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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 nine months ended August 4, 2002
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 |_|
The number of shares of the Registrant's common stock, $.10 par value,
outstanding as of September 13, 2002 was 15,217,415.
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 -
Nine Months and Three Months Ended August 4, 2002 and
August 5, 2001 3
Condensed Consolidated Balance Sheets -
August 4, 2002 and November 4, 2001 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended August 4, 2002 and August 5, 2001 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Qualitative and Quantitative Disclosures about Market Risk 32
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURE 33
CERTIFICATIONS BY PRINCIPAL EXECUTIVE AND FINANCIAL OFFICERS 34
-2-
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Three Months Ended
------------------------- ----------------------
August 4, August 5, August 4, August 5,
2002 2001 2002 2001
---------- ---------- --------- ---------
(In thousands, except per share amounts)
NET SALES $1,082,813 $1,486,564 $376,635 $459,003
COST AND EXPENSES:
Cost of sales 1,023,602 1,406,020 349,800 433,001
Selling and administrative 52,428 58,237 17,547 21,332
Depreciation and amortization--Note L 16,640 18,411 5,888 6,245
---------- ---------- -------- --------
1,092,670 1,482,668 373,235 460,578
---------- ---------- -------- --------
OPERATING (LOSS) PROFIT (9,857) 3,896 3,400 (1,575)
OTHER INCOME (EXPENSE):
Interest income 610 705 204 205
Other (expense) income-net--Notes B, F and G (663) 1,263 (560) 1,927
Foreign exchange (loss) gain-net--Note K (316) (64) (255) 114
Interest expense (3,819) (9,493) (778) (2,462)
Gain on sale of partnership interest--Note I 4,173
---------- ---------- -------- --------
(Loss) income from continuing operations before income
taxes (14,045) 480 2,011 (1,791)
Income tax benefit (provision) 5,306 103 (878) 832
---------- ---------- -------- --------
(Loss) income from continuing operations (8,739) 583 1,133 (959)
Discontinued operations, net of taxes--Note I 4,310 (781) (283)
Extraordinary item--Note E:
Loss on early payment of debt, net of taxes (1,262)
Cumulative effect of a change in accounting--Note L:
Goodwill impairment (31,927)
---------- ---------- -------- --------
NET (LOSS) INCOME ($37,618) ($198) $ 1,133 ($1,242)
========== ========== ======== ========
Per Share Data
--------------
Basic and Diluted:
(Loss) income from continuing operations per share ($0.57) $ 0.04 $ 0.07 ($0.06)
Discontinued operations per share 0.28 (0.05) (0.02)
Extraordinary loss per share (0.08)
Cumulative effect of a change in accounting per share (2.10)
---------- ---------- -------- --------
Net (loss) income per share ($2.47) ($0.01) $ 0.07 ($0.08)
========== ========== ======== ========
Weighted average number of shares-Basic--Note H 15,216 15,211 15,217 15,215
========== ========== ======== ========
Weighted average number of shares-Diluted--Note H 15,216 15,211 15,280 15,215
========== ========== ======== ========
See accompanying notes to condensed consolidated financial statements.
-3-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August 4, November 4,
2002 2001(a)
--------- -----------
ASSETS (Unaudited)
CURRENT ASSETS (In thousands, except shares)
Cash and cash equivalents, including restricted cash of $15,070 (2002)--Note K $ 44,647 $ 18,474
Short-term investments 3,709 3,778
Trade accounts receivable less allowances of $10,579 (2002) and $9,376 (2001)
--Notes B and E 273,058 362,784
Assets held for sale--Notes G and I 2,660 47,635
Inventories--Note C 33,872 36,186
Recoverable income taxes 11,368
Deferred income taxes 7,369 8,585
Prepaid expenses and other assets 19,577 13,487
--------- ---------
TOTAL CURRENT ASSETS 396,260 490,929
Investment in joint venture--Note G 38 3,739
Property, plant and equipment less allowances for depreciation and amortization of
$84,522 (2002) and $70,517 (2001)--Note E 90,666 97,147
Deposits and other assets 3,563 5,152
Intangible assets-net of accumulated amortization of $1,227 (2002) and
$12,138 (2001)--Note L 9,106 40,269
--------- ---------
TOTAL ASSETS $ 499,633 $ 637,236
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks--Note D $ 2,505 $ 65,843
Current portion of long-term debt--Note E 1,517 31,429
Accounts payable 145,318 114,544
Liabilities related to assets held for sale--Note I 26,313
Accrued wages and commissions 38,474 47,282
Accrued taxes other than income taxes 17,580 15,412
Accrued interest and other accruals 8,495 20,936
Customer advances and other liabilities 25,471 16,548
Income taxes 2,038
--------- ---------
TOTAL CURRENT LIABILITIES 239,360 340,345
Long-term debt--Note E 14,557 15,993
Deferred income taxes 13,458 11,086
STOCKHOLDERS' EQUITY--Notes D, E and F
Preferred stock, par value $1.00; authorized--500,000 shares; issued--none
Common stock, par value $.10; authorized--30,000,000 shares; issued--
15,217,415 shares 1,522 1,522
Paid-in capital 41,037 41,002
Retained earnings 190,148 227,766
Accumulated other comprehensive loss (449) (478)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 232,258 269,812
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 499,633 $ 637,236
========= =========
(a) The Balance Sheet at November 4, 2001 has been derived from the audited
financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
-4-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
-----------------------
August 4, August 5,
2002 2001
--------- ---------
(In thousands)
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES
Net loss ($ 37,618) ($198)
Adjustments to reconcile net loss to cash provided by operating activities:
Discontinued operations (4,310) 781
Extraordinary item 1,262
Cumulative effect of a change in accounting - goodwill impairment 31,927
Depreciation and amortization 16,640 18,458
Equity in net income of joint venture (50) (49)
Gain on sale of partnership interest (4,173)
Net gain on marketable securities (1,090)
Accounts receivable provisions 7,991 6,758
Loss (gain) on foreign currency translation 207 (27)
Deferred income tax provision (benefit) 3,576 (492)
Other 227 129
Changes in operating assets and liabilities:
Decrease in accounts receivable 30,569 54,391
Proceeds from securitization of accounts receivable 50,000
Decrease in inventories 2,314 15,421
Increase in prepaid expenses and other current assets (5,622) (1,225)
Decrease in other assets 1,080 1,628
Increase (decrease) in accounts payable 31,427 (35,309)
Decrease in accrued expenses (19,331) (4,964)
Increase in customer advances and other liabilities 9,023 6,963
Net change in income taxes (10,830) (8,574)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 108,482 48,428
--------- --------
-5-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Nine Months Ended
-----------------------
August 4, August 5,
2002 2001
--------- ---------
(In thousands)
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES
Sales of investments $ 634 $ 2,622
Purchases of investments (882) (1,448)
Acquisitions (174)
Proceeds from disposals of property, plant and equipment 719 1,263
Purchases of property, plant and equipment (10,706) (19,781)
Proceeds from sale of subsidiary 24,233
Proceeds from sale of partnership interest 4,017
Other 1
-------- --------
NET CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES 13,998 (13,500)
-------- --------
CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES
Payment of debt (33,395) (1,974)
Exercise of stock options 35 141
Decrease in notes payable to banks (61,760) (35,373)
-------- --------
NET CASH APPLIED TO FINANCING ACTIVITIES (95,120) (37,206)
-------- --------
Effect of exchange rate changes on cash (1,187) (73)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FROM CONTINUING OPERATIONS 26,173 (2,351)
Net increase in cash and cash equivalents from discontinued operations 2,446
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 26,173 95
Cash and cash equivalents, beginning of period 18,474 34,099
-------- --------
CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED CASH, END OF PERIOD $ 44,647 $ 34,194
======== ========
SUPPLEMENTAL INFORMATION Cash paid during the period:
Interest expense $ 4,644 $ 9,961
Income taxes, net of refunds $ 4,520 $ 7,403
See accompanying notes to condensed consolidated financial statements.
-6-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X and, therefore, do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Company's consolidated financial position at August 4, 2002, consolidated
results of operations for the nine and three months ended August 4, 2002 and
August 5, 2001 and consolidated cash flows for the nine months ended August 4,
2002 and August 5, 2001. Operating results for interim periods are not
necessarily indicative of the results that may be expected for the fiscal year.
These statements should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended November 4, 2001. Except as described in Note L, the accounting policies
used in preparing these financial statements are the same as those described in
that Report. The Company's fiscal year ends on the Sunday nearest October 31.
Note B--Securitization Program
Effective April 15, 2002, the Company entered into a $100.0 million, three-year
accounts receivable securitization program ("Securitization Program"). Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A., an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $100.0 million). The
Company retains the servicing responsibility for the accounts receivable. On
April 15, 2002, TRFCO initially purchased from Volt Funding a participation
interest of $50.0 million out of an initial pool of approximately $162.0 million
of receivables. Of the $50.0 million cash paid by Volt Funding to the Company,
$35.0 million was used to repay the entire outstanding principal balance under
the Company's former revolving credit facility (see Note D).
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors (subject also, as described
in Note E, to the security interest that the Company has granted in the common
stock of Volt Funding in favor of the lenders under the Company's new Credit
Facility). TRFCO has no recourse to the Company (beyond the pool of receivables
owned by Volt Funding) for any of the sold receivables.
The Company accounts for the securitization of accounts receivable in accordance
with Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment 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
-7-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note B--Securitization Program--Continued
from the sale are reflected as cash provided by operating activities. Losses and
expenses associated with the transactions, primarily related to discounts on
TRFCO's commercial paper, are charged to the consolidated statement of
operations.
In conjunction with the initial and subsequent transactions through August 4,
2002, the Company incurred charges of $0.4 million, which are included in Other
Expense on the condensed consolidated statement of operations. The equivalent
cost of funds in the Securitization Program was 3% per annum. The Company's
carrying retained interest in the receivables approximated fair value due to the
relatively short-term nature of the receivable collection period.
At August 4, 2002, the Company's carrying retained interest, net of a service
fee liability, was approximately $106.6 million, in a revolving pool of
receivables of approximately $156.7 million. The outstanding balance of the
undivided interest sold to TRFCO was $50.0 million at August 4, 2002.
Accordingly, the trade accounts receivable included on the August 4, 2002
balance sheet have been reduced to reflect the $50.0 million participation
interest sold.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold or the Company failing to maintain a long-term
debt rating of "B" or better, or the equivalent thereof from a nationally
recognized rating organization. The Company's most recent long-term debt rating
was "BBB-" with a negative rating outlook as a result of consecutive difficult
quarters primarily due to the Company's high sensitivity to the weakened
economic environment, which has adversely affected the Staffing and
Telecommunications Services segments.
Note C--Inventories
Inventories of accumulated unbilled costs and materials by segment are as
follows:
August 4, November 4,
2002 2001
--------- -----------
(In thousands)
Staffing Services $ 31 $ 29
Telephone Directory 15,406 9,805
Telecommunications Services 13,630 22,970
Computer Systems 4,805 3,382
------- -------
Total $33,872 $36,186
======= =======
The cumulative amounts billed under service contracts at August 4, 2002 and
November 4, 2001 of $0.5 million and $4.6 million, respectively, are credited
against the related costs in inventory.
-8-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note D--Short-Term Borrowings
At August 4, 2002, the Company had total outstanding bank borrowings of $2.5
million under credit lines with foreign banks that provide for borrowings and
letters of credit up to an aggregate of $10.7 million. In addition to these
lines, at November 4, 2001, the Company had a revolving credit agreement, which
provided for $115.5 million of borrowings. The Company had total outstanding
bank borrowings of $60.3 million under the revolving credit agreement at
November 4, 2001. This revolving credit agreement was replaced in April 2002 by
the Securitization Program (see Note B) and a new, two-year, $40.0 million
Credit Facility (see Note E).
Note E--Long-Term Debt
Long-term debt consists of the following:
August 4, November 4,
2002 2001
--------- -----------
(In thousands)
7.92% Senior Notes (a) $30,000
Term loan (b) $14,891 15,125
Note payable (c) 1,183 2,297
------- -------
16,074 47,422
Less amounts due within one year 1,517 31,429
------- -------
Total long-term debt $14,557 $15,993
======= =======
(a) During the fiscal 2002 first quarter, the Company determined to prepay the
remaining $30.0 million of its Senior Notes in lieu of seeking amendments
to the agreements under which the Senior Notes were issued that would have
been required in order for the Company to implement the Securitization
Program discussed in Note B and that may have been required, depending
upon the size of the Company's then expected first quarter loss. The
Company prepaid the Senior Notes on March 5, 2002, which otherwise would
have been due in installments over the next two and one-half years. The
"make whole" premium paid to the holders of the Senior Notes of $2.1
million, or $1.3 million net of taxes, was recognized as an extraordinary
charge in the second quarter of fiscal 2002 for the early payment of that
debt.
(b) In September 2001, a subsidiary of the Company entered into a $15.1
million loan agreement with General Electric Capital Business Asset
Funding Corporation. The 20-year loan, which bears interest at 8.2% per
annum and requires principal and interest payments of $0.4 million per
quarter, is secured by a deed of trust on certain land and buildings
(carrying amount at August 4, 2002, $11.8 million). The obligation is
guaranteed by the Company.
(c) On February 9, 1999, the Company entered into a $5.6 million installment
payment agreement to finance the purchase and support of an Enterprise
Resource Planning system for internal use as an accounting and back office
system, which has been capitalized and is being amortized over a five to
seven year period. The agreement provides for interest, calculated at 6%,
and principal payments in five equal annual installments of $1.3 million,
which began in February 1999, with the final payment due February 2003.
-9-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note E--Long-Term Debt--Continued
Effective April 15, 2002, the Company entered into a $40.0 million, two-year,
secured, syndicated, revolving credit agreement ("Credit Agreement") which
established a credit facility ("Credit Facility") in favor of the Company and
designated subsidiaries, of which up to $15.0 million may be used for letters of
credit. Borrowings by subsidiaries are limited to $25.0 million in the
aggregate. The administrative agent arranger for the secured Credit Facility is
JP Morgan Chase Bank. The other banks participating in the Credit Facility are
Mellon Bank, NA, Wells Fargo, N. A. and Lloyds TSB Bank PLC. Borrowings and
letters of credit under the Credit Facility are limited to a specified borrowing
base, which is based upon the level of specified receivables at the time of each
calculation. At August 4, 2002, the borrowing base was approximately $29.0
million. To date, the Company and its subsidiaries have made no borrowings under
the Credit Facility. Borrowings under the Credit Facility are to bear interest
at various rate options selected by the Company at the time of each borrowing,
certain of which options are based on a leverage ratio, as defined (as is the
facility fee). Additionally, interest and the facility fees can be increased or
decreased upon a change in the Company's long-term debt rating provided by a
nationally recognized rating agency. Based upon the Company's leverage ratio and
debt rating at August 4, 2002, if a three-month LIBO rate was the interest rate
option selected by the Company, borrowings would have borne interest at the rate
of 3.3% per annum. At August 4, 2002, the facility fee was 0.05% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined, of $220.0 million (the
Company's consolidated tangible net worth as of August 4, 2002 was $224.4
million); limits cash dividends and capital stock repurchases and redemptions by
the Company in any one fiscal year to 25% of consolidated net income, as
defined, for the prior fiscal year; requires the Company to maintain a ratio of
EBIT, as defined, to interest expense, as defined, of 1.0 to 1.0 for the four
fiscal quarters ending November 3, 2002 and 1.25 to 1.0 for each of the four
fiscal quarters ending as of the last day of each quarter thereafter; and
requires that there be no net loss, excluding non-operating items, in either of
the final two fiscal quarters in the Company's current fiscal year, ending
November 3, 2002. 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.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers; however, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are guarantors of all
loans made to the Company or to subsidiary borrowers under the Credit Facility,
with four of those guarantors having pledged accounts receivable, other than
those in the Securitization Program, the level of which at August 4, 2002 was
approximately $39.6 million, as collateral security for their guarantee
obligations. Under certain circumstances, other subsidiaries of the Company also
may be required to become guarantors under the Credit Facility. The Company has
pledged all of the stock of the Volt Funding subsidiary as collateral security
for the Company's obligations under the Credit Facility.
The Company is currently in compliance with the covenants included in the Credit
Agreement. However, one covenant in the Credit Facility, regarding the ratio of
EBIT to interest expense for fiscal year 2002, may not be achieved depending on
the level of profitability in the fourth quarter of fiscal 2002. The Company has
not
-10-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note E--Long-Term Debt--Continued
borrowed under the Credit Facility since its inception in April 2002 and no
borrowings are anticipated in the fourth quarter of fiscal 2002 or the first
quarter of fiscal 2003. As long as the facility is unused, there would be no
effect on any other financing, including the Securitization Program. However,
the Company is presently in discussion with its banks to obtain a waiver.
Note F--Stockholders' Equity
Changes in the major components of stockholders' equity for the nine months
ended August 4, 2002 are as follows:
Common Paid-In Retained
Stock Capital Earnings
-------- ------- --------
(Dollars in thousands)
Balance at November 4, 2001 $ 1,522 $41,002 $227,766
Stock options exercised -1,750 shares 35
Net loss for the nine months (37,618)
-------- ------- --------
Balance at August 4, 2002 $ 1,522 $41,037 $190,148
======== ======= ========
Another component of stockholders' equity, the accumulated other comprehensive
loss, consists of cumulative unrealized foreign currency translation losses, net
of taxes, of $441,000 and $468,000 at August 4, 2002 and November 4, 2001,
respectively, and an unrealized loss, net of taxes, of $8,000 and $10,000 in
marketable securities at August 4, 2002 and November 4, 2001, respectively.
Changes in these items, net of income taxes, are included in the calculation of
comprehensive loss as follows:
Nine Months Ended Three Months Ended
---------------------- ----------------------
August 4, August 5, August 4, August 5,
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands)
Net (loss) income (a) ($37,618) ($198) $ 1,133 ($1,242)
Foreign currency translation adjustments-net 27 57 (43) (6)
Unrealized gain (loss) on marketable securities-net 2 (32) (12) (8)
Reclassification adjustment for loss included in net
income, net of taxes of $282 in fiscal year 2001 (b) 428
-------- ----- ------- -------
Total comprehensive (loss) income ($37,589) $ 255 $ 1,078 ($1,256)
======== ===== ======= =======
(a) During the three months ended August 5, 2001, the Company sold one-third
of an investment in equity securities, previously written off in 1997,
resulting in a pre-tax gain of $1.8 million.
(b) In April 2001, a write-down of an investment in marketable securities,
considered other than temporary, was charged to other expense.
-11-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note G--Joint Venture
The Company owns a 50% interest in westVista Advertising Services, a joint
venture with a subsidiary of TELUS Corporation. The venture was formed in fiscal
1998 for the acquisition or establishment and subsequent operation of one or
more businesses engaged in the publication of telephone directories in the
western United States. Additional acquisitions by the joint venture have been
suspended. In the nine months ended August 4, 2002, sales of the venture were
$6.7 million and the Company's portion of the net income was $50,000, which is
included in other (expense) income. In addition, the Company recorded a charge
for the write-down of goodwill related to the joint venture of $1.1 million as a
portion of the Cumulative Effect of a Change in Accounting (see Note L). On
August 15, 2002, the joint venture sold one of its subsidiaries. Accordingly,
the Company's share of the investment in this company has been reclassified as
assets held for sale on the fiscal 2002 balance sheet. The gain on the sale to
be recognized in the Company's fiscal 2002 fourth quarter will not be material.
Note H--Per Share Data
In calculating basic earnings per share, the dilutive effect of stock options
are excluded. Diluted earnings per share are computed on the basis of the
weighted average number of shares of common stock outstanding and the assumed
exercise of dilutive outstanding stock options based on the treasury stock
method.
Nine Months Ended Three Months Ended
----------------------- -----------------------
August 4, August 5, August 4, August 5,
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands)
Denominator for basic earnings per share:
Weighted average number of shares 15,216 15,211 15,217 15,215
Effect of dilutive securities:
Employee stock options 63
------ ------ ------ ------
Denominator for diluted earnings per share:
Adjusted weighted average number of shares 15,216 15,211 15,280 15,215
====== ====== ====== ======
Options to purchase 189,002 shares of the Company's common stock were
outstanding at August 4, 2002 but were not included in the computation of
diluted earnings per share in the three months then ended because the options'
exercise price was greater than the average market price of the common shares.
Due to a pre-tax loss in the first nine months of fiscal 2002 and third quarter
and nine-month periods of fiscal 2001, none of the options to purchase 570,045
and 581,843 shares, respectively, of the Company's common stock were included in
the computation of diluted earnings per share because the effect would be
antidilutive.
-12-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note I--Sale and Acquisitions of Subsidiaries and Businesses
On November 30, 2001, the Company's 59% owned publicly-held subsidiary,
Autologic Information International, Inc. ("Autologic"), that comprised the
Company's Electronic Publication and Typesetting segment, was acquired by Agfa
Corporation through a tender offer for all of Autologic's outstanding shares and
a subsequent merger. The Company received $24.2 million for its shares. The
Company's gain on the transaction of $4.5 million, including a tax benefit of
$1.7 million, was reflected in the Company's first quarter of fiscal 2002. The
results of operations of Autologic have been classified as discontinued,
Autologic's prior period results have been reclassified and its assets and
liabilities have been included as separate line items on the Company's fiscal
2001 consolidated balance sheet.
Included in discontinued operations for the nine months ended August 4, 2002
(through November 30, 2001) and August 5, 2001 and the three months ended August
5, 2001 are:
Nine Months Ended Three Months Ended
-------------------------- ------------------
August 4, August 5, August 5,
2002 2001 2001
--------- --------- ---------
(In thousands)
Revenue $ 3,296 $ 50,844 $ 16,678
======= ======== ========
Loss before taxes and minority interest ($488) ($1,432) ($483)
Income tax benefit 153 143 55
Minority interest 138 508 145
------- -------- --------
Loss from operations (197) (781) (283)
------- -------- --------
Gain on disposal before tax benefit 2,761
Income tax benefit 1,746
-------
Gain on disposal 4,507
------- -------- --------
Gain (loss) from discontinued operations $ 4,310 ($781) ($283)
======= ======== ========
Autologic's assets and liabilities, as reclassified in the November 4, 2001
balance sheet, include:
November 4, 2001
----------------
(In thousands)
Cash $14,879
Accounts receivable 10,807
Inventory 7,782
Deferred taxes and other current assets 5,717
Property, plant and equipment, net 4,401
Deferred taxes and other non-current assets 4,049
-------
Assets held for sale $47,635
=======
Accounts payable $ 2,358
Accrued expenses 4,333
Customer advances and other liabilities 4,037
Minority interest 15,585
-------
Liabilities related to assets held for sale $26,313
=======
In April 2001, the Company sold its interest in a real estate partnership,
resulting in a pre-tax gain of $4.2 million.
-13-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note J--Segment Disclosures
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the nine months and the three months
ended August 4, 2002 and August 5, 2001, included on page 20 of this Report, are
an integral part of these financial statements. During the nine months ended
August 4, 2002, consolidated assets decreased by $137.6 million, primarily due
to the sale of Autologic, the new Securitization Program, the impairment of
goodwill in the Staffing Services and Telephone Directory segments and decreases
in receivables and inventories in the Telecommunications Services segment.
Note K--Derivative Financial Instruments and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts and 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 August 4, 2002, the Company had outstanding
foreign currency option and forward contracts in the aggregate notional amount
of $11.1 million, which approximated its exposure in foreign currencies at that
date.
Under certain contracts with customers, the Company manages the customers'
alternative staffing requirements including the payment of associate vendors.
Included in cash and cash equivalents at August 4, 2002 was approximately $15.1
million restricted to cover such obligations that were reflected in accounts
payable at that date.
Note L--Goodwill and Other Intangibles
As of the beginning of fiscal 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). Under these new rules, goodwill and other intangibles with indefinite
lives are no longer amortized, but are subject to annual testing using fair
value methodology. Intangible assets with finite, measurable lives continue to
be amortized over their respective useful lives until they reach their estimated
residual values, and are reviewed for impairment in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." As a
result, the Company did not incur any expense for the amortization of goodwill
in the third quarter or nine months of fiscal 2002. The pretax expense for the
amortization of goodwill was $0.7 million and $2.3 million in the third quarter
and nine months ended August 5, 2001, respectively.
The Company engaged independent valuation firms to assist in the determination
of impairment, if any, which may have existed in the $39.8 million of goodwill
recorded as of the beginning of the fiscal year, November 5,
-14-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note L--Goodwill and Other Intangibles--Continued
2001. The valuation firms primarily used comparable multiples of revenue and
EBITDA and other valuation methods to assist the Company in the determination of
the fair value of the reporting units measured. The result of testing goodwill
for impairment in accordance with SFAS No. 142, as of November 5, 2001, was a
non-cash charge of $31.9 million, which is reported under the caption
"Cumulative effect of a change in accounting." The total remaining goodwill of
the Company at August 4, 2002 was $9.0 million.
The impairment charge in the Staffing Services segment relates to the Company's
European Technical Placement division and the Commercial and Light Industrial
division, which have been adversely affected by the economic declines in Europe
and the United States, respectively. Both divisions have incurred losses in
fiscal 2001 and to-date in fiscal 2002. Accordingly, an impairment charge of
$23.9 million (including $2.6 million, the total carrying amount of goodwill for
the Commercial and Light Industrial division as of November 5, 2001) was
recognized.
The impairment charge in the Company's Telephone Directory business related to
its independent telephone directory publishing division ($6.9 million) of that
segment, and the Company's 50% interest in the westVista joint venture ($1.1
million), which also publishes independent directories. Due to the fact that
some of the directories purchased have not performed as well as projected, and
in some cases had incurred losses, an impairment charge of $8.0 million was
recognized.
The changes in the carrying amount of goodwill by segment during the nine months
ended August 4, 2002 are as follows:
Balance Balance
November Impairment August
4, 2001 Charge (1) 4, 2002
-------- ---------- ------
(In thousands)
Staffing Services $32,271 $23,930 $8,341
Telephone Directory 6,907 6,907
Computer Systems 642 642
------- ------- ------
Total $39,820 $30,837 $8,983
======= ======= ======
(1) The impairment charge does not include the $1.1 million charge related to
the goodwill associated with the westVista joint venture, as discussed
above.
-15-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
Note L--Goodwill and Other Intangibles--Continued
The following tables reflect the impact that the elimination of the amortization
portion of SFAS No. 142 would have had on prior year net income and earnings per
share, if adopted in 2001:
Nine Months Ended Three Months Ended
----------------- ------------------
August 5, 2001 August 5, 2001
-------------- --------------
(In thousands, except per share data)
Reported net loss ($198) ($1,242)
Add back: Goodwill amortization, net of taxes (a) 1,822 475
------ ------
Adjusted net income (loss) $1,624 ($767)
====== ======
Per Share Data
--------------
Basic and Diluted:
Reported net loss per share ($0.01) ($0.08)
Add back: Goodwill amortization per share (a) 0.12 0.03
------ ------
Adjusted net income (loss) per share $0.11 ($0.05)
====== ======
(a) Includes goodwill amortization applicable to discontinued operations of
$0.3 million, net of taxes, or $0.02 per share and $20,000, net of taxes,
for the nine months and three months ended August 5, 2001, respectively.
As of August 4, 2002, other intangible assets, which will continue to be
amortized, are comprised of specific sales contracts that were purchased, having
a definite life, and have a carrying value of $0.1 million, net of accumulated
amortization of $0.2 million. The related amortization expense for the nine and
three months ended August 4, 2002 was $0.3 million and $30,000, respectively,
and the remaining $0.1 million is expected to be amortized by the end of fiscal
2003.
-16-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements Disclosure
This Report and other reports and statements issued by the Company and its
officers from time-to-time contain certain statements concerning the Company's
future plans, objectives, performance, intentions and expectations that are, or
may be deemed to be, "forwarding-looking statements." Although the Company
believes that its expectations are based on reasonable assumptions, these
forward-looking statements are subject to a number of known and unknown risks
and uncertainties that could cause the Company's actual results, performance and
achievements to differ materially from those described or implied in the
forward-looking statements. These risks and uncertainties include, but are not
limited to:
o general economic, competitive and other business conditions, including the
effects of instability in the U.S. and European economies
o continued financial strength of the Company's customers, some of which
have announced layoffs, unfavorable financial results, investigations by
government agencies and lowered financial expectations for the near term
o the Company's performance on contracts
o the degree and timing of obtaining new contracts and the rate of renewals
of existing contracts, as well as customers' degree of utilization of the
Company's services
o material changes in demand from larger customers, including those with
which the Company has national contracts
o the effect of litigation by temporary employees against, and government
activity regarding, temporary help companies and the customers with which
they do business
o variations in the rate of unemployment and higher wages sought by
temporary workers, especially those in certain technical fields
particularly characterized by labor shortages, which could affect the
Company's ability to meet its customers' demands and the Company's profit
margins
o changes in customer attitudes toward the use of outsourcing and temporary
personnel
o the Company's ability to recruit qualified employees to satisfy customer
requirements for the Company's Staffing Services
o the Company's ability to attract and retain certain classifications of
technologically qualified personnel for its own use, particularly in the
areas of research and development and customer service and maintain
superior technological capability and manage risks inherent in the
development, implementation and upgrading of internal systems
o intense price competition and pressure on margins
o the Company's ability to meet competition in highly competitive markets
with minimal impact on margins
o the Company's ability to achieve customer acceptance of its products and
systems in markets characterized by rapidly changing technology and
frequent new product introductions
o the Company's ability to foresee changes and to identify, develop and
commercialize innovative and competitive products and systems in a timely
and cost effective manner
o risks inherent in new product introductions, such as start-up delays, cost
overruns and uncertainty of customer acceptance
o the timing of customer acceptances of systems
o the Company's dependence on third parties for some product components
o changes in laws, regulations and government policies
o the degree and effects of inclement weather
o the Company's ability to maintain a sufficient credit rating to enable it
to continue its securitization program and ability to maintain its
existing credit rating in order to avoid any increase in interest rates
and any increase in fees under its revolving credit facility, as well as
to comply with the financial and other covenants applicable under its
credit facility and other borrowing instruments
These and certain other factors are discussed in the Company's Annual Report on
Form 10-K for the fiscal year ended November 4, 2001 and, from time-to-time, in
the Company's other reports filed with the Securities and Exchange Commission.
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's condensed 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, judgements, assumptions and
valuations that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures. Future reported results of operations can be
impacted if the Company's estimates, judgements, 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,
judgements, assumptions or valuations used in the preparation of the Company's
financial statements are as follows:
Revenue Recognition - The Company recognizes revenue as services are rendered.
Within the Company's operating segments, these services include the billing of
labor, material and directory assistance transactions as they are provided and
directories when they are published. In addition, the Company may provide
services under long-term contracts. Revenue and costs applicable to long-term
contracts, including those providing for software customization or modification,
are recognized on the percentage-of-completion method, measured by work
performed, or the completed contract method, as appropriate, in accordance with
AICPA Statement of Positions No. 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" and No. 97-2, "Software
Revenue Recognition" and related interpretations and amendments. 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. Under certain other contracts with
customers, the Company manages the customers' alternative staffing requirements,
including transactions between the customer and other staffing vendors
("associate vendors"). When payments to associate vendors are subject to receipt
of the customers' payment to the Company and the Company does not bear credit
responsibility, the arrangements are considered non-recourse against the Company
and the revenue, other than management fees to the Company, is excluded from
sales.
Allowance for Uncollectable Accounts - The establishment of an allowance
requires the use of judgement and assumptions regarding potential losses on
receivable balances. Allowances for doubtful accounts receivable are maintained
based upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company believes that these allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required and a related charge to earnings.
Long-Lived Assets - As of the beginning of fiscal 2002, the Company adopted SFAS
No. 142, "Goodwill and Other Intangible Assets." Under these new rules, goodwill
and other intangibles with indefinite lives are no longer amortized, but are
subject to annual testing using fair value methodology. The Company engaged
independent valuation firms, which primarily used comparable multiples of
revenue and EBITDA and other valuation methods to assist the Company in the
determination of the fair value of the reporting units measured. An impairment
charge of $31.9 million was recognized for the amount, by which the carrying
value of goodwill exceeded its implied fair value as of the beginning of fiscal
2002. Intangible assets with finite, measurable lives continue to be amortized
over their respective useful lives. Property, plant and equipment is recorded at
cost, and depreciation and amortization are provided on the straight-line and
accelerated methods at rates calculated to write off the cost of the assets over
their estimated lives. Intangible assets, other than goodwill and property,
plant and equipment are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No.
144, these assets are tested for recoverability
-18-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable. The fair values of the assets are based upon Company
estimates of the discounted cash flows that are expected to result from the use
and eventual disposition of the assets or that amount that would be realized
from an immediate sale. An impairment charge is recognized for the amount, if
any, by which the carrying value of an asset exceeds its fair value. Although
the Company believes its estimates are appropriate, the fair value measurements
of the Company's long-lived assets could be affected by using different
estimates and assumptions in these valuation techniques.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with AICPA Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent to the preliminary project planning and approval
stage, all appropriate costs are capitalized until the point at which the
software is ready for its intended use. Subsequent to the software being used in
operations, the capitalized costs are transferred from costs-in-process to
completed property, plant and equipment, and are accounted for as such. All
post-implementation costs, such as maintenance, training and minor upgrades that
do not result in additional functionality, are expensed as incurred.
Consolidation - The consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions have
been eliminated upon consolidation. The Company accounts for the securitization
of accounts receivables in accordance with Financial Accounting Standards Board
Statement ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities." At the time a participation interest
in the receivables is sold, that interest is removed from the condensed
consolidated balance sheet. On April 15, 2002, under a new securitization
program, the Company, through a special purpose subsidiary, sold a participation
interest of $50.0 million out of an initial pool of approximately $162.0 million
of receivables. At August 4, 2002, the participation interest sold remained at
$50.0 million. Accordingly, the trade receivables included in the August 4, 2002
balance sheet have been reduced to reflect the $50.0 million participation
interest sold and no debt was recorded.
-19-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Results of Operations
The information, which appears below, relates to current and prior periods, the
results of operations for which periods are not necessarily indicative of the
results for any subsequent periods.
On November 30, 2001, the Company's 59% owned publicly-held subsidiary,
Autologic Information International, Inc. ("Autologic"), that comprised the
Company's Electronic Publication and Typesetting segment, was acquired by Agfa
Corporation through a tender offer for all of Autologic's outstanding shares and
a subsequent merger. The Company received $24.2 million for its shares. The
Company's gain on the transaction of $4.5 million, including a tax benefit of
$1.7 million, was reflected in the Company's first quarter of fiscal 2002. The
results of operations of Autologic have been classified as discontinued,
Autologic's prior period results have been reclassified and its assets and
liabilities have been included as separate line items on the Company's fiscal
2001 balance sheet.
Nine Months Ended Three Months Ended
----------------------------- -------------------------
August 4, August 5, August 4, August 5,
2002 2001 2002 2001
----------- ----------- --------- ---------
Net Sales: (In thousands)
Staffing Services
Traditional Staffing $ 849,663 $ 1,001,481 $ 296,848 $ 314,630
Managed Services 488,273 580,090 214,352 178,140
----------- ----------- --------- ---------
Total Gross Sales 1,337,936 1,581,571 511,200 492,770
Less: Non-Recourse Managed Services (438,729) (385,788) (194,301) (137,550)
----------- ----------- --------- ---------
Net Staffing Services 899,207 1,195,783 316,899 355,220
Telephone Directory 50,866 61,799 19,763 25,187
Telecommunications Services 84,910 192,220 24,307 66,767
Computer Systems 58,289 49,449 18,604 17,697
Elimination of inter-segment sales (10,459) (12,687) (2,938) (5,868)
----------- ----------- --------- ---------
Total Net Sales $ 1,082,813 $ 1,486,564 $ 376,635 $ 459,003
=========== =========== ========= =========
Segment Operating Profit (Loss):
Staffing Services $ 9,275 $ 10,738 $ 6,130 $ 281
Telephone Directory 2,505 (1,537) 3,381 (358)
Telecommunications Services (11,316) 6,408 (3,282) 2,460
Computer Systems 6,528 5,899 2,563 2,373
----------- ----------- --------- ---------
Total Segment Operating Profit 6,992 21,508 8,792 4,756
General corporate expenses (11,025) (11,243) (3,118) (3,721)
Financial Reporting System expense (5,824) (6,369) (2,274) (2,610)
----------- ----------- --------- ---------
Total Operating (Loss) Profit (9,857) 3,896 3,400 (1,575)
Interest and other (expense) income (53) 6,141 (356) 2,132
Foreign exchange (loss) gain-net (316) (64) (255) 114
Interest expense (3,819) (9,493) (778) (2,462)
----------- ----------- --------- ---------
(Loss) Income from Continuing Operations Before Income Taxes ($14,045) $ 480 $ 2,011 ($1,791)
=========== =========== ========= =========
-20-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED AUGUST 4, 2002 COMPARED
TO THE NINE MONTHS ENDED AUGUST 5, 2001
Results of Operations - Summary
In the nine-month period of fiscal 2002, consolidated net sales decreased by
$403.8 million, or 27%, to $1.1 billion, from the comparable period in fiscal
2001. The decrease in fiscal 2002 net sales resulted primarily from a $296.6
million decrease in sales in the Staffing Services segment and a $107.3 million
decrease in sales in the Telecommunications Services Segment.
The Company's operating segments reported an operating profit of $7.0 million in
the nine-month period of fiscal 2002 compared to an operating profit of $21.5
million in the prior year nine-month period. Contributing to the nine-month
fiscal 2002 decrease in operating profit was a decrease in operating results of
$17.7 million reported by the Telecommunications Services segment and a decrease
of $1.4 million in operating profit reported by the Staffing Services segment.
These decreases were partially offset by an increase in profitability of $4.0
million reported by the Telephone Directory segment and an increase of $0.6
million in operating profit by the Computer Systems segment.
The Company's nine-month fiscal 2002 loss from continuing operations before
income taxes was $14.0 million compared to income from continuing operations
before taxes of $0.5 million in the first nine months of fiscal 2001.
Non-recurring items affecting results from continuing operations in the first
nine months of fiscal 2001 included a gain on the sale of the Company's interest
in a real estate partnership of $4.2 million and a gain of $1.8 million on the
sale of an investment in equity securities that had been written off in 1997,
partially offset by a write-down of an investment in marketable securities of
$0.7 million. In addition, results from continuing operations for the nine
months of fiscal 2001 included amortization of goodwill, which is no longer
permitted to be amortized, of $2.3 million.
The net loss for the first nine months of fiscal 2002 was $37.6 million compared
to a net loss of $0.2 million in the prior year first nine-month period.
Consolidated results for the nine-month period of fiscal 2002 included a
non-cash charge for the write-down of goodwill of $31.9 million reported as a
cumulative effect of a change in accounting and a net gain from discontinued
operations, after taxes, of $4.3 million comprised of a $4.5 million gain,
including a tax benefit of $1.7 million, on the sale of the Company's interest
in Autologic partially offset by a loss from Autologic's operations through the
disposal date of $0.2 million (compared to a loss of $0.8 million in fiscal
2001). In addition, fiscal 2002 nine-month results included a $1.3 million, net
of taxes, extraordinary charge for the early payment of the Company's remaining
$30.0 million outstanding Senior Notes.
Results of Operations - By Segment
Sales of the Staffing Services segment decreased by $296.6 million, or 25%, to
$899.2 million in fiscal 2002. Despite increased operating profits in the third
quarter of fiscal 2002, the segment reported a reduction in operating profit to
$9.3 million for the nine-month period of fiscal 2002 from $10.7 million in the
first nine months of fiscal 2001. The Technical Placement division reported an
operating profit of $18.4 million on sales of $585.8 million for the nine months
of fiscal 2002, compared with an operating profit of $18.6 million on sales of
$816.4 million in the prior year nine-month period. Low-margin managed service
sales comprised 60%
-21-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED AUGUST 4, 2002 COMPARED
TO THE NINE MONTHS ENDED AUGUST 5, 2001--Continued
Results of Operations - By Segment--Continued
of the sales decline reported by the division. The decline was due primarily to
an increase in the number of associate vendors who agreed to be paid subject to
the receipt of the customers' payment to the Company, resulting in the amounts
associated with such revenue being excluded from sales. A reduction in the use
of managed service programs by several of the division's managed service clients
also adversely affected sales. Although the division reported decreases in both
traditional and managed service sales, an increase in high-margin project
management work contributed to an increase in gross margins of 3.7 percentage
points. In addition, the division's continued overhead reductions and the
absence in fiscal 2002 of goodwill amortization of $1.5 million enabled the
Technical Placement division to slightly increase its profit margin percentages.
The Commercial and Light Industrial division reported an operating loss of $9.1
million on sales of $313.4 million for the first nine months of fiscal 2002
compared with an operating loss of $7.9 million on sales of $379.4 million in
the prior year nine-month period. The increase in operating loss was the result
of a 16% decline in traditional staffing sales, partially offset by lower
overhead due to cost reduction efforts. Although sequential quarterly operating
losses have declined during fiscal 2002, cost control initiatives in the
Commercial and Light Industrial division have not yet fully offset lower revenue
and gross margins.
The Telephone Directory segment reported an operating profit of $2.5 million on
sales of $50.9 million in the nine months of fiscal 2002, compared to an
operating loss of $1.5 million on sales of $61.8 million in the comparable
fiscal 2001 period. The reduction in sales was primarily due to decreases in
independent directory and toll-free directory publishing sales as well as lower
printing sales, in the first six months of fiscal 2002, in Uruguay due to the
economic instability in the region, particularly Argentina. Despite the reduced
sales, decreases in paper prices, production costs and overhead along with
increased productivity and the absence in fiscal 2002 of goodwill amortization
of $0.6 million resulted in the higher profitability of the segment. The segment
currently has a high-margin production contract with a telecommunications
company, which accounted for 6% of the segment's annual revenue in fiscal 2001,
that will terminate in June 2003 as the customer's operations are being sold.
The segment can not determine the amount of revenue it will receive from the
customer through the end of the contract or whether current revenue and profits
will be replaced through existing or new customers in the future.
The Telecommunications Services segment's sales decreased by $107.3 million, or
56%, to $84.9 million in the first nine months of fiscal 2002 and the segment
sustained an operating loss of $11.3 million in the first nine months of fiscal
2002, compared with an operating profit of $6.4 million in the comparable fiscal
2001 period. Despite a decrease in overhead of 29% due to cost reduction
efforts, the results of the segment continue to be affected by the decline in
capital spending within the telecommunications industry. This factor has also
increased competition for available work, pressuring pricing and margins. The
Company recently announced the reorganization of the segment's two western
divisions and continues its cost control initiatives in an effort to permit the
segment to operate profitably at the lower revenue levels without impairing its
ability to take advantage of opportunities when the telecommunications industry
stabilizes and customers' spending increases.
The Computer Systems segment's sales increased by $8.8 million, or 18%, to $58.3
million in the nine months of fiscal 2002 and its operating profit increased by
$0.6 million, or 11%, to $6.5 million. The growth in operating profit is the
result of increased sales in all of the segment's divisions, including the
segment's
-22-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED AUGUST 4, 2002 COMPARED
TO THE NINE MONTHS ENDED AUGUST 5, 2001--Continued
Results of Operations - By Segment--Continued
Application Service Provider directory assistance and web-based services
provided by its VoltDelta Resources division, as well as IT services provided by
its Maintech division. In addition, the first half of fiscal 2002 sales included
project revenues of $4.2 million for its European operation, VoltDelta Europe,
associated with the customer's acceptance of a new operator services switching
infrastructure. This lower margin project was accounted for under the completed
contract method.
Results of Operations - Other
Other items, discussed on a consolidated basis, affecting the results of
operations for the nine-month periods were:
Selling and administrative expenses decreased by $5.8 million, or 10%, to $52.4
million for the first nine months of fiscal 2002 from the comparable fiscal 2001
period as a result of decreased commissions and incentives due to the lower
sales, the Company's cost cutting initiatives and reduced financial reporting
system expenses in fiscal 2002. Selling and administrative expenses, expressed
as a percentage of sales, were 4.8% in the nine-month period of fiscal 2002 and
3.9% in the comparable fiscal 2001 period.
Depreciation and amortization decreased by $1.8 million, or 10%, to $16.6
million in the nine months of fiscal 2002. The decrease was attributable to a
$2.3 million reduction in goodwill amortization due to the effect of new rules
on accounting for goodwill, which eliminated amortization of goodwill in favor
of annual impairment tests (see "Critical Accounting Policies," above),
partially offset by increased depreciation of fixed assets.
The Company incurred other expense of $0.7 million in the first nine months of
fiscal 2002 million resulting primarily from expenses related to the Company's
new Securitization Program. In the comparable fiscal 2001 period, the Company
reported other income of $1.3 million primarily as a result of a gain of $1.8
million on the sale of an investment in equity securities, partially offset by a
write-down of an investment in marketable securities of $0.7 million.
The foreign exchange loss in the first nine months of fiscal 2002 was $0.3
million compared with $0.1 million in fiscal 2001. The increase was a result of
unfavorable currency movements in the Uruguayan and European currency markets.
To reduce the potential adverse impact from foreign currency changes on the
Company's foreign currency receivables and firm commitments, the Company
utilizes foreign currency option and forward contracts, when required, that
generally settle on the last weekday of each quarter.
Interest expense decreased by $5.7 million, or 60%, to $3.8 million in the first
nine months of fiscal 2002. The decrease was attributable to reduced working
capital requirements resulting from sales declines as well as the early
repayment of the remaining $30.0 million of 7.92% Senior Notes in contemplation
of the lower cost accounts receivable Securitization Program. The Securitization
Program, costs of which are reflected in other expense (see above), also
eliminated higher cost borrowings under the revolving credit facility.
Throughout
-23-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NINE MONTHS ENDED AUGUST 4, 2002 COMPARED
TO THE NINE MONTHS ENDED AUGUST 5, 2001--Continued
Results of Operations - Other--Continued
fiscal 2002, the Company has also benefited from significantly lower market
rates for financing, partially offset by an increase in rates in Uruguay.
The Company's effective tax rate on its financial reporting pre-tax income was a
37.8% benefit in the first nine months of fiscal 2002 compared to a $0.1 million
tax benefit on a pre-tax income of $0.5 million in fiscal 2001. The tax benefit
in fiscal 2001 was due to 2001 general business credits being high in relation
to pre-tax income, partially offset by non-deductible goodwill amortization in
that year.
-24-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED AUGUST 4, 2002 COMPARED
TO THE THREE MONTHS ENDED AUGUST 5, 2001
Results of Operations - Summary
In the third quarter of fiscal 2002, consolidated net sales decreased by $82.4
million, or 18%, to $376.6 million from the comparable period in fiscal 2001.
The decrease in fiscal 2002 net sales resulted primarily from a $42.5 million
decrease in sales in the Telecommunications Services segment and a $38.3 million
decrease in sales in the Staffing Services segment.
The Company's operating segments reported an operating profit of $8.8 million in
the third quarter of fiscal 2002 compared to $4.8 million in the fiscal 2001
third quarter. The increase in segment operating profit was primarily the result
of a $5.8 million increase in operating profit in the Staffing Services segment
and a $3.4 million operating profit reported by the Telephone Directory segment
compared to a $0.4 million operating loss in the prior year's third quarter.
These improvements were partially offset by an operating loss of $3.3 million
reported by the Telecommunications Services segment compared to an operating
profit of $2.5 million in the third quarter of fiscal 2001.
The Company's third quarter fiscal 2002 income from continuing operations before
income taxes was $2.0 million, compared with a loss from continuing operations
before taxes of $1.8 million in the third quarter of fiscal 2001. Non-recurring
items affecting results from continuing operations in the third quarter of
fiscal 2001 included the gain of $1.8 million on the sale of an investment in
equity securities that had been written off in 1997. In addition, results from
continuing operations in the third quarter of fiscal 2001 included amortization
of goodwill, which is no longer permitted to be amortized, of $0.7 million.
The Company's net income in the third quarter of fiscal 2002 was $1.1 million
compared with a net loss of $1.2 million in the third quarter of 2001.
Consolidated results for the third quarter of fiscal 2001 included a $0.3
million loss from Autologic, which was sold in the first quarter of fiscal 2002
and is considered a discontinued operation.
Results of Operations - By Segment
Sales of the Staffing Services segment decreased by $38.3 million, or 11%, to
$316.9 million in the fiscal 2002 third quarter while the segment's operating
profit increased by $5.8 million to $6.1 million in the fiscal 2002 third
quarter. The Technical Placement division reported an operating profit of $8.0
million on sales of $200.2 million for the third quarter of fiscal 2002 compared
with an operating profit of $5.1 million on sales of $242.4 million in the prior
year period. Gross margins increased by 3.2 percentage points over the prior
year's third quarter due to an increase in the division's high-margin project
management work and increased managed service program fees from its ProcureStaff
subsidiary, as transactions by two newer ProcureStaff clients ramped up. In
addition, cost reductions and the absence in the third quarter of fiscal 2002 of
goodwill amortization of $0.5 million resulted in a $2.4 million, or 8%,
reduction in overhead compared to the 2001 third quarter. The Commercial and
Light Industrial division sustained an operating loss of $1.9 million on sales
of $116.7 million during the quarter compared with an operating loss of $4.8
million on sales of $112.8 million for the third quarter of 2001. Although the
division continued to be adversely affected by the nation's economic conditions,
the losses reported in the third quarter of fiscal 2002 declined 61% from the
losses incurred in the third quarter fiscal 2001 as overhead was reduced by 16%
due to continued cost control initiatives.
-25-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED AUGUST 4, 2002 COMPARED
TO THE THREE MONTHS ENDED AUGUST 5, 2001--Continued
Results of Operations - By Segment--Continued
The Telephone Directory segment's sales decreased by $5.4 million, or 22%, to
$19.8 million in the third quarter of fiscal 2002, primarily due to the
Datanational and Domestic Directories divisions. Nevertheless, the segment
reported an operating profit of $3.4 million in the third quarter of fiscal 2002
compared with an operating loss of $0.4 million in the prior year comparable
period. A significant increase in gross margins and profitability was achieved,
despite the lower revenue, due to decreased paper prices, production costs and
overhead, along with increased productivity and the absence of goodwill
amortization which lowered fiscal 2001 third quarter results by $0.2 million. As
discussed earlier, the Company has been advised that a high-margin production
contract with a telecommunications company will terminate in June 2003 as the
customer's operations are being sold.
The Telecommunications Services segment's sales decreased by $42.5 million, or
64%, to $24.3 million in the third quarter of fiscal 2002, and the segment
sustained an operating loss of $3.3 million in the fiscal 2002 third quarter
compared with an operating profit of $2.5 million in the fiscal 2001 third
quarter. Although the segment was able to reduce overhead by approximately $7.0
million from the fiscal 2001 third quarter, the operating loss was the result of
the reduction in sales caused by the continued instability in the segment's
telecommunications industry customer base.
The Computer Systems segment's sales increased by $0.9 million, or 5%, to $18.6
million in the fiscal 2002 third quarter and its operating profit increased by
$0.2 million, or 8%, to $2.6 million in the fiscal 2002 third quarter. The
growth in sales and operating profit was the result of the continued expansion
of the segment's directory assistance business and an increase in sales by the
segment's IT service division partially offset by lower system sales in the
fiscal 2002 third quarter.
Results of Operations - Other
Other items, discussed on a consolidated basis, affecting the results of
operations for the three-month periods were:
Selling and administrative expenses decreased by $3.8 million, or 18%, to $17.5
million in the third quarter of fiscal 2002 from the comparable period in fiscal
2001 as a result of the Company's cost cutting initiatives and reduced financial
reporting system expenses in the third quarter of fiscal 2002. Selling and
administrative expenses, expressed as a percentage of sales, were 4.7% in the
third quarter of fiscal 2002 and 4.6% in the comparable fiscal 2001 period.
Depreciation and amortization decreased by $0.4 million, or 6%, to $5.9 million
in the fiscal 2002 third quarter. The decrease was attributable to a $0.7
million reduction in goodwill amortization due to the effect of new rules on
accounting for goodwill which eliminated amortization of goodwill in favor of
annual impairment tests (see "Critical Accounting Policies," above), partially
offset by increased depreciation of fixed assets.
-26-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED AUGUST 4, 2002 COMPARED
TO THE THREE MONTHS ENDED AUGUST 5, 2001--Continued
Results of Operations - Other--Continued
Other expense of $0.6 million incurred in the third quarter of fiscal 2002
resulted primarily from expenses related to the Company's new Securitization
Program. Other income in the third quarter of fiscal 2001 of $1.9 million was
primarily the result of a gain on the sale of an investment in securities.
The foreign exchange loss in the third quarter of fiscal 2002 was $0.3 million
compared to a foreign exchange gain of $0.1 million in fiscal 2001. The loss was
the result of unfavorable currency movements in the Uruguayan and European
currency markets. To reduce the potential adverse impact from foreign currency
changes on the Company's foreign currency receivables and firm commitments, the
Company utilizes foreign currency option and forward contracts, when required,
that generally settle on the last weekday of each quarter.
Interest expense decreased by $1.7 million, or 68%, to $0.8 million in the third
quarter of fiscal 2002. The decrease was primarily attributable to reduced
working capital requirements resulting from revenue declines as well as the
early repayment of the remaining $30.0 million of 7.92% Senior Notes in
contemplation of the lower cost accounts receivable Securitization Program. The
Securitization Program, the costs of which are reflected in other expense (see
above), also eliminated higher cost borrowings under the revolving credit
facility. The Company has also benefited from significantly lower market rates
for financing, partially offset by increased rates in Uruguay.
The Company's effective tax rate on its financial reporting pre-tax income was a
43.7% provision in the third quarter of fiscal 2002 compared to a 46.5% benefit
in the fiscal 2001 third quarter. The higher effective benefit rate in the
fiscal 2001 third quarter was due to higher general business credits in 2001,
partially offset by the absence in the third quarter of fiscal 2002 of
non-deductible goodwill amortization and by 2002 foreign losses for which no tax
benefit was provided.
Liquidity and Sources of Capital
Cash and cash equivalents increased by $26.2 million to $44.6 million in the
nine months ended August 4, 2002. Operating activities, exclusive of changes in
operating assets and liabilities, produced $19.9 million of cash, as the
Company's net loss of $37.6 million included non-cash charges of $57.5 million,
primarily for the impairment of goodwill of $31.9 million, depreciation and
amortization of $16.6 million and accounts receivable provisions of $8.0
million, partially offset by the net gain from discontinued operations of $4.3
million. Changes in operating assets and liabilities produced $88.6 million of
cash, net, principally due to proceeds from the new Securitization Program of
$50.0 million, cash provided by additional decreases in the levels of accounts
receivable of $30.6 million, a $12.1 million increase of accounts payable and
accrued expenses and an increase of $9.0 million in customer advances, partially
offset by a $10.8 million reduction in net income taxes.
The principal factor in the cash provided by investing activities was the
proceeds received from the sale of Autologic of $24.2 million, partially offset
by the expenditure of $10.7 million for property, plant and equipment.
-27-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Sources of Capital--Continued
A decrease of $61.8 million in bank loans and a $33.4 million payment of debt,
including the early payment of the $30.0 million outstanding of Senior Notes,
were the principal factors in the cash applied to financing activities of $95.1
million. The funds used to reduce bank loans and repay the long term debt
include the $24.2 million proceeds received from the sale of Autologic, the
$50.0 million proceeds received from the new Securitization Program and cash
provided due to reduced working capital requirements.
In fiscal 2000, the Company began development of a new internet-based front end
system designed to improve efficiency and connectivity in the recruiting,
assignment, customer maintenance, and other functions in the branch offices of
the Staffing Services segment. The total costs to develop and install this
system are anticipated to be approximately $16.0 million, of which approximately
$6.1 million has been incurred and capitalized to date. The Company has no other
material capital commitments.
The following table summarizes the Company's contractual cash obligations and
other commercial commitments at August 4, 2002:
Contractual Cash Obligations Payments Due By Period
----------------------------------------------------------------
Less than 1-3 4-5 After 5
Total 1 year years years years
----- ---------- ----- ----- -------
(In thousands)
Term Loan $ 14,891 $ 335 $ 757 $ 892 $12,907
Notes Payable to Banks 2,505 2,505
Other Note Payable, including interest 1,256 1,256
-------- ------- ------- ------- -------
Total Debt 18,652 4,096 757 892 12,907
Securitization Program, used 50,000 50,000
Operating Leases (a) 60,116 18,377 25,173 12,521 4,045
-------- ------- ------- ------- -------
Total Contractual Cash Obligations $128,768 $72,473 $25,930 $13,413 $16,952
======== ======= ======= ======= =======
(a) As of November 4, 2001. There has been no material change through August
4, 2002. Represents the future minimum rental commitments for all
non-cancelable operating leases.
Other Commercial Commitments Amount by Commitment Expiration Period
----------------------------------------------------------------
Less than 1-3 4-5 After 5
Total 1 year years years years
----- ---------- ----- ----- -------
(In thousands)
Lines of Credit, unused $ 8,202 $ 8,202
Revolving Credit Facility, unused 29,000 $29,000
Securitization Program, unused 50,000 50,000
Standby Letters of Credit, outstanding 488 488
------- ------- -------
Total Commercial Commitments $87,690 $ 8,202 $79,488
======= ======= =======
The Company believes that its current financial position, working capital,
future cash flows, credit lines and accounts receivable Securitization Program
are sufficient to fund its presently contemplated operations and satisfy its
debt obligations.
-28-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Sources of Capital--Continued
Credit Lines
At August 4, 2002, the Company had credit lines with domestic and foreign banks
that provide for borrowings and letters of credit up to an aggregate of $50.7
million, including a $40.0 million credit facility ("Credit Facility") in favor
of the Company and designated subsidiaries under a secured syndicated revolving
credit agreement ("Credit Agreement") which expires in April 2004. The Credit
Facility includes a $15.0 million letter of credit sub-facility. Borrowings by
subsidiaries are limited to $25.0 million in the aggregate. The administrative
agent arranger for the secured Credit Facility is JP Morgan Chase Bank. The
other banks participating in the Credit Facility are Mellon Bank, NA, Wells
Fargo, N. A. and Lloyds TSB Bank PLC. This two-year Credit Facility, along with
a three-year accounts receivable Securitization Program (see below), replaced
the Company's $115.5 million credit agreement which was due to expire in
September 2002. Borrowings and letters of credit under the Credit Facility are
limited to a specified borrowing base, which is based upon the level of
specified receivables at the time of each calculation. At August 4, 2002, the
borrowing base was approximately $29.0 million. To date, the Company and its
subsidiaries have made no borrowings under the Credit Facility and no borrowings
are anticipated under the Credit Facility in the fourth quarter of fiscal 2002
or the first quarter of fiscal 2003. Borrowings under the Credit Facility are to
bear interest at various options selected by the Company at the time of each
borrowing, certain of which rate options are based on a leverage ratio, as
defined (as is the facility fee). Additionally, interest and the facility fees
can be increased or decreased upon a change in the Company's long-term debt
rating provided by a nationally recognized rating agency. Based upon the
Company's leverage ratio and debt rating at August 4, 2002, if a three-month
LIBO rate was the interest rate option selected by the Company, borrowings would
have borne interest at the rate of 3.3% per annum. At August 4, 2002, the
facility fee was 0.5% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined, of $220.0 million (the
Company's consolidated tangible net worth as of August 4, 2002 was $224.4
million); limits cash dividends and capital stock repurchases and redemptions by
the Company in any one fiscal year to 25% of consolidated net income, as
defined, for the prior fiscal year; requires the Company to maintain a ratio of
EBIT, as defined, to interest expense, as defined, of 1.0 to 1.0 for the four
fiscal quarters ending November 3, 2002 and 1.25 to 1.0 for each of the four
fiscal quarters ending as of the last day of each quarter thereafter; and
requires that there be no net loss, excluding non-operating items, in either of
the final two fiscal quarters in the Company's current fiscal year, ending
November 3, 2002. 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.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers; however, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are guarantors of all
loans made to the Company or to subsidiary borrowers under the Credit Facility,
with four of those guarantors having pledged accounts receivable, other than
those in the Securitization Program, the level of which at August 4, 2002 was
approximately $39.6 million, as collateral security for their guarantee
obligations.
-29-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Sources of Capital--Continued
Under certain circumstances, other subsidiaries of the Company also may be
required to become guarantors under the Credit Facility. The Company has pledged
all of the stock of the Volt Funding subsidiary (discussed below) as collateral
security for its own obligations under the Credit Facility.
At August 4, 2002, the Company had total outstanding short-term bank borrowings
of $2.5 million, none of which was borrowed under the Credit Facility. The
Company is currently in compliance with the covenants included in the Credit
Agreement. However, one covenant in the Credit Facility, regarding the ratio of
EBIT to interest expense for fiscal year 2002, may not be achieved depending on
the level of profitability in the fourth quarter of fiscal 2002. The Company has
not borrowed under the Credit Facility since its inception in April 2002 and no
borrowings are anticipated in the fourth quarter of fiscal year 2002 or first
quarter of fiscal 2003. As long as the facility is unused, there would be no
effect on any other financing, including the Securitization Program. However,
the Company is presently in discussion with its banks to obtain a waiver.
Securitization Program - Off-Balance Sheet Financing
Effective April 15, 2002, the Company entered into a $100.0 million three-year
accounts receivable securitization program ("Securitization Program"). Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A., an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $100.0 million). The
Company retains the servicing responsibility for the accounts receivable. On
April 15, 2002, TRFCO initially purchased from Volt Funding a participation
interest of $50.0 million out of an initial pool of approximately $162.0 million
of receivables. Of the $50.0 million cash paid by Volt Funding to the Company,
$35.0 million was used to repay the entire outstanding principal balance under
the Company's former revolving credit facility. The participation interest sold
remained at $50.0 million until August 14, 2002, when it was increased to $60.0
million.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors (subject also, as described
above, to the security interest that the Company has granted in the common stock
of Volt Funding in favor of the lenders under the Company's new Credit
Facility). TRFCO has no recourse to the Company (beyond the pool of receivables
owned by Volt Funding) for any of the sold receivables.
The Company accounts for the securitization of accounts receivable in accordance
with Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
At the time a participation interest in the receivables is sold, the receivable
representing that interest is removed from the consolidated balance sheet (no
debt is recorded) and the proceeds from the sale are reflected as cash provided
by operating activities. Losses and expenses associated with the transactions,
primarily related to discounts on TRFCO's commercial paper, are charged to the
consolidated statement of operations.
-30-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Sources of Capital--Continued
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold or the Company failing to maintain a long-term
debt rating of "B" or better, or the equivalent thereof from a nationally
recognized rating organization. The Company's most recent long-term debt rating
was "BBB-" with a negative rating outlook as a result of consecutive difficult
quarters primarily due to the Company's high sensitivity to the weakened
economic environment, which has adversely affected the Staffing and
Telecommunications Services segments.
The Effect of New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment to SFAS No. 13,
and Technical Corrections" ("SFAS No. 145"). SFAS No. 145 updates, clarifies and
simplifies existing accounting pronouncements, by rescinding SFAS No. 4, which
required all gains and losses from the extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Accounting Principles Board Opinion No. 30
will now be used to classify those gains and losses. Additionally, SFAS No. 145
also makes technical corrections to existing pronouncements. While those
corrections are not substantive in nature, in some instances, they may change
accounting practice. The provisions of SFAS No. 145 that amend SFAS No. 13 are
required to be adopted by the Company in its consolidated financial statements
for the first quarter of fiscal 2003. The Company believes that the adoption of
SFAS No. 145 will not have a material impact on the Company's consolidated
financial position and results of operations, but will require a future
reclassification of the extraordinary item arising from the March 2002 early
payment of the Company's Senior Notes to Other income (expense).
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and nullifies EIFT 94-3. The Company plans to adopt SFAS No. 146 in
November 2002, the beginning of fiscal year 2003.
-31-
ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk exposure in the following areas:
Interest Rate Market Risk
The Company has cash and cash equivalents ($44.6 million at August 4, 2002) 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 up to an aggregate of $50.7 million and a $100.0 million
accounts receivable securitization program. At August 4, 2002, short-term
borrowings and accounts receivable financing under the Securitization Program
amounted to $52.5 million under these agreements, of which $50.0 million was
under the Securitization Program. 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.
Increases in interest expense resulting from an increase in interest rates could
impact the Company's results of operations. The Company policy is to take
actions that would mitigate such risk when appropriate and available.
The Company's long-term debt of $14.6 million at August 5, 2002 consists of
borrowings at fixed interest rates, and the Company's interest expense related
to these borrowings is not exposed to changes in interest rates in the near
term.
Equity Price Risk
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At August 4, 2002, the total market value of these
investments was $3.7 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.
Foreign Exchange Market Risk
The Company has a number of overseas subsidiaries and is, therefore, subject to
exposure from the risk of currency fluctuations as the value of foreign
currencies fluctuate against the dollar, which may impact reported earnings. The
Company attempts to reduce these risks by utilizing foreign currency option and
exchange contracts to hedge the adverse impact on foreign currency receivables
when the dollar strengthens against the related foreign currency. At August 4,
2002, the Company had entered into foreign currency option and forward contracts
in the aggregate notional amount of $11.1 million, which approximated its
exposure in foreign currencies at that date. As a result, the Company does not
believe that it is exposed to material foreign exchange market risk.
-32-
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15.01 Letter from Ernst & Young LLP
15.02 Letter from Ernst & Young LLP regarding interim financial
information
99.01 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sabanes-Oxley Act of 2002.
99.02 Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sabanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
No Reports on Form 8-K filed during the quarter ended August 4, 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: September 17, 2002 JACK EGAN
Vice President - Corporate Accounting
(Principal Accounting Officer)
-33-
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
I, William Shaw, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Volt Information
Sciences, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 17, 2002
/s/ William Shaw
- -----------------------------------------
William Shaw
Chairman of the Board of Directors,
President and Principal Executive Officer
-34-
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
I, James J. Groberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Volt Information
Sciences, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 17, 2002
/s/ James J. Groberg
- -------------------------------
James J. Groberg
Senior Vice President and
Principal Financial Officer
-35-
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
15.01 Letter from Ernst & Young LLP
15.02 Letter from Ernst & Young LLP regarding interim financial
information
99.01 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.02 Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.