE COMPANY MUST STAY IN COMPLIANCE WITH ITS SECURITIZATION PROGRAM AND OTHER
LOAN AGREEMENTS
The Company is required to maintain a sufficient credit rating to enable it to
continue its $150 million Securitization Program and other loan agreements and
maintain its existing credit rating in order to avoid any increase in interest
rates and any increase in fees under these credit agreements, as well as to
comply with the financial and other covenants applicable under the credit
agreements and other borrowing instruments.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
- --------------------------------------
While the Company was in compliance with all such requirements at the end of the
fiscal quarter and believes it will remain in compliance through the next twelve
months, there can be no assurance that will be the case or that waivers may not
be required.
THE COMPANY'S PRINCIPAL SHAREHOLDERS OWN A SIGNIFICANT PERCENTAGE OF THE COMPANY
AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER THE COMPANY AND THEIR
INTERESTS MAY DIFFER FROM THOSE OF OTHER SHAREHOLDERS.
As of May 15, 2005, William Shaw, Jerome Shaw and members of their family own in
excess of 47% of the Company's outstanding common stock. Accordingly, these
shareholders are able to control the composition of the Company's board of
directors and many other matters requiring shareholder approval and will
continue to have significant influence over the Company's affairs. This
concentration of ownership also could have the effect of delaying or preventing
a change in control of the Company or otherwise discouraging a potential
acquirer from attempting to obtain control of the Company.
THE COMPANY'S STOCK PRICE COULD BE EXTREMELY VOLATILE AND, AS A RESULT,
INVESTORS MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID
FOR THEM.
Among the factors that could affect the Company's stock price are:
o limited float and a low average daily trading volume, notwithstanding that
the Company's stock is traded on the New York Stock Exchange;
o industry trends and the business success of the Company's customers;
o loss of a key customer;
o fluctuations in the Company's results of operations;
o the Company's failure to meet the expectations of the investment community
and changes in investment community recommendations or estimates of the
Company's future results of operations;
o strategic moves by the Company's competitors, such as product announcements
or acquisitions;
o regulatory developments;
o litigation;
o general market conditions; and
o other domestic and international macroeconomic factors unrelated to the
Company's performance.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
- --------------------------------------
The stock market has and may in the future experience extreme volatility that
has often been unrelated to the operating performance of particular companies.
These broad market fluctuations may adversely affect the market price of the
Company's common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. If a
securities class action suit is filed against the Company, it would incur
substantial legal fees and management's attention and resources would be
diverted from operating its business in order to respond to the litigation.
Critical Accounting Policies
- ----------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments.
Staffing Services:
Staffing: 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. In the first six
months of fiscal 2005, this revenue comprised approximately 76% of net
consolidated sales.
Managed Services: 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's payment to the associate vendor. The customer
is typically responsible for assessing the work of the associate vendor,
and has responsibility for the acceptability of its personnel, and in most
instances the customer and associate vendor have agreed that the Company
does not pay the associate vendor until the customer pays the Company.
Based upon the revenue recognition principles in Emerging Issues Task Force
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
- ----------------------------
("EITF") 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent," revenue for these services, where the customer and the associate
vendor have agreed that the Company is not at risk for payment, is
recognized net of associated costs in the period the services are rendered.
In the first six months of fiscal 2005, this revenue comprised approximately
2% of net consolidated sales.
Outsourced Projects: Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables. The Company's employees perform the services and the Company
has credit risk for collecting its billings. Revenue for these services is
recognized on a gross basis in the period the services are rendered when on
a time and material basis, and when the Company is responsible for project
completion, revenue is recognized when the project is complete and the
customer has approved the work. In the first six months of fiscal 2005, this
revenue comprised approximately 6% of net consolidated sales.
Shaw & Shaw: Sales of the Company's Shaw & Shaw subsidiary, which ceased
operations in the second quarter of fiscal 2005, were generated when the
Company provided professional employer organizational services ("PEO") to
certain customers. Generally, the customers transferred their entire
workforce or employees of specific departments or divisions to the Company,
but the customers maintained control over the day-to-day job duties of the
employees. In the first six months of fiscal 2005, this revenue comprised
less than 1% of net consolidated sales, due to the Company's reporting of
these revenues on a net basis.
Telephone Directory:
Directory Publishing: Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher in the United States and Uruguay. The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
books are printed and distributed. In the first six months of fiscal 2005,
this revenue comprised approximately 2% of net consolidated sales.
Ad Production and Other: Sales are generated when the Company performs
design, production and printing services, and database management for other
publishers' telephone directories. The Company's employees perform the
services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
Company has completed its production work and upon customer acceptance. In
the first six months of fiscal 2005, this revenue comprised approximately 1%
of net consolidated sales.
Telecommunications Services:
Construction: Sales are derived from the Company supplying aerial and
underground construction services. The Company's employees perform the
services, and the Company takes title to all inventory, and has credit risk
for collecting its billings. The Company relies upon the principles in AICPA
Statement of Position ("SOP") 81-1, "Accounting for Performance of
Construction-Type Contracts," using the completed-contract method, to
recognize revenue on a gross basis upon customer acceptance of the project.
In the first six months of fiscal 2005, this revenue comprised approximately
4% of net consolidated sales.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
- ----------------------------
Non-Construction: 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. In the first six months
of fiscal 2005, this revenue comprised approximately 2% of net consolidated
sales.
Computer Systems:
Database Access: 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. In the first six months of fiscal
2005, this revenue comprised approximately 5% of net consolidated sales.
IT Maintenance: Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who have the Company's systems, on a time and material basis or a contract
basis. The Company uses its own employees and inventory in the performance
of the services, and has credit risk for collecting its billings. Revenue
for these services is recognized on a gross basis in the period in which
the services are performed, contingent upon customer acceptance when on a
time and material basis, or over the life of the contract, as appropriate.
In the first six months of fiscal 2005, this revenue comprised
approximately 1% of net consolidated sales.
Telephone Systems: Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in AICPA SOP 97-2, "Software Revenue Recognition" and EITF
00-21, "Revenue Arrangements with Multiple Deliverables" to recognize
revenue on a gross basis upon customer acceptance of each part of the
system based upon its fair value. In the first six months of fiscal 2005,
this revenue comprised approximately 1% of net consolidated sales.
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 Uncollectible Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for accounts receivable are maintained based
upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company believes that its allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required and a related charge or credit to earnings.
Goodwill - Under Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill is no longer amortized, but is
subject to annual impairment testing using fair value methodologies. The
impairment test for goodwill is a two-step process. Step one consists of a
comparison of a reporting unit with its carrying amount, including the goodwill
allocated to the reporting unit. Measurement of the fair value of a reporting
unit is based on one or more fair value measures including present value
techniques of estimated future cash flows and estimated amounts at which the
unit as a whole could be bought or sold in a current transaction between willing
parties. If the carrying amount of the reporting unit exceeds the fair value,
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
- ----------------------------
step two requires the fair value of the reporting unit to be allocated to the
underlying assets and liabilities of that reporting unit, resulting in an
implied fair value of goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
equal to the excess is recorded in net earnings (loss). The Company performs its
impairment testing using comparable multiples of sales and EBITDA and other
valuation methods to assist the Company in the determination of the fair value
of the reporting units measured.
Long-Lived Assets - Property, plant and equipment are recorded at cost, and
depreciation and amortization are provided on the straight-line and accelerated
methods at rates calculated to depreciate the cost of the assets over their
estimated useful lives. Intangible assets, other than goodwill, and property,
plant and equipment are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No.
144, these assets are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; the accumulation of costs
significantly in excess of the amount originally expected for the acquisition or
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and a current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life. Recoverability is assessed based on the carrying amount of the asset and
the sum of the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset or asset group. An impairment loss is recognized
when the carrying amount is not recoverable and exceeds the fair value of the
asset or asset group. The impairment loss is measured as the amount by which the
carrying amount exceeds fair value.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with AICPA SOP No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use."
Subsequent to the preliminary project planning and approval stage, all
appropriate costs are capitalized until the point at which the software is ready
for its intended use. Subsequent to the software being used in operations, the
capitalized costs are transferred from costs-in-process to completed property,
plant and equipment, and are accounted for as such. All post-implementation
costs, such as maintenance, training and minor upgrades that do not result in
additional functionality, are expensed as incurred.
Securitization Program - The Company accounts for the securitization of accounts
receivable in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A., was $80.0 million at
May 1, 2005 and $70.0 million at October 31, 2004. Accordingly, the trade
receivables included on the May 1, 2005 and October 31, 2004 balance sheets have
been reduced to reflect the participation interest sold. TRFCO has no recourse
to the Company (beyond its interest in the pool of receivables owned by Volt
Funding Corp., a wholly owned special purpose subsidiary of the Company) for any
of the sold receivables.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
- ----------------------------
Primary Casualty Insurance Program - The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Adjustments to premiums are made based upon the
level of claims incurred at a future date up to three years after the end of the
respective policy period. For the policy year ended March 31, 2003, a maximum
premium was predetermined and accrued. For subsequent policy years, management
evaluates the accrual, and the underlying assumptions, regularly throughout the
year and makes adjustments as needed. The ultimate premium cost may be greater
or less than the established accrual. While management believes that the
recorded amounts are adequate, there can be no assurances that changes to
management's estimates will not occur due to limitations inherent in the
estimation process. In the event it is determined that a smaller or larger
accrual is appropriate, the Company would record a credit or a charge to cost of
services in the period in which such determination is made.
Medical Insurance Program - Beginning in April 2004, the Company became
self-insured for the majority of its medical benefit programs. The Company
remains insured for a portion of its medical program (primarily HMOs) as well as
the entire dental program. The Company provides the self-insured medical
benefits through an arrangement with a third party administrator. However, the
liability for the self-insured benefits is limited by the purchase of stop loss
insurance. Contributed and withheld funds and related liabilities for the
self-insured program together with unpaid premiums for the insured programs,
other than the current provision, are held in a 501(c)(9) employee welfare
benefit trust and do not appear on the balance sheet of the Company. In order to
establish the self-insurance reserves, the Company utilized actuarial estimates
of expected losses based on statistical analyses of historical data. The
provision for future payments is initially adjusted by the enrollment levels in
the various plans. Periodically, the resulting liabilities are monitored and
will be adjusted as warranted by changing circumstances. Should the amount of
claims occurring exceed what was estimated or medical costs increase beyond what
was expected, liabilities might not be sufficient, and additional expense may be
recorded.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 1, 2005 COMPARED
TO THE SIX MONTHS ENDED MAY 2, 2004
The information, which appears below, relates to current and prior periods, the
results of operations for which periods are not indicative of the results which
may be expected for any subsequent periods.
Six Months Ended Three Months Ended
----------------- ------------------
May 1, May 2, May 1, May 2,
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Restated) (Restated)
(In thousands)
Net Sales:
- ----------
Staffing Services
Staffing $856,916 $739,914 $442,822 $397,238
Managed Services 609,766 529,796 312,334 291,698
------------ ------------ ------------ ------------
Total Gross Sales 1,466,682 1,269,710 755,156 688,936
Less: Non-Recourse Managed Services (593,485) (516,416) (302,292) (283,283)
------------ ------------ ------------ ------------
Net Staffing Services 873,197 753,294 452,864 405,653
Telephone Directory 33,073 32,682 17,369 16,833
Telecommunications Services 63,139 63,404 37,935 33,508
Computer Systems 84,114 50,422 42,920 26,327
Elimination of inter-segment sales (9,643) (7,364) (5,043) (3,842)
------------ ------------ ------------ ------------
Total Net Sales $1,043,880 $892,438 $546,045 $478,479
============ ============ ============ ============
Segment Operating Profit (Loss):
- -------------------------------
Staffing Services $9,716 $10,958 $7,263 $9,567
Telephone Directory 4,608 4,594 2,501 1,995
Telecommunications Services (2,236) (2,719) 193 (817)
Computer Systems 16,529 10,389 9,015 5,866
------------ ------------ ------------ ------------
Total Segment Operating Profit 28,617 23,222 18,972 16,611
General corporate expenses (17,283) (15,193) (8,976) (7,633)
------------ ------------ ------------ ------------
Total Operating Profit 11,334 8,029 9,996 8,978
Interest income and other expense (746) (1,429) (290) (913)
Foreign exchange loss-net (260) (70) (98) (94)
Interest expense (954) (880) (442) (423)
------------ ------------ ------------ ------------
Income from Continuing Operations Before Minority
Interest and Income Taxes $9,374 $5,650 $9,166 $7,548
============ ============ ============ ============
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 1, 2005 COMPARED
TO THE SIX MONTHS ENDED MAY 2, 2004--Continued
EXECUTIVE OVERVIEW
- ------------------
Volt Information Sciences, Inc. ("Volt") is a leading national provider of
staffing services and telecommunications and information solutions with a
material portion of its revenue coming from Fortune 100 customers. The Company
operates in four segments and the management discussion and analysis addresses
each. A brief description of these segments and the predominant source of their
sales follow:
STAFFING SERVICES: This segment is divided into three major functional
areas and operates through a network of over 300 branch offices.
o Staffing Solutions fulfills IT and other technical, commercial
and industrial placement requirements of its customers, on both a
temporary and permanent basis, together with managed staffing
services.
o E-Procurement Solutions provides global vendor neutral
procurement and management solutions for supplemental staffing
using web-based tools through the Company's ProcureStaff
subsidiary.
o Information Technology Solutions provides a wide range of
information technology consulting and project management services
through the Company's VMC Consulting subsidiary.
TELEPHONE DIRECTORY: This segment publishes independent telephone
directories, provides telephone directory production services, database
management, printing and computer-based projects to public utilities and
financial institutions.
TELECOMMUNICATIONS SERVICES: This segment provides a full spectrum of
telecommunications construction, installation, and engineering services
in the outside plant and central offices of telecommunications and cable
companies as well as for large commercial and governmental entities.
COMPUTER SYSTEMS: This segment provides directory and operator systems
and services primarily for the telecommunications industry, and provides
IT maintenance services.
Several historical seasonal factors usually affect the sales and profits of the
Company. The Staffing Services segment's sales are always lowest in the
Company's first fiscal quarter due to the Thanksgiving, Christmas and New Year
holidays, as well as certain customer facilities closing for one to two weeks.
During the third and fourth quarters of the fiscal year, this segment benefits
from a reduction of payroll taxes when the annual tax contributions for higher
salaried employees have been met, and customers increase the use of the
Company's administrative and industrial labor during the summer vacation period.
In addition, the Telephone Directory segment's DataNational division publishes
more directories during the second half of the fiscal year.
Numerous non-seasonal factors impacted sales and profits in the current six and
three month periods. In the six months and the current quarter, the sales of the
Staffing Services segment, in addition to the factors noted above, were
positively impacted by a continued increase in the use of contingent technical
staffing. Operating profits in both periods were lower than their comparable
periods due to higher overhead costs incurred to enable the continuation of the
growth in the Technical Placement division, including the higher margin VMC
Consulting business. Although net sales in the Administrative and Industrial
division in the six months and current quarter have increased from their
comparable periods, the single digit growth in the second quarter was weaker
than expected due to lower demand for clerical, administrative and industrial
temporary staffing and permanent placements. Operating profits for the segment
have decreased in the six months due to a slight decrease in gross margins and a
growth in overhead costs. The operating profit decrease in the quarter was due
to an increase in overhead of 0.6 percentage points in relation to sales.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 1, 2005 COMPARED
TO THE SIX MONTHS ENDED MAY 2, 2004--Continued
EXECUTIVE OVERVIEW--Continued
- -----------------------------
The sales and operating results of the Telecommunications segment increased in
the second quarter of fiscal 2005 compared to the comparable prior year quarter
primarily due to a sales increase in the Construction and Engineering division,
partially offset by a decline in the sales in Business Systems division and
reduced segment margins. However, for the six months, sales have decreased
slightly from the comparable period, although operating losses have declined, as
the Company continues to carefully monitor the overhead within the segment in
order to partially mitigate the effect of the reduced segment sales and margins.
For the six months and current quarter, the Computer Systems segment's sales and
profits continue to be positively impacted by the increase in the segment's ASP
directory assistance outsourcing business, in which there continues to be a
substantial increase in transaction revenue, as well as revenue and operating
profit from the business acquired from Nortel Networks.
The Company has, and will continue to focus on aggressively increasing its
market share, while attempting to maintain margins in order to increase profits.
All segments have emphasized cost containment measures, along with improved
credit and collections procedures designed to improve the Company's cash flow.
The Company continues its effort to streamline its processes to manage the
business and protect its assets through the continued deployment of its Six
Sigma initiatives, upgrading its financial reporting systems, its compliance
with the Sarbanes-Oxley Act, and the standardization and upgrading of IT
redundancy and business continuity for corporate systems and communications
networks. To the extent possible, the Company has been utilizing, and will
continue to utilize, internal resources supplemented with temporary staff to
comply with the Sarbanes-Oxley Act by the end of fiscal year 2005. To-date,
outside costs of compliance with this Act, including software licenses,
equipment, temporary staff, consultants and professional fees amounted to $1.0
million, and it is anticipated that a similar amount, excluding audit fees, will
be expended in the remainder of calendar year 2005.
RESULTS OF OPERATIONS - SUMMARY
- -------------------------------
In the first six months of fiscal 2005, consolidated net sales increased by
$151.4 million, or 17%, to $1.04 billion, from the comparable period in fiscal
2004. The primary increase in fiscal 2005 net sales resulted from increases in
Staffing Services sales of $119.9 million and Computer Systems of $33.7 million.
Net income for the first six months of fiscal 2005 was $3.7 million compared to
$13.0 million in the comparable 2004 period. The results of the 2004 period
included a gain from discontinued operations from the sale of real estate of
$9.5 million. The Company reported a pre-tax income from continuing operations
before minority interest for the six months of fiscal 2005 of $9.4 million,
compared to $5.7 million in the prior year's period.
The Company's operating segments reported an operating profit of $28.6 million
in the six-month period of 2005, an increase of $5.4 million, or 23%, from the
comparable 2004 period. Contributing to the increase was an increase in the
operating profit of the Computer Systems segment of $6.1 million, a decrease in
the operating loss of the Telecommunications Services segment of $0.5 million,
partially offset by a decrease in the operating profit of the Staffing Services
segment of $1.3 million.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 1, 2005 COMPARED
TO THE SIX MONTHS ENDED MAY 2, 2004--Continued
RESULTS OF OPERATIONS - SUMMARY--Continued
- ------------------------------------------
General corporate expenses increased by $2.1 million, or 14%, due to costs
incurred to meet the disaster recovery requirements of redundancy and business
continuity for corporate systems and communication networks, as well as salary
and professional fee increases. In addition, the Company incurred costs related
to compliance with the Sarbanes-Oxley Act.
RESULTS OF OPERATIONS - BY SEGMENT
- ----------------------------------
STAFFING SERVICES
- -----------------
Six Months Ended
----------------
May 1, 2005 May 2, 2004
----------- -----------
Staffing Services % of % of Favorable Favorable
- ----------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $856.9 $739.9 $117.0 15.8%
- ----------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) * $609.8 $529.8 $80.0 15.1%
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $873.2 $753.3 $119.9 15.9%
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $131.3 15.0% $114.8 15.2% $16.5 14.4%
- ----------------------------------------------------------------------------------------------------------------------------
Overhead $121.6 13.9% $103.8 13.8% ($17.8) (17.7%)
- ----------------------------------------------------------------------------------------------------------------------------
Operating Profit $9.7 1.1% $11.0 1.4% ($1.3) (11.3%)
- ----------------------------------------------------------------------------------------------------------------------------
*Included in Sales (Gross) are billings for associate vendors which are
substantially all excluded from Sales (Net).
The sales increase of the Staffing Services segment in the first six months of
fiscal 2005 from the comparable fiscal 2004 period was due to increased staffing
business in both the Technical Placement and the Administrative and Industrial
divisions and in the VMC Consulting business of the Technical Placement
division. The decrease in operating profit in the segment resulted from the
decrease in gross margins and the higher overhead costs.
Six Months Ended
----------------
May 1, 2005 May 2, 2004
Technical Placement ----------- -----------
Division % of % of Favorable Favorable
- -------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $1,123.3 $962.7 $160.6 16.7%
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $541.2 $456.5 $84.7 18.5%
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $89.7 16.6% $76.5 16.8% $13.2 17.2%
- ----------------------------------------------------------------------------------------------------------------------------
Overhead $75.1 13.9% $61.5 13.5% ($13.6) (22.0%)
- ----------------------------------------------------------------------------------------------------------------------------
Operating Profit $14.6 2.7% $15.0 3.3% ($0.4) (2.5%)
- ----------------------------------------------------------------------------------------------------------------------------
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 1, 2005 COMPARED
TO THE SIX MONTHS ENDED MAY 2, 2004--Continued
STAFFING SERVICES --Continued
- -----------------------------
The Technical Placement division's increase in gross sales in the first six
months of fiscal 2005 from the comparable fiscal 2004 period was due to a 17%
sales increase in traditional alternative staffing, a 12% increase in
ProcureStaff volume due to new accounts and increased business from existing
accounts, and a 26% increase in higher margin VMC Consulting project management
and consulting sales. However, substantially all of the ProcureStaff billings
are deducted in arriving at net sales due to the use of associate vendors who
have contractually agreed to be paid only upon receipt by the Company of the
customers' payment. The decrease in the operating profit was the result of the
increase in overhead as a percentage of net sales and the decrease in gross
margin percentage, partially offset by the increased sales. The increase in
overhead was principally due to a 26% increase in indirect labor and related
payroll costs incurred to sustain the growth of the division, including the VMC
Consulting business.
Six Months Ended
----------------
May 1, 2005 May 2, 2004
Administrative & ----------- -----------
Industrial Division % of % of Favorable Favorable
- ------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $343.4 $307.0 $36.4 11.9%
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $332.0 $296.8 $35.2 11.9%
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $41.6 12.5% $38.3 12.9% $3.3 8.8%
- ----------------------------------------------------------------------------------------------------------------------------
Overhead $46.5 14.0% $42.3 14.3% ($4.2) (10.0%)
- ----------------------------------------------------------------------------------------------------------------------------
Operating Loss ($4.9) (1.5%) ($4.0) (1.4%) ($0.9) (21.3%)
- ----------------------------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in gross sales in the
first six months of fiscal 2005 resulted from revenue from both new accounts and
increased business from existing accounts. The increased operating loss was a
result of the decreased gross margin percentage, partially offset by the
decrease in overhead as a percentage of sales and the increased sales. The
decrease in gross margin percentage was primarily due to higher payroll taxes.
Although the markets for the segment's services include a broad range of
industries throughout the United States and Europe, general economic
difficulties in specific geographic areas or industrial sectors have in the past
and could, in the future, affect the profitability of the segment.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 1, 2005 COMPARED
TO THE SIX MONTHS ENDED MAY 2, 2004--Continued
TELEPHONE DIRECTORY
- -------------------
Six Months Ended
----------------
May 1, 2005 May 2, 2004
----------- -----------
Telephone Directory % of % of Favorable Favorable
- ------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $33.1 $32.7 $0.4 1.2%
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $17.5 52.9% $17.0 52.1% $0.5 2.8%
- ----------------------------------------------------------------------------------------------------------------------------
Overhead $12.9 39.0% $12.4 38.0% ($0.5) (3.8%)
- ----------------------------------------------------------------------------------------------------------------------------
Operating Profit $4.6 13.9% $4.6 14.1% $0.0 0.3%
- ----------------------------------------------------------------------------------------------------------------------------
The major components of the Telephone Directory segment's sales increase for the
first six months of fiscal 2005 compared to the comparable 2004 period were an
increase of $2.1 million in systems revenue to $2.6 million, partially offset by
a decrease of $1.7 million, or 5%, in publishing revenue. The increase in
systems sales was due to an increase in the number of telephone directory
systems sold during the period. The publishing revenue decrease was principally
due to the community telephone directory operation of DataNational, as sales
decreased by $0.4 million, or 2%, from the prior year, a decrease in the sales
of the Uruguayan directory operation, as sales decreased by $0.6 million and the
elimination of a directory publication sold in fiscal 2004. The DataNational and
Uruguayan variances in revenue were due to the changes in the number of
directories printed and delivered. The segment's operating profit remained the
same as in the comparable period in fiscal 2004 as a result of the sales
increase, the increase in gross margin percentage due to the increased margins
on the directory systems sold, offset by lower margins recognized on the
Uruguayan telephone directories published in the period, and the increase in
overhead as a percentage of sales.
Other than the DataNational division, which accounted for 60% of the segment's
fiscal 2005 first six months' sales, the segment's business is obtained through
submission of competitive proposals for production and other contracts. These
short and long-term contracts are re-bid after expiration. Many of this
segment's long-term contracts contain cancellation provisions under which the
customer can cancel the contract, even if the segment is not in default under
the contract and generally do not provide for a minimum amount of work to be
awarded to the segment. While the Company has historically secured new contracts
and believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurance that contracts will be renewed or extended, or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms. In addition, this segment's sales and profitability are
highly dependent on advertising revenue for DataNational's directories, which
could be affected by general economic conditions.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 1, 2005 COMPARED
TO THE SIX MONTHS ENDED MAY 2, 2004--Continued
TELECOMMUNICATIONS SERVICES
- ---------------------------
Six Months Ended
----------------
May 1, 2005 May 2, 2004
Telecommunications ----------- -----------
Services % of % of Favorable Favorable
- -------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $63.1 $63.4 ($0.3) (0.4%)
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $12.4 19.7% $15.1 23.9% ($2.7) (18.1%)
- ----------------------------------------------------------------------------------------------------------------------------
Overhead $14.6 23.2% $17.8 28.2% $3.2 18.0%
- ----------------------------------------------------------------------------------------------------------------------------
Operating Loss ($2.2) (3.5%) ($2.7) (4.3%) $0.5 17.8%
- ----------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales decrease in the first six months
of fiscal 2005 over the comparable 2004 period was due to a 33% decrease in the
sales of the Business Systems division, and a 31%, decrease in the sales of the
Central Office division, partially offset by a 42% increase in the sales of the
Construction and Engineering division resulting from customer acceptance of
construction work accounted for using the completed-contract method. The
decrease in the operating loss was due to the decrease in overhead as a
percentage of sales (which included in the 2004 period, a previously reported
$1.3 million charge in the six months of fiscal 2004 related to a domestic
consulting contract for services), partially offset by the decrease in sales and
the decrease in gross margin. The segment's decreased gross margin was primarily
comprised of an 8.9 percentage point decrease in Business Systems, partially
offset by a 2.9 percentage point increase in Central Office. Despite an emphasis
on cost controls, the results of the segment continue to be affected by the
decline in capital spending by telephone companies caused by the depressed
conditions within the segment's telecommunications industry customer base. This
factor has also increased competition for available work, pressuring pricing and
gross margins throughout the segment. Recent actions by major long-distance
telephone companies regarding local residential service have negatively impacted
sales and continue to impact margins of the segment.
A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically expire within
one to three years and are re-bid. Many of this segment's Long-term contracts
contain cancellation provisions under which the customer can cancel the
contract, even if the segment is not in default under the contract and generally
do not provide for a minimum amount of work to be awarded to the segment. While
the Company believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurances that contracts will be renewed or extended or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 1, 2005 COMPARED
TO THE SIX MONTHS ENDED MAY 2, 2004--Continued
COMPUTER SYSTEMS
- ----------------
Six Months Ended
----------------
May 1, 2005 May 2, 2004
----------- -----------
Computer Systems % of % of Favorable Favorable
- ---------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $84.1 $50.4 $33.7 66.8%
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $44.8 53.3% $28.5 56.6% $16.3 57.1%
- ----------------------------------------------------------------------------------------------------------------------------
Overhead $28.3 33.6% $18.1 36.0% $10.2 55.9%
- ----------------------------------------------------------------------------------------------------------------------------
Operating Profit $16.5 19.7% $10.4 20.6% $6.1 59.1%
- ----------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the first six months of fiscal
2005 over the comparable 2004 period was primarily due to improvements in the
segment's operator services business, including ASP directory assistance, which
reflected a 91% growth in sales during the quarter, a sales increase of 53% in
DataServ's directory assistance services which are provided to non-telco
enterprise customers, a 13% sales growth in the Maintech division's IT
maintenance services, and a 245% increase in product revenue recognized. The
sales increases noted above included $14.8 million of DOS Business acquired from
Nortel Networks, which represented 18% of the segment's sales for the 2005
period. The growth in operating profit from the comparable 2004 period was the
result of the increase in sales, the decrease in overhead as a percentage of
sales, partially offset by the decrease in gross margin percentage.
Volt Delta, the entity which operates the Computer Systems segment, acquired
certain assets and liabilities of the DOS Business of Nortel Networks on August
2, 2004 in exchange for a 24% equity interest in the segment. This acquisition
permits Volt Delta to provide the newly combined customer base with new
solutions and an expanded suite of products, content and enhanced services.
This segment's results are highly dependent on the volume of calls to the
segment's customers that are processed by the segment under existing contracts
with telephone companies, the segment's ability to continue to secure
comprehensive telephone listings from others, its ability to obtain additional
customers for these services and its continued ability to sell products and
services to new and existing customers.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
SIX MONTHS ENDED MAY 1, 2005 COMPARED
TO THE SIX MONTHS ENDED MAY 2, 2004--Continued
RESULTS OF OPERATIONS -- OTHER
- ------------------------------
Six Months Ended
----------------
May 1, 2005 May 2, 2004
----------- -----------
Other % of % of Favorable Favorable
- ----- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Selling & Administrative * $43.0 4.1% $38.0 4.3% ($5.0) (13.4%)
- ----------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $15.0 1.4% $12.4 1.4% ($2.6) (21.5%)
- ----------------------------------------------------------------------------------------------------------------------------
Interest Income $1.1 0.1% $0.4 - $0.7 160.3%
- ----------------------------------------------------------------------------------------------------------------------------
Other Expense ($1.9) 0.2% ($1.9) 0.2% - 0.4%
- ----------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.3) - ($0.1) - ($0.2) (271.4%)
- ----------------------------------------------------------------------------------------------------------------------------
Interest Expense ($1.0) 0.1% ($0.9) 0.1% ($0.1) (8.4%)
- ----------------------------------------------------------------------------------------------------------------------------
* The first six months of fiscal 2004 amount has been restated
Other items, discussed on a consolidated basis, affecting the results of
operations for the fiscal periods were:
The increase in selling and administrative expenses in the first six months of
fiscal 2005 from the comparable 2004 quarter was a result of increased selling
expenses to support the increased sales levels throughout the Company, in
addition to increased corporate general and administrative expenses related to
costs to meet the disaster recovery requirements of redundancy and business
continuity for corporate systems and communications networks. In addition, the
Company incurred increased salaries, professional fees and costs related to
compliance with the Sarbanes-Oxley Act.
The increase in depreciation and amortization for the first six months of fiscal
2005 from the comparable 2004 quarter was attributable to increases in fixed
assets, primarily in the Computer Systems and Staffing Services segments.
Interest income increased due to higher interest rates together with additional
funds available for investment.
Other expense in both fiscal years is primarily the charges related to the
Company's Securitization Program as well as sundry expenses.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 39.2% in the first six months of 2005 compared to
38.8% in 2004.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 1, 2005 COMPARED
TO THE THREE MONTHS ENDED MAY 2, 2004--Continued
RESULTS OF OPERATIONS - SUMMARY
- -------------------------------
In the second quarter of fiscal 2005, consolidated net sales increased by $67.6
million, or 14%, to $546.0 million, from the comparable period in fiscal 2004.
The primary increase in fiscal 2005 net sales resulted from increases in
Staffing Services sales of $47.2 million, Computer Systems of $16.6 million and
Telecommunications Services of $4.4 million.
Net income for the second quarter of fiscal 2005 was $4.5 million compared to
$14.1 million in the comparable 2004 second quarter. The consolidated results
for the second quarter of fiscal 2004 included income from discontinued
operations of $9.5 million (net of taxes of $4.6 million) from the sale of a
facility previously leased to the Company's 59% owned subsidiary, Autologic
International, Inc. The Company reported a pre-tax income from continuing
operations before minority interest for the second quarter of fiscal 2005 of
$9.2 million, compared to $7.5 million in the prior year's second quarter.
The Company's operating segments reported an operating profit of $19.0 million
in the fiscal 2005 quarter, an increase of $2.4 million, or 14%, from the
comparable 2004 quarter. Contributing to the increase were increases in the
operating profit of the Computer Systems segment of $3.1 million and the
Telephone Directory segment of $0.5 million and an improvement in the
Telecommunications Services segment of $1.0 million, partially offset by a
decrease in the operating profit of the Staffing Services segment of $2.3
million.
General corporate expenses increased by $1.3 million, or 18%, due to costs
incurred to meet the disaster recovery requirements of redundancy and business
continuity for corporate systems and communication networks, as well as salary
and professional fee increases. In addition, the Company incurred costs related
to compliance with the Sarbanes-Oxley Act.
RESULTS OF OPERATIONS - BY SEGMENT
- ----------------------------------
STAFFING SERVICES
- -----------------
Three Months Ended
------------------
May 1, 2005 May 2, 2004
----------- -----------
Staffing Services % of % of Favorable Favorable
- ----------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $442.8 $397.2 $45.6 11.5%
- ----------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) * $312.3 $291.7 $20.6 7.1%
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $452.9 $405.7 $47.2 11.6%
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $69.7 15.4% $63.3 15.6% $6.4 10.1%
- ----------------------------------------------------------------------------------------------------------------------------
Overhead $62.4 13.8% $53.7 13.2% ($8.7) (16.2%)
- ----------------------------------------------------------------------------------------------------------------------------
Operating Profit $7.3 1.6% $9.6 2.4% ($2.3) (24.1%)
- ----------------------------------------------------------------------------------------------------------------------------
*Included in Sales (Gross) are billings for associate vendors which are
substantially all excluded from Sales (Net).
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 1, 2005 COMPARED
TO THE THREE MONTHS ENDED MAY 2, 2004--Continued
RESULTS OF OPERATIONS - BY SEGMENT --Continued
- ----------------------------------------------
STAFFING SERVICES--Continued
- ----------------------------
The sales increase of the Staffing Services segment in the fiscal 2005 second
quarter from the comparable fiscal 2004 quarter was due to increased staffing
business in both the Technical Placement and the Administrative and Industrial
divisions and in the VMC Consulting business of the Technical Placement
division. The decrease in operating profit in the segment resulted from the
decrease in gross margins and the higher overhead costs.
Three Months Ended
------------------
May 1, 2005 May 2, 2004
Technical Placement ----------- -----------
Division % of % of Favorable Favorable
- -------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $580.0 $524.5 $55.5 10.6%
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $283.3 $247.3 $36.0 14.6%
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $48.2 17.0% $42.8 17.3% $5.4 12.7%
- ----------------------------------------------------------------------------------------------------------------------------
Overhead $39.0 13.8% $32.0 13.0% ($7.0) (21.7%)
- ----------------------------------------------------------------------------------------------------------------------------
Operating Profit $9.2 3.2% $10.8 4.3% ($1.6) (14.4%)
- ----------------------------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in gross sales in the second quarter
of fiscal 2005 from the comparable fiscal 2004 quarter was due to an 13% sales
increase in traditional alternative staffing, a 4% increase in ProcureStaff
volume due to new accounts and increased business from existing accounts, and a
24% increase in higher margin VMC Consulting project management and consulting
sales. However, substantially all of the ProcureStaff billings are deducted in
arriving at net sales due to the use of associate vendors who have contractually
agreed to be paid only upon receipt by the Company of the customers' payment.
The decrease in the operating profit was the result of the increase in overhead
as a percentage of sales, the reduction in gross margin percentage, partially
offset by the increased sales. The increase in overhead was principally due to a
26% increase in indirect labor and related payroll costs incurred to sustain the
growth of the division, including the VMC Consulting business.
Three Months Ended
------------------
May 1, 2005 May 2, 2004
Administrative & ----------- -----------
Industrial Division % of % of Favorable Favorable
- ------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $175.1 $164.4 $10.7 6.6%
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $169.6 $158.4 $11.2 7.1%
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $21.5 12.7% $20.5 13.0% $1.0 4.9%
- ----------------------------------------------------------------------------------------------------------------------------
Overhead $23.4 13.8% $21.7 13.7% ($1.7) (8.1%)
- ----------------------------------------------------------------------------------------------------------------------------
Operating Loss ($1.9) (1.1%) ($1.2) (0.7%) ($0.7) (65.5%)
- ----------------------------------------------------------------------------------------------------------------------------
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 1, 2005 COMPARED
TO THE THREE MONTHS ENDED MAY 2, 2004--Continued
STAFFING SERVICES --Continued
- -----------------------------
The Administrative and Industrial division's increase in gross sales in the
second quarter of fiscal 2005 compared to the fiscal 2004 second quarter
resulted from both revenue from new accounts and increased business from
existing accounts. The increase in the operating loss was due to the reduced
gross margins, the increase in overhead as a percentage of sales, partially
offset by the increase in sales. The decrease in gross margin was due to higher
payroll taxes.
TELEPHONE DIRECTORY
- -------------------
Three Months Ended
------------------
May 1, 2005 May 2, 2004
----------- -----------
Telephone Directory % of % of Favorable Favorable
- ------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $17.4 $16.8 $0.6 3.2%
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $9.2 52.8% $8.1 48.1% $1.1 13.4%
- ----------------------------------------------------------------------------------------------------------------------------
Overhead $6.7 38.4% $6.1 36.2% ($0.6) (9.6%)
- ----------------------------------------------------------------------------------------------------------------------------
Operating Profit $2.5 14.4% $2.0 11.9% $0.5 25.4%
- ----------------------------------------------------------------------------------------------------------------------------
The major components of the Telephone Directory segment's sales increase for the
second quarter of fiscal 2005 compared to the comparable 2004 quarter were
increases of $0.7 million in telephone directory systems sold in the quarter to
$1.0 million and $0.6 million or 7%, in the community telephone directory
operation of DataNational, partially offset by a decrease of $0.3 million, or
21%, in the Uruguayan telephone directory publishing revenue and the elimination
of a directory publication sold in fiscal 2004. The DataNational and Uruguayan
variances in revenue were due to changes in the number of directories printed
and delivered. The segment's increased operating profit was the result of the
sales increase, the increase in gross margin percentage, primarily due to the
high margin system sales and the mix of directories published by DataNational in
the period, partially offset by the increase in overhead.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 1, 2005 COMPARED
TO THE THREE MONTHS ENDED MAY 2, 2004--Continued
TELECOMMUNICATIONS SERVICES
- ---------------------------
Three Months Ended
------------------
May 1, 2005 May 2, 2004
----------- -----------
Telecommunications % of % of Favorable Favorable
- ------------------ Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $37.9 $33.5 $4.4 13.2%
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $7.9 20.9% $8.0 23.9% ($0.1) (0.8%)
- ----------------------------------------------------------------------------------------------------------------------------
Overhead $7.7 20.4% $8.8 26.3% $1.1 12.2%
- ----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $0.2 0.5% ($0.8) (2.4%) $1.0 125.5%
- ----------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in the second quarter
of fiscal 2005 over the comparable 2004 quarter was due to a 78% sales increase
in the Construction and Engineering division due to customer acceptance of
construction work accounted for using the completed-contract method, partially
offset by a 43% sales decrease in the Business Systems division. The segment's
return to profitability for the quarter was due to the sales increase and the
decrease in overhead, partially offset by the decrease in gross margin
percentage caused by the Business Systems margin decrease of 6.5 percentage
points. Despite an emphasis on cost controls, the results of the segment
continue to be affected by the decline in capital spending by telephone
companies caused by the depressed conditions within the segment's
telecommunications industry customer base. This factor has also increased
competition for available work, pressuring pricing and gross margins throughout
the segment. Recent actions by major long-distance telephone companies regarding
local residential service have negatively impacted sales and continue to impact
margins of the segment.
COMPUTER SYSTEMS
- ----------------
Three Months Ended
------------------
May 1, 2005 May 2, 2004
----------- -----------
Computer Systems % of % of Favorable Favorable
- ---------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $42.9 $26.3 $16.6 63.0%
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $23.0 53.5% $15.1 57.3% $7.9 52.4%
- ----------------------------------------------------------------------------------------------------------------------------
Overhead $14.0 32.5% $9.2 35.0% ($4.8) (51.1%)
- ----------------------------------------------------------------------------------------------------------------------------
Operating Profit $9.0 21.0% $5.9 22.3% $3.1 53.7%
- ----------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in the second quarter of fiscal
2005 over the comparable 2004 quarter was primarily due to improvements in the
segment's operator services business, including ASP directory assistance, which
reflected a 77% growth in sales during the quarter, a sales increase of 30% in
DataServ's directory assistance services which are provided to non-telco
enterprise customers, a 12% sales growth in the Maintech division's IT
maintenance services, and a 436% increase in product revenue recognized. The
sales increases noted above included $7.6 million of DOS Business acquired from
Nortel Networks, which represented 18% of the segment's sales for the 2005
quarter. The growth in operating profit from the comparable 2004 fiscal quarter
was the result of the increase in sales and the decrease in overhead as a
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED MAY 1, 2005 COMPARED
TO THE THREE MONTHS ENDED MAY 2, 2004--Continued
COMPUTER SYSTEMS-Continued
- --------------------------
percentage of sales, partially offset by the decrease in gross margin
percentage. Volt Delta, the entity which operates the Computer Systems segment,
acquired certain assets and liabilities of the DOS Business of Nortel Networks
on August 2, 2004. This acquisition permits Volt Delta to provide the newly
combined customer base with new solutions and an expanded suite of products,
content and enhanced services.
RESULTS OF OPERATIONS -- OTHER
- ------------------------------
Three Months Ended
------------------
May 1, 2005 May 2, 2004
----------- -----------
Other % of % of Favorable Favorable
- ----- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Selling & Administrative * $22.2 4.1% $19.0 4.0% ($3.2) (16.5%)
- ----------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $7.5 1.4% $6.2 1.3% ($1.3) (21.1%)
- ----------------------------------------------------------------------------------------------------------------------------
Interest Income $0.5 0.1% $0.2 - $0.3 178.2%
- ----------------------------------------------------------------------------------------------------------------------------
Other Expense ($0.8) (0.2%) ($1.1) (0.2%) $0.3 23.6%
- ----------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.1) - ($0.1) - - -
- ----------------------------------------------------------------------------------------------------------------------------
Interest Expense ($0.4) (0.1%) ($0.4) (0.1%) - -
- ----------------------------------------------------------------------------------------------------------------------------
*The second quarter of fiscal 2004 amount has been restated.
Other items, discussed on a consolidated basis, affecting the results of
operations for the fiscal periods were:
The increase in selling and administrative expenses in the second quarter of
fiscal 2005 from the comparable 2004 quarter was a result of increased selling
expenses to support the increased sales levels throughout the Company, in
addition to increased corporate general and administrative expenses related to
costs to meet the disaster recovery requirements of redundancy and business
continuity for corporate systems and communications networks. In addition, the
Company incurred increased salaries, professional fees and costs related to
compliance with the Sarbanes-Oxley Act.
The increase in depreciation and amortization for the second quarter of fiscal
2005 from the comparable 2004 quarter was attributable to increases in fixed
assets, primarily in the Computer Systems and Staffing Services segments.
Interest income increased due to higher interest rates together with additional
funds available for investment.
Other expense in both fiscal years is primarily the charges related to the
Company's Securitization Program as well as sundry expenses.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 38.9% in the second fiscal quarter of 2005 and 2004.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents, including restricted cash held in escrow for
ProcureStaff and Viewtech customers of $26.4 million and $43.7 million at May 1,
2005 and October 31, 2004, respectively, increased by $0.6 million to $88.6
million in the six months ended May 1, 2005. Unrestricted cash and cash
equivalents increased to $62.2 million at May 1, 2005 from $44.3 million at
October 31, 2004.
Operating activities provided $14.7 million of cash in the first six months of
fiscal 2005. In the comparable fiscal 2004 period, operating activities used
$1.0 million in cash.
Operating activities in the first six months of fiscal 2005, exclusive of
changes in operating assets and liabilities, produced $22.8 million of cash, as
the Company's net income of $3.7 million included non-cash charges primarily for
depreciation and amortization of $15.0 million, accounts receivable provisions
of $1.9 million, and minority interest of $3.3 million, partially offset by a
deferred tax benefit of $1.2 million. In the first six months of fiscal 2004,
operating activities, exclusive of changes in operating assets and liabilities,
produced $17.4 million of cash, as the Company's net income of $13.0 million
included non-cash charges primarily for depreciation of $12.4 million, and
accounts receivable provisions of $1.8 million, partially offset by income from
discontinued operations of $9.5 million.
Changes in operating assets and liabilities used $8.1 million of cash, net, in
the first six months of fiscal 2005 principally due to a decrease in the level
of accounts payable and accrued expenses of $12.0 million, a decrease in income
taxes payable of $7.0 million and an increase in prepaid and other assets of
$4.7 million, partially offset by an increase in securitization of receivables
of $10.0 million, and a decrease in the level of accounts receivable of $5.9
million. In the first six months of fiscal 2004 changes in operating assets and
liabilities used $18.4 million of cash, net, principally due to an increase in
the level of accounts receivable of $35.2 million and a $20.0 million reduction
in the participation interest sold under the Company's Securitization Program,
partially offset by an increase in the level of accounts payable and accrued
expenses of $27.7 million, an increase in the level of deferred income and other
liabilities of $3.2 million and a decrease in the level of inventory of $5.9
million.
The $10.5 million of cash applied to investing activities for the first six
months of fiscal 2005 resulted from the net additions to property, plant and
equipment totaling of $10.9, offset by the net reduction in investments of $0.4.
The principal factors in the $1.9 million of cash provided by investing
activities for the first six months of fiscal 2004 were the $18.5 million in
proceeds from the sale of real estate, previously leased to the Company's former
59%-owned subsidiary, substantially offset by the net additions to property,
plant and equipment totaling $16.7 million.
The principal factors in the $3.4 million of cash applied to financing
activities in the first six months of fiscal 2005 was a decrease in the level of
bank loans of $4.1 million, partially offset by the funds received from
employees' exercises of stock options of $0.9 million. The principal factors in
the $0.2 million of cash applied to financing activities in the first six months
of fiscal 2004 were repayments of long-term debt and notes payable to banks of
$0.3 million.
Commitments
- -----------
There has been no material change through May 1, 2005 in the Company's
contractual cash obligations and other commercial commitments from that reported
in the Company's Annual Report on Form 10-K for the fiscal year ended October
31, 2004.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Off-Balance Sheet Financing
- ---------------------------
The Company has no off-balance sheet financing arrangements, as that term has
meaning in Item 303(a) (4) of Regulation S-K.
Securitization Program
- ----------------------
In April 2005, the Company amended its $150.0 million accounts receivable
securitization program ("Securitization Program") to provide that the expiration
date be extended from April 2006 to April 2007. Under the Securitization
Program, receivables related to the United States operations of the staffing
solutions business of the Company and its subsidiaries are sold from
time-to-time by the Company to Volt Funding Corp., a wholly owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A., an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $150.0 million). The
Company retains the servicing responsibility for the accounts receivable. At May
1, 2005, TRFCO had purchased from Volt Funding a participation interest of $80.0
million out of a pool of approximately $256.4 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors (subject also, as described
above, to the security interest that the Company granted in the common stock of
Volt Funding in favor of the lenders under the Company's Credit Facility). TRFCO
has no recourse to the Company (beyond its interest in the pool of receivables
owned by Volt Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts incurred by
TRFCO on the issuance of its commercial paper, are charged to the consolidated
statement of operations.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Securitization Program--Continued
- ----------------------
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, among other things, the default rate, as
defined, on receivables exceeding a specified threshold, the rate of collections
on receivables failing to meet a specified threshold, the Company failing to
maintain a long-term debt rating of "B" or better or the equivalent thereof from
a nationally recognized rating organization or a default occurring and
continuing on indebtedness for borrowed money of at least $5.0 million. At May
1, 2005, the Company was in compliance with all requirements of its
Securitization Program.
Credit Lines
- ------------
In April 2005, the Company amended its secured, syndicated, revolving credit
agreement ("Credit Agreement") which was to expire in April 2005, to, among
other things, extend the term for three years to April 2008 and increase the
line from $30.0 million to $40.0 million. In July 2004, this program was amended
to release Volt Delta Resources, LLC ("Volt Delta") as a guarantor and
collateral grantor under the Credit Agreement due to the previously announced
agreement between Volt Delta and Nortel Networks Inc. ("Nortel Networks"). At
May 1, 2005, the Company had credit lines with domestic and foreign banks which
provided for borrowings and letters of credit up to an aggregate of $51.7
million, including $40.0 million under the Credit Agreement.
The Credit Agreement established a credit facility ("Credit Facility") in favor
of the Company and designated subsidiaries, of which up to $15.0 million may be
used for letters of credit. Borrowings by subsidiaries are limited to $25.0
million in the aggregate. The administrative agent for the secured Credit
Facility is JPMorgan Chase Bank. The other banks participating in the Credit
Facility are Mellon Bank, N.A., Wells Fargo Bank, N.A., Lloyds TSB Bank PLC and
Bank of America, N.A..
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. As amended, in lieu of the previous
borrowing base formulation, the Credit Agreement now requires the maintenance of
specified accounts receivable collateral in excess of any outstanding
borrowings. Based upon the Company's leverage ratio and debt rating at May 1,
2005, if a three-month U.S. Dollar LIBO rate were the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
4.0% per annum. At May 1, 2005, the facility fee was 0.3% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock repurchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ending as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At May 1, 2005, the Company was in compliance with all covenants
in the Credit Agreement.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
- ------------
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. Under the new amendment, five subsidiaries of the
Company remain as guarantors of all loans made to the Company or to subsidiary
borrowers under the Credit Facility. At May 1, 2005, four of those guarantors
have pledged approximately $42.7 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
At May 1, 2005, the Company had total outstanding foreign currency bank
borrowings of $4.0 million, none of which were under the Credit Agreement.
Subsequent to May 1, 2005, the Company borrowed two million Euros ($2.6 million)
under the Credit Agreement. These bank borrowings provide a hedge against
devaluation in foreign currency denominated assets.
Summary
- -------
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program will be sufficient to fund its presently contemplated
operations and satisfy its obligations through, at least, the next twelve
months.
New Accounting Pronouncements and New Laws to be Effective in Fiscal 2005
- -------------------------------------------------------------------------
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an Amendment of
ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and spoilage. This Statement
requires that these items be recognized as period costs even if the amounts are
not considered to be abnormal. The provisions of this Statement are effective
for inventory costs incurred in fiscal years beginning after June 15, 2005. The
Company does not believe that the adoption of this Statement in fiscal 2006 will
have a material impact on the Company's consolidated financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets-an Amendment of APB Opinion No. 29," to eliminate the exception for
nonmonetary exchanges of similar productive assets and replace it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. The provisions of this Statement are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005, with early
application permitted for exchanges beginning after November 2004. The Company
does not believe that the adoption of this Statement in fiscal 2005 will have a
material impact on the Company's consolidated financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," which
replaces the superseded SFAS No. 123, "Accounting for Stock-Based Compensation."
This Statement requires that all entities apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and
suppliers when the entity acquires goods or services. The provisions of this
Statement are required to be adopted by the Company beginning October 31, 2005.
The Company is currently assessing the impact that the adoption will have on the
Company's consolidated financial position and results of operations.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements and New Laws to be Effective in Fiscal 2005--
- -------------------------------------------------------------------------
Continued
The American Jobs Creation Act of 2004 (the "Act") provided for a special
one-time tax deduction of 85% of certain foreign earnings that are repatriated.
The Company is currently assessing the impact the Act will have on the Company's
consolidated financial position and results of operations.
Related Party Transactions
- --------------------------
During the first six months of fiscal 2005, the Company paid or accrued $0.6
million to the law firms of which Lloyd Frank, a director, is of counsel, for
services rendered to the Company and expenses reimbursed. During that quarter,
the Company also paid $5,000 to the law firm of which Bruce Goodman, a director,
is a partner, for services rendered to the Company.
The Company rents approximately 2,600 square feet of office space to a
corporation owned by Steven A. Shaw, an officer and director, in the Company's
El Segundo, California facility, which the Company does not require for its own
use, on a month-to-month basis at a rental of $1,750 per month. Based on the
nature of the premises and a recent market survey conducted for the Company, the
Company believes the rent is the fair market rental for such space.
46
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The Company`s earnings, cash flows
and financial position are exposed to market risks relating to fluctuations in
interest rates and foreign currency exchange rates. The Company has cash and
cash equivalents on which interest income is earned at variable rates. The
Company also has credit lines with various domestic and foreign banks, which
provide for borrowings and letters of credit, as well as a $150 million accounts
receivable securitization program to provide the Company with additional
liquidity to meet its short-term financing needs.
The interest rates on these borrowings and financing are variable and,
therefore, interest and other expense and interest income are affected by the
general level of U.S. and foreign interest rates. Based upon the current levels
of cash invested, notes payable to banks and utilization of the securitization
program, on a short-term basis, as noted below in the tables, a hypothetical
100-basis-point (1%) increase or decrease in interest rates would increase or
decrease its annual net interest expense and securitization costs by $46,000,
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 $14.9 million
at May 1, 2005. This fair value was calculated by applying the appropriate
fiscal year-end interest rate supplied by the lender to the Company's present
stream of loan payments.
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At May 1, 2005, the total market value of these
investments was $3.9 million, all of which are being held for the benefit of
participants in a non-qualified deferred compensation plan with no risk to the
Company.
The Company has a number of overseas subsidiaries and is, therefore, subject to
exposure from the risk of currency fluctuations as the value of foreign
currencies fluctuates against the dollar, which may impact reported earnings. As
of May 1, 2005, the total of the Company's net investment in foreign operations
was $8.6 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 May 1, 2005, the
total of the Company's foreign exchange contracts was $5.5 million, leaving a
balance of net foreign assets exposed of $3.1 million. The amount of risk and
the use of foreign exchange instruments described above are not material to the
Company's financial position or results of operations and the Company does not
use these instruments for trading or other speculative purposes. Based upon the
current levels of net foreign assets, a hypothetical weakening of the U.S.
dollar against these currencies at May 1, 2005 by 10% would result in a pretax
gain of $0.6 million related to these positions. Similarly, a hypothetical
strengthening of the U.S. dollar against these currencies at May 1, 2005 by 10%
would result in a pretax loss of $0.6 million related to these positions.
47
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at May 1, 2005.
For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
Interest Rate Market Risk Payments Due by Period as of May 1, 2005
- ------------------------- ----------------------------------------
Less than 1-3 3-5 After 5
Total 1 year Years Years Years
-------- -------- -------- -------- --------
(Dollars in thousands of US$)
Cash and Cash Equivalents
- -------------------------
Money Market and Cash Accounts $88,614 $88,614
Weighted Average Interest Rate 2.6% 2.6%
-------- --------
Total Cash and Cash Equivalents $88,614 $88,614
======== ========
Securitization Program
- ----------------------
Accounts Receivable Securitization $80,000 $80,000
Finance Rate 3.7% 3.7%
-------- --------
Securitization Program $80,000 $80,000
======== ========
Debt
- ----
Term Loan $13,934 $416 $941 $1,109 $11,468
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Payable to Nortel Networks $1,914 $1,914
Interest Rate 6.0% 6.0%
Notes Payable to Banks $4,007 $4,007
Weighted Average Interest Rate 5.5% 5.5% - - -
-------- -------- -------- -------- --------
Total Debt $19,855 $6,337 $941 $1,109 $11,468
======== ======== ======== ======== ========
48
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
Foreign Exchange Market Risk
- ----------------------------
Contract Values
---------------
Contract Less Than Fair
Exchange Rate Total 1 Year Value (1)
------------- ----- ------ ---------
(Dollars in thousands of U.S. $)
Option Contract
- ---------------
Canadian $ to U.S.$ 1.37 $2,920 $2,920 $18
Forward Contract
- ----------------
Euro to U.S.$ 1.29 2,573 2,573 1
------- ------- -------
Total Exchange Contracts $5,493 $5,493 $19
======= ======= =======
(1) Represents the fair value of the foreign contracts at May 1, 2005.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation of the effectiveness of the design
and operation of its "disclosure controls and procedures," as defined in,
and pursuant to, Rule 13a-15 of the Securities Exchange Act of 1934, as of
May 1, 2005 under the supervision and with the participation of the
Company's management, including the Company's Chairman of the Board,
President and Principal Executive Officer (the "CEO") and its Senior Vice
President and Principal Financial Officer (the "CFO"). Based on that
evaluation, the Company's CEO and its CFO concluded that, as of the date of
their evaluation, the Company's disclosure controls and procedures were
effective as of May 1, 2005 to ensure that material information relating to
the Company and its subsidiaries is made known to them on a timely basis.
Prior Period Weaknesses in Internal Controls
The Company's operation in Uruguay (which is part of the Telephone
Directory segment) printed its Montevideo telephone directory each year
during the October-November timeframe, and revenue should have been
recognized in the months of distribution of the books. In mid-December
2004, through discussions with the financial staff in Uruguay and by
examination of detailed correspondence and schedules from their offices,
the Company's CFO and its Principal Accounting Officer (the "PAO")
determined that revenue had not been properly recognized in Uruguay in
accordance with the Company's policies. This improper recognition involved
only the timing of when certain advertising revenue and related costs and
expenses were recognized. During the review, it was determined by the PAO
that the revenue had been recognized improperly in this operation since at
least 1998, and as a result, the Company restated in its Annual Report on
Form 10-K for the fiscal year ended October 31, 2004 (the "2004 Form 10-K")
its previously issued financial results for the fiscal years 2000 through
2003 and the first two quarters of fiscal 2004, and also filed an amended
Annual Report on Form 10-K for the fiscal year ended November 2, 2003. This
improper recognition constituted a material weakness (within the standards
established by the American Institute of Certified Public Accountants and
the Public Company Accounting Oversight Board) within the Company's system
of internal control.
In addition, one week prior to the filing deadline for the 2004 Form 10-K,
the Company's management and Ernst & Young LLP, the Company's independent
registered public accounting firm, determined that an additional material
weakness existed relating to adjusting entries which were made during the
course of the audit to correct the underlying books and records. As
49
CONTROLS AND PROCEDURES--Continued
described in fuller detail under the caption, "Remediation Efforts Related
to the Material Weaknesses in Internal Controls," these adjusting entries
were the result of certain account analyses and reconciliations not being
performed on a timely basis, certain instances of incomplete review of
facts and circumstances resulting in errors of judgment and estimation, and
failures to follow the Company's existing policies and procedures to ensure
that all adjustments were made on a timely basis during the close process.
Management and the Company's independent registered public accounting firm
then informed the Audit Committee of the Company's Board of Directors of
such facts. Due to the limited timeframe prior to the 2004 Form 10-K filing
deadline, the Company was unable to complete the implementation and
validation of remedial actions with regard to this additional material
weakness prior to the filing deadline.
On January 10, 2005, Ernst & Young issued an unqualified opinion on the
Company's financial statements for the fiscal year ended October 31, 2004.
Based upon the events described above and the Company's evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures, the Company's CEO and its CFO concluded that as of fiscal year
end, the Company's disclosure controls and procedures were not effective to
ensure that material information relating to the Company and its
subsidiaries was made known to them on a timely basis.
Remediation Efforts Related to the Material Weaknesses in Internal Controls
To address the prior period weaknesses in internal controls described
above, during the first quarter of fiscal year 2005, management of the
Company instituted a review of the Company's internal controls in order to
correct the deficiencies related to revenue recognition in Uruguay and the
Company's financial close process, and to strengthen the accounting
infrastructure as required. On January 18, 2005, after the filing of the
Company's 2004 Form 10-K, but prior to the end of the Company's first
fiscal quarter of 2005, the Company intensified its remediation efforts
with a conference call to senior operating and financial management led by
the CEO and the CFO. During the following week, the CFO issued two
memoranda reiterating the discussion points from the conference call which
are summarized below. The memoranda contained general accounting directives
and each financial manager was also given a listing specific to his/her
operation. The memoranda included the Company's proposed remediation
solutions, with a directive that significant control areas be remediated
prior to the closing of the first quarter and less significant control
areas be remediated prior to the close of the second quarter. The memoranda
were followed up with face-to-face meetings with all of the Company's
domestic business units' senior financial managers (whose units represented
over 90% of the Company's consolidated revenues in fiscal 2004) by the CFO
and the PAO, as well as telephonic meetings with the remaining senior
financial managers. The significant items discussed and documented were as
follows:
1. Proper revenue recognition procedures in Uruguay;
2. Stringent review and justification for accruals (including FAS 5
analyses), with emphasis on income, payroll and other taxes, and
computer and communication costs;
3. Comprehensive review of inventory costs and methodology to
identify excess and obsolete inventory;
4. Review of leases to ensure proper accounting consistency with FAS
13 and Technical Bulletin 85-3 ("TB 85-3");
5. Complete periodic analysis of accounts receivable to identify and
adjust for billing errors and customer credit balances;
6. Expanded analyses to determine whether there are any unrecorded
liabilities for the quarterly periods; and
7. Reinforcement of the financial statement close processes.
50
CONTROLS AND PROCEDURES--Continued
Prior to the end of the Company's first fiscal quarter for 2005, the PAO
reaffirmed the Company's accounting policy concerning the reporting of
revenue in the telephone directory operation. The policy requires that
directory revenue be recognized in an accounting period upon the shipment of
directories to customers, designated drop off locations or designated
shippers. Subsequent to the reaffirmation of the policy, correspondence and
schedules substantiating the recognition of the telephone directory
publishing revenue and related costs have been issued by the telephone
directory operations and reviewed by the office of the PAO on a quarterly
basis, and, after being approved, are included in the financial statements
of the Company.
Prior to the end of the first fiscal quarter of 2005, a substantial part of
the Company's remediation efforts over the financial statement close process
had been completed. As of the filing date of the First Quarter 10-Q, the
remediation status of the above-listed items was as follows:
1. Accrual analyses were expanded to include additional information,
and the related accounts were trued up to the actual amounts as
soon as the information became available;
2. The Company reaffirmed its supervisory sign-and-date procedures
ensuring that all analyses were reviewed by authorized personnel
on a timely basis;
3. The Company documented its procedures related to the recognition
of excess and obsolete inventory and implemented those procedures
effective with the first fiscal quarter close;
4. As part of the financial close process for fiscal year end 2004,
the Company reviewed its significant leases, and a sampling of
other leases, and adjusted the lease expense to conform with FAS
13 and TB 85-3. The Company issued new procedures to ensure
continued compliance with the straight-line method of accounting
for leases;
5. Accounts receivable analyses in the first quarter were expanded
to highlight problem accounts identified in the agings and
customer credit balances were reclassified into accounts payable;
6 Unrecorded liability analyses for the first quarter were expanded
to include the accrual of inventory and fixed assets; and
7. The Company reinforced its financial close process by holding
meetings with, and distributing memoranda to, its financial
managers in January 2005, emphasizing enhanced analyses and more
diligent reviews, and this was augmented by the increased
financial staff, discussed further below.
In addition to the foregoing, the Company has already implemented or is in
the process of implementing the following key remediation initiatives:
o The Company expanded its corporate and regional financial staff in the
first and second fiscal quarters of 2005 to improve account analyses,
reviews and the testing of controls, and additional staff will be
added as required;
o The Company improved its monitoring controls starting in the first
fiscal quarter of 2005, with additional improvements in the second
fiscal quarter of 2005;
o Prior to the close of the first fiscal quarter of 2005, the Company,
through an oral and written communications program, improved the
awareness of the importance of the financial close process throughout
the Company;
o Prior to the completion of the first fiscal quarter financial
statements for 2005, the Company completed the upgrade of its
enterprise resource planning system which enabled a more thorough and
timely analysis of its accounts, and an upgrade to its human resources
module is scheduled to be completed by the end of the calendar year;
and
o The Company has purchased hardware which will allow the Company to
provide improved backup and recovery functions for system servers that
are not on the Company network by the end of the Company's third
fiscal quarter of 2005;
51
CONTROLS AND PROCEDURES--Continued
Based upon the remediation of the deficiencies noted above, or the
implementation of compensating controls until such time as complete
remediation has been effected, prior to the filing of the First Quarter
10-Q, the CEO and the CFO reached the conclusion that the previously
identified weakness in the Company's financial close process no longer
existed, and its disclosure controls and procedures were effective as of
January 30, 2005, ensuring that material information relating to the Company
and its subsidiaries was made known to them on a timely basis.
Changes in Internal Controls
Except as set forth above, there were no changes in the Company's internal
controls over financial reporting that materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Internal Controls Over Financial Reporting.
Beginning with the Company's Annual Report on Form 10-K for the fiscal year
ending October 30, 2005, the Company will be subject to the provisions of
Section 404 of the Sarbanes-Oxley Act that require an annual management
assessment of its internal controls over financial reporting and related
attestation by the Company's independent registered public accounting firm.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2005 Annual Meeting of shareholders held on April 8, 2005,
shareholders:
(a) elected the following to serve as Class II directors of the Company
until the 2007 Annual Meeting of the shareholders by the following
votes:
For Vote Withheld
--- -------------
William Shaw 13,183,677 1,074,068
William H. Turner 14,080,649 177,096
Theresa A. Havell 14,094,562 163,183
(b) ratified the action of the Board of Directors in appointing Ernst &
Young LLP as the Company's independent registered public accounting
firm for the fiscal year ending October 30, 2005 by the following
vote:
For Against Abstain
--- ------- -------
14,217,429 37,228 3,088
52
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Description
- --------------------------------------------------------------------------------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of
Independent Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
(Registrant)
BY: /s/ JACK EGAN
-------------
Date: June 9, 2005 JACK EGAN
Vice President - Corporate Accounting
(Principal Accounting Officer)
53
EXHIBIT INDEX
- -------------
Exhibit
Number Description
- ------- -----------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of
Independent Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002