UNITED STATESFORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the fiscal year ended October 31, 2004November 2, 2003
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from __________________________________ to _________________________________________to______________________
Commission file number:File Number: 1-9232
VOLT INFORMATION SCIENCES, INC.
-------------------------------
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)
New York 13-5658129
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(State or Other Jurisdictionother jurisdiction of (I.R.S. Employer
Incorporationincorporation or Organization)organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
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(Address of Principal Executive Offices)principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 704-2400
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Classeach class Name of Each Exchangeeach exchange on Which Registeredwhich registered
------------------- -----------------------------------------
Common Stock, $.10 par value New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act: None
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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 (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X__X__ No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.10-K/A. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes XYes__X__ No
---
The aggregate market value of the common stock held by non-affiliates of the
Registrant was approximately $195$99 million, based on the closing price of $25.81$13.23
per share on the New York Stock Exchange on May 2, 20044, 2003 (the last business day of the
Registrant's fiscal second quarter). Shares of common stock held beneficially by
executive officers and directors and their spouses and the Registrant's Savings
Plan, have been excluded, without conceding that all such persons or plans are
"affiliates" of the Registrant).
The number of shares of common stock outstanding as of January 6, 200516, 2004 was
15,294,635.15,222,675.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 20052004 Annual Meeting are
incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 2
Item 2. Properties 24
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 31
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 56
Item 8. Financial Statements and Supplementary Data 58
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 97
Item 9A. Controls and Procedures 97
Item 9B. Other Information 98
PART III
Item 10. Directors and Executive Officers of the Registrant 98
Item 11. Executive Compensation 98
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters 98
Item 13. Certain Relationships and Related Transactions 98
Item 14. Principal Accountant Fees and Services 98
PART IV
Item 15. Exhibits and Financial Statement Schedules 99
Page
PART I ----
Introduction and Purpose of Amendment 2
Item 1. Business 2
Item 2. Properties 27
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
PART II
Item 5. Market for Registrant's Common Stock, Related Stockholder
Matters and Insider Purchases of Equity Securities 30
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 34
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 55
Item 8. Financial Statements and Supplementary Data 57
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 91
Item 9A. Controls and Procedures 91
PART III
Item 10. Directors and Executive Officers of the Registrant 92
Item 11. Executive Compensation 92
Item 12. Security Ownership of Certain Beneficial
Owners and Management 92
Item 13. Certain Relationships and Related Transactions 92
Item 14. Principal Accountant Fees and Services 92
PART IV
Item 15. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 93
1
Introduction and Purpose of Amendment
In a press release issued by Volt Information Sciences, Inc. on January 10, 2005
and included as an exhibit to its Current Report on Form 8-K for an event dated
January 10, 2005, the Company stated that as a result of inappropriate
application of accounting principles for revenue recognition by its telephone
directory publishing operations in Uruguay, it would be restating its previously
issued financial statements for fiscal years 1999 through 2003 and the first six
months of 2004 and would file an amended Form 10-K for the fiscal year ended
November 2, 2003 containing such restated information. This Form 10-K/A
principally reflects such restatement. The Company's previously filed Annual
Report on Form 10-K for the fiscal year ended October 31, 2004 also included
such restated financial information.
PART I
ITEM 1. BUSINESS
General
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Volt Information Sciences, Inc. is a New York corporation, incorporated in 1957.
We sometimes refer to Volt Information Sciences, Inc. and its subsidiaries
collectively as "Volt" or the "Company," unless the context otherwise requires.
Volt operates in the following two businesses which haveand, since Volt's
Telecommunications and Information Solutions business contains three segments,
Volt has four operating segments:
o Staffing Services
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-----------------
(1) Staffing Services - This segment provides a broad range of employee
staffing services to a wide range of customers throughout the United
States, Canada and Europe. These services fall within three major
functional areas:
o Staffing Solutions - provides a full spectrum of managed staffing,
temporary/alternative personnel employment and direct hire placement
and professional employer organization services.
o Information Technology Solutions - provides a wide range of
information technology services including consulting, outsourcing,
and turnkey project management in
the product development lifecycle, IT and customer contact arenas.software and web development.
o E-Procurement Solutions - provides global vendor neutral procurement
and management solutions for supplemental staffing using web-based
tools.software systems.
o Telecommunications and Information Solutions
-
--------------------------------------------
(2) Telephone Directory - This segment publishes independent telephone
directories in the United States and publishes telephone directories in
Uruguay;Uruguay under a contract with the government-owned telephone company;
provides telephone directory production, commercial printing, database
management, sales and marketing services; licenses directory production and
contract management software systems to directory publishers and others;
and provides services, principally computer-based projects, to public
utilities and financial institutions.
(3) Telecommunications Services - This segment provides telecommunications
services, including design, engineering, construction, installation,
maintenance and removals in the outside plant and central offices of
telecommunications and cable companies and within their customers'
premises,
2
as well as for large commercial and governmental entities requiring
telecommunications services; and also provides complete turnkey services
for wireless and wireline telecommunications companies.
(4) Computer Systems - This segment provides directory and operatorassistance services,
both traditional and enhanced, to wireline and wireless telecommunications
companies; provides directory assistance content and data services;content; designs, develops,
integrates, markets, sells and maintains computer-based directory
assistance systems and other database management and telecommunications
systems, primarily for the telecommunications industry; and provides IT
services to the Company's other businesses and to third parties.
-2-3
Information as to Operating Segments
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The following tables set forth the contribution of each operating segment to the
Company's consolidated sales and operating profit for each of the three fiscal
years in the period ended October 31, 2004,November 2, 2003, and those assets identifiable within
each segment at the end of each of those fiscal years. This information should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements in
Items 7 and 8, respectively, of this Report.
October November November 31, 2004November
2, 2003 3, 2002 -------- -------- --------
(Restated) (Restated)4, 2001
-----------------------------------------
NET SALES (In thousands)
(Restated) (Restated) (Restated)
Staffing Services:
Staffing Services:
Staffing $1,580,225Traditional Staffing--Note 2 $1,266,875 $1,141,717 $1,251,282
Managed Services 1,148,116 1,043,572 745,667 ---------- ---------- ----------737,417
-----------------------------------------
Total gross sales 2,728,341 2,310,447 1,887,384 1,988,699
Less Non-recourse Managed Services--Note 1 (1,120,079)3 (967,379) (679,110) (503,027)
Intersegment sales 3,839 2,367 2,044 ---------- ---------- ----------
1,612,10112,169
-----------------------------------------
1,345,435 1,210,318 ---------- ---------- ----------1,497,841
-----------------------------------------
Telephone Directory:
Sales to unaffiliated customers 72,194 69,750 83,519 102,492
Intersegment sales 1 43 114 ---------- ---------- ----------
72,195264
-----------------------------------------
69,793 83,633 ---------- ---------- ----------102,756
-----------------------------------------
Telecommunications Services:
Sales to unaffiliated customers 134,266 112,201 104,039 246,892
Intersegment sales 1,132 638 4,833 ---------- ---------- ----------
135,3982,040
-----------------------------------------
112,839 108,872 ---------- ---------- ----------248,932
-----------------------------------------
Computer Systems:
Sales to unaffiliated customers 110,055 84,472 72,261 66,435
Intersegment sales 9,962 9,167 6,535 ---------- ---------- ----------
120,0174,863
-----------------------------------------
93,639 78,796 ---------- ---------- ----------71,298
-----------------------------------------
Elimination of intersegment sales (14,934) (12,215) (13,526) ---------- ---------- ----------(19,336)
-----------------------------------------
TOTAL NET SALES $1,924,777 $1,609,491 $1,468,093 =========== ========== ==========$1,901,491
=========================================
SEGMENT PROFIT (LOSS)
Staffing Services $36,718 $21,072 $20,469 $16,558
Telephone Directory 10,115 6,748 6,863 3,302
Telecommunications Services (2,838) (3,986) (13,259) 7,353
Computer Systems 30,846 14,679 8,912 ---------- ---------- ----------10,739
-----------------------------------------
Total segment profit 74,841 38,513 22,985 37,952
General corporate expenses (30,812) (27,668) (22,704) ---------- ---------- ----------(24,416)
-----------------------------------------
TOTAL OPERATING PROFIT 44,029 10,845 281 13,536
Interest and other (loss) income (3,471)income--Note 4 (1,953) (2,611) 859
Gain on securities-net 5,552
Gain on sale of real estate 3,295partnership interest 4,173
Interest expense (1,817) (2,070) (4,549) (11,880)
Foreign exchange gain (loss) 97 299 (477) ---------- ---------- ----------(158)
-----------------------------------------
Income (loss) from continuing operations before income
taxes and minority interest $42,133 $7,121 ($7,356) ========== ========== ==========$12,082
=========================================
-3-4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
OPERATING SEGMENT DATA--Continued
Note 1 Under certain 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, the arrangements are considered non-recourse
against the Company and revenue, other than management fees to the Company,
is excluded from the net sales in the above table.
October
November November 31, 2004November
2, 2003 3, 2002 -------- -------- --------4, 2001
------------------------------------------
(Restated) (Restated) (Restated)
(In thousands)
IDENTIFIABLE ASSETS
IDENTIFIABLE ASSETS
Staffing Services $422,658 $350,796 $332,482 $319,659
Telephone Directory 55,740 61,942 62,084 77,908
Telecommunications Services 52,770 49,053 46,666 87,723
Computer Systems 102,487 39,006 31,860 -------- -------- --------
633,65535,039
------------------------------------------
500,797 473,092 520,329
Assets held for sale--Note 5 47,635
Cash, investments and other corporate assets 56,381 39,686 38,477 -------- -------- --------71,294
------------------------------------------
Total assets $690,036 $540,483 $511,569 ======== ======== ========$639,258
==========================================
Note 21 The Company has restated its previously issued financial statements
for fiscal years 20001999 through 2003 as a result of inappropriate
application of accounting principles for revenue recognition by its
telephone directory publishing operation in Uruguay. The operation in
Uruguay printed and distributed its Montevideo directory each year
during the October - November time frame, and the Company has
determined that revenue recognition should have been taken in the first
six months of each year instead of in the fourth quarter of the prior
fiscal year. The restatement involves only the timing of when certain
advertising revenue and related costs and expenses are recognized, and
the cumulative results of the Company do not change. The restatement of
the Telephone Directory net sales, operating profit and identifiable
assets for fiscal 2002 and2001 through 2003 areis reflected in the table below.
See Note M of Notes to the Consolidated Financial Statements for the
restatement of the financial statements of the first, second and second quarterfourth
quarters of fiscal 2004.2002 and 2003.
November November November
2, 2003 3, 2002 -------- --------4, 2001
------------------------------------------
(In thousands)
Telephone Directory net sales - as previously reported $70,159 $83,326 (Decrease) increase$99,946
Change (366) 307 -------- --------2,810
------------------------------------------
Telephone Directory net sales - as restated $69,793 $83,633 ======== ========$102,756
==========================================
Telephone Directory operating profit - as previously
reported $7,674 $6,712 Decrease (increase)$2,238
Change (926) 151 -------- --------1,064
------------------------------------------
Telephone Directory operating profit - as restated $6,748 $6,863 ======== ========$3,302
==========================================
Telephone Directory identifiable assets - as
previously reported $60,152 $60,105 Increase$75,886
Change 1,790 1,979 -------- --------2,022
------------------------------------------
Telephone Directory identifiable assets - as restated $61,942 $62,084 ======== ========$77,908
==========================================
-4-5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
OPERATING SEGMENT DATA--Continued
Note 2 As previously announced, the Company has changed the method of
reporting revenues of its Professional Employer Organization ("PEO")
subsidiary, Shaw & Shaw, from gross billing to a net revenue basis in
fiscal 2003. Accordingly, reported PEO revenues and related cost of
sales for fiscal years 2002 and 2001 have been reduced by $20.1 million
and $33.6 million, respectively, with no effect on operating profit or
the net results to the Company.
Note 3 Under certain 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, the arrangements are considered
non-recourse against the Company and revenue, other than management
fees to the Company, is excluded from sales.
Note 4 Pursuant to the Company's previously announced adoption of SFAS
No.145, results for fiscal year 2002 have been restated to give effect
to the reclassification of a charge of $2.1 million arising from the
March 2002 early payment of the Company's 7.92% senior notes to other
expense, previously presented as an extraordinary item.
Note 5 On November 30, 2001, the Company's 59% owned publicly-held
subsidiary, Autologic Information International, Inc. ("Autologic"),
which was the Company's former 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 sale of $4.5 million, including a tax benefit of $1.7 million
(resulting from a taxable loss versus a gain for financial statement
purposes), was reflected in fiscal 2002. The results of operations of
Autologic have been classified as discontinued, Autologic's prior
period results have been reclassified and its assets have been
included as Assets held for sale, on a separate line item in the
Company's fiscal 2001 balance sheet.
6
Forward-Looking Statements
- --------------------------
This report and other reports and statements issued by the Company and its
officers from time to time contain certain "forward-looking statements." Words
such as "may," "should," "likely," "could," "seek," "believe," "expect," "anticipate,"
"estimate," "project," "intend," "strategy," "design to,"likely," and similar expressions
are intended to identify forward-looking statements about the Company's future
plans, objectives, performance, intentions and expectations. These
forward-looking statements are subject to a number of known and unknown risks
and uncertainties including, but are not limited to, those set forth below under
"Factors That May Affect Future Results.Results," as well as the following:
o variations in the rate of unemployment and higher wages sought by temporary
workers in certain technical fields particularly characterized by labor
shortages, which could affect the Company's ability to meet its customers'
demands and the Company's profit margins;
o the adverse effect of customers and potential customers moving
manufacturing and servicing operations off-shore, reducing their need for
temporary workers;
o the ability of the Company to diversify its available temporary personnel
to offer greater support to the service sector of the economy;
o changes in customers' attitudes toward the use of outsourcing and temporary
personnel;
o intense price competition and pressure on margins;
o the Company's ability to meet competition in its highly competitive markets
with minimal impact on margins;
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 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 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 the degree and effects of inclement weather; and
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.
7
Such risks and uncertainties could cause the Company's actual results,
performance and achievements to differ materially from those described in or
implied by the forward-looking statements. Accordingly, readers should not place
undue reliance on any forward-looking statements made by or on behalf of the
Company. The Company does not assume any obligation to update any
forward-looking statements after the date they are made.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY'S BUSINESS IS DEPENDENT UPON GENERAL ECONOMIC, COMPETITIVE AND OTHER
BUSINESS CONDITIONS INCLUDING THE EFFECTS OF THE UNITED STATES AND EUROPEAN
ECONOMIES ANDFactors That May Affect Future Results
The Company's business is dependent upon general economic, competitive and other
generalbusiness conditions such as CUSTOMERS OFF-SHORING ACTIVITIES
TO OTHER COUNTRIES.including the effects of weakened United States and European
economies.
The demand for the Company's services in all segments is dependent upon general
economic
conditions. Accordingly, the Company's business tends to suffer during economic
downturns. In addition, in the past few years major United States
companies, many of which are customers of the Company, have increasingly
outsourced business to foreign countries with lower labor rates, less costly
employee benefit requirements and fewer regulations than the United States.
There could be an adverse effect on the Company if customers and potential
customers move manufacturing and servicing operations off-shore, reducing their
need for temporary workers within the United States. It is also important for
the Company to diversify its pool of available temporary personnel to offer
greater support to the service sector of the economy and other businesses that
have more difficulty in moving off-shore. In addition, the Company's other
segments may be adversely affected if they are required to compete from the
Company's United States based operations against competitors based in such other
countries. Although the Company has begun to expand its operations, in a limited
manner and to serve existing customers, in such countries, and has established
subsidiaries in some foreign countries, there can be no assurance that this
effort will be successful or that the Company can successfully compete with
competitors based overseas or who have established foreign operations. The Company's business is dependent upon the continued financial
strength of its customers. Certain of the Company's customers have announced
layoffs, unfavorable financial results, investigations by government agencies
and lowered financial expectations for the near term. Customers that experience
economic downturns or other negative
factorsany of these events are less likely to use the Company's services.
In the staffing services segment, a weakened economy results in decreased demand
for temporary and permanent personnel. WhenAs economic activity slows down, many of
the Company's customers reduce their use of temporary employees before they
reduce the number of their regular employees. There is less need for contingent
workers byin all potential customers, who are less inclined to add to their costs.
Since employees are reluctant to risk changing employers, there are fewer
openings and reduced activity in permanent placements as well. In addition,
while in many fields there are ample applicants for available positions,
variations in the rate of unemployment and higher wages sought by temporary
workers in certain technical fields particularly characterized by labor
shortages, could affect the Company's ability to meet its customers' demands in
these fields and the Company's profit margins. The segment has
also experienced
-5-
margin erosion caused by increased competition, electronic
auctions and customers leveraging their buying power by consolidating the number
of vendors with whom they deal. In addition, increased payroll and other taxes, some of
which the Company is unable to pass on to customers, place pressure on margins.
Customer use of the Company's telecommunications
services is similarly affected
by a weakened economy in that some of the Company's customers reduce
their use of outside services in order to provide work to their in-house
departments and, in the aggregate, because of the current downturn in the
telecommunications industry and continued over capacity, there is less available
work. In addition,
the reductionThe continued delay in telecommunications companies' capital expenditure
projects during the current economic climate has significantly reduced the
segment's operating marginsrevenue, particularly from long-haul fiber optic projects and
minimalcross-connect box projects, and little improvement can be expected until the
industry begins to increase its capital expenditures.
Recent actions by major
long-distance telephone companies regarding local residential service could also
negatively impact both sales and margins of the Business Systems division.
Despite an emphasis on cost controls, the results of the segment continue to be
affected by the decline in capital spending by telephone companies caused by the
depressed conditions within the segment's telecommunications industry customer
base which has also increased competition for available work, pressuring pricing
and gross margins throughout the segment. The continued delay in
telecommunications companies' capital expenditure projects has significantly
reduced the segment's revenue and resulted in continuing operating losses. A
return to material profitability will be difficult until the industry begins to
increase its capital expenditures.
Additionally, the degree and timing of customer acceptance of systems and of obtaining new contracts and the rate of
renewals of existing contracts, as well as customers' degree of utilization of
the Company's services, could adversely affect the Company's businesses.
MANY OF THE COMPANY'S CONTRACTS EITHER PROVIDE NO MINIMUM PURCHASE REQUIREMENTS
OR ARE CANCELABLE DURING THE TERM.Many of the Company's contracts either provide no minimum purchase requirements
or are cancelable during the term.
In all segments, many of the Company's contracts, even those master service contracts
whose duration spans a number of years, provide no assurance of any minimum
amount of work that will actually be available under any contract. Most
staffing services contracts are not sole source, so the segment must compete for
each placement at the customer. Similarly many telecommunications master
contracts require competition in order to obtain each individual work project.
In addition,
many of the Company'sthis segment's long-term contracts contain cancellation provisions under
which the customer can cancel the contract, even if the Companysegment is not in
default under the contract. Therefore, these contracts do not give the
assurances that long-term contracts typically provide.
THE COMPANY'S STAFFING SERVICES BUSINESS AND ITS OTHER SEGMENTS SUBJECTS IT TO
EMPLOYMENT-RELATED AND OTHER CLAIMS.8
The Company's staffing services business subjects it to employment-related
claims.
The Company's staffing services business employs individuals on a temporary
basis and places them in a customer's workplace. The Company's ability to
control the customer workplace is limited, and the Company risks incurring liability to
its employees for injury or other harm that they suffer at the customer's
workplace. Although the Company has not historically suffered materially for
such harm suffered by its employees, there can be no assurance that future
claims will not materially adversely affect the Company.
Additionally, the Company risks liability to its customers for the actions of
the Company's temporary employees that may result in harm to the Company's
customers. Such actions may be the result of negligence or misconduct on the
part of the Company's employees. These same factors apply to all of the
Company's business units, although the risk is reduced where the Company itself
controls the workplace. Nevertheless, the risk is present in all segments.
-6-
The Company may incur fines or other losses and negative publicity with respect
to any litigation in which it becomes involved. Although the Company maintains
insurance for many such actions, there can be no assurance that its insurance
will cover future actions or that the Company will continue to be able to obtain
such insurance on acceptable terms, if at all.
NEW AND INCREASED GOVERNMENT REGULATION COULD HAVE A MATERIAL ADVERSE EFFECT ON
THE COMPANY'S BUSINESS, ESPECIALLY ITS CONTINGENT STAFFING BUSINESS.
Certain ofNew and increased government regulation could have a material adverse effect on
the Company's business.
The Company's businesses are subject to licensing and regulation in many states and licensing
and regulation in certain foreign jurisdictions. Although the Company has not
had any difficulty complying with these requirements in the past, there can be
no assurance that the Company will continue to be able to do so, or that the
cost of compliance will not become material. Additionally, the jurisdictions in
which we do or intend to do business may:
o create new or additional regulations that prohibit or restrict the types of
services that we currently provide;
o impose new or additional employee benefit requirements, thereby increasing
costs that may not be able to be passed on to customers or which would
cause customers to reduce their use of the Company's services, especially
in its staffing services segment, which wouldcould adversely impact the Company's ability to conduct its
business;business ;
o require the Company to obtain additional licenses to provide its services;
or
o increase taxes (especially payroll and other employment related taxes) or enact new or different taxes payable by the providers of
services such as those offered by the Company, thereby increasing costs, some of which may not be
able to be passed on to customers or which would cause customers to
reduce their use of the Company's services, especially incustomers.
The Company is dependent upon its staffing
services segment, which would adversely impact the Company's ability to conduct its business.
In addition,attract and retain certain
private and governmental entities have focused on the
contingent staffing industry in particular and, in addition to their potential
to impose additional requirements and costs, they and their supporters could
cause changes in customers' attitudes toward the use of outsourcing and
temporary personnel in general. This could have an adverse effect on the
Company's contingent staffing business.
THE COMPANY IS DEPENDENT UPON ITS ABILITY TO ATTRACT AND RETAIN CERTAIN
TECHNOLOGICALLY QUALIFIED PERSONNEL.technologically qualified personnel.
The Company's future success is dependent upon its ability to attract and retain
certain classifications of technologically qualified personnel for its own use,
particularly in the areas of research and development, implementation and
upgrading of internal systems, as well as in its staffing services segment. The
availability of such personnel is dependent upon a number of economic and
demographic conditions. The Company may in the future find it difficult or more
costly to hire
such personnel in the face of competition from other companies.
THE INDUSTRIES IN WHICH THE COMPANY DOES BUSINESS ARE VERY COMPETITIVE.companies in different
industries who are capable of offering higher compensation.
9
All of the industries in which the Company does business are very competitive,
which could adversely affect the results of those businesses.
The Company operates in very competitive industries with, in most cases, limited
barriers to entry. Some of the Company's principal competitors are larger and
have substantially greater financial resources than the Company.Volt. Accordingly,
-7-
these
competitors may be better able than the CompanyVolt to attract and retain qualified
personnel and may be able to offer their customers more favorable pricing terms
than the Company. In many businesses, small competitors can offer similar
services at lower prices because of lower overheads. The Company, in all segments, has experienced intense price competition and
pressure on margins and lower renewal markups for customers' contracts than
previously obtained. While the Company has and will continue to take action to
meet competition in its highly competitive markets with minimal impact on
margins, there can be no assurance that the Company will be able to do so.
The Company, in certain businesses in all segments, must obtain or produce
products and systems, principally in the IT environment, to satisfy customer
requirements and to remain competitive. While the Company has been able to do so
in the past, there can be no assurance that in the future the Company will be
able to foresee changes and to identify, develop and commercialize innovative
and competitive products and systems in a timely and cost effective manner and
to achieve customer acceptance of its products and systems in markets
characterized by rapidly changing technology and frequent new product
introductions. In addition, the Company's products and systems are subject to
risks inherent in new product introductions, such as start-up delays, cost
overruns and uncertainty of customer acceptance, the Company's dependence on
third parties for some product components and in certain technical fields
particularly characterized by labor shortages, the Company's ability to hire and
retain such specialized employees, all of which could affect the Company's
ability to meet its customers' demands in these fields and the Company's profit
margins.
In addition to these
general statements, the following information applies to the specific segments
identified below.identified.
The Company's Staffing Servicesstaffing services segment is in a very competitive industry with
few significantlimited barriers to entry. There are many temporary service firms in the United
States and Europe, many with only one or a few offices that service only a small
market. On the other hand, some of this segment's principal competitors are
larger and have substantially greater financial resources than Volt and service
the national accounts whose business the Company solicits. Accordingly, these
competitors may be better able than Volt to attract and retain qualified
personnel and may be able to offer their customers more favorable pricing terms
than the Company. Furthermore, all of the staffing industry is subject to the
fact that contingent workers are provided to customers and most customers are
more protective of their full time workforce than contingent workers.
The results of the Company's Computer Systemscomputer systems segment are highly dependent on
the volume of directory assistance calls to this segment'sVoltDelta's customers which are
processed byrouted to the segment under existing contracts, the segment's ability to
continue to secure comprehensive listings from others, at acceptable pricing, its ability to obtain
additional customers for these services and on its continued ability to sell
products and services to new and existing customers. The volume of transactions
with this segment's customers is subject to reduction as consumers utilize
listings offered on the Internet. This segment's position in
its market depends largely upon its reputation, quality of service and ability
to develop, maintain and implement information systems on a cost competitive
basis. Although Volt continues its investment in research and development, there
is no assurance that this segment's present or future products will be
competitive, that the segment will continue to develop new products or that
present products or new products can be successfully marketed.
The Company's Telecommunications Servicestelecommunications services segment faces substantial competition
with respect to all of its telecommunications services from other suppliers and
from in-house capabilities of present and potential customers. Since many of our
customers provide the same type of services as the segment, the segment faces
competition from its own customers and potential customers as well as from third
parties. The telecommunications service segment performs much of its services
outdoors, and its business can be adversely affected by the degree and effects
of inclement weather. Some of this segment's significant competitors are larger
-8-
and have
substantially greater financial resources than Volt. There are relatively few
significant barriers to entry into certain of the markets in which the segment
operates, and many competitors are small, local companies that generally have
lower overhead. Volt's ability to compete in this segment depends upon its
reputation, technical capabilities, pricing, quality of service and ability to
meet customer requirements in a timely manner. Volt believes that its
competitive position in this segment is augmented by its ability to draw upon
the expertise and resources of other Volt segments.
THE COMPANY MUST SUCCESSFULLY INTEGRATE THE PURCHASED DIRECTORY AND OPERATOR
SERVICES BUSINESS INTO THE COMPANY'S COMPUTER SYSTEMS SEGMENT
On August 2, 2004, Volt Delta Resources, LLC ("Volt Delta"), a wholly-owned
subsidiary of the Company, acquired from Nortel Networks, Inc. ("Nortel
Networks") certain of the assets (consisting principally of customer base and
contracts, intellectual property and inventory) and certain specified
liabilities of Nortel Networks directory and operator services ("DOS") business,
in exchange for a 24% minority equity interest in Volt Delta. Together with its
subsidiaries, Volt Delta is reported as the Company's Computer Systems Segment.10
The Company's results in this segment are dependent upon the Company's ability
to continue the successful integration of the acquisition into Volt Delta's
business with minimal interference with the segment's business.
THE COMPANY MUST STAY IN COMPLIANCE WITH ITS SECURITIZATION PROGRAM AND OTHER
LOAN AGREEMENTS
The Company is required to maintainstock price could be extremely volatile and, as a sufficient credit rating to enable it to
continue its $150 million Securitization Program and other loan agreements and
maintain its existing credit rating in order to avoid any increase in interest
rates and any increase in fees under these credit agreements, as well as to
comply with the financial and other covenants applicable under the credit
agreements and other borrowing instruments. While the Company was in compliance
with all such requirements at the end of the fiscal year and believes it will
remain in compliance throughout the remainder of the 2005 fiscal year, there can
be no assurance that will be the case or that waiversresult,
investors may not be required.
THE COMPANY'S PRINCIPAL SHAREHOLDERS OWN A SIGNIFICANT PERCENTAGE OF THE COMPANY
AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER THE COMPANY AND THEIR
INTERESTS MAY DIFFER FROM THOSE OF OTHER SHAREHOLDERS.
As of December 31, 2004, the Company's principal shareholders controlled
approximately 46% of the Company's outstanding common stock. Accordingly, these
shareholders are able to controlresell their shares at or above the composition of the Company's board of
directors and many other matters requiring shareholder approval and will
continue to have significant influence over the Company's affairs. This
concentration of ownership also could have the effect of delaying or preventing
a change in control of the Company or otherwise discouraging a potential
acquirer from attempting to obtain control of the Company.
THE COMPANY'S STOCK PRICE COULD BE EXTREMELY VOLATILE AND, AS A RESULT,
INVESTORS MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID
FOR THEM.price they paid
for them.
Among the factors that could affect the Company's stock price are:
o while the Company's stock is traded on the New York Stock Exchange, there
is limited float, and a relatively low average daily trading volume;
-9-
o industry trends and the business success of the Company's customers;
o loss of a key customer;
o fluctuations in the Company's results of operations;
o the Company's failure to meet the expectations of the investment community
and changes in investment community recommendations or estimates of the
Company's future results of operations;
o strategic moves by the Company's competitors, such as product announcements
or acquisitions;
o regulatory developments;
o litigation;
o general market conditions; and
o other domestic and international macroeconomic factors unrelated to our
performance.
The stock market has and may in the future experiencerecently experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the market price of the Company's
common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. If a
securities class action suit is filed against the Company, itus, we would incur substantial
legal fees and our management's attention and resources would be diverted from
operating itsour business in order to respond to the litigation.
The Company's principal stockholders and members of their families own a
significant percentage of the Company and will be able to exercise significant
influence over the Company and their interests may differ from those of other
stockholders.
As of December 31, 2003, the Company's principal officers controlled
approximately 47% of the Company's outstanding common stock. Accordingly, these
stockholders are able to control the composition of the Company's board of
directors and many other matters requiring shareholder approval and will
continue to have significant influence over the Company's affairs. This
concentration of ownership also could have the effect of delaying or preventing
a change in control of the Company or otherwise discouraging a potential
acquirer from attempting to obtain control of the Company.
11
Staffing Services Segment
- -------------------------
Volt's Staffing Services segment, through two divisions, the Technical Placement division and the
Administrative and Industrial, division, provides a broad spectrum of staffing services in
three major functional areas: Staffing Solutions, Information Technology ("IT")
Solutions and E-Procurement Solutions, to a wide range of customers throughout
the world.United States, Canada and Europe. The Technical Placement division provides
Staffing Solutions, IT Solutions and E-Procurement Solutions, while the
Administrative and Industrial division provides Staffing Solutions.
Staffing Solutions
- ------------------
Volt markets a full spectrum of staffing solutions, such as managed services,
alternative staffing services and direct hire services, through its Volt
Services Group, Volt Human Resources and Volt Europe divisions. In addition,
professional employer organization ("PEO") services are offered by the Company's
subsidiary, Shaw & Shaw.
Volt Services Group/Volt Europe/Volt Human Resources (Staffing Solutions
Group)
Staffing solutions provided by this segment are generally identified and
marketed throughout the United States as "Volt Services Group," throughout
Europe as "Volt Europe" and throughout Canada as "Volt Human Resources"
-10-
(the "Staffing Solutions Group") and provide a broad range of employee
staffing and professional services, from over 300 branches, including
dedicated on-site offices located on customerclient premises. The Staffing
Solutions Group is a single-source provider of all levels of staffing,
offering to customers an extensive range of alternative employment
services. Offerings include managed staffing programs, known as
Volt
Source,VoltSource, in which the segment is responsible for fulfilling a
customer's entire alternative staffing requirements and engages
subcontractors to assist the segment in satisfying those requirements;
alternative staffing of clerical, administrative, light industrial,
technical, professional and information technology personnel; employment,
direct hire and professional personnel placement services; referred
employee management services; human
resources outsourcing; and specifically tailored recruitment
services.
The Staffing Solutions Group provides skilled employees, such as computer
and other IT specialties, engineering, design, scientific and technical
support, and accounting and financial personnel, in its Technical Placement division. This group also provides
lesser skilled employees, such as administrative, clerical, office
automation, accounting, bookkeeping and other financial, call center,
light industrial and other personnel, in its Administrative and Industrial
division. The Staffing Solutions Group matches available workers to
employer assignments and, as a result, competes both to recruit and
maintain a database of potential employees and to attract customersclients to
employ contingent workers. AssignmentsPersonnel placements are provided for varying
periods of time (both short and long-term) to companies and other
organizations (including government agencies and non profit entities) in a
broad range of industries that have a need for such personnel, but are
unable, or choose not to, engage certain personnel as their own employees.
Customers range from those that require one or two temporary employees at a time to
national accounts that require as many as several thousand temporary
employees at one time.
12
The Staffing Solutions Group furnishes contingenttemporary employees to meet
specific customer requirements, such as to complete a specific project or
subproject (with employees typically being retained until its completion),
to enable customers to scale their workforce according to business
conditions,
meet a particular need that has arisen, substitute for regular employees
during vacation or sick leave, staff high turnover positions, fill in
during the full-time hiring process or during a hiring freeze, and staff
seasonal peaks, conversions, inventory taking and offices that are
downsizing. Many large organizations utilize contingent labor as a
strategic element of their overall workforce, allowing them to more
efficiently meet their fluctuating staffing requirements. In certain
instances,addition, the Staffing Solutions Group also provides management
personnel to coordinate and manage special projects and to supervise
temporary employees.
Many customers use more than one staffing services provider; however, in
recent years, the practice of using a limited number of temporary
suppliers, a sole temporary supplier or a primary supplier has become
increasingly important among the largest companies. The Staffing Solutions
Group has been successful in obtaining a number of large national
contracts, which typically require on-site Volt representation and involve
fulfilling requirements atservicing multiple customer facilities. In addition to contracting for
traditional temporary staffing, many of Volt's larger customers,
particularly those with national agreements, have contracted for managed
services programs under which Volt, in addition to itself providing
staffing services, performs various administrative functions. Thesefunctions, which may
include centralized and coordinated order processing and procurement of
other qualified staffing providers as subcontractors, commonly referred to
as "associate vendors," to providefor service in areas where the Company does not
maintain an office, or cannot recruit qualified personnel and to supplyas well as supplying secondary source back-up
recruiting or provide assistance in meeting the
customer's stated diversity and/or subcontracting goals.recruiting. In other managed programs, requisitions are sent
simultaneously to a number of approved staffing firms, and Volt must compete for
each placement. Other features of managed services programs include
customized and consolidated billing to the customer for all of Volt's and
associate vendors' services, and -11-
detailed management reports on staffing
usage and costs. Some managed services programs are tailored to the
customer's unique needs for ultimate single source consolidated billing,
reporting and payment. In most cases, Volt is required to pay the
associate vendor only after Volt receives payment from its customer. Volt
also acts as an associate vendor to other national providers in their
managed services programs to assist them in meeting their obligations to
their customers. The bidding process for these managed service and
national contracts, in general, is very competitive. Many contracts are
for a one to three year time period, at which time they are typically
re-bid. Others are for shorter periods or may be for the duration of a
particular project or subproject or a particular need that has arisen,
which requires additional or substitute personnel. These contracts expire
upon completion of the project or when the particular need ends. Many of
these contracts typically require considerable start-up costs and usually
take from six to twelve months to reach anticipated revenue levels and
reaching those levels is dependant on the customer's requirements at that
time. The Staffing Solutions Group maintains a group dedicated to the
acquisition, implementation and service of national accounts; however,
there can be no assurance that Volt will be able to retain accounts that
it currently serves, or that Volt can obtain additional national accounts
on satisfactory terms.
Branch offices that have developed a specialty in one or more disciplines
often use the name "Volt" followed by their specialty disciplines to
identify themselves. Other branch offices have adopted other names to
differentiate themselves from traditional temporary staffing when their
focus is more project oriented.
13
Volt Services Group and Volt Human Resources maintain centralizedcomputerized
nationwide resume databases, containing resumes of computer professionals,
engineers and other technical, professional and scientific candidates,
from which they fill customer job requirements. Other candidates are referred by the customer itself for
assignment as Volt employees. Volt Europe maintains
similar computerized resume databases containing resumes of candidates
from the United Kingdom and continental Europe. These higher skilled
individuals employed by the Staffing Solutions Group are frequently
willing to relocate to fill assignments while lesserassignments. In addition to maintaining its
proprietary internet recruiting sites, the segment has numerous contracts
with independent job search web site companies. Lesser skilled employees
are generally recruited and assigned locally, and employment
information/resumes for these employees are maintained in computerized
databases at branch offices. In addition to
maintaining its proprietary Internet recruiting sites, the segment has
numerous contracts with independent job search Web site companies.
Individuals hired by the Staffing Solutions Group typically become Volt
employees or contractors during the period of their assignment. As
employer of record, Volt is responsible for the payment of wages,salaries,
payroll taxes, workers' compensation and unemployment insurance and other
benefits, which may include paid sick days, holidays and vacations and
medical insurance. Class action lawsuits have been instituted in the
United States against some users of temporary services, including some
customers of the Company, by certain temporary employees assigned to the
customers, and a few have been threatened or commenced against providers
of temporary services, including one case instituted against the Company
and other temporary agencies. In general, these lawsuits claim that
certain temporary employees should be classified as the customers'
employees and are entitled to participate in certain of the customers'
benefit programs. In the Company's European markets, temporary services
are more heavily regulated than in the
United States and litigation and governmental activity (at
European Union and national levels) directed at the way the industry does
business is also being conducted or considered. Volt does not know the
effect, if any, the resolution of these cases or the outcome of this
governmental activity will have on the industry in general or upon the
Staffing Solutions Group's business.
Volt Services Group and Volt Europe also provide permanent employment
services. In the United States, these services are provided through Volt
Professional Placement, which is dedicated to serve as an employment
search organization specializing in
-12-
the recruitment and direct hire of
individuals in professional disciplines including information technology,
technical, accounting, finance and administrative support disciplines. The
direct placement recruiters operate within Volt's existing United States
and European branch system. Customers of this service include customers of
Volt's Staffing Services and other segments.
Volt has and will continue to make substantial investments in technological
solutions that focus on core recruiting competencies, improving
productivity and reducing administrative burdens for field operations,
including new efficiencies for the onboarding process by the elimination of
most paper forms. There can be no assurance that these solutions will be
competitive, that the segment will continue to develop new solutions or
that they will be successful.
Shaw & Shaw
Shaw & Shaw, Inc. provides professional employer organization ("PEO")
services, also known as "employee leasing," as part of the Administrative
and Industrial division. The customer using these services generally
transfers its entire work force or employees of a specific department or
division to Shaw & Shaw. Shaw & Shaw's services include payroll
administration, human resource administration, consulting on employee
legal and regulatory compliance, providing comprehensive benefits,
including retirement plans, workers' compensation coverage, loss control
and risk management and certain other services. The customer has control
over the day-to-day job duties of the employees. Shaw & Shaw utilizes the
purchasing power of the Company and, thus, is able to provide its
customers' employees with a competitive benefits package. Customers are
relieved of the administrative responsibilities involved in maintaining
employees.
14
Shaw & Shaw provides and markets its services to large and small client
companies in a broad spectrum of industries and non-profit organizations.
Sales generated by Shaw & Shaw in fiscal 20042003 represented less than 1% of
the Staffing Services segment's total sales due to the Company reporting
these revenues net of related payroll costs.
Information Technology Solutions
- --------------------------------
VMC Consulting/Volt Europe Solutions
VMC Consulting (VMC) and Volt Europe Solutions offerare outsource consulting
companies offering a comprehensive portfolio of project-based professional
services often utilizing the pool
of contingent employees of the other divisions of the Staffing Services
segment, from product developmentquality assurance, software/firmware testing to extended
sales and IT infrastructure to customer support in outsource, insource or blended environment
to Global 2000 clients in 30 states in North America and 7 countries in
Asia and Europe.
These business units, as part of the Technical Placement division, perform
outsource services in the form of project-based work, in which the Company
assumes responsibility for project milestones and deliverables. Services
include hardware and software testing, software development, data center
management,systems
integration, project management, information technology services,
technical communications, extended sales, technical support and technical
communications.communications call centers, information technology services, systems
integration and software development and logistics and clinical research.
State-of-the-art technology solutions are delivered to clients on a
project basis, with the work performed either in Volt's premises or at the
client's location.
-13-
AtThe Company's Information Technology Solutions services are generally
marketed throughout the end of fiscal 2004,United States under the names VMC Consulting, in
Canada under the name VMC Consulting Canada and in the United Kingdom and
continental Europe under the names Volt Europe Solutions was integrated intoand VMC
Consulting Europe. VMC Consulting is based in Redmond, WashingtonWashington. Volt
Europe Solutions is based in Redhill, England and VMC Consulting Europe is
based in Slough, England and Redhill, England.
Although VMC Consulting continues itsand Volt Europe Solutions continue their efforts
to increase itstheir customer base and to broaden itstheir services, there is no
assurance that itsthis group's present or future services will be
competitive, that itthe units will continue to obtain new customers or renew
and/or extend existing customer contracts or develop new services or that
its present services or new services will continue to be successfully
marketed.
15
E-Procurement Solutions
- -----------------------
ProcureStaff
Increasingly, corporations, industry consortia and other buying
communities are leveraging the efficiencies of the Internetinternet to maximize
their buying power. To take advantage of this emerging e-commerce market,
the Staffing Services segment, through a wholly-owned subsidiary,
ProcureStaff, Ltd., provides managed serviceservices programs by means of a
web-based, vendor neutral, web-based procurement and management solution.solution for
alternative staffing.
A vendor neutral program enables a customercustomers to meet itsfulfill their staffing
requirements by
selecting a candidatean employee from a number of competingstaffing firms,
including Volt (if a selected vendor), based upon the customer
requirements and the skills of the candidates. At the core of the
ProcureStaff model are Consol and HRP, patent pending business-to-business
e-commerce procurement applications that are designed to streamline client
and vendor functions with increased efficiencies while significantly
reducing costs.
Utilizing Consol and HRP, web-based software systems, and proprietary
management methodologies, ProcureStaff provides procurement and management
solutions for supplemental or alternative staffing, primarily in the
United States and Europe as part of the Technical Placement division. The
Company believes that ProcureStaff represents the next generation of
staffing services systems and software.
Consol also automates and manages the source-to-settle process for
resource-based services to provide visibility and centralized control over
all categories of enterprise-wide services expenditures. ProcureStaff
provides this source-to-settle process to its customers with web-based
access for requisition management, electronic procurement, relationship
management, vendor management, time keeping, consolidated invoicing,
consolidated billing and paying, resource redeployment, demand management and sophisticated on-linegraphical
ad-hoc management reporting.
By adhering to open standards, ProcureStaff enables both customers and
vendors to facilitate implementation with minimal cost and resources.
Implementation of these programs typically requires considerable start up
costs by ProcureStaff and usually takes up to four months. ProcureStaff
competes with other companies which provide similar vendor neutral
solutions, some of which are affiliated with competitive staffing
companies. ProcureStaff believes that its experience in developing and
implementing sophisticated software solutions and on-site staffing
management for major domestic and international corporations provides the
type of expertise necessary to build superior global staffing and vendor
procurement solutions.
The enhancements to ProcureStaff's software systems and the ability of
ProcureStaff to offer a vendor neutral procurement environment isare
designed to enable ProcureStaff to pursue new opportunities in the
business-to-business marketplace.
-14-16
Although ProcureStaff continues its efforts to obtain new customers and to
develop and enhance its services and systems, there is no assurance that
itsthis division's present or future services will be competitive, that itthe
division will continue to obtain new customers or renew and/or extend
existing customer contracts or develop new services or that present
services or new services will continue to be successfully marketed.
During the week ended October 31, 2004,November 2, 2003, the entire Staffing Services segment
provided approximately 40,000 (36,70036,700 (31,500 in 2003)2002) of its own temporary employees to its
customers, in addition to employees provided by subcontractors and associate
vendors.
While the markets for the entire Staffing Services segment's services include a
broad range of industries throughout the United States and Europe, general
economic conditions in specific geographic areas or industrial sectors affecthave had,
in the present are having and in the future could have, an effect on the
profitability of thethis segment. In the past, theThe segment hadhas been adversely affected by the
weakened economy in the United States and Europe, causing customers to
significantly reduce their requirement for alternative and permanent staffing
and the other services provided by this segment, although an
improved economy has resulted in improved results for the segment. The segment hadhas also
experienced margin erosion caused by increased competition, electronic auctions
and customers leveraging their buying power by consolidating the number of
vendors with whom they deal. The segment hadhas implemented a series of cost
cutting initiatives and is committed to further efficiencies designed to
increase profitability, however,profitability. However, there can be no assurances that this increase
in profitability will occur as a result of these actions.occur. In addition, this segment could be adversely
affected by changes in laws, regulations and government policies, including the
results of pending litigation and governmental activity regarding the staffing
services industry, and related litigation expenses, customers' attitudes toward
outsourcing and temporary personnel, any decreases in rates of unemployment in
the future and higher wages sought by temporary workers, especially those in
certain technical fields often characterized by labor shortages.
The Company has increased the number of its offices which offer higher margin
project-oriented services to its customers and thus assumed greater
responsibility for the finished product. As the Staffing Services segment
increases the amount of project-oriented work it performs for customers, the
risks of unsuccessful performance, including claims by customers, uncompensated
rework and other liabilities increase. While the Company believes that it can
successfully implement these project-based contracts, there can be no assurance
that the Company will be able to do so, or that it can continue to obtain such
contracts on a satisfactory basis or continue delivering quality results that
satisfy its customers.
The ability of the entire Staffing Services segment to compete successfully for
customers depends on its reputation, pricing and quality of service provided and
its ability to engage, in a timely manner, personnel meeting customer
requirements. Competition varies from market-to-market and country-to-country
and in most areas, there are few significantlimited barriers to entry and no single provider
has a dominant share of the market. The staffing services market is highly
competitive, particularly for office clerical and light industrial personnel.
Pricing pressure from customers and competitors continues to be significant and
high state unemployment and workers compensation rates continue to impact
margins. Many of the contracts entered into by this segment are of a relatively
short duration, and awarded on the basis of competitive proposals which are
periodically re-bid by the customer. Under many of these contracts, there is no
assurance of any minimum amount of work that will actually be available and Volt is frequently required to compete for each placement.available.
Although Volt has been successful in obtaining various short and long-term
contracts in the past, in many instances margins under these contracts have
decreased. There can be no assurance that existing contracts will be renewed on
satisfactory terms or that additional or replacement contracts will be awarded
to the
17
Company, or that revenues or profitability from an expired contract will be
immediately replaced. Some of this segment's national contracts are large, and
the loss of any large contract could have a significantly negative effect on
this segment's business unless, and until, the business is replaced. The segment
competes with many technical service, temporary personnel, other alternative
staffing and permanent placement firms, some of which are larger and have
-15-
substantially greater financial resources than Volt, as well as with individuals
seeking direct employment with the Company's existing and potential customers.
Telephone Directory Segment
- ---------------------------
Volt's Telephone Directory segment publishes independent telephone directories
in the United States and publishes telephone directories in Uruguay;Uruguay under a
contract with the government-owned telephone company; provides telephone
directory production, commercial printing, database management, sales and
marketing services; licenses directory production and contract management
software systems to directory publishers and others; and provides various
computer-based services to public utilities and financial institutions. This
segment has transitioned in the United States, from the production of telephone
directories for others, to the publishing of its own independent telephone
directories and commencing in 2005 will do the same in Uruguay.directories. This segment consists of DataNational, Directory Systems/Services,
the Uruguay division and Volt VIEWtech.
DataNational
DataNational, Volt's independent telephone directory publisher,
principally publishes community-based directories, primarily in the
mid-Atlantic and southeastern portions of the United States.States, Arkansas and
Texas. DataNational's community-based directories provide consumers with
information concerning businesses that provide services within their local
geographic area. The directories may also include features that are unique
to the community, such as school information, maps and a calendar of
events. All of the DataNational directories are also available on the
Internetinternet at www.communityphonebook.info. The division identifies markets
where demographics and local shopping patterns are favorable to the
division's community-oriented product and adjustsexpands accordingly. During
fiscal 2004,2003, the division published 130109 community, county and regional
directories. DataNational's principal competitors are regional telephone
companies, whose directories typically cover a much wider geographic area
than the DataNational directories, as well as other independent telephone
directory companies, which compete on the local level. DataNational's
revenues are generated from yellow page advertising sold in its
directories. Volt believes that advertisers are attracted to
DataNational's community directories because the directories enable them
to specifically target their local markets at a much lower cost than directories covering larger
markets.cost.
Directory Systems/Services
Directory Systems/Services develops and markets telephone directory
systems and services to directory publishers, using computer systems
manufactured by others, combined with proprietary software developed by
the Company and by third parties specifically for the division. These
systems manage the production and control of databases principally for
directory and other advertising media publishers and produce digitized
display advertisements and photocomposed pages, with integrated graphics
for both printed and
electronic yellow and white pages directories, as well as CD/ROM directories.
These systems incorporate "workflow management," by which ads are
automatically routed between workstations, increasing throughput and
control, including
18
management of additions and deletions of listings. These systems are
licensed to, and the services are performed for, publishers and others
worldwide, includingas well as for the segment's DataNational division.
Directory Systems/Services also publishes semi-annually The National
Internet Toll-Free Directory ( www.internettollfree.com ), which provides
Internet web sites and toll-free listings for businesses. The revenues for
this product are generated by selling advertising in this directory and
from the sale of directories to third party resellers.
Uruguay
Until 2004,
Volt's Uruguay division wasis the official publisher of white and yellow
pages telephone directories for Antel, the government-owned telephone
company in Uruguay, under a contract originally entered into in -16-
1983.1983 and
subsequently extended through 2006. Revenues are generated from the sale
of yellow pagespage advertising. The
contract with Antel was terminated early by mutual consent in fiscal 2004
and the division will now begin producing proprietary directories in
Uruguay.
In addition to the directory business, Volt's Uruguay division owns and
operates anone of the most advanced directory printing facility,facilities in South
America, which includes, among other presses, a high speed, four-color,
heat set printing press that is used to print not only its own telephone
directories, but also directories for publishers in other South American
countries. In addition, this facility does commercial printing, including
magazines and periodicals for various customers in Uruguay and elsewhere
in South and Central America.
Economic instability in neighboring countries, as well as in Uruguay
itself, continues to have a significant adverse impact on advertising and
printing revenue and operating profits. Because of this instability, the
Company is also seeking to renegotiate the contract with Antel, which
could result in an early termination or reduction (or increase) in
directory revenue and operating profits.
Volt VIEWtech
Volt VIEWtech services the energy and water utility industries, providing
energy and water conservation based customer services. VIEWtech is one of
the oldest and most experienced lenders and servicers for the Fannie Mae
Energy Loan program, which provides low interest and energy efficient home
improvement
unsecured financing under major utility sponsorship. These loans are
immediately resold, after closing, to Fannie Mae. VIEWtech services theretains
servicing of loans after they are resold, providing billing, collection
and document custodian services on behalf of Fannie Mae. VIEWtech also
provides servicing for loans resold by other Fannie Mae Energy Loan
lenders. VIEWtech is also a utility rebate processing firm, processing
energy and water efficient appliance and home improvement rebates on
behalf of utilities across the nation.
TheVolt's ability to compete in its Telephone Directory segment's ability to competesegment depends on its
reputation, technical capabilities, price, quality of service and ability to
meet customer requirements in a timely manner. Volt believes that its
competitive position in this segment's areas of operations is augmented by its
ability to draw upon the expertise and resources of its other segments. The
segment faces intense competition for all of its services and products from
other suppliers and from in-house facilities of potential customers. Some of
this segment's significant competitors are companies that are larger and have
substantially
19
greater financial resources than Volt. This segment's sales and profitability
are highly dependent on advertising revenue, which has been and continues to be
affected by general and local economic conditions. Economic conditions in Uruguay and
neighboring countries continue to have a significant adverse impact on
advertising and printing revenue and operating profits of the Uruguay operation.
Other than DataNational, a substantial portion of this segment's business is
obtained through submission of competitive proposals for contracts. These short
and long-term contracts are re-bid after expiration.
While the Company has historically secured new contracts and believes it can
secure renewals and/or extensions of some of these contracts, some of which are
material to this segment, and obtain new business and customers, there can be no
assurance that contracts will be renewed or extended, that the segment can
successfully obtain new business and customers or that additional or replacement
contracts will be awarded to the Company on satisfactory terms.
Telecommunications Services Segment
- -----------------------------------
Volt's Telecommunications Services segment provides telecommunications and other
services, including design, engineering, construction, installation, maintenance
and removals of telecommunications equipment for the outside plant and central
offices of telecommunications and cable companies, and within end-user premises,
throughout North America, Europe and in the United States.Pacific Basin. This segment also
provides complete turnkey services for wireless telecommunications carriers and
wireless infrastructure suppliers and provides limited distribution of productsproducts.
In Europe, some services were performed by the Company's Volt Telecom Europe
subsidiary, which because of the telecommunications depression in Europe,
operated at reduced levels during the fiscal year and provides some
non-telecommunications engineering and construction services.
-17-
was operating at a minimal
level as of the end of the fiscal year.
The Telecommunications Services segment is a full-service provider of turnkey
solutions to the telecommunications, cable and related industries, as well as
for large corporations and governmental entities. The segment's services
include:
o Engineering services, including feasibility studies, right-of-wayright of way
acquisition, network design and detailed engineering for copper, coaxial
and fiber systems, carrier systems design, conduit design, computer-aided
design drafting, digitizing records, building industry consultant
engineering (BICSI), turnkey design, program management, air pressure
design and record verification.
o Construction services, including both aerial and underground construction
services, using the Company's owned and leased vehicles and equipment.
These services include jack and bore, directional boring, trenching and
excavation for
conduit and manhole systems, cable placement and splicing, pole placement
and wrecking, copper, coaxial and long- and short-haul fiber optic cable
installation, splicing, termination and testing, project management and
inspection services. Construction services have been, and could in the
future, be adversely affected by weather conditions, because much of the
business is performed outdoors.
o Business Systems Integration services, including structured cabling and
wiring and field installation and repair services involving the design,
engineering, installation and maintenance of various types of local and
wide-area networks, utilizing copper wiring coaxial and fiber optics, for voice,
data and video, and digital subscriber lines (DSL) and other broadband
installation and
20
maintenance services to operating telephone companies, long distance
carriers, telecommunications equipment manufacturers, cable companies and
large end-users, in both the government and private sectors.
o Central Office services, including engineering, furnishingengineer, furnish and installinginstall (EF&I) services, maintenanceincluding
central office engineering, installation and removal of transmission
systems, distribution frame systems, AC/DC power systems, wiring and
cabling, switch peripheral systems, equipment assembly and system
integration and controlled environment structures, and other network
support services, such as grounding surveys and asset management.
o
Wireless services, including complete turnkey services to both fixed and
mobile wireless providers. This includes establishing or enhancing network
infrastructure, design, engineering and construction/installation services,
site selection, RF engineering, tower erection, antenna installation and
inside cabling and wiring services. In performing these services, the segment
employs the latest technologies, such as GPS mapping of facilities.
This segment also accommodates customersclients in the telecommunications industry that
require a full range of services from multiple Volt business segments, such as
human resources, systems analysis, network integration, software development and
turnkey applications. This segment also resells telecommunications equipment to
customers. In addition, this segment offers the added value of being able to
provide total management of multi-discipline projects because of its ability to
integrate efforts on a single project and to assume responsibility for programs
that require a single point of contact and uniform quality. The segment performs
these services on a project and/or contract personnel placement basis in the
outside plant, central offices, wireless sector and within end-user premises.
Customers include telephone operating companies, inter-exchange carriers, long
distance carriers, local exchange carriers, wireless carriers,
telecommunications equipment manufacturers, cable television providers,
electric, gas, water and water-services utilities, federal, state and municipal
government units and private industry.
This segment faces substantial competition with respect to all of its
telecommunications services from other suppliers and from in-house capabilities
of potential customers. Additionally, many customers provide the same type of
services as the segment, which means that the segment faces competition from its
-18-
own customers as well as from third parties. Construction services have been,
and could be in the future, adversely affected by weather conditions, because
much of the business is performed outdoors. Some of this segment's significant
competitors are larger and have substantially greater financial resources than
Volt. There are relatively few significant barriers to entry into certain of the
markets in which the segment operates, and many competitors are small, local
companies that generally have lower overhead. Volt's ability to compete in this
segment depends upon its reputation, technical capabilities, pricing, quality of
service and ability to meet customer requirements in a timely manner. Volt
believes that its competitive position in this segment is augmented by its
ability to draw upon the expertise and resources of other Volt segments.
A portion of Volt's business in this segment is obtained through the submission
of competitive proposals for contracts that typically expire within one to three
years and upon expiration are re-bid and price is often an important factor in
the award of such agreements. Many of this segment's long-term contracts contain
cancellation provisions under which the customer can cancel the contract, even
if the segment is not in default under the contract. Therefore, these contracts
do not give the assurances that long-term contracts typically provide. Under
many of these contracts, including master service contracts, there is no
assurance of any minimum amount of work that will actually be available. Therefore, these
contracts do not give the assurances that long-term contracts typically provide.
While
the Company believes it can secure renewals and/or extensions of some of these
contracts, some of which are
21
material to this segment, and obtain new business and customers, there can be no
assurance that contracts will be renewed or extended or that additional or
replacement contracts will be awarded to the Company on satisfactory terms or
that the Company can obtain new business and customers. The continued delay in
telecommunications companies' capital expenditure projects during the current
economic climate has significantly reduced the segment's revenue, particularly
from long-haul fiber optic projects and resulted in continuing operating losses. A return to material profitability willcross-connect box projects, and little
improvement can be difficultexpected until the industry begins to increase its capital
expenditures.
Computer Systems Segment
- ------------------------
The Company's Computer Systems segment consists of Volt Delta, which is 76%
owned by the Company, and its subsidiaries. On August 2, 2004, Volt Delta, which
prior to that time was a wholly-owned subsidiary of the Company, consummated a
Contribution Agreement with Nortel Networks under which Nortel Networks
contributed substantially all of the assets (consisting principally of customer
base and contracts, intellectual property and inventory) and certain specified
liabilities of its directory and operator services ("DOS") business to Volt
Delta in exchange for a 24% minority interest in Volt Delta. The Company and
Nortel Networks have also entered into agreements which provide for the
management of Volt Delta and the respective rights and obligations of the
interest holders thereof. For further information on the transaction, see the
Company's Current Report on Form 8-K dated August 2, 2004.
Volt's Computer Systems segment provides directory and operatorassistance services, and
designs, develops, sells, leases and maintains computer-based directory
assistance services along with other database management and related services,
primarily to the telecommunications industry. It also provides third party IT
and data services to others. This segment is comprised of three business units: Volt DeltaVoltDelta
Resources ("VoltDelta"), DataServ and Maintech.
VoltDelta
VoltDelta unit markets information services solutions to telephone companies
and inter-exchange carriers worldwide. The unit sells information
serviceVoltDelta has transitioned its
business from only the sale of systems to, its customers and in addition, provides an Application
Service Provider ("ASP") model which alsoso that it now provides information
services, including infrastructure and database content, on a
transactional use fee basis. The VoltDelta unit has service agreements with major
telecommunications carriers in North America and Europe.
-19-
To meet the needs of customers who desire to upgrade their operator
services capabilities by procuring services as an alternative to making a
capital investment, the unit has deployed and is marketing enhanced
directory assistance and other information service capabilities as a
transaction-based ASP service, charging a fee per transaction. One ASP
service is marketed as DirectoryExpress, which provides directory
assistance operators worldwide with access to over 180 million United
States and Canadian business, residential and government listings to directory assistance operators and automation systems
worldwide. Another ASP service is Directory Assistance Automation ("DAA"),
which is currently deployed by major carriers. Thelistings.
VoltDelta unit owns and operates its own proprietary systems and provides its
customers access to a national database sourced from listings obtained by
Volt DeltaVoltDelta from various
telephone companiesthe Regional Bell Operating Companies ("RBOCs") and other
independent sources. In addition, the
VoltDelta unit continues to provide customers
with new systems, as well as enhancements to existing systems, equipment
and software.
The VoltDelta unit'sIn addition to DirectoryExpress, VoltDelta's InfoExpress suite of services
includes iExpress, a service that enables its transaction-based customers
to offer operator-assisted yellow pages, directions and other information
dependent enhanced services. For consumers (the end-users), especially
cellular and PCS users, InfoExpress provides a more convenient and
efficient level of directory assistance service since, among other things,
consumers may obtain enhanced directory and yellow pages information
without having to know the correct area code or even the name of the
business. Enhanced information services are particularly attractive in the
wireless market, where there is no access to printed telephone
directories. The unit'sVoltDelta's ASP services are being delivered over the
switched telephone network to live operators, via the Internetinternet and,
recently, through DAA voice portals using speech recognition technologies.
VoltDelta has service agreements with major telecommunications carriers,
including RBOCs in the United States. Similar services are also provided
to major telecommunications providers in
22
the United Kingdom, Belgium, Holland, Italy, Germany and Ireland through
Volt's wholly owned European subsidiaries.
DataServ
DataServ was established in fiscal year 2002 as a separate division of
Volt
DeltaVoltDelta to target non-telco enterprise customers with enhanced directory
assistance and information services. The division's services utilize the
most accurate consumer and business databases to allow companies to
improve their operations and marketing capabilities. Working with
Volt DeltaVoltDelta and other data aggregators, DataServ's information is updated
daily and is substantially augmented with specialized information unique
to the non-telco enterprise customer. DataServ integrates customer
applications access via XML and other advanced technologies with its
various databases. DataServ has agreements with several agents and
resellers to distribute its services into targeted industries.
Although the VoltDelta unit was successful during fiscal year 20042003 in obtaining new
customers for these services, including major telephone companies serving the
long distance and cellular markets, and DataServ expanded its customer base
and achieved significant revenue growth,commenced generating
revenues, there can be no assurance that itthey will continue to be successful
in marketing these services to additional customers, or that the customers'
volume of transactions will be at a level sufficient to enable the segment to
maintain profitability.
In order to fulfill its commitments under its contracts, the VoltDelta unit and
DataServ are required to develop advanced computer software programs and
purchase substantial amounts of computer equipment, as well as license data
content, from several suppliers. Most of the equipment and data content
required for these contracts isare purchased as needed and isare readily
available from a number of suppliers.
-20-
Maintech
Maintech a division of Volt Delta, provides managed IT service solutions to mid-size and large
corporate clients across the United States, and Canada,
including many of those who
have purchased systems from Volt Delta.VoltDelta. Its service offerings are tailored
to mission-critical,mission-control, multi-platform operating
environmentsapplications where standards of
operating performance and system availability ofare routinely defined as
99+% are the norm.. Its target markets include banking and brokerage,
telecommunications, aerospace, healthcare and hospital, and higher
education. Maintech's services portfolio includes three groups of
interrelated services:
o Hardware maintenance services, which includes on-site repair and Tier
1 & 2 technical support for Wintel and UNIX-based servers,
workstations and network products. Maintech is certified to support
products from most major OEMs including HP/Compaq, SUN, IBM, Dell,
Cisco and Nortel. Maintech also supports storage systems from Network
Appliance, EMC and STK. Representative application environments
include Wall Street trading desks, electronic funds transfer, R & D
laboratories and 411 Directory Assistance systems. Maintech provides
these programs on a 24 x 7 x 365 basis with available on-site, 2 hour
or 4 hour response terms.
o Network Operations Center (NOC) services, which includes 24 x 7 x
365 monitoring and management of LAN/WAN environments, network design,
carrier selection and
23
management, and product procurement, deployment, transition and
support. Maintech's dual NOCs in Orange, California and Wallington,
New Jersey are staffed with certified network design and support
engineers, and employ state-of-the-art diagnostic monitoring and
management software. In addition to outside customers, Maintech
provides these services across the business units of Volt.
o Professional services, which includes comprehensive project management
for planning, design, deployment and support of enterprise-wide,
workstation/server/network upgrades, technology refresh programs,
warehousing, asset management, product integration and testing, and
installation and facility planning. This group of services is
attractive to the end user, as well as OEMs, VARs (value added
resellers) and distributors.
The Company believes that Maintech's strengths and economic structure
enable Maintech's customers to meet the demand to improve operating cost
parameters by using these IT services, particularly for those companies
that are correcting or adjusting an overbuilt IT infrastructure.
Maintech headquarters are in Wallington, New Jersey. District service
offices are located in most metropolitan areas across the United States.
ThisThe business environment in which this segment operates in a business environment which is highly competitive.
Some of this segment's principal competitors are larger and have substantially
greater financial resources than Volt. This segment's results are highly
dependent on the volume of transactionsdirectory assistance calls to VoltDelta's customers
which are processed byrouted to the segment under existing contracts, the segment's ability
to continue to secure comprehensive listings from others, its ability to obtain
additional customers for these services and on its continued ability to sell
products and services to new and existing customers. This segment's position in
its market depends largely upon its reputation, quality of service and ability
to develop, maintain and implement information systems on a cost competitive
basis. Although the segmentVolt continues its investment in research and development, there
is no assurance that this segment's present or future products will be
competitive, that the segment will continue to develop new products or that
present products or new products can be successfully marketed.
-21-
Some of this segment's contracts expired in 2004,2003, while others were renewed and
new contracts were awarded to the segment. Other contracts are scheduled to
expire in 20052004 through 2008. Many of this segment's long-term contracts contain
cancellation provisions under which the customer can cancel the contract, even
if the segment is not in default under the contract. Therefore, these contracts
do not give the assurances that long-term contracts typically provide. While the Company believes it can secure renewals
and/or extensions of some of these contracts, some of which are material to this
segment, and obtain new business and customers, there can be no assurance that
contracts will be renewed or extended or that additional or replacement
contracts will be awarded to the Company on satisfactory terms or that new
business and customers can be obtained.
Research, Development and Engineering
- -------------------------------------
During fiscal years 2004, 2003, 2002 and 2002,2001, the Company expended approximately $4.7$2.1
million, $2.1$2.5 million and $2.5 million, respectively, on research, development
and engineering for product and service development and improvement,
substantially all of which is Company sponsored, and none of which was
capitalized. The major portion of research and development expenditures was
incurred by the Computer Systems segment.
24
In addition, the Company invests in software for internal use, including
planning, coding, testing, deployment, training and maintenance. In fiscal 2004,2003,
expenditures for internal-use software were $19.3 million of which $7.3$5.9 million
was capitalized.
Intellectual Property
- ---------------------
"Volt" is a registered trademark of the Company under a number of registrations.
The Company also holds a number of other trademarks and patents related to
certain of its products and services; however, it does not believe that any of
these are material to the Company's business or that of any segment. The Company
is also a licensee of technology from many of its suppliers, none of which
individually is considered material to the Company's business or the business of
any segment.
Customers
- ---------
In fiscal 2004, the Telecommunications Services segment's sales to four
customers accounted for approximately 17%, 15%, 12%, and 11% respectively, of
the total sales of that segment; the Computer Systems segment's sales to one
customer accounted for approximately 28% of the total sales of that segment; the
Staffing Services segment's sales to one customer accounted for approximately
14% of the total sales of that segment; and the Telephone Directory segment's
sales to one customer accounted for approximately 10% of the total sales of that
segment. In fiscal 2004, the sales to seven operating units of one customer,
Microsoft Corporation, accounted for 12% of the Company's consolidated net sales
of $1.9 billion and 7.6% of the Company's consolidated gross billings of $3.0
billion. The difference between net sales and gross billings is the Company's
associate vendor costs, which are excluded from sales due to the Company's
relationship with the customers and the Company's associate vendors, who have
agreed to be paid subject to receipt of the customers' payment to the Company.
Generally accepted accounting principles require these sales to be reported net.
The Company believes that gross billing is a meaningful measure, which reflects
actual volume by the customers.
In fiscal 2003, the Telecommunications Services segment's sales to three
customers accounted for approximately 23%, 18%, and 12%, respectively, of the
total sales of that segment; the Computer Systems segment's sales to two
customers accounted for approximately 27% and 13% of the total sales of that
segment; the Staffing Services segment's sales to one customer accounted for
approximately 13% of the total sales of that segment; and the Telephone
Directory segment's sales to one customer accounted for approximately 10% of the
total sales of that segment. In fiscal 2003, the sales to seven operating units
of one customer, Microsoft Corporation, accounted for 10.6% of the Company's
consolidated net sales of $1.6 billion and 6.7% of the Company's consolidated
gross billings of $2.6 billion. -22-
The difference between net sales and gross
billings is the Company's associate vendor costs, which are excluded from sales
due to the Company's relationship with the customers and the Company's associate
vendors, who have agreed to be paid subject to receipt of the customers' payment
to the Company, which causes these sales to be recorded net. The Company
believes that gross billing is a meaningful measure, which reflects actual
volume by the customers.
In fiscal 2002, the Telecommunications Services segment's sales to three
customers accounted for approximately 24%, 20%, and 12%, respectively, of the
total sales of that segment; and the Computer Systems segment's sales to one
customer accounted for approximately 30% of that segment. In fiscal 2002, there
were no customers to which sales accounted for over 10% of the Company's
consolidated net sales.
The lossIn fiscal 2001, the Telecommunications Services segment's sales to three
customers accounted for approximately 23%, 17%, and 12%, respectively, of the
total sales of that segment; and the Computer Systems segment's sales to one
or morecustomer accounted for approximately 35% of thesethat segment. In fiscal 2001, there
were no customers unlessto which sales accounted for over 10% of the business is replaced by
the segment, could result in an adverse effect on the results for that segment's
business.Company's
consolidated net sales.
Seasonality
- -----------
Historically, the Company's results of operations have been lowest in its first
fiscal quarter as a result of reduced requirements for the Staffing Services
segment's personnel due to the Thanksgiving, Christmas and New Year holidays as
well as certain customer facilities closing for one to two weeks. In addition,
the Telephone Directory segment's DataNational division publishes more
directories during the second half of the fiscal year. The Uruguay division of
the Telephone Directory segment produces a major portion of its revenues and
most of its profits in the Company's fourth fiscal quarter. During the third and
fourth quarter of the fiscal year, the Staffing Services segment benefits from a
reduction of payroll taxes and increased use of Administrative and Industrial
services during the summer vacation period.
25
Employees
- ---------
During the week ended October 31, 2004,November 2, 2003, Volt employed approximately 45,00041,600
persons, including approximately 40,00036,700 persons who were on temporary assignment
for the Staffing Services segment. Volt is a party to two collective bargaining
agreements, which cover a small number of its employees. The Company believes that
its relations with its employees are satisfactory.
Certain services rendered by Volt's operating segments require highly trained
technical personnel in specialized fields, some of whom are currently in short
supply and, while the Company currently has a sufficient number of such
technical personnel in its employ, there can be no assurance that in the future,
these segments can continue to employ sufficient technical personnel necessary
for the successful conduct of their services without significantly higher costs.services.
Regulation
- ----------
SomeThe Company's business is not subject to specific industry government
regulations except that some states in the United States license and regulate temporary
service firms, employment agencies and construction companies. In Europe, the
temporary service business and employment agencies areis subject to regulation at both country and European
levels. In connection with foreign sales by the Telephone Directory and Computer
Systems segments, the Company is subject to export controls, including
restrictions on the export of certain technologies. With respect to countries in
which the Company's Telephone Directory and Computer Systems segments presently
sell certain of their current products, the sale of their current products, both
hardware and software, are permitted pursuant to a general export license. If
the Company began selling to countries designated by the United States as
sensitive or developed products subject to restriction, sales would be subject
to more restrictive export regulations.
Compliance with applicable present federal, state and local environmental laws
and regulations has not had, and the Company believes that compliance with those
laws and regulations in the future will not have, a material effect on the
Company's earnings, capital expenditures or competitive position.
-23
Access to Company Information
- -----------------------------
The Company electronically files its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reportscurrent reports on Form 8-K and all amendments to those
reports with the Securities and Exchange Commission ("SEC"). These and other SEC
filings by the Company are available to the public over the Internet at the
SEC's website at http://www.sec.gov and at the Company's website at
http://www.volt.com in the Investor Information section as soon as reasonably
practicable after they are electronically filed with the SEC. Copies of the
Company's Code of Ethics and other significant corporate policies are also
available at the Company's website in the Investor Information section. Copies
are also
available without charge upon request to Volt Information Sciences, Inc., 560
Lexington Avenue, New York, New York 10022, 212-704-2400, Attention: Shareholder
Relations.
26
ITEM 2. PROPERTIES
The Company occupies approximately 46,00038,000 square feet of space at 560 Lexington
Avenue, New York, New York under leases that expire in 2007 and 2009. The
facility serves as the Company's corporate headquarters, the headquarters for
the Company's Computer Systems segment and a base for certain operations of the
Company's Staffing Services segment. The following table sets forth certain
information as to each of the Company's other major facilities:
Approximate Sq. Ft. If Leased, Year of
Location Business Segment Leased Or Owned Lease Expiration
- -------- ---------------- ------------------- --------------------------------- ---------------
Orange, West Region Headquarters 200,000 Owned (1)
California Accounting Center
Staffing Services
Computer Systems
Anaheim, Telephone Directory 39,000 Owned
California
El Segundo, Staffing Services 20,000 Owned
California
San Diego, Staffing Services 20,000 Owned
California
Montevideo, Telephone Directory 96,000 20072004
Uruguay
Blue Bell, Telephone Directory 55,00051,000 2007
Pennsylvania Computer Systems
Redmond, Staffing Services 46,000 2010
Washington 40,000 2005
Edison, Telecommunications Services 42,000 20102005
New Jersey
Wallington, Computer Systems 32,000 2008
New Jersey
(1) See Note F of Notes to Consolidated Financial Statements for information
regarding a term loan secured by a deed of trust on this property.
-24-27
ITEM 2. PROPERTIES--Continued
In the second quarter of 2004,addition, the Company sold itsowns a 134,000 square foot facility in Thousand Oaks,
CACalifornia, which was previously leased by the Company to its former 59% owned subsidiary,
Autologic Information International, Inc., until December 31, 2002. The Company
has entered into an agreement with an unrelated party, which interest
was sold in November 2001. The cash transaction resultedsubject to due
diligence, may result in a $9.5 million gain,
net of taxes of $4.6 million.
Inlease to commence in fiscal 2004 with an option to
purchase the fourth quarter of 2004, the Company sold its 39,000 square foot facility
in Anaheim, CA resulting in a gain of $3.3 million. The property was no longer
used by the Company.facility.
In addition, the Company leases space in approximately 230 other facilities
worldwide (excluding month-to-month rentals), each of which consists of less
than 20,000 square feet. These leases expire at various times from 20052004 until
2011.
At times, the Company leases space to others in the buildings that it owns or
leases, if it does not require the space for its own business. The Company
believes that its facilities are adequate for itstheir presently anticipated uses
and that it is not dependent upon any individually leased premises.
For additional information pertaining to lease commitments, see Note P of Notes
to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to certain claims and legal proceedings
which arise in the ordinary course of business, including those discussed in
Item 1 of this Report. There are no claims or legal proceedings pending against
the Company or its subsidiaries, which, in the opinion of management, would have
a material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-2528
Executive OfficersEXECUTIVE OFFICERS
------------------
WILLIAM SHAW, 80,79, a founder of the Company, has been President and Chairman of
the Board of the Company since its inception in 1957 and has been employed in
executive capacities by the Company and its predecessors since 1950.
JEROME SHAW, 78,77, a founder of the Company, has been Executive Vice President and
Secretary of the Company since its inception in 1957 and has been employed in
executive capacities by the Company and its predecessors since 1950.
JAMES J. GROBERG, 76,75, has been a Senior Vice President and Principal Financial
Officer of the Company since September 1985 and was also employed in executive
capacities by the Company from 1973 to 1981.
STEVEN A. SHAW, 45,44, has been a Senior Vice President of the Company since
November 2000 and served as Vice President of the Company from April 1997 until
November 2000. HeMr. Shaw has been employed by the Company in various capacities
since November 1995.
HOWARD B. WEINREICH, 62,61, has been General Counsel of the Company since September
1985 and a Senior Vice President of the Company since May 2001. He has been
employed in executive capacities by the Company since 1981.
THOMAS DALEY, 50,49, has been Senior Vice President of the Company since March 2001
and has been employed in executive capacities by the Company since 1980.
LUDWIG M. GUARINO, 53,52, has been Treasurer of the Company since January 1994 and
has been employed in executive capacities by the Company since 1976.
JACK EGAN, 55,54, has been Vice President - Corporate Accounting and Principal
Accounting Officer since January 1992 and has been employed in executive
capacities by the Company since 1979.
DANIEL G. HALLIHAN, 56,55, has been Vice President - Accounting Operations since
January 1992 and has been employed in executive capacities by the Company since
1986.
NORMA J. KRAUS, 73,72, has been Vice President - Human Resources since March 1987
and has been employed in executive capacities by the Company since 1979.
William Shaw and Jerome Shaw are brothers. Steven A. Shaw is the son of Jerome
Shaw. Bruce G. Goodman, a director of the Company, is the son-in-law of William
Shaw. There are no other family relationships among the executive officers or
directors of the Company.
-26-29
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITYSTOCK RELATED STOCKHOLDER MATTERS AND
ISSUERINSIDER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the New York Stock Exchange (NYSE
Symbol-VOL). The following table sets forth the high and low prices of Volt's
common stock, as reported by the NYSE, during the Company's two fiscal years
ended October 31, 2004:November 2, 2003:
2004 2003 2002
-------------------------------- --------------------------------
Fiscal Period High Low High Low
- ------------- ----- ---- -------- ---- ---
First Quarter $23.55 $17.70 $18.92 $13.15 $17.25 $11.10
Second Quarter 27.79 21.20 14.40 9.39 22.90 14.50
Third Quarter 31.98 23.03 18.80 12.11 24.50 18.70
Fourth Quarter 31.23 22.28 19.45 15.40 18.95 12.65
As of January 6, 2005,9, 2004, there were approximately 349362 holders of record of the
Company's common stock, exclusive of shareholders whose shares were held by
brokerage firms, depositories and other institutional firms in "street name" for
their customers.
Cash dividends have not been paid during the reported periods. The Company's
credit agreement contains financial covenants, one of which limits dividends in
any fiscal year to 50%25% of the prior year's consolidated net income, as defined.
Therefore, the amount available for dividends at November 1, 20042, 2003 was $16.9$1.2
million.
The Company does not currently anticipate the payment of cash dividends
in fiscal 2005 beyond Volt Delta's obligation to pay Nortel a distribution of
its proportionate share of excess cash, as defined.Equity Compensation Plans
The following table sets forth certainforth-certain information, as at October 31, 2004,November 2, 2003, with
respect to the Company's equity compensation plans:
Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options, outstanding options, future issuance under
Plan Category warrants and rights warrants and rights equity compensation plans
------------- ------------------- ------------------- -------------------------
Equity compensation plans approved
by security holders 527,753(a) $20.77 340,430(a)582,539(a) $20.48 347,854(a)
Equity compensation plans not
approved by security holders - - -
------- ------- -------______ _____ _______
Total 527,753 $20.77 340,430582,539 $20.48 347,854
======= ====== =======
(a) Under the Company's 1995 Non-Qualified Stock Option Plan, the Company's
only equity compensation plan. Upon the expiration, cancellation or
termination of unexercised granted options, shares subject to those
options will again be available for the grant of options under the
plan.
No
30
Insider Equity Compensation Plans
The information of the type called for by Items 701 andItem 703 of Regulation S-K (relating to unregistered sales of equity securities by the Company and purchases
of equity securities by the Company and affiliated purchasers) is
requiredhas been omitted
pursuant to be included in this Form 10-K.
-27-
the effective date provisions of the SEC release Nos. 33-8335,
34-48766, IC-26252 (November 10, 2003).
ITEM 6. SELECTED FINANCIAL DATA
Year Ended (Notes 1, 2 and 3)
---------------------------------------------------------------------------------
October1-3)
---------------------------------------------------------------
November November November November 31, 2004October
2, 2003 3, 2002 4, 2001 3, 2000 -------- -------- -------- -------- --------29, 1999
---------------------------------------------------------------
(Restated) (Restated) (Restated) (Restated) (Restated)
(In thousands, except per share data)
Net Sales $1,924,777Sales--Note 4 $1,609,491 $1,468,093 $1,901,491 $2,099,921 ========== ========== ========== ========== ==========$2,056,021
===============================================================
Income (loss) from continuing
operations - before items shown
below--Note 4 $24,1965 $4,205 ($5,096) $7,296 $31,930 $31,516
Discontinued operations--Note 5 9,5206 4,310 (814) (697) (2,533)
Cumulative effect of a change in
accounting - goodwill impairment--Note 45 (31,927)
---------- ---------- ---------- ---------- ---------------- ------------ ------ ------- ------
Net income (loss) $33,716 $4,205 ($32,713) $6,482 $31,233 ========== ========== ========== ========== ==========$28,983
===============================================================
Per Share Data
- --------------
Basic:
Income (loss) from continuing
operations - before items shown below $1.59 $0.28 ($0.33) $0.48 $2.11 $2.10
Discontinued operations .62 0.28 (0.06) (0.05) (0.17)
Cumulative effect of a change in
accounting (2.10)
---------- ---------- ---------- ---------- --------------- ------------ ------ ----- -------
Net income (loss) $2.21 $0.28 ($2.15) $0.42 $2.06 ========== ========== ========== ========== ==========$1.93
===============================================================
Weighted average number of shares 15,234 15,218 15,217 15,212 15,139 ========== ========== ========== ========== ==========15,023
===============================================================
Diluted:
Income (loss) income from continuing
operations - before items shown below $1.58 $0.28 ($0.33) $0.48 $2.09 $2.08
Discontinued operations .62 0.28 (0.06) (0.05) (0.17)
Cumulative effect of a change in
accounting (2.10)
---------- ---------- ---------- ---------- --------------- ------------ ----- ---------------------------
Net income (loss) $2.20 $0.28 ($2.15) $0.42 $2.04 ========== ========== ========== ========== ==========$1.91
===============================================================
Weighted average number of shares 15,354 15,225 15,217 15,244 15,316 ========== ========== ========== ========== ==========15,153
===============================================================
Total assets $690,036 $540,483 $511,569 $639,258 $748,596 ========== ========== ========== ========== ==========$621,539
Long-term debt, net of current portion $15,588 $14,098 $14,469 $15,993 $32,297 ========== ========== ========== ========== ==========$45,728
Note 1--The1-- The Company has restated its previously issued financial statements
for fiscal years 20001999 through 2003 as a result of inappropriate
application of accounting principles for revenue recognition by its
telephone directory publishing operation in Uruguay. The operation in
Uruguay printed and distributed its Montevideo directory each year
during the October - November time frame, and the Company has
determined that revenue recognition should have been taken in the first
six months of each year instead of in the fourth quarter of the prior
fiscal year. The restatement involves only the timing of when certain
advertising revenue and related costs and expenses are recognized, and
the cumulative results of the Company do nonot change. The restated
figures are reflected in the table above. The tablestable on the next page
reflectreflects the restatements of the selected financial data.
-28-31
ITEM 6. SELECTED FINANCIAL DATA--Continued
Year Ended
--------------------------------------------------------------
November November November November October
2, 2003 3, 2002 4, 2001 3, 2000 ---------- ---------- ---------- ----------
(In thousands, except per share data)29, 1999
-----------------------------------------------------------------
Net Sales - as previously reported $1,609,857 $1,467,786 $1,898,681 $2,099,600 (Decrease) increase$2,053,677
Change (366) 307 2,810 321 ---------- ---------- ---------- ----------2,344
-----------------------------------------------------------------
Net Sales - as restated $1,609,491 $1,468,093 $1,901,491 $2,099,921 ========== ========== ========== ==========$2,056,021
=================================================================
Income (loss) from continuing
operations - as previously reported $4,761 ($5,187) $6,658 $31,402 (Decrease) increase$31,492
Change (556) 91 638 528 ---------- ---------- ---------- ----------24
-----------------------------------------------------------------
Income (loss) from continuing
operations - as restated $4,205 ($5,096) $7,296 $31,930 ========== ========== ========== ==========$31,516
=================================================================
Net income (loss) - as previously
reported $4,761 ($32,804) $5,844 $30,705 (Decrease) increase$28,959
Change (556) 91 638 528 ---------- ---------- ---------- ----------24
-----------------------------------------------------------------
Net income (loss) - as restated $4,205 ($32,713) $6,482 $31,233 ========== ========== ========== ==========$28,983
=================================================================
Per Share Data
- --------------
Basic:
Income (loss) from continuing
operations - as previously reported $0.31 ($0.34) $0.44 $2.08 (Decrease) increase$2.10
Change (0.03) 0.01 0.04 0.03 ---------- ---------- ---------- ----------0.0
-----------------------------------------------------------------
Income (loss) from continuing
operations - as restated $0.28 ($0.33) $0.48 $2.11 ========== ========== ========== ==========$2.10
=================================================================
Net income (loss) - as previously
reported $0.31 ($2.16) $0.38 $2.03 (Decrease) increase$1.93
Change (0.03) 0.01 0.04 0.03 ---------- ---------- ---------- ----------0.0
-----------------------------------------------------------------
Net income (loss) - as restated $0.28 ($2.15) $0.42 $2.06 ========== ========== ========== ==========$1.93
=================================================================
Diluted:
Income (loss) from continuing
operations - as previously reported $0.31 ($0.34) $0.44 $2.05 (Decrease) increase$2.08
Change (0.03) 0.01 0.04 0.04 ---------- ---------- ---------- ----------0.0
-----------------------------------------------------------------
Income (loss) from continuing
operations - as restated $0.28 ($0.33) $0.48 $2.09 ========== ========== ========== ==========$2.08
=================================================================
Net income (loss) - as previously
reported $0.31 ($2.16) $0.38 $2.00 (Decrease) increase$1.91
Change (0.03) 0.01 0.04 0.04 ---------- ---------- ---------- ----------0.0
-----------------------------------------------------------------
Net income (loss) - as restated $0.28 ($2.15) $0.42 $2.04 ========== ========== ========== ==========$1.91
=================================================================
Total assets - as previously reported $538,693 $509,590 $637,236 $744,828 Increase$618,329
Change 1,790 1,979 2,022 3,768 ---------- ---------- ---------- ----------3,210
-----------------------------------------------------------------
Total assets - as restated $540,483 $511,569 $639,258 $748,596 ========== ========== ========== ==========$621,539
=================================================================
-29-32
ITEM 6. SELECTED FINANCIAL DATA--Continued
Note 2--Fiscal years 1999 and 2001 through 20042003 consisted of 52 weeks, while
fiscal year 2000 consisted of 53 weeks.
Note 3--Cash3-- Cash dividends were not paid during the five-year period ended October
31, 2004.November
2, 2003.
Note 4--Fiscal 2004 included4-- As previously announced, the Company has changed the method of
reporting revenues of its Professional Employer Organization ("PEO")
subsidiary, Shaw & Shaw, from gross billing to a gain fromnet revenue basis in
fiscal year 2003. Accordingly, reported PEO revenues and related cost
of sales have been reduced in prior fiscal years, with no effect on
operating profit or the sale of real estate of $3.3net results to the Company, as follows:
2002-$20.1 million, ($2.02001-$33.6 million, net of taxes, or $0.13 per share).2000-$20.7 million and
1999-$15.0 million.
Note 5-- Fiscal 2002 included a non-cash charge of $31.9 million, or $2.10
per share, recognized for goodwill impairment as of November 5, 2001
presented as a cumulative effect of a change in accounting.
Amortization of goodwill, included in continuing operations net of
taxes, which was not permitted to be amortized beginning in fiscal year
2002 under Statement of Financial Accounting Standards No. 142, is
included in the prior fiscal years as follows: 2001 - $2.0 million, or
$0.13 per share andshare; 2000 - $2.3 million, or $0.15 per share, and 1999 -
$2.2 million, or $0.14 per share.
Pursuant to the Company's previously announced adoption of SFAS No.145,
results for fiscal year 2002 have been restated to give effect to the
reclassification of a charge of $2.1 million arising from the March
2002 early payment of the Company's 7.92% senior notes to other
expense, previously presented as an extraordinary item.
Fiscal 2001 included a gain on the sale of the Company's interest in a
real estate partnership of $4.2 million ($2.5 million, net of taxes, or
$0.16 per share) and a gain on the sale of securities, net of a
write-down of other securities, of $5.6 million ($3.4 million, net of
taxes, or $0.22 per share).
Note 5--Fiscal 2004 included a gain from discontinued operations of $9.5In fiscal 1999, the Company recognized $2.0 million, (net of taxes of $4.6 million), or $0.62$0.13 per share
fromof a previously deferred gain on the sale in 1997 of real estate previously leasedits interest in a
Brazilian joint venture. In connection with the sale, the Company
granted credit with respect to the printing of telephone directories by
the Company's former 59% owned
subsidiary, Autologic International, Inc. ("Autologic").Uruguayan division and guaranteed the venture's
obligations with respect to certain import financing, resulting in a
partial deferral of the gain. Through fiscal year 1999, the venture
repaid substantially all of its obligations and the gain was
recognized.
Note 6-- Fiscal 2002 included a net gain of $4.3 million, or $0.28 per share,
including a tax benefit of $1.7 million (resulting from a taxable loss
versus a gain for financial statement purposes), from discontinued
operations resulting from the Company's sale of its 59% interest in
Autologic.Autologic Information International, Inc. ("Autologic"), which was the
Company's former Electronic Publication and Typesetting segment. This
amount included a $4.5 million gain on the sale, partially offset by a
$0.2 million loss on operations. Accordingly, the results of operations
of Autologic have also been classified as discontinued in the
statements of income for fiscal years 20001999 through 2001.
-30-33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Policies
- ----------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104101 ("SAB 104"101"), entitled "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments.
Staffing Services:
Traditional Staffing: In fiscal 2004,2003, this revenue comprised approximately
76%74% of net consolidated sales. Sales are derived from the Company's Staffing
Solutions Group supplying its own temporary personnel to its customers, for
which the Company assumes the risk of acceptability of its employees to its
customers, and has credit risk for collecting its billings after it has paid
its employees. The Company reflects revenues for these services on a gross
basis in the period the services are rendered.
Managed Services: In fiscal 2004,2003, this revenue comprised approximately 2%5% of net
consolidated sales. Sales are generated by the Company's E-Procurement
SolutionsSolutions' subsidiary, ProcureStaff, and for certain contracts, sales are
generated by the Company's Staffing Solutions Group's managed services
operations. The Company receives an administrative fee for arranging for,
billing for and collecting the billings related to other staffing companies
("associate vendors") who have supplied personnel to the Company's
customers. The administrative fee is either charged to the customer or
subtracted from the Company payment to the associate vendor. The customer is
typically responsible for assessing the work of the associate vendor, andwho
has responsibility for the acceptability of itstheir personnel to the customer,
and in most instances the customer and associate vendor have agreed thatto the
Company does not paypaying the associate vendor until the customer pays the Company.
Based upon the revenue recognition principles prescribed in Emerging Issues
Task Force 99-19 ("EITF 99-19"), entitled "Reporting Revenue Gross as a
Principal versus Net as an Agent,"Agent", revenue for these services, where the
customer has agreed, is recognized net of associated costs in the period the
services are rendered.
Outsourced Projects: In fiscal 2004,2003, this revenue comprised approximately 5%4%
of net consolidated sales. Sales are derived from the Company's Information
Technology SolutionsSolutions' operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables. The Company's employees perform the services and the Company
has credit risk for collecting its billings. Revenue for these services is
recognized on a gross basis in the period the services are rendered, and
when the Company is responsible for project completion, revenue is
recognized when the project is complete and the customer has approved the
work.
-31-34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies --- Continued
- ----------------------------
Shaw & Shaw: In fiscal 2004,2003, this revenue comprised less than 1% of net
consolidated sales, due to the Company's reporting of these revenues on a
net basis. Sales are generated by the Company's Shaw & Shaw subsidiary, for
which the Company provides professional employer organizational services
("PEO") to certain customers. Generally, the customers transfer their entire
workforce or employees of specific departments or divisions to the Company,
but the customers maintain control over the day-to-day job duties of the
employees. Based upon the revenue recognition principles prescribed in EITF
99-19, effective with the Company's second fiscal quarter of 2003, the
Company has changed its method of reporting revenue from these services from
a gross basis to a net basis. The change in reporting, which is reflected in
all current and prior periods, resulted in a reduction in both reported PEO
revenues and related costs of sales, with no effect on the Company's
operating results.
Telephone Directory:
Directory Publishing: In fiscal 2004,2003, this revenue comprised approximately
3% of net consolidated sales. Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher or for a telephone company in Uruguay. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period the books are printed and delivered.
Ad Production and Other:Production: In fiscal 2004,2003, this revenue comprised approximately 1% of net
consolidated sales. Sales are generated when the Company performs design production and
printingproduction services, and database management for other publishers' telephone
directories. The Company's employees perform the services and the Company
has credit risk for collecting its billings. Revenue for these services is
recognized on a gross basis in the period the Company has completed its ad
production work and upon customer acceptance.
Telecommunications Services:
Construction: In fiscal 2004,2003, this revenue comprised approximately 4%3% of
net
consolidated sales. Sales are derived from the Company supplying aerial and
underground construction services.services related to telecommunications and cable
operations. The Company's employees perform the services, and the Company
takes title to all inventory, and has credit risk for collecting its
billings. The Company relies upon the principles in Statement of Position
81-1 ("SOP 81-1"), entitled "Accounting for Performance of Construction-Type
Contracts," using the completed-contract method, to recognize revenue on a
gross basis upon customer acceptance of the project.
Non-Construction: In fiscal 2004,2003, this revenue comprised approximately 3%4% of net
consolidated sales. Sales are derived from the Company performing design,
engineering and business systems integrations work. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which services are performed, and if applicable, any completed
units are delivered and accepted by the customer.
-32-35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies --- Continued
- ----------------------------
Computer Systems:
Database Access: In fiscal 2004,2003, this revenue comprised approximately 4%3% of
net
consolidated sales. Sales are derived from the Company granting access to
its proprietary telephone listing databases to telephone companies,
inter-exchange carriers and non-telco enterprise customers. The Company
uses its own databases and has credit risk for collecting its billings. The
Company recognizes revenue on a gross basis in the period in which the
customers access the Company's databases.
IT Maintenance: In fiscal 2004,2003, this revenue comprised approximately 2% of
net
consolidated sales. Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who have our systems. The Company uses its own employees and inventory in
the performance of the services, and has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which the services are performed, contingent upon customer
acceptance.
Telephone Systems: In fiscal 2004,2003, this revenue comprised less thanapproximately 1%
of
net consolidated sales. Sales are derived from the Company providing
telephone operator services-related systems and enhancements to existing
systems, equipment and software to customers. The Company uses its own
employees and has credit risk for collecting its billings. The Company
relies upon the principles in Statement of Position 97-2 ("SOP 97-2"),
entitled "Software Revenue Recognition" and Emerging Issues Task Force
00-21 ("EITF 00-21"), entitled "Revenue Arrangements with Multiple
Deliverables" to recognize revenue on a gross basis upon customer
acceptance of each part of the system based upon its fair value.
The Company records provisions for estimated losses on contracts when losses
become evident. Accumulated unbilled costs on contracts are carried in inventory
at the lower of actual cost or estimated realizable value.
Allowance for Uncollectable Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for doubtful accounts receivable are maintained
based upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company believes that its allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required and a related charge or credit to earnings.
GoodwillLong-Lived Assets - UnderAs of the beginning of fiscal 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets,Assets." Under these new rules, goodwill isand other intangibles
with indefinite lives are no longer amortized, but isare subject to annual impairment testing
using fair value methodologies. Themethodology. An impairment testcharge is recognized for goodwill is a two-step process. Step one consists of a
comparison of a reporting unit with itsthe amount,
if any, by which the carrying amount, including the goodwill
allocated to the reporting unit. Measurement of the fair value of a reporting
unit is based on one or morean intangible asset exceeds its fair
value measures including present value
techniques of estimated future cash flows and estimated amounts at which the
unit as a whole could be bought or sold in a current transaction between willing
parties. If the carrying amount of the reporting unit exceeds the fair value,
step two requires the fair value of the reporting unit to be allocated to the
underlying assets and liabilities of that reporting unit, resulting in an
implied fair value of goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
equal to the excess is recorded in net earnings (loss).value. The Company performs its
impairment testing usingengaged independent valuation firms, which primarily used
comparable multiples of salesrevenue and EBITDA and other valuation methods to assist
the Company in the determination of the fair value of the reporting units
measured. -33-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. Using the same valuation methods employed by the
independent valuation firms, the Company completed its annual impairment tests
on the remaining $9.0 million of goodwill during the second quarter of fiscal
2003 and determined the fair value exceeded the carrying value. Intangible
assets with finite, measurable lives continue to be amortized over their
respective useful lives.
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies --- Continued
- ----------------------------
Long-Lived AssetsProperty, Plant and Equipment - Property, plant and equipment is recorded at
cost, and depreciation and amortization are provided on the straight-line and
accelerated methods at rates calculated to depreciate the cost of the assets
over their estimated lives. Intangible assets, other than goodwill, and
property, plant and equipment are reviewed for impairment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Under SFAS No. 144, these assets are tested for recoverability whenever events
or changes in circumstances indicate that their carrying amounts may not be
recoverable. Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market priceThe fair values of the asset; significant adverse
changes in the business climate or legal factors; the accumulation of costs
significantly in excessassets are based upon Company estimates of
the amount originally expected for the acquisition of
construction of the asset; current perioddiscounted cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and a current expectationflows that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life. Recoverability is assessed based on the carrying amount of the asset and
the sum of the undiscounted cash flowsare expected to result from the use and the
eventual
disposaldisposition of the assetassets or asset group.that amount that would be realized from an
immediate sale. An impairment losscharge is recognized whenfor the carrying amount, is not recoverable and exceeds the fair value of the
asset or asset group. The impairment loss is measured as the amountif any, by
which the carrying amountvalue of an asset exceeds its fair value. No impairment
charge was recognized in fiscal 2003, as no events or circumstances indicated
the existence of impairment. Although the Company believes its estimates are
appropriate, the fair value measurements of the Company's long-lived assets
could be affected by using different estimates and assumptions in these
valuation techniques.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with AICPA Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent to the preliminary project planning and approval
stage, all appropriate costs are capitalized until the point at which the
software is ready for its intended use. Subsequent to the software being used in
operations, the capitalized costs are transferred from costs-in-process to
completed property, plant and equipment, and are accounted for as such. All
post-implementation costs, such as maintenance, training and minor upgrades that
do not result in additional functionality, are expensed as incurred.
Securitization Program - The Company accounts for the securitization of accounts
receivablereceivables in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A, was $70.0 million and
$60.0 million at October 31, 2004November 2, 2003 and November 2, 2003.3, 2002, respectively.
Accordingly, the trade receivables included on the October 31, 2004November 2, 2003 and November
2, 20033, 2002 balance sheets have been reduced to reflect the $70.0 million and $60.0
million participation interest sold.sold, respectively. TRFCO has no recourse to the
Company (beyond its interest in the pool of receivables owned by Volt Funding)
for any of the sold receivables.
Primary Casualty Insurance Program - The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds and thefunds. The
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initialInitial premium accruals are established based upon the
underlying exposure, such as the amount and type of labor utilized, number of
vehicles, etc. The Company establishes accruals utilizing actuarial methods to
estimate the future cash payments that will be made
to satisfy the claims, including an allowance for incurred-but-not-reported
-34-37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies --- Continued
- ----------------------------
to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Prior to March 31, 2002, the amount of the
additional or return premium was finalized. Subsequent thereto, adjustments to
premiumspremium will be made based upon the level of claims incurred at a future date up
to three years after the end of the respective policy period. For the policy
year endedending March 31, 2003, a maximum premium was predetermined and accrued. For
subsequent policy years, managementhas been predetermined. Management
evaluates the accrual, and the underlying assumptions, regularly throughout the
year and makes adjustments as needed. The ultimate premium cost may be greater
than or less than the established accrual. While management believes that the
recorded amounts are adequate, there can be no assurances that changes to
management's estimates will not occur due to limitations inherent in the
estimation process. In the event it is determined that a smaller or larger
accrual is appropriate, the Company would record a credit or a charge to cost of
services in the period in which such determination is made.
Medical Insurance Program - Beginning in April 2004, the Company became
self-insured for the majority of its medical benefit programs. The Company
remains insured for a portion of its medical program (primarily HMO's) as well
as the entire dental program. The Company provides the self-insured medical
benefits through an arrangement with a third party administrator. However, the
liability for the self-insured benefits is limited by the purchase of stop loss
insurance. The funds and related liabilities for the self-insured program
together with unpaid premiums for the insured programs, other than the current
provision, are held in a 501(c)9 employee welfare benefit trust and do not
appear on the balance sheet of the Company. In order to establish the
self-insurance reserves, the Company utilized actuarial estimates of expected
losses based on statistical analyses of historical data. The provision for
future payments is initially adjusted by the enrollment levels in the various
plans. Periodically, the resulting liabilities are monitored and will be
adjusted as warranted by changing circumstances. Should the amount of claims
occurring exceed what was estimated or medical costs increase beyond what was
expected, liabilities might not be sufficient, and additional expense may be
recorded.
-35-38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCALFiscal Year 2003 EXECUTIVE OVERVIEW(52 weeks) Compared to Fiscal Year 2002 (52 weeks)
- ------------------
Volt Information Sciences, Inc. ("Volt") is a leading national provider------------------------------------------------------------------
Results of staffing services and telecommunications and information solutions with a
material portion of its revenue coming from Fortune 100 customers. The Company
operates in four segments and the management discussion and analysis is broken
down into these segments. A brief description of these segments and the
predominant source of their sales follow:
Staffing Services: This segment is divided into three major functional
areas and operates through a network of over 300 branch offices. Staffing
Solutions fulfills IT and other technical, commercial and industrial
placement requirements of its customers, on both a temporary and permanent
basis, managed staffing, and professional employer organization services.
E-Procurement Solutions provides global vendor neutral procurement and
management solutions for supplemental staffing using web-based tools
through the Company's ProcureStaff subsidiary. Information Technology
Solutions provides a wide range of information technology consulting and
project management services through the Company's VMC Consulting
subsidiary.
Telephone Directory: This segment publishes independent telephone
directories, provides telephone directory production services, database
management, printing and computer-based projects to public utilities and
financial institutions.
Telecommunications Services: This segment provides a full spectrum of
telecommunications construction, installation, and engineering services in
the outside plant and central offices of telecommunications and cable
companies as well as for large commercial and governmental entities.
Computer Systems: This segment provides directory and operator systems and
services primarily for the telecommunications industry, and provides IT
maintenance services.
Several historical seasonal factors usually affect the sales and profits of the
Company. The Staffing Services segment's sales are always lowest in the
Company's first fiscal quarter due to the Thanksgiving, Christmas and New Year
holidays, as well as certain customer facilities closing for one to two weeks.
During the third and fourth quarters of the fiscal year, this segment benefits
from a reduction of payroll taxes when the annual tax contributions for higher
salaried employees have been met, and customers increase the use of the
Company's administrative and industrial labor during the summer vacation period.
In addition, the Telephone Directory segment's DataNational division publishes
more directories during the second half of the fiscal year.
Numerous non-seasonal factors impacted sales and profits in the current fiscal
year. The sales and profits of the Staffing Services segment, in addition to the
factors noted above, were positively impacted by a rebound in the country's use
of temporary staffing, partially offset by the continued pressure on margins
caused by increases in employment related and other taxes. In addition to the
increase in sales, the profitability of the Staffing Services segment has
benefited by the increased proportion of the segment's sales from higher margin
VMC Consulting subsidiary sales. In both the third and fourth quarters of fiscal
2004, the Administrative and Industrial division recorded its highest two
quarterly operating profits since the fourth quarter of fiscal 2000, but for the
year, the division's loss continues to negatively impact the Staffing segment.
The sales and profits of the Telephone Directory segment were positively
affected by an improvement in the ad backlog and the continued positive effects
of its new stringent credit policy, which has reduced bad debts, partially
-36-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
EXECUTIVE OVERVIEW--Continued
- -----------------------------
offset by the previously announced loss of a telephone directory production
contract in the third quarter of fiscal 2003. The sales and operating results of
the Telecommunications segment improved in fiscal 2004, but the segment still
sustained an operating loss due to a material reduction in the sales and gross
margins of its Central Office division. The Company has continued to carefully
monitor the overhead within the segment in order to mitigate the effect on the
reduced segment margins. In the third and fourth quarters of fiscal 2004, the
Computer Systems segment recorded the two highest quarterly operating profits in
its history. The sales and profits of the segment were positively impacted by
the continued increase in the segment's ASP directory assistance outsourcing
business, in which there continues to be a sequential increase in transaction
revenue and business acquired from Nortel Networks.
The Company has, and will continue to focus on aggressively increasing its
market share in order to increase profits. All segments have emphasized cost
containment measures, along with improved credit and collections procedures
designed to improve the Company's cash flow.
The Company continues its effort to streamline its processes to manage the
business and protect its assets through the continued deployment of its Six
Sigma initiatives, upgrading its financial reporting systems, its ongoing
compliance with the Sarbanes-Oxley Act, and the standardization and upgrading of
the IT redundancy and business continuity for corporate systems and
communications networks. To the extent possible, the Company has been utilizing,
and will continue to utilize, internal resources to comply with the
Sarbanes-Oxley Act by the end of fiscal year 2005. To-date, outside costs of
compliance with this Act, including software licenses, equipment, consultants
and professional fees amounted to $0.4 million and it is anticipated that a
somewhat larger amount, excluding audit fees, will be expended over the next
twelve months.
Volt Delta, the principal business unit of the Computer Systems segment,
acquired certain assets and liabilities of the DOS Business of Nortel Networks
on August 2, 2004 in return for a 24% interest in Volt Delta. After a period of
two years, Nortel Networks and Volt Delta each has an option to cause Nortel
Networks to sell and Volt Delta to buy these interests for an amount ranging
from $25 to $70 million. As a result of this transaction, approximately 155 DOS
Business employees in North America joined Volt Delta. This acquisition permits
Volt Delta to provide the newly combined customer base with new solutions and an
expanded suite of products, content and enhanced services.
RESULTS OF OPERATIONSOperations
- ---------------------
The information that appears below relates to prior periods. The results of
operations for those periods are not necessarily indicative of the results,
which may be expected for any subsequent period. The following discussion should
be read in conjunction with the Operating Segment Data in Item 1 of this Report
and the Consolidated Financial Statements and Notes thereto which appear in Item
8 of this Report.
-37-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
RESULTS OF OPERATIONSResults of Operations - SUMMARYSummary
- -------------------------------
In fiscal 2004, consolidated net sales increased by $315.3 million, or 19.6%, to
$1.9 billion, from fiscal 2003. The primary increase in fiscal 2004 net sales
resulted from increases in Staffing Services of $266.7 million, Computer Systems
of $26.4 million, Telecommunications Services of $22.6 million, and Telephone
Directory of $2.4 million.
The net income for fiscal 2004 was $33.7 million compared to $4.2 million in the
prior fiscal year. The consolidated results for fiscal 2004 included income from
discontinued operations of $9.5 million (net of taxes of $4.6 million) from the
sale of real estate previously leased to the Company's former 59% owned
subsidiary, Autologic International, Inc.
The Company's fiscal 2004 income from continuing operations before income taxes
was $39.7 million compared to $7.1 million in fiscal 2003. The Company's
operating segments reported an operating profit of $74.8 million in fiscal 2004,
an increase of $36.3 million, or 94%, from the prior year. Contributing to the
$36.3 million increase were increases in the operating profit of the Computer
Systems segment of $16.2 million, the Staffing Services segment of $15.6
million, the Telephone Directory segment of $3.4 million, and a reduction in the
operating loss of the Telecommunications Services segment of $1.1 million.
General corporate expenses increased by $3.1 million due to costs incurred to
meet the disaster recovery requirements of redundancy and business continuity
for corporate systems and communication networks, as well as salary and
professional fee increases. In addition, the Company incurred costs related to
compliance with the Sarbanes-Oxley Act.
RESULTS OF OPERATIONS - BY SEGMENT
- ----------------------------------
STAFFING SERVICES
- -----------------
Year Ended
----------
October 31, 2004 November 2, 2003
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Staffing Services
- -----------------
(Dollars in Millions)
- -------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) * $1,584.0 $1,269.2 $314.8 24.8%
- -------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) * $1,148.1 $1,043.6 $104.5 10.0%
- -------------------------------------------------------------------------------------------------------------------
Sales (Net) $1,612.1 $1,345.4 $266.7 19.8%
- -------------------------------------------------------------------------------------------------------------------
Gross Profit $256.4 15.9% $212.4 15.8% $44.0 20.8%
- -------------------------------------------------------------------------------------------------------------------
Overhead $219.7 13.6% $191.3 14.2% ($28.4) (14.9%)
- -------------------------------------------------------------------------------------------------------------------
Operating Profit $36.7 2.3% $21.1 1.6% $15.6 74.3%
- -------------------------------------------------------------------------------------------------------------------
*Included in Sales (Gross) are billings for associate vendors which are
substantially excluded from Sales (Net).
The sales increase of the Staffing Services segment in fiscal 2004 from fiscal
2003 was due to increased staffing business in both the Technical Placement and
the Administrative and Industrial divisions, and the VMC Consulting business of
the Technical Placement division.
-38-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
STAFFING SERVICES --Continued
- -----------------------------
The increase in operating profit in the segment was derived from the staffing
and managed service operations of the Technical Placement division, including
VMC Consulting, together with reduced losses of the Administrative and
Industrial division.
Year Ended
October 31, 2004 November 2, 2003
---------------- ----------------
Technical Placement % of % of Favorable Favorable
Division Net Net (Unfavorable) (Unfavorable)
- -------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $2,072.4 $1,791.8 $280.6 15.7%
- ------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $974.9 $834.5 $140.4 16.8%
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit $170.3 17.5% $143.1 17.1% $27.2 19.1%
- ------------------------------------------------------------------------------------------------------------------------------
Overhead $130.5 13.4% $114.2 13.7% ($16.3) (14.3%)
- ------------------------------------------------------------------------------------------------------------------------------
Operating Profit $39.8 4.1% $28.9 3.5% $10.9 37.8%
- ------------------------------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in gross sales in fiscal 2004 from
fiscal 2003 was due to a 21% sales increase with traditional staffing customers,
a 16% increase in ProcureStaff volume due to new accounts and increased business
from existing accounts, and a 44% increase in higher margin VMC Consulting
project management and consulting sales. However, substantially all of the
ProcureStaff billings are deducted in arriving at net sales due to the use of
associate vendors who have contractually agreed to be paid only upon receipt of
the customers' payment to the Company. The increase in net sales was due to the
increase in gross sales. The increase in the operating profit for the year was
the result of the increase in sales, a 0.4 percentage point improvement in gross
margin and a 0.3 percentage point decrease in overhead costs as related to net
sales. Partially offsetting the increases in fiscal 2004 was $1.2 million in
accruals for potential losses and employee separation charges for Volt Europe.
Year Ended
----------
October 31, 2004 November 2, 2003
---------------- ----------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
- ------------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $659.7 $521.0 $138.7 26.6%
- -----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $637.2 $510.9 $126.3 24.7%
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit $86.1 13.5% $69.3 13.6% $16.8 24.3%
- -----------------------------------------------------------------------------------------------------------------------------
Overhead $89.2 14.0% $77.1 15.1% ($12.1) (15.7%)
- -----------------------------------------------------------------------------------------------------------------------------
Operating Loss ($3.1) (0.5%) ($7.8) (1.5%) $4.7 60.0%
- -----------------------------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in gross sales in fiscal
2004 resulted from both revenue from new accounts and increased business from
existing accounts. The decrease in operating loss was the result of the sales
increase, a 1.1 percentage point decrease in overhead costs as related to net
sales, partially offset by a decrease in gross margin of 0.1 percentage points
due to higher payroll taxes, increased competition and customers leveraging
their buying power by consolidating the number of vendors with whom they deal.
-39-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
STAFFING SERVICES --Continued
- -----------------------------
Although the markets for the segment's services include a broad range of
industries throughout the United States and Europe, general economic
difficulties in specific geographic areas or industrial sectors have in the past
and could, in the future, affect the profitability of the segment.
TELEPHONE DIRECTORY
- -------------------
Year Ended
----------
October 31, 2004 November 2, 2003
---------------- ----------------
% of % of Favorable Favorable
Telephone Directory Net Net (Unfavorable) (Unfavorable)
- ------------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
- ------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $72.2 $69.8 $2.4 3.4%
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit $39.4 54.6% $35.0 50.1% $4.4 12.7%
- ------------------------------------------------------------------------------------------------------------------------------
Overhead $29.3 40.6% $28.3 40.4% ($1.0) (3.9%)
- ------------------------------------------------------------------------------------------------------------------------------
Operating Profit $10.1 14.0% $6.7 9.7% $3.4 49.9%
- ------------------------------------------------------------------------------------------------------------------------------
The Telephone Directory segment's sales increase for fiscal 2004 was due to an
increase of $10.2 million, or 22%, in publishing sales, partially offset by a
decrease of $7.8 million, or 32% in production, printing and other operations.
The publishing increase was due to the community telephone directory operation
of DataNational, whose sales increased by $10.8 million, or 26%, from the prior
year due to an increase in advertising sold for the year and an increase in the
number of directories printed and delivered. The most significant cause of the
revenue decrease in the production, printing and other operations was the $3.2
million in production revenue related to the previously reported loss of a
contract with a telecommunications company in the third quarter of fiscal 2003,
and a $1.8 million decrease in printing revenue in Uruguay. The segment's
improvement in operating results was the result of the sales increase, a 4.5
percentage point increase in gross margins, primarily due to the mix of
directories published by DataNational in the period, partially offset by an
increase in overhead of 0.2 percentage points. The Company has incurred $1.0
million of expenses in connection with an investigation of a failure to comply
with certain Company policies at its operations in Uruguay, and possible
litigation against certain former management personnel at such operations. The
operations in Uruguay are not significant to the Company. (See restatement table
in Item 1 of this Report.)
Other than the DataNational division, which accounted for 72% of the segment's
fiscal 2004 sales, the segment's business is obtained through submission of
competitive proposals for contracts. These short and long-term contracts are
re-bid after expiration. While the Company has historically secured new
contracts and believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurance that contracts will be renewed or extended, or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms. In addition, this segment's sales and profitability are
highly dependent on advertising revenue, which could be affected by general
economic conditions.
-40-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
TELECOMMUNICATIONS SERVICES
- ---------------------------
Year Ended
----------
October 31, 2004 November 2, 2003
---------------- ----------------
% of % of Favorable Favorable
Telecommunications Net Net (Unfavorable) (Unfavorable)
- ------------------ Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $135.4 $112.8 $22.6 20.0%
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit $31.0 22.9% $31.0 27.5% - 0.1%
- ------------------------------------------------------------------------------------------------------------------------------
Overhead $33.8 25.0% $35.0 31.0% $1.2 3.2%
- ------------------------------------------------------------------------------------------------------------------------------
Operating Loss ($2.8) (2.1%) ($4.0) (3.5%) $1.2 28.8%
- ------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in fiscal 2004 was due
to increased business in the Business Systems and Construction and Engineering
divisions, partially offset by a decrease in the Central Office division. The
decrease in operating loss was due to the sales increase, a decrease in overhead
as a percentage of net sales of 6.0 percentage points (including a previously
reported $1.3 million charge in the first quarter related to a domestic
consulting contract for services), partially offset by a 4.6 percentage point
decrease in gross margins. Despite an emphasis on cost controls, the results of
the segment continue to be affected by the decline in capital spending by
telephone companies caused by the depressed conditions within the segment's
telecommunications industry customer base. This factor has also increased
competition for available work, pressuring pricing and gross margins throughout
the segment. The division most affected by reduced sales and margins was Central
Office, whose sales and margins decreased by 47% and 16.8 percentage points,
respectively. Sales in the Construction and Engineering division of the segment,
increased by 12% over the prior year while margins decreased by 1.0 percentage
point. The increase in sales was attributable to the completion of several
long-term contracts. Sales in the Business Systems division increased by 78% due
to revenue increases from two large customers, while margins decreased by 5.8
percentage points. Recent actions by major long-distance telephone companies
regarding local residential service could negatively impact sales and continue
to impact margins of the Business Systems division.
A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically expire within
one to three years and are re-bid. Many of this segment's long-term contracts
contain cancellation provisions under which the customer can cancel the
contract, even if the segment is not in default under the contract and generally
do not provide for a minimum amount of work to be awarded to the segment. While
the Company believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurances that contracts will be renewed or extended or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms.
-41-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
COMPUTER SYSTEMS
- ----------------
Year Ended
----------
October 31, 2004 November 2, 2003
---------------- ----------------
% of % of Favorable Favorable
Computer Systems Net Net (Unfavorable) (Unfavorable)
- ---------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $120.0 $93.6 $26.4 28.2%
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit $72.1 60.1% $47.8 51.0% $24.3 50.8%
- ------------------------------------------------------------------------------------------------------------------------------
Overhead $41.2 34.4% $33.1 35.4% ($8.1) (24.5%)
- ------------------------------------------------------------------------------------------------------------------------------
Operating Loss $30.9 25.7% $14.7 15.7% $16.2 110.1%
- ------------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in fiscal 2004 was primarily due
to improvements in the segment's operator services business, including ASP
directory assistance, which reflected a 47% growth in sales during the year, a
sales increase of 125% in DataServ's directory assistance services which are
provided to non-telco enterprise customers, a 13% sales growth in the Maintech
division's IT maintenance services, partially offset by a decrease in product
revenue recognized of 64%. The sales increase for the year also included $8.1
million of DOS Business acquired from Nortel Networks, which represented 7% of
the segment's sales for the year. The growth in operating profit from the prior
fiscal year was the result of the increase in sales, an increase in gross
margins of 9.0 percentage points, partially due to $1.2 million for the
settlement of a vendor dispute and vendor refunds related to prior periods,
together with an overhead decrease of 1.0 percentage point as related to sales.
Volt Delta, the principal business unit of the Computer Systems segment,
acquired certain assets and liabilities of the DOS Business of Nortel Networks
on August 2, 2004. This acquisition permits Volt Delta to provide the newly
combined customer base with new solutions and an expanded suite of products,
content and enhanced services. At October 31, 2004, the Company owned 76% of
Volt Delta, the entity which operates the Computer Systems segment.
This segment's results are highly dependent on the volume of calls to the
segment's customers that are processed by the segment under existing contracts
with telephone companies, the segment's ability to continue to secure
comprehensive telephone listings from others, its ability to obtain additional
customers for these services and its continued ability to sell products and
services to new and existing customers.
-42-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
RESULTS OF OPERATIONS -- OTHER
- ------------------------------
Year Ended
----------
October 31, 2004 November 2, 2003
---------------- ----------------
% of % of Favorable Favorable
Other Net Net (Unfavorable) (Unfavorable)
- ----- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative * $83.1 4.3% $71.7 4.4% ($11.4) (15.9%)
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $25.5 1.3% $24.3 1.5% ($1.2) (5.0%)
- ------------------------------------------------------------------------------------------------------------------------------
Interest Income $0.9 - $0.7 - $0.2 30.9%
- ------------------------------------------------------------------------------------------------------------------------------
Other Expense ($4.4) 0.2% ($2.7) 0.2% ($1.7) (65.3%)
- ------------------------------------------------------------------------------------------------------------------------------
Gain on Sale of Real Estate $3.3 0.2% - - $3.3 100.0%
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Gain $0.1 - $0.3 - ($0.2) (67.6%)
- ------------------------------------------------------------------------------------------------------------------------------
Interest Expense ($1.8) 0.1% ($2.1) 0.1% $0.3 12.2%
- ------------------------------------------------------------------------------------------------------------------------------
*Restated in fiscal year 2003, from $71.6 million to $71.7 million. See
note 2 in Item 1 of this Report.
Other items, discussed on a consolidated basis, affecting the results of
operations for the fiscal years were:
The increase in selling and administrative expenses in fiscal 2004 from the
prior year was a result of increased corporate general and administrative
expenses related to costs to meet the disaster recovery requirements of
redundancy and business continuity for corporate systems and communications
networks, in addition to increased selling expenses to support the increased
sales levels throughout the Company.
The increase in depreciation and amortization for fiscal 2004 from the prior
year was attributable to an increase in fixed assets, primarily in the Computer
Systems and Staffing Services segments.
Other Expense in both fiscal years is primarily the charges related to the
Company's Securitization Program as well as sundry expenses.
The gain on sale of real estate is from the sale of land and a building in
Anaheim, California for cash. The property was no longer being used by the
Company.
The decrease in interest expense in fiscal 2004 from the prior year was the
result of lower borrowing levels and interest rates in Uruguay.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 36.8% in fiscal 2004 compared to an effective tax rate
of 40.9% in fiscal 2003. In fiscal 2004, the effective tax rate was lower due to
federal and state income taxes attributable to the minority interest treated as
a partnership interest, lower foreign losses for which no tax benefit was
provided and lower non-tax deductible items.
-43-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
RESULTS OF OPERATIONS -- SUMMARY
- --------------------------------
Consolidated net sales increased by $141.4 million, or 10%, to $1.6 billion in
fiscal 2003. This increase in net sales resulted primarily from a $135.1 million
increase in sales in the Staffing Services segment. The Company's operating
segments reported an operating profit in fiscal 2003 of $38.5 million, an
increase of $15.5 million, or 68%, from the prior year, with all four segments
reflecting improvements.year. Contributing to the
fiscal 2003 increase in operating profit was a $9.3 million decrease in the
operating loss sustained by the Telecommunications Services segment, and
increases in operating profit of $5.8 million by the Computer Systems segment
and $0.6 million inby the Staffing Services segment, partially offset by a
decrease of $0.1 million by the Telephone Directory segment.
In fiscal 2003, the Company reported income from continuing operations before
income taxes of $7.1 million compared to a loss from continuing operations
before taxes of $7.4 million in fiscal 2002. An item affecting results from
continuing operations in fiscal 2002 was a charge of $2.1 million arising from
the early payment of the Company's remaining $30.0 million 7.92% Senior Notes,
which was previously presented as an extraordinary item.
In fiscal 2003, the Company reported net income of $4.2 million compared with a
net loss of $32.7 million in the prior year. Results for 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. The net gain from discontinued
operations was comprised of a $4.5 million gain, including a tax benefit of $1.7
million (resulting from a taxable loss versus a gain for financial statement
purposes), on the sale of the Company's 59% interest in Autologic Information
International Inc. ("Autologic"), partially offset by a loss from Autologic's
operations through the disposal date of $0.2 million.
RESULTS OF OPERATIONS -- BY SEGMENTResults of Operations - -----------------------------------
STAFFING SERVICESBy Segment
- ----------------------------------
Staffing Services
- -----------------
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
% of % of Favorable Favorable
Staffing Services Net Net (Unfavorable) (Unfavorable)
- ----------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $1,269.2 $1,143.8 $125.4 11.0%
- -------------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $1,043.6 $745.7 $297.9 39.9%
- -------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $1,345.4 $1,210.3 $135.1 11.2%
- -------------------------------------------------------------------------------------------------------------------------------
Gross Profit $212.4 15.8% $199.8 16.5% $12.6 6.3%
- -------------------------------------------------------------------------------------------------------------------------------
Overhead $191.3 14.2% $179.3 14.8% ($12.0) (6.7%)
- -------------------------------------------------------------------------------------------------------------------------------
Operating Profit $21.1 1.6% $20.5 1.7% $0.6 2.9%
- -------------------------------------------------------------------------------------------------------------------------------
The sales increase of the Staffing Services segment increased by $135.1 million, or 11%,
to $1.3 billion in fiscal 2003, was dueand its operating profit increased by $0.6
million, or 3%, to increased traditional staffing and managed service business$21.1 million in both the
Technical Placement and Administrative and Industrial divisions, and the VMC
Consulting businessfiscal 2003.
The sales of the Technical Placement division.
-44-division of the Staffing Services segment
increased by $45.4 million, or 6%, to $834.5 million in fiscal 2003, while its
operating profit decreased by $0.7 million, or 2%, to $28.9 million in fiscal
2003. Gross billings in the division increased by $360.1 million, or 23%, to
$1.9 billion during fiscal 2003 due to new ProcureStaff accounts. However,
substantially all of the ProcureStaff billings are
39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
FISCAL YEARFiscal Year 2003 COMPARED TO FISCAL YEAR 2002-Continued
RESULTS OF OPERATIONS(52 weeks) Compared to Fiscal Year 2002 (52 weeks)--Continued
- BY SEGMENT--Continued------------------------------------------------------------------
Results of Operations - ---------------------------------------------
STAFFING SERVICES -- ContinuedBy Segment--Continued
- ------------------------------
The increase in operating profit in the segment was derived from the VMC
Consulting business of the Technical Placement division, along with reduced
losses of the Administrative and Industrial division, partially offset by
reduced operating profits of the traditional staffing and managed service
operations of the Technical Placement division.
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
Technical Placement % of % of Favorable Favorable
Division Net Net (Unfavorable) (Unfavorable)
- -------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $1,791.8 $1,459.2 $332.6 22.8%
- ------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $834.5 $789.2 $45.3 5.8%
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit $143.1 17.1% $134.7 17.1% $8.4 6.2%
- ------------------------------------------------------------------------------------------------------------------------------
Overhead $114.2 13.7% $105.2 13.3% ($9.0) (8.6%)
- ------------------------------------------------------------------------------------------------------------------------------
Operating Profit $28.9 3.5% $29.5 3.7% ($0.6) (2.0%)
- ------------------------------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in gross sales in fiscal 2003 from
fiscal 2002 was due to a 4% sales increase with traditional staffing customers,
an 18% increase in ProcureStaff volume due to new accounts and increased
business from existing accounts, and a 49% increase in higher margin VMC
Consulting project management and consulting sales. However, substantially all
of the ProcureStaff billings are----------------------------------
Staffing Services--Continued
- -----------------
reported on a net basis due to contracts with associate vendors who have agreed
to be paid upon receipt of the customers' payment to the Company. The increase insales of
VMC Consulting project management and consulting increased by $24.3 million, or
49%, and the net sales was due to the aforementioned
increase in gross sales.of ProcureStaff increased by $14.0 million, or 17%. The
decrease in the division's operating profit was due to an increase of overhead
expressed as a percentage of sales of 0.4 percentage point. The largest increase
in overhead costs from the prior year was in ProcureStaff, whose costs increased
by $6.0$5.6 million, or 2.92.7 percentage points, due to ongoing development of new
products and the implementation of new accounts. ProcureStaff incurred an
operating loss of $1.0 million for the year compared to an operating profit of
$0.3 million in the prior year due to these higher costs. The Technical
Placement division's gross margin percentages remained relatively constant
compared to fiscal 2002, with lower markups on traditional staffing placement
and higher state unemployment insurance rates, offset by higher margins earned
by VMC Consulting which, together with a 49% increase in sales, reported ana 44%
increase in operating profit ofto $10.8 million in fiscal 2003 compared tofrom $7.5 million
in fiscal 2002. The Technical Placement division recently lost a managed service
contract, the effect of which will be reflected in the first quarter of fiscal
2004. Revenue and gross profit from this contract each
approximated 4% each of the
division's total revenue and gross profit in both fiscal 2003 and 2002. -45-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
- ---------------------------------------------
STAFFING SERVICES--Continued
- ----------------------------
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
- ------------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $521.0 $430.3 $90.7 21.1%
- ------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $510.9 $421.1 $89.8 21.3%
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit $69.3 13.6% $65.1 15.5% $4.2 6.5%
- ------------------------------------------------------------------------------------------------------------------------------
Overhead $77.1 15.1% $74.1 17.6% ($3.0) (3.9%)
- ------------------------------------------------------------------------------------------------------------------------------
Operating Loss ($7.8) (1.5%) ($9.0) (2.2%) $1.2 13.8%
- ------------------------------------------------------------------------------------------------------------------------------
The
division cannot determine the amount of revenue and gross profit that will be
replaced through existing or new customers in the future.
The sales of the Administrative and Industrial division's increase in gross salesdivision of the Staffing Services
segment increased by $89.7 million, or 21%, to $510.9 million in fiscal 2003,
resulted from new accounts and increased business from existing accounts.while its operating loss decreased by $1.3 million, or 14%, to $7.8 million in
fiscal 2003. The decrease in operating loss was the result of the aforementionedincrease in
sales, increase,together with a 2.5 percentage point decrease in overhead costsexpressed as related to neta percentage of sales
of 2.5 percentage points, partially offset by a 1.9 percentage point decrease in
gross margins due to higher state unemployment and workers' compensation rates,
increased competition, electronic auctions and customers leveraging their buying
power by consolidating the number of vendors with whom they deal. Although
sequential quarterly operating losses have declined during fiscal 2003, cost
control initiatives in the division have not fully offset lower gross margins.
TELEPHONE DIRECTORYWhile the Staffing Services segment is committed to continued cost controls
designed to increase profitability for fiscal 2004, a return to substantially
higher profit levels is likely to depend on the timing and strength of a general
economic recovery and more specifically, an increase towards previous usage
levels of alternative staffing by industry. The Company expects that high
unemployment and the need for state and local governments to align their
revenues with expenditures will continue to result in pressures on margins as
jurisdictions increase payroll and various other taxes. Although the markets for
the segment's services include a broad range of industries throughout the United
States and Europe, general economic difficulties in specific geographic areas or
industrial sectors have in the past, and could in the future, affect the
profitability of the segment.
40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Fiscal Year 2003 (52 weeks) Compared to Fiscal Year 2002 (52 weeks)--Continued
- ------------------------------------------------------------------
Results of Operations - By Segment--Continued
- ----------------------------------
Telephone Directory
- -------------------
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
% of % of Favorable Favorable
Telephone Directory Net Net (Unfavorable) (Unfavorable)
- -------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated) (Restated)
- ------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $69.8 $83.6 ($13.8) (16.5%)
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit $35.0 50.1% $41.6 49.8% ($6.6) (16.0%)
- ------------------------------------------------------------------------------------------------------------------------------
Overhead $28.3 40.4% $34.7 41.5% $6.4 18.8%
- ------------------------------------------------------------------------------------------------------------------------------
Operating Profit $6.7 9.7% $6.9 8.2% ($0.2) (1.7%)
- ------------------------------------------------------------------------------------------------------------------------------
TheSales of the Telephone Directory segment's salessegment decreased by $13.8 million, or 17%, to
$69.8 million in fiscal 2003, dueand its operating profit decreased by $0.1
million, or 2%, to numerous
factors. The Uruguayan printing$6.7 million. Printing sales in Uruguay decreased by $3.6
million, or 45%, due to the economic instability in neighboring countries, as
well as in Uruguay itself. The DataNational operation's community telephone
directory sales decreased by $3.1 million, or 7%, due to a decrease in the
number of directories printed and delivered during the year. The segment's
telephone production revenue decreased by $3.5 million, or 17%, in fiscal 2003
primarily due to the previously announced termination of a contract with a
telecommunications company in the third quarter of fiscal 2003. Despite the 17%
reduction in sales, the profitability of the segment decreased by only 2% due to
increased productivity, which resulted in a 0.3 percentage point increase in
gross margins, and a reduction in overhead
-46-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002--Continued
TELEPHONE DIRECTORY--Continued
- ------------------------------ expressed as a percentage of sales of
1.1 percentage points. The decreased overhead was predominantly related to a
lower bad debt expense as a result of a more stringent credit policy. Operating
profit in fiscal 2003 also benefited from a $0.8 million fee due to the
terminated contract. (See restatement table in Item 1 of this Report.)
TELECOMMUNICATIONS SERVICESOther than the DataNational division, which accounted for 58% of the segment's
fiscal 2003 sales, the segment's business is obtained through submission of
competitive proposals for contracts. These short and long-term contracts are
re-bid after expiration. While the Company has historically secured new
contracts and believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurance that contracts will be renewed or extended, or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms. In addition, this segment's sales and profitability are
highly dependent on advertising revenue, which has been and continues to be
affected by general economic conditions.
Telecommunications Services
- ---------------------------
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
% of % of Favorable Favorable
Telecommunications Net Net (Unfavorable) (Unfavorable)
- ------------------ Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $112.8 $108.9 $3.9 3.6%
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit $31.0 27.5% $28.6 26.3% $2.4 8.4%
- ------------------------------------------------------------------------------------------------------------------------------
Overhead $35.0 31.0% $41.9 38.5% $6.9 16.5%
- ------------------------------------------------------------------------------------------------------------------------------
Operating Loss ($4.0) (3.5%) ($13.3) (12.2%) $9.3 69.9%
- ------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales were up slightlyincreased by $4.0 million, or
4%, to $112.8 million in fiscal 2003, and the segment's operating loss was
reduced by $9.3 million, or 70%, from the prior
year's level.fiscal 2002, to $4.0 million. The
reduction in the operating loss was due to the sales increase, a 1.2 percentage
point increase in gross margin, together with a reduction in overhead expressed
as a percentage of sales of 7.57.4 percentage points. Despite an emphasis on cost
controls, the results of the segment continue to be affected by the decline in
capital spending by telephone companies caused by the depressed conditions
within the segment's telecommunications industry customer base. This factor has
also increased competition for available work, pressuring pricing and margins.
Following the reorganization of the business operations initiated in fiscal
2002, the segment continued its cost control initiatives in an effort to permit
the segment to operate profitably at lower revenue levels without impairing its
ability to take advantage of opportunities when the telecommunications industry
stabilizes and customers' spending increases. The segment incurredwill incur a pre-tax
charge of $1.3 million in the first quarter of fiscal 2004 as a result of costs
incurred related to a domestic consulting contract for services.
COMPUTER SYSTEMS
- ----------------
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
% of % of Favorable Favorable
Computer Systems Net Net (Unfavorable) (Unfavorable)
- ---------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $93.6 $78.8 $14.8 18.8%
- ------------------------------------------------------------------------------------------------------------------------------
Gross Profit $47.8 51.0% $37.7 47.9% $10.1 26.8%
- ------------------------------------------------------------------------------------------------------------------------------
Overhead $33.1 35.4% $28.8 36.5% ($4.3) (14.9%)
- ------------------------------------------------------------------------------------------------------------------------------
Operating Profit $14.7 15.7% $8.9 11.3% $5.8 65.2%
- ------------------------------------------------------------------------------------------------------------------------------
-47-A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically expire within
one to three years and are re-bid. Many of this segment's ong-term contracts
contain cancellation provisions under which the customer can cancel the
contract, even if the
41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
FISCAL YEARFiscal Year 2003 COMPARED TO FISCAL YEAR 2002--Continued(52 weeks) Compared to Fiscal Year 2002 (52 weeks)--Continued
- --------------------------------------------------------
COMPUTER SYSTEMS--Continued------------------------------------------------------------------
Results of Operations - By Segment--Continued
- ----------------------------------
Telecommunications Services--Continued
- ---------------------------
segment is not in default under the contract. While management believes it can
secure renewals and/or extensions of most of these contracts, some of which are
material to this segment, and obtain new business, there can be no assurances
that contracts will be renewed or extended or that additional or replacement
contracts will be awarded to the Company on satisfactory terms.
Computer Systems
- ----------------
The Computer Systems segment's sales increaseincreased by $14.8 million, or 19%, to
$93.6 million in fiscal 2003, was dueand operating profit increased by $5.8 million, or
65%, to gains$14.7 million. An increase in revenue was reported by all of the
divisions within the segment. The segment's ASP directory assistance
out-sourcing business, together with its domestic products and services,
reflected a 20% sales increase; its IT services sales provided by the Maintech
division reflected an 11% increase in sales, and sales of the European division
increased by 38% in fiscal 2003. The growth in operating profit for the year was
the result of the increase in sales, an increase in gross margins of 3.1
percentage points, and a reduction in overhead expressed as a percentage of
sales of 1.1 percentage points.
RESULTS OF OPERATIONS -- OTHERThis segment's results are highly dependent on the volume of directory
assistance calls to the segment's customers that are routed to the segment under
existing contracts with telephone companies, the segment's ability to continue
to secure comprehensive listings from others, its ability to obtain additional
customers for these services and its continued ability to sell products and
services to new and existing customers.
Results of Operations - ------------------------------
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
% of % of Favorable Favorable
Other Net Net (Unfavorable) (Unfavorable)
- -------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative * $71.7 4.4% $74.6 5.1% $2.9 3.9%
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $24.3 1.5% $22.2 1.5% ($2.1) (9.8%)
- ------------------------------------------------------------------------------------------------------------------------------
Interest Income $0.7 - $0.9 - ($0.2) (16.8%)
- ------------------------------------------------------------------------------------------------------------------------------
Other Expense ($2.7) 0.2% ($3.5) 0.2% $0.8 23.1%
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Gain (Loss) $0.3 - ($0.5) - $0.8 162.7%
- ------------------------------------------------------------------------------------------------------------------------------
Interest Expense ($2.1) 0.1% ($4.5) 0.3% $2.4 54.5%
- ------------------------------------------------------------------------------------------------------------------------------
*Restated in fiscal years 2003 and 2002, from $71.6 million to $71.7
million and $74.5 million to $74.6 million, respectively. See note 2 in
Item 1 of this Report.Other
- ---------------------
Other items, discussed on a consolidated basis, affecting the results of
operations were:
The decrease in sellingSelling and administrative expenses decreased by $2.9 million, or 4%, to $71.7
million in fiscal year 2003 wasfrom fiscal year 2002 primarily as a result of
continued cost-cutting initiatives throughout the operating segments, and a
reduction of bad debt expense (see discussion by segment, above), partially
offset by increased corporate general and administrative expenses related to
costs to meet the disaster recovery requirements of redundancy and business
continuity for corporate systems and communications networks. Selling and
administrative expenses, expressed as a percentage of sales, were 4.4% in fiscal
2003 and 5.1% in fiscal 2002. The selling and administrative expenses have been
restated in fiscal years 2003 and 2002 from their original $71.6 million and
$74.5 million, respectively. (See Note 1 in Item 1 of this Report.)
Depreciation and amortization increased by $2.2 million, or 10%, to $24.3
million in fiscal 2002. The increase in depreciation and amortization was attributable to the increase in fixed
assets during the year in the Staffing Services and Computer Systems segments.
The Other ExpenseCompany incurred other expense of $2.7 million in fiscal 2003 compared to
$3.5 million in 2002. The fiscal 2003 expense was primarily the result of $1.6
million of charges related to the Company's Securitization Program, which began
in April 2002 and significantly reduced interest expense, as well as sundry
expenses.
42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Fiscal Year 2003 (52 weeks) Compared to Fiscal Year 2002 (52 weeks)
- -------------------------------------------------------------------
Results of Operations - Other--Continued
- -----------------------------
The fiscal 2002 expense was primarily the result of a $2.1 million charge for
the early payment of the Company's remaining $30.0 million outstanding 7.92%
Senior Notes, which was previously presented as an extraordinary item, along
with expenses incurred in conjunction with the initial and subsequent
transactions under the Company's Securitization Program and other sundry
expenses.
-48-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002--Continued
RESULTS OF OPERATIONS - OTHER--Continued
- ----------------------------------------
The foreign exchange gain in fiscal 2003 was $0.3 million compared to thea loss of
$0.5 million in fiscal 20022002. The improvement was a result of favorable 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 appropriate, that generally settle on the
last weekday of each quarter.
Interest expense decreased by $2.5 million, or 54%, to $2.1 million in fiscal
2003. The decrease in interest expense was attributable to the early repayment on March 5, 2002 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 Expenseother expense (see above), also eliminated
higher cost borrowings under the revolving credit facility, which was not used
in fiscal 2003. Throughout fiscal 2003, the Company has also benefited from
significantly lower interest rates on borrowings in Uruguay.
The Company's tax provision in 2003 reflected an effective tax rate of 40.9% of
its financial reporting pre-tax income from continuing operations compared to a
2002 tax benefit effective rate of 30.7% of its financial reporting pre-tax loss
from continuing operations. The low effective tax benefit in fiscal 2002 was
primarily due to 2002 foreign losses for which no tax benefit was provided.
The consolidated results for fiscal 2002 included a net gain from discontinued
operations of $4.3 million which consisted of a $4.5 million gain, including a
tax benefit of $1.7 million, on the sale of the Company's interest in the
Company's former 59% owned publicly-owned subsidiary, Autologic Information
International, Inc., partially offset by a loss from its operations through the
November 30, 2001 disposal date of $0.2 million.
As of the beginning of fiscal 2002, the Company performed the first of the
required impairment tests of goodwill and other intangible assets, in accordance
with SFAS No. 142. At that date, the Company's goodwill related to prior
acquisitions amounted to approximately $40.0 million. The Company's revaluation
under the new accounting rules was completed during the second quarter of 2002,
and a $31.9 million impairment writedown was taken, reflecting declines in the
market value of the acquisitions since they were purchased. The writedown was
reported as a cumulative effect of a change in accounting. Using the same
valuation methods employed by the independent valuation firms, the Company
completed its annual impairment tests on the then remaining $9.0 million of goodwill
during the second quartersquarter of fiscal 2003, and 2004, and determined that the fair value exceeded
the carrying value.
-49-43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Fiscal Year 2002 (52 weeks) Compared to Fiscal Year 2001 (52 weeks)
- -------------------------------------------------------------------
Results of Operations - Summary
- -------------------------------
Consolidated net sales decreased by $433.4 million, or 23%, to $1.5 billion in
fiscal 2002. This decrease in net sales resulted primarily from a $287.5 million
decrease in sales in the Staffing Services segment and a $140.1 million decrease
in sales in the Telecommunications Services segment.
The Company's operating segments reported an operating profit of $23.0 million
in fiscal 2002 compared to $38.0 million in the prior year. Contributing to the
fiscal 2002 decrease in operating profit were a decrease in operating results of
$20.6 million reported by the Telecommunications Services segment and a decrease
of $1.8 million in operating profit reported by the Computer Systems segment.
These decreases were partially offset by increases in operating profit of $3.6
million reported by the Telephone Directory segment and $3.9 million by the
Staffing Services segment.
In fiscal 2002, the Company reported a loss from continuing operations before
income taxes of $7.4 million compared to income from continuing operations
before taxes of $12.1 million in fiscal 2001. Non-recurring items affecting
results from continuing operations in fiscal 2002 included a charge of $2.1
million arising from the early payment of the Company's 7.92% Senior Notes,
which was previously presented as an extraordinary item. Non-recurring items
affecting results from continuing operations in fiscal 2001 included a gain of
$6.3 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 and a gain on the sale of the Company's
interest in a real estate partnership of $4.2 million. In addition, results from
continuing operations for fiscal 2001 included amortization of goodwill, which
is no longer permitted to be amortized, of $3.0 million.
In fiscal 2002, the Company reported a net loss of $32.7 million compared with
net income of $6.5 million in the prior year. Results for 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 (resulting from a taxable loss versus a
gain for financial statement purposes), on the sale of the Company's 59%
interest in Autologic Information International Inc. ("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).
Results of Operations - By Segment
- ----------------------------------
Staffing Services
- -----------------
Although sales of the Staffing Services segment decreased by $287.5 million, or
19%, to $1.2 billion in fiscal 2002, its operating profit increased by $3.9
million, or 24%, to $20.5 million in fiscal 2002.
The Technical Placement division of the Staffing Services segment reported an
operating profit of $29.6 million on sales of $789.2 million for fiscal 2002,
compared with an operating profit of $27.5 million on sales of $1.1 billion in
the prior year. Gross billings in the division increased by $26.9 million, or
2%, to $1.6 billion during
44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Fiscal Year 2002 (52 weeks) Compared to Fiscal Year 2001 (52 weeks)--Continued
- ------------------------------------------------------------------
Results of Operations - By Segment--Continued
- ----------------------------------
Staffing Services--Continued
- -----------------
fiscal 2002. Low-margin managed service sales comprised 62% of the reported
sales decline of 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, other than
management fees to the Company, associated with those revenues being excluded
from sales, as non-recourse managed service revenue. 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 3.9 percentage
points. In addition, the division's continued overhead reductions and the
absence in fiscal 2002 of goodwill amortization of $2.1 million enabled the
Technical Placement division to increase its operating profit and profit margin
percentage.
The Administrative and Industrial division of the Staffing Services segment
reported an operating loss of $9.1 million on net sales of $421.2 million for
fiscal 2002 compared with an operating loss of $10.9 million on net sales of
$445.8 million in the prior period. The decrease in operating loss was the
result of lower overhead due to cost reduction efforts partially offset by a 6%
decline in revenue and a decrease in gross margins of 1.4 percentage points due
to increased competition, electronic auctions and customers leveraging their
buying power by consolidating the number of vendors with whom they deal.
Although sequential quarterly operating losses have declined during fiscal 2002,
cost control initiatives in the past have not fully offset lower revenue and
gross margins.
Telephone Directory
- -------------------
While the Telephone Directory segment's sales decreased by $19.1 million, or
19%, to $83.6 million in fiscal 2002, its operating profit increased by $3.6
million, or 108%, to $6.9 million. The reduction in sales was primarily due to
lower printing and advertising revenue in Uruguay due to the economic
instability in neighboring countries, as well as in Uruguay itself, along with
decreased toll-free directory advertising revenue in the United States. 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 $0.7 million resulted in the higher profitability of the
segment. (See restatement table in Item 1 of this Report.)
Telecommunications Services
- ---------------------------
The Telecommunications Services segment's sales decreased by $140.1 million, or
56%, to $108.9 million in fiscal 2002 and the segment sustained an operating
loss of $13.3 million in fiscal 2002, compared to an operating profit of $7.4
million in fiscal 2001. Despite a decrease in overhead of 32% due to the
emphasis on overhead reductions, the results of the segment continue to be
affected by the decline in spending caused by the depressed conditions within
the segment's telecommunications industry customer base. This factor has also
45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Fiscal Year 2002 (52 weeks) Compared to Fiscal Year 2001 (52 weeks)--Continued
- ------------------------------------------------------------------
Results of Operations - By Segment--Continued
- ----------------------------------
Telecommunications Services --Continued
- ---------------------------
increased competition for available work, pressuring pricing and margins. During
fiscal 2002, the Company announced the reorganization of the segment's
operations and continued its cost control initiatives in an effort to permit the
segment to operate profitably at lower revenue levels without impairing its
ability to take advantage of opportunities when the telecommunications industry
stabilizes and customers' spending increases.
Computer Systems
- ----------------
The Computer Systems segment's sales increased by $7.5 million, or 11%, to $78.8
million in fiscal 2002 while its operating profit decreased by $1.8 million, or
17%, to $8.9 million. The higher operating profit in fiscal 2001 resulted from
the beneficial settlement with a vendor. An increase in sales, in fiscal 2002,
was reported by all of the segment's divisions, with the sales in the European
division increasing by 51% and the IT services sales of the Maintech division
increasing by 12%.
Results of Operations - Other
- -----------------------------
Other items, discussed on a consolidated basis, affecting the results of
operations were:
Selling and administrative expenses decreased by $9.2 million, or 11%, to $74.6
million in fiscal year 2002 from fiscal year 2001 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
5.1% in fiscal 2002 and 4.4% in fiscal 2001. The selling and administrative
expenses have been restated in fiscal years 2002 and 2001 from their original
$74.5 million and $83.1 million, respectively. (See note 1 in Item 1 of this
Report.)
Depreciation and amortization decreased by $2.4 million, or 10%, to $22.2
million in fiscal 2002. The decrease was attributable to a $3.0 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 which the Company adopted at the beginning of fiscal 2002 (see
"Critical Accounting Policies," above). This was partially offset by increased
depreciation of fixed assets.
The Company incurred other expense of $3.5 million in fiscal 2002, due to a $2.1
million charge for the early payment of the Company's 7.92% Senior Notes, which
was previously presented as an extraordinary item, along with expenses incurred
in conjunction with the initial and subsequent transactions under the Company's
new Securitization Program and other sundry expenses.
In fiscal 2001, the Company recognized a pre-tax gain of $6.3 million on the
sale of securities that had been previously written off in 1997, partially
offset by a $0.7 million write down of an investment in marketable securities,
resulting in a net pre-tax gain of $5.6 million. In fiscal 2001, the Company
also recognized a pre-tax gain of $4.2 million on the sale of the Company's
interest in a real estate partnership.
46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Fiscal Year 2002 (52 weeks) Compared to Fiscal Year 2001 (52 weeks)--Continued
- ------------------------------------------------------------------
Results of Operations - Other--Continued
- -----------------------------
The foreign exchange loss in fiscal 2002 was $0.5 million compared to $0.2
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 $7.3 million, or 62%, to $4.5 million in fiscal
2002. The decrease was attributable to reduced working capital requirements
resulting from the sales decline, as well as from the early repayment on March
5, 2002 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 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 tax benefit in 2002 reflected an effective tax rate of 30.7% of
its financial reporting pre-tax loss from continuing operations compared to a
2001 tax provision which reflected an effective tax rate of 39.6% of its
financial reporting pre-tax income from continuing operations. The low effective
tax benefit in fiscal 2002 was primarily due to 2002 foreign losses for which no
tax benefit was provided.
The $4.3 million gain, net of taxes, from discontinued operations arose from the
Company's sale on November 30, 2001 of Autologic, the Company's 59% owned
publicly-held subsidiary, that comprised the Company's Electronic Publication
and Typesetting segment, to 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 net gain was comprised of a $4.5 million gain on the sale, including a tax
benefit of $1.7 million (resulting from a taxable loss versus a gain for
financial statement purposes), 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).
The $31.9 million charge to earnings recorded as a cumulative effect of a change
in accounting arose from the required adoption, as of the beginning of fiscal
2002, of SFAS No. 142, "Goodwill and Other Intangible Assets," under which
goodwill and other intangibles with indefinite lives are no longer amortized,
but instead are subject to annual testing using fair value methodology. The
Company engaged independent valuation firms to assist in the determination of
the impairment that may have existed in the $39.8 million of goodwill recorded
as of the beginning of the fiscal year, November 5, 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 was a
non-cash charge of $31.9 million. The total remaining goodwill of the Company at
November 3, 2002 was $9.0 million.
47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents, including restricted cash held in escrow for
ProcureStaff and Viewtech customers of $43.7 million, $18.9 million and $11.5 million at October 31, 2004,
November 2, 2003 and November 3, 2002, respectively, increased by $26.0 million to $88.0 million in fiscal 2004,
increased by $18.5$18.4 million
to $62.1 million in fiscal 2003 and increased by
$25.1 million to $43.6 million in fiscal 2002.2003. Unrestricted cash and cash equivalents
increased by $1.1 million to $44.3 million in fiscal 2004, increased
by $11.1 million to $43.2 million in fiscalat November 2, 2003 and increased by $13.6from $32.2 million to $32.1 million in fiscalat November 3,
2002.
The cash provided by operating activities of continuing operations in fiscal
20042003 was $31.2$36.2 million compared to $36.2$108.5 million and $108.5$89.3 million in fiscal
years 20032002 and 2002,2001, respectively.
The cash provided by operating activities in fiscal 2004,2003, exclusive of changes
in operating assets and liabilities, was $52.2 million, as the Company's net
income of $33.7 million included non-cash charges primarily for depreciation and
amortization of $25.5 million, accounts receivable provisions of $7.8 million
and income attributable to the minority interest of $2.4 million, partially
offset by income from discontinued operations of $9.5 million, a gain from
dispositions of property, plant and equipment of $3.4 million and a deferred
income tax benefit of $4.2 million. In fiscal 2003, operating activities,
exclusive of changes in operating assets and liabilities, produced $35.0 million,
of cash, as the Company's net
income of $4.2 million included non-cash charges primarily for depreciation and
amortization of $24.3 million and accounts receivable provisions of $6.2
million. In fiscal 2002, operating activities, exclusive of changes in operating
assets and liabilities, produced $33.5 million of cash, as the Company'Company's net
loss of $32.7 million included non-cash charges of $31.9 million for goodwill
impairment, depreciation and amortization of $22.2 million, accounts receivable
provisions of $10.2 million, a deferred income tax provision of $3.9 million,
and a $2.1 million charge for the early payment of the Company's 7.92% Senior
Notes, partially offset by income from discontinued operations of $4.3 million.
In fiscal 2001, operating activities, exclusive of changes in operating assets
and liabilities, produced $33.6 million of cash, as the Company's net income of
$6.5 million included non-cash charges primarily for depreciation and
amortization of $24.6 million, accounts receivable provisions of $8.5 million
and a deferred income tax provision of $2.6 million, partially offset by gains
on securities of $5.6 million and a $4.2 million gain on the sale of a
partnership interest.
Changes in operating assets and liabilities in 2004 used $21.0 million of cash,
net, principally due to an increase in the level of accounts receivable of
$101.7 million, partially offset by increases in accounts payable of $37.1
million, accrued expenses of $24.7 million and deferred income and other
liabilities of $6.1 million, and decreases in the level of inventories of $6.7
million, recoverable income taxes of $2.8 million and prepaid expenses and other
assets of $2.6 million. In fiscal 2003 changes in operating assets and
liabilities produced $1.2 million of
cash, net, principally due to cash provided by increases in accrued expenses of
$14.6 million, proceeds from the Securitization Program of $10.0 million,
increases in deferred income and other liabilities of $8.9 million, and an
increase in income taxes payable of $3.6 million, partially offset by an
increase in the level of accounts receivable of $28.6 million and inventory of
$7.2 million. In fiscal 2002, changes in operating assets and liabilities
produced $75.0 million of cash, net, principally due to the proceeds received
under the then new Securitization Program of $60.0 million, an increase in the
level of accounts payable of $40.1 million and a decrease in inventories of $6.5
million, partially offset by a $18.7 million decrease in accrued expenses, an
increase in the level of accounts receivable of $8.6 million and a $6.8 million
decrease in the income tax liability. In fiscal 2001, changes in operating
assets and liabilities produced $55.7 million of cash, net, principally due to
cash provided by decreases in the level of accounts receivable of $61.9 million
and inventories of $29.5 million, partially offset by decreases of $29.6 million
in accounts payable and $6.2 million in the income tax liability.
The cash used for investing activities in 2004 was $10.1 million, principally
due to purchases of property, plant and equipment totaling $30.7 million and
acquisitions of businesses of $1.9 million, partially offset by proceeds from
the sale of real estate and other assets of $22.4 million. In fiscal 2003 the
cash used for investing activities was $17.4 million, principally
due to purchases of property, plant and equipment totaling $18.0 million. In
fiscal 2002, the cash provided by investing activities was $13.5 million,
primarily due to the proceeds received from the sale of Autologic of $24.2
million and distributions from a joint venture of $3.3 million, partially offset
by purchases of plant, property and equipment totaling $14.7 million. -50-In fiscal
2001, the cash used for investing activities was $16.7 million, primarily due to
purchases of property, plant and equipment totaling $27.1 million, partially
offset by the net cash provided by investment transactions of $5.3 million and
$4.0 million proceeds from the sale of a partnership interest.
48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources--Continued
- -------------------------------
The cash provided by financing activities in fiscal 20042003 of $4.6$0.1 million
primarily resulted from a $3.6 million increase in bank loans and $1.4 million
from employee exercises of stock options. In 2003, the cash provided by
financing activities of $0.1 million resulted primarily from a $1.5 million increase in bank loans, offset by
payments of long-term debt totaling $1.5 million. In 2002, the cash used for
financing activities was $95.7 million, primarily resulting from net repayments
of bank loans totaling $62.3 million and $33.5 million in payments of long-term
debt, including the early payment of the $30.0 million outstanding 7.92% Senior
Notes. In fiscal 2001, the cash used for financing activities was $76.0 million,
resulting primarily from net repayments of bank loans totaling $77.6 million and
a $13.7 million payment of long-term debt, partially offset by the proceeds from
new long-term debt of $15.1 million.
Off-Balance Sheet Arrangements
- ------------------------------
The Company has no off-balancedoes not have any "off-balance sheet financing arrangements as thatarrangements" (as such term is
useddefined in Item 303(a)4303 of Regulation S-K.S-K).
Commitments
- -----------
In fiscal 2000, the Company began development of a new web-enabled front-end
system designed to improve efficiency and connectivity in the recruiting,
assignment, customer maintenance and other functions in the branch offices of
the Staffing Services segment. The total costs to develop and install this
system are currently anticipated to be approximately $12.0 million (reduced from
$16.0 million previously reported due to anticipated cost savings), of which
approximately $8.1 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 October 31, 2004:November 2, 2003:
Contractual Cash Obligations
- ----------------------------
Payments Due By Period
---------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------
Less than 1- 3 3 - 5 After 5
Total 1 year years years years
----- -------- ----- ----- -----------------------------------------------------------------------------
(In thousands)
Term Loan $14,130 399 904 $1,064 $11,763
Payable to Nortel Networks 1,857 1,857$14,469 $371 $839 $987 $12,272
Notes Payable to Banks 7,955 7,9554,062 4,062 - - -
-------- ------- ------- ------- -----------------------------------------------------------------------------
Total Debt $23,942 $8,354 $2,761 $1,064 $11,76318,531 4,433 839 987 12,272
Accrued Insurance (a) 13,583 13,497 86
Deferred Compensation (b) 4,999 4,9994,098 4,098
Operating Leases (c) 49,039 18,975 22,684 5,736 1,644
-------- ------- ------- ------- -------(a) 49,356 18,619 21,032 6,704 3,001
----------------------------------------------------------------------
Total Contractual Cash Obligations $91,563 $45,825 $25,531 $6,800 $13,407
======== ======= ======= ======= =======
$71,985 $23,052 $25,969 $7,691 $15,273
======================================================================
(a) Includes $10.5 million for the Company's Primary Insurance Casualty
Program and $3.1 million for the Company's Medical Insurance Program.
See Note A of Notes to Consolidated Financial Statements.
(b) Includes $4.2 million for the Company's non-qualified deferred
compensation and supplemental savings plan and $0.8 million for the
Company's other deferred compensation plan. See Note N to Consolidated
Financial Statements.
(c) See Note P of Notes to Consolidated Financial Statements.
-51-
49
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Commitments--Continued
- -----------
Other Contingent Commitments Amount Expected by
Commitment Expiration Period
- ----------------------------
Amount Expected by
Commitment Expiration Period
---------------------------------------------------
Less than 1-3
Total 1 year years
------- ------- -------
(In thousands)
Lines of Credit, available $7,234 $ 7,234
Revolving Credit Facility, available 26,324 26,324
Securitization Program, available 80,000 $80,000
Contingent Liability - Nortel 45,144 45,144
Standby Letters of Credit, outstanding 224 224 -
------ ------ -------
Total Commercial Commitments $158,926 $33,782 $125,144
======== ======= ========
------------------------------------------------------------------------------
Less than 1-3
Total 1 year years
------------------------------------------
(In thousands)
Lines of Credit, available $7,029 $7,029
Revolving Credit Facility, available 40,000 40,000
Securitization Program, available 30,000 $30,000
Standby Letters of Credit,
outstanding 224 224 -
------------------------------------------
Total Commercial Commitments $77,253 $47,253 $30,000
==========================================
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 in fiscal 2004 and
satisfy its debt obligations.
Securitization Program
- ----------------------
Effective April 15, 2002, the Company entered into a $100.0 million three-year
accounts receivable securitization program ("Securitization Program"). In April
2004, the Company amended its Securitization Program which increased the
capacity of its accounts receivable securitization program to $150.0 million and
extended its maturity to April 2006. Under the
Securitization Program, receivables related to the United States operations of
the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A., an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $150.0$100.0 million). The
Company retains the servicing responsibility for the accounts receivable. On
April 15, 2002, TRFCO initially purchased from Volt Funding a participation
interest of $50.0 million out of an initial pool of approximately $162.0 million
of receivables. Of the $50.0 million cash paid by Volt Funding to the Company,
$35.0 million was used to repay the entire outstanding principal balance under
the Company's former revolving credit facility. At October 31, 2004,November 2, 2003, TRFCO had
purchased from Volt Funding a participation interest of $70.0 million (increased
to $80 million on November 14, 2003 and reduced to $65 million on January 14,
2004) out of a pool of approximately $248.7$189.3 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors (subject also, as described
below,above, to the security interest that the Company has granted in the common stock
of Volt Funding in favor of the lenders under the Company's Credit Facility).
TRFCO has no recourse to the Company (beyond its interest in the pool of
receivables owned by Volt Funding) for any of the sold receivables.
-52-50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Securitization Program--Continued
- -------------------------------------------------------
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts incurred by
TRFCO on the issuance of its commercial paper, are charged to the consolidated
statement of operations.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, among other things, the default rate, as
defined, on receivables exceeding a specified threshold, the rate of collections
on receivables failing to meet a specified threshold, the Company failing to
maintain a long-term debt rating of "B" or better or the equivalent thereof from
a nationally recognized rating organization or a default occurring and
continuing on indebtedness for borrowed money of at least $5.0 million. The
Company's most recent debt rating of its two-year revolving Credit Facility was
"BBB-" with a neutral rating outlook. At October 31, 2004,November 2, 2003, the Company was in
compliance with all requirements of its Securitizaton Program.
The Company has been notified by TRFCO that a request to increase the
securitization facility to $150 million in anticipation of increased revenue, as
well as an extension of the term, has been approved and will be finalized in the
near future.
Credit Lines
- ------------
In April 2004, the Company amended its $40.0 million secured, syndicated,
revolving credit agreement ("Credit Agreement") which was to expire in April
2004, to, among other things, extend the term for 364 days and reduce the line
to $30.0 million, because of the increase in its Securitization Program
(discussed above). Additionally, in July 2004, this program was further amended
to release Volt Delta as a guarantor and collateral grantor under the Credit
Agreement due to the previously announced agreement between Volt Delta and
Nortel Networks. At October 31, 2004,November 2, 2003, the Company had credit lines with domestic and foreign
banks that provide for borrowings and letters of credit up to an aggregate of
$41.5$51.1 million, including $30.0a $40.0 million under the Credit Agreement,
which will expire in April 2005.
The Credit Agreement established atwo-year revolving credit facility ("Credit(the
"Credit Facility") in favor of the Company and designated subsidiaries under a
secured syndicated revolving credit agreement (the "Credit Agreement").
The Credit Facility of $40.0 million, which upis scheduled to expire in April
2004, includes a $15.0 million may be
used for lettersletter of credit.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, NA and Lloyds TSB Bank, PLC. Borrowings and letters of credit under the
Credit Facility are limited to a specified borrowing base, which is based upon
the level of specified receivables, generally at the end of the fiscal month
preceding a borrowing. At October 31, 2004, $30.0 million was available underNovember 2, 2003, the borrowing base formula.was approximately
$40.0 million. Borrowings under the Credit Facility are to bear interest at
various rate
options selected by the Company at the time of each borrowing. Certainborrowing, certain
of which rate options together with a facility fee, are based on a leverage ratio, as defined.
-53-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
- ------------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. At October 31, 2004,Based upon the Company's leverage ratio and debt
rating at November 2, 2003, if a three-month LIBO rate was the interest rate
option selected by the Company, borrowings would have borne
51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
- ------------
interest at the rate of 3.0% per annum. At November 2, 2003, the facility fee
was 0.4% per annum. The Company has not borrowed, 2.0 million
British Pounds ($3.7 million)and no letters of credit have
been issued, under the Credit Facility at an interest rate of
5.8% per annum. At October 31, 2004, the facility fee was 0.3% per annum.since its inception in April 2002.
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 defined, as of November 2, 2003
was $234.3 million); a limitation on cash dividends and capital stock
repurchases and redemptions by the Company in any one fiscal year to 50%25% of
consolidated net income, as defined, for the prior fiscal year; and a
requirement that the Company maintain a ratio of EBIT, as defined, to interest
expense, as defined, of 1.25 to 1.0 for the twelve months ending as of the last
day of each fiscal quarter. The Credit Agreement also imposes limitations on,
among other things, the incurrence of additional indebtedness, the incurrence of
additional liens, sales of assets, the level of annual capital expenditures and
the amount of investments, including business acquisitions and investments in
joint ventures, and loans that may be made by the Company and its subsidiaries.
At October 31, 2004,November 2, 2003, the Company was in compliance with all covenants in the
Credit Agreement.Agreement and believes it will be in compliance throughout its remaining
term.
The Company is liable foron all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are guarantors of all
loans made to the Company or to subsidiary borrowers under the Credit Facility.
At October 31, 2004, fiveNovember 2, 2003, four of those guarantors have pledged approximately $62.6$52.4
million of accounts receivable, other than those in the Securitization Program
(discussed below), as collateral security for thetheir guarantee obligations. Under
certain circumstances, other subsidiaries of the Company also may be required to
become guarantors under the Credit Facility. The Company has pledged all of the
stock of its Volt Funding Corp. subsidiary (discussed above) as collateral
security for its own obligations under the Credit Facility.
The Company has requested, and expects to obtain, from the participating banks
an extension of the term of the Credit Facility beyond April 2004, but at a
reduced amount in conjunction with our increase in the Securitization Program
(discussed above). The Company's intention is to use the facility for short-term
borrowings and to hedge foreign currency exposures in place of currency options
and exchange contracts, when borrowing in the foreign currency provides a
low-cost alternative.
Summary
- -------
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program will be sufficient to fund its presently contemplated
operations and satisfy its debt obligations in fiscal 2005.
-54-2004.
52
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements
- -----------------------------
In January 2003,April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB issued InterpretationStatements No. 46, "Consolidation4, 44 and 64, Amendment of Variable Interest Entities,"SFAS
No. 13, and Technical Corrections" ("FIN 46"SFAS No. 145"). SFAS No. 145 updates,
clarifies and simplifies existing accounting pronouncements, by rescinding SFAS
No. 4, which provides guidance on identifyingrequired all gains and assessing interestslosses 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 variable interest entitiesAccounting Principles Board
Opinion No. 30 will now be used to decide whetherclassify those gains and losses.
Additionally, SFAS No. 145 also makes technical corrections to consolidate that entity. FIN 46 requires consolidation of existing
unconsolidated variable interest entities if the entities dopronouncements. While those corrections are not effectively
disperse risk among parties involved. In October 2003, the FASB issued FASB
Staff Position No. FIN 46-6, deferring the effective date for applying the
provision of FIN 46 for variable interest entities created before February 1,
2003. In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a
revision which clarifiessubstantive in nature, in some
instances, they may change accounting practice. The provisions of FIN 46. TheSFAS No. 145
that amend SFAS No. 13 were adopted by the Company has no
unconsolidated subsidiaries.in its consolidated financial
statements for the first quarter of fiscal 2003. The adoption of FIN 46RSFAS No. 145
did not have a material impact on the Company's consolidated financial position
andor results of operations.operations, but required a reclassification of the extraordinary
item arising from the March 2002 early payment of the Company's 7.92% Senior
Notes to Other Expense in the second quarter of fiscal 2003.
In November 2004,June 2002, the FASB issued SFAS No. 151, "Inventory Costs-an Amendment of
ARB No. 43, Chapter 4,146, "Accounting for Costs Associated
with Exit or Disposal Activities," which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and spoilage. This Statement
requires that these itemsa liability for a cost
associated with an exit or disposal activity be recognized as period costs even ifwhen the amounts are
not considered to be abnormal.liability is
incurred and nullifies Emerging Issues Task Force No. 94-3. The provisions of this Statement are effective
for inventory costs incurred in fiscal years beginning after June 15, 2005. The
Company does not believe that theCompany's
adoption of this Statement inSFAS No. 146 at the beginning of fiscal 2006 will2003 did not have a material
impact on the Company's consolidated financial position or results of
operations.
In December 2004,2002, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets-an148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of APB Opinionto FASB Statement No.
29,123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to eliminateprovide new guidance concerning the exceptiontransition when a company
changes from the intrinsic value method to the fair value method of accounting
for nonmonetary exchanges of similar productive assetsemployee stock-based compensation cost. As amended by SFAS No. 148, SFAS No.
123 also requires additional disclosure regarding such cost in annual financial
statements and replace it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. Thecondensed interim financial statements. As required, certain
provisions of this Statement are effectiveSFAS No. 148 were adopted by the Company in the condensed
consolidated financial statements for nonmonetary asset
exchanges occurring inthe second quarter of fiscal periods beginning after June 15, 2005, with early
application permitted for exchanges beginning after November, 2004.2003. The
Company
does not believe that theCompany's adoption of this Statement in fiscal 2005 willSFAS No. 148 did not have a material impact on the
Company's consolidated financial position or results of operations.
In December 2004,January 2003, the FASB issued SFASFASB Interpretation No. 123R, "Share-Based Payment," which
replaces46, "Consolidation of
Variable Interest Entities" to provide new guidance with respect to the
superseded SFAS No. 123, "Accounting for Stock-Based Compensation."
This Statement requires thatconsolidation of all previously unconsolidated entities, apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and
suppliers whenincluding special
purpose entities. The Company has no unconsolidated subsidiaries; however, the
entity acquires goods or services. The provisions of this
Statement are effective asCompany continues to evaluate the impact of the beginningadoption of the first interim or annual
reporting period that begins after June 15, 2005, with early adoption of this
Statement permitted for any interim period whose financial statements are not
yet issued. The Company is currently assessing the impact that the adoption will
haveinterpretation
on the Company's consolidated financial position and results of operations.
Related Party TransactionsIn April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," to amend and clarify financial
accounting and improve reporting for derivative instruments and for hedging
activities under FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003. The Company's adoption of SFAS No. 149 did not
have a material impact on the Company's consolidated financial position or
results of operations.
53
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements--Continued
- --------------------------
During fiscal 2004,-----------------------------
In May 2003, the Company paidFASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", to provide new
guidance with respect to how an issuer classifies and measures these items in
its financial statements. SFAS No. 150 is effective for financial instruments
entered into or accrued $1.9 million tomodified after May 31, 2003, and otherwise is effective at the
law firmbeginning of which Lloyd Frank, a director, isthe first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of counsel, primarily for services rendered
and expenses reimbursed, including $0.9 million related to the transaction with
Nortel Networks discussed elsewhere in this Report. During that year, the
Company also paid $13,000 to the law firmnonpublic entities. The
Company's adoption of which Bruce Goodman, a director, is
a partner, for services rendered to the Company.
The Company rents approximately 2,600 square feet (previously 2,500 square feet)
of office space to a corporation owned by Steven A. Shaw, an officer and
director,SFAS No. 150 in the Company's El Segundo, California facility, which the Company
doesfourth quarter did not require for its own use, on a month-to-month basis at a rental of
$1,750 per month (previously $1,500 per month), effective March 1, 2004. Basedhave an impact
on the natureCompany's consolidated financial position or results of the premises and a recent market survey conducted for the
Company, the Company believes the rent is the fair market rental for such space.
-55-
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The Company`s earnings, cash flows
and financial position are exposed to market risks relating to fluctuations in
interest rates and foreign currency exchange rates. The Company has cash and
cash equivalents on which interest income is earned at variable rates. The
Company also has credit lines with various domestic and foreign banks, which
provide for borrowings and letters of credit, as well as a $150$100 million accounts
receivable securitization program to provide the Company with additional
liquidity to meet its short-term financing needs.
The interest rates on these borrowings and financing are variable and,
therefore, interest and other expense and interest income are affected by the
general level of U.S. and foreign interest rates. Based upon the current levels
of cash invested, notes payable to banks and utilization of the securitization
program, on a short-term basis, as noted below in the tables, a hypothetical
100-basis-point (1%) increase or decrease in interest rates would increase or
decrease its annual net interest income/expense and securitization costs by
$0.1
million$120,000 and $0.1 million,$240,000, respectively.
The Company has a term loan, as noted in the table below, which consists of
borrowings at fixed interest rates, and the Company's interest expense related
to these borrowings is not affected by changes in interest rates in the near
term. The fair value of the fixed rate term loan was approximately $15.3$15.0 million
at October 31, 2004.November 2, 2003. This fair value was calculated by applying the appropriate
fiscal year-end interest rate supplied by the lender to the Company's present
stream of loan payments.
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At October 31, 2004,November 2, 2003, the total market value of these
investments was $4.2$4.1 million, all of which are being held for the benefit of
participants in a non-qualified deferred compensation plan with no risk to the
Company.
The Company has a number of overseas subsidiaries and is, therefore, subject to
exposure from the risk of currency fluctuations as the value of foreign
currencies fluctuate against the dollar, which may impact reported earnings. As
of October 31, 2004,November 2, 2003, the total of the Company's net investment in foreign
operations was $9.7$13.3 million. The Company attempts to reduce these risks by
utilizing foreign currency option and exchange contracts, as well as borrowing
in foreign currencies, to hedge the adverse impact on foreign currency net
assets when the dollar strengthens against the related foreign currency. As of
October 31, 2004,November 2, 2003, the total of the Company's foreign exchange options was $5.7$10.0
million, leaving a balance of net foreign assets exposed of $4.0$3.3
54
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
million. The amount of risk and the use of foreign exchange instruments
described above are not material to the Company's financial position or results
of operations and the Company does not use these instruments for trading or
other speculative purposes. Based upon the current levels of net foreign assets,
a hypothetical weakening of the U.S. dollar against these currencies at October 31, 2004 by 10%
would result in a pretax gain of $1.0 million related to these positions.
Similarly, a hypotheticalor strengthening of the U.S. dollar against these
currencies at October 31, 2004November 2, 2003 by 10% would result in a pretax gain or loss of
$0.4$1.3 million and $0.3 million, respectively, related to these positions.
-56-
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at October 31,
2004.November 2,
2003. For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
Interest Rate Market Risk Payments Due By Period as of October 31, 2004November 2, 2003
- ------------------------- ---------------------------------------------
Less than 1-3 3-5 After 5
Total 1 year Years Years Years
----- --------- ----- ----- -------------------------------------------------------------------
(Dollars in thousands of US$)
Cash and Cash Equivalents
- -------------------------
Money Market and Cash Accounts $88,031 $88,031$62,057 $62,057
Weighted Average Interest Rate 1.5% 1.5%
------- -------0.8% 0.8%
-------------------------
Total Cash and& Cash Equivalents $88,031 $88,031
======= =======$62,057 $62,057
==========================
Securitization Program
- ----------------------
Accounts Receivable Securitization $70,000 $70,000
Finance Rate 2.1% 2.1%
------- -------2.6% 2.6%
--------------------------
Securitization Program $70,000 $70,000
======= =================================
Interest Rate Market Risk Payments Due By Period as of October 31, 2004November 2, 2003
- ------------------------- ---------------------------------------------
Less than 1 - 3 3 - 5 After 5
Total 1 yearYear Years Years Years
----- --------- ----- ----- -------------------------------------------------------------------
(Dollars in thousands of US$)
Debt
- ----
Term Loan (1) $14,130 $ 399 $904 $1,064 $11,763$14,469 $371 $839 $988 $12,271
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Payable to Nortel Networks 1,857 1,857
Weighted Aveage Interest Rate 6.0% 6.0%
Notes Payable to Banks 7,955 7,955$4,062 $4,062
Weighted Average Interest Rate 6.7% 6.7%9.9% 9.9% - - -
------- ------ ------ ------ -------------------------------------------------------------------
Total Debt $23,942 $8,354 $2,761 $1,064 $11,763
======= ====== ====== ====== =======$18,531 $4,433 $839 $988 $12,271
============================================================
-57-55
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--ContinuedRISK-- Continued
Foreign Exchange Market Risk Contract Values
- ----------------------------
Contract Values
---------------
Contractual Fair Value
Exchange Less than Option
Rate Total 1 Year Premium(1)
---- ----- ------ ----------
(Dollars in thousands of US $)
Option Contracts
- ----------------
British Pound Sterling to U.S.$ 1.82 $911 $911 $17
Euro to British Pound Sterling .070 1,914 1,914 19
Canadian $ to U.S.$ 1.37 2,920 2,920 18
------ ------ ----
Total Option Contracts $5,745 $5,745 $54
====== ====== ====
---------------
Fair Value
Less than Option
Total 1 Year Premium (1)
----------------------- -------------
(Dollars in thousands of US $)
Option Contracts
- ----------------
British Pound Sterling to U.S.$ $6,731 $6,731 $115
Contractual Exchange Rate 1.68 1.68
Euro to British Pounds Sterling $1,161 $1,161 $19
Contractual Exchange Rate 0.69 0.69
Canadian $ to U.S.$ $2,067 $2,067 $29
-------------
Contractual Exchange Rate 1.45 1.45
Total Option Contracts $9,959 $9,959 $163
======================= =============
(1) Represents the cost of the options purchased on October 29, 2004.31, 2003.
56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-58-
ERNST & YOUNG LLP
5 Times Square
New York, New York 10036
Phone #: 212-773-3000
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Volt Information Sciences, Inc.
We have audited the accompanying consolidated balance sheets of Volt Information
Sciences, Inc. and subsidiaries as of October 31, 2004November 2, 2003 and November 2, 2003,3, 2002, and
the related consolidated statements of operations, shareholders'stockholders' equity, and
cash flows for each of the three years in the period ended October 31, 2004.November 2, 2003. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a)(2). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Volt
Information Sciences, Inc. and subsidiaries at October 31, 2004November 2, 2003 and November 2, 2003,3,
2002, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended October 31, 2004,November 2, 2003, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As described in Note A to the consolidated financial statements, the
accompanying consolidated financial statements of Volt Information Sciences,
Inc. as of November 2, 2003 and November 3, 2002 and for the three years in the
period ended November 2, 2003 and
November 3, 2002 have been restated.
As discussed in Note H to the consolidated financial statements, Volt
Information Sciences, Inc. and subsidiaries adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," at the
beginning of fiscal 2002.
/s/ Ernst & Young LLP
- ---------------------
New York, New York
December 22, 2003, except for the second paragraph of Note A, which is as of
January 10, 2005
-59-57
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31,November November
2, 2004 2003 ---------- -----------3, 2002
------------------------
(Restated) (Restated)
ASSETS (Dollars in thousands,
ASSETS except per share data)thousands)
CURRENT ASSETS
Cash and cash equivalents including restricted cash of $43,722 (2004) and $18,870
(2003) $88,031and $11,458 (2002)--Notes A and O $62,057 $43,620
Short-term investments 4,248investments--Notes A and C 4,149 3,754
Trade accounts receivable less allowances of $10,210 (2004) and $10,498 (2003) 409,130and
$10,994 (2002)
--Notes A, B, F and Schedule II 313,946 Inventories 32,676300,670
Inventories--Notes A and D 37,787 30,594
Recoverable income taxes -taxes--Notes A and G 3,080 6,665
Deferred income taxes 9,385taxes--Notes A and G and Schedule II 8,722 8,343
Prepaid expenses and other assets 14,847 17,008 -------- --------16,174
------------------------
TOTAL CURRENT ASSETS 558,317 446,749 409,820
Investment in securities 100securities--Notes A and C and Schedule II 193 52
Property, plant and equipment-net 85,038equipment-net--Notes A, F and L 82,452 89,294
Deposits and other assets 1,439 2,107 Goodwill 29,144 8,982
Other intangible3,328
Intangible assets-net of accumulated amortization of $288 (2004) 15,998 -
-------- --------$1,349 (2003)
and
$1,258 (2002)--Notes A and H 8,982 9,075
------------------------
TOTAL ASSETS $690,036 $540,483 ======== ========$511,569
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $7,955banks--Notes E and F $4,062 $2,424
Current portion of long-term debt 399debt--Note F 371 1,524
Accounts payable 192,163payable--Note O 153,979 154,054
Accrued wages and commissions 54,200commissions--Note N 45,834 39,529
Accrued taxes other than income taxes 17,729 16,741 18,525
Other accruals 36,036 14,673 8,276
Deferred income and other liabilities 36,909 30,180 Income taxes payable 4,270 -
-------- --------21,157
------------------------
TOTAL CURRENT LIABILITIES 349,661 265,840 245,489
Accrued insurance 86insurance--Note A 4,098
Long-term debt 15,588debt--Note F 14,098 14,469
Deferred income taxes 11,764taxes--Notes A and G 15,252 Commitments14,743
STOCKHOLDERS' EQUITY--Notes A, B, C, E, F, G, K, M and contingencies
Minority Interest 36,420 -
STOCKHOLDERS' EQUITYO and
Schedule II
Preferred stock, par value $1.00; Authorized--500,000 shares;
issued--none
Common stock, par value $.10; Authorized--30,000,000 shares;
issued-- 15,282,625 shares (2004) and 15,220,415 shares (2003) 1,528and 15,217,415 shares (2002) 1,522 1,522
Paid-in capital 42,453 41,091 41,036
Retained earnings 232,714 198,998 194,793
Accumulated other comprehensive loss (178) (416) -------- --------(483)
------------------------
TOTAL STOCKHOLDERS' EQUITY 276,517 241,195 -------- --------236,868
------------------------
COMMITMENTS--Note P
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $690,036 $540,483 ======== ========$511,569
========================
See Notes to Consolidated Financial Statements
-60-58
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
-----------------------------------------------------
October 31,November November November
2, November2003 3, 2004 2003 2002 --------------- ----------- -----------(1,2) 4, 2001 (1)
-----------------------------------------------
(Restated) (Restated) (Restated)
(In thousands, except per share data)
NET SALES $1,924,777 $1,609,491 $1,468,093 $1,901,491
COSTS AND EXPENSES:
Cost of sales 1,772,087 1,502,622 1,371,027 1,779,572
Selling and administrative 83,124 71,693 74,619 83,801
Depreciation and amortization 25,537 24,331 22,166 ---------- ---------- ----------
1,880,74824,582
-----------------------------------------------
1,598,646 1,467,812 ---------- ---------- ----------1,887,955
-----------------------------------------------
OPERATING PROFIT 44,029 10,845 281 13,536
OTHER INCOME (EXPENSE):
Interest income 927 708 851 877
Other expense-net (4,398)expense-net--Notes B and J (2,661) (3,462) (18)
Gain on securities-net--Note C 5,552
Gain on sale of real estate 3,295partnership interest--Note J 4,173
Foreign exchange gain (loss)-net 97 299 (477) (158)
Interest expense (1,817) (2,070) (4,549) ---------- ---------- ----------(11,880)
-----------------------------------------------
Income (loss) from continuing operations before income taxes 7,121 (7,356) 12,082
Income tax (provision) benefit--Notes A and G (2,916) 2,260 (4,786)
-----------------------------------------------
Income (loss) from continuing operations before items shown
below 42,133 7,121 (7,356)
Minority interest (2,420)
---------- ---------- ----------4,205 (5,096) 7,296
Discontinued operations, net of taxes--Note J 4,310 (814)
Cumulative effect of a change in accounting--Note H
Goodwill impairment (31,927)
-----------------------------------------------
NET INCOME (LOSS) $4,205 ($32,713) $6,482
===============================================
Per Share Data
-----------------------------------------------
Basic and Diluted:
Income (loss) from continuing operations before taxes 39,713 7,121 (7,356)
Income tax (provision) benefit (15,517) (2,916) 2,260
---------- ---------- ----------
Income (loss) from continuing operations 24,196 4,205 (5,096)items shown
below $0.28 ($0.33) $0.48
Discontinued operations net of taxes 9,520 4,310
Cumulative effect of a change in accounting
Goodwill impairment (31,927)
---------- ---------- ----------
NET INCOME (LOSS) $33,716 $4,205 ($32,713)
========== ========== ==========
Per Share Data
----------------------------------------------------
Basic:
Income (loss) from continuing operations $1.59 $0.28 ($0.33)
Discontinued operations 0.62 0.28 (0.06)
Cumulative effect of a change in accounting (2.10)
---------- ---------- ---------------------------------------------------------
Net income (loss) $2.21 $0.28 ($2.15) ========== ========== ==========$0.42
===============================================
Weighted average number of shares-basic 15,234shares-basic--Notes A and I 15,218 15,217 ========== ========== ==========
Diluted:
Income (loss) from continuing operations $1.58 $0.28 ($0.33)
Discontinued operations 0.62 0.28
Cumulative effect of a change in accounting (2.10)
---------- ---------- ----------
Net income (loss) $2.20 $0.28 ($2.15)
========== ========== ==========15,212
===============================================
Weighted average number of shares-diluted 15,354shares-diluted--Notes A and I 15,225 15,217 ========== ========== ==========15,244
===============================================
Note 1 - As previously announced, the Company has changed the method of reporting revenues of its Professional
Employer Organization ("PEO") subsidiary, Shaw & Shaw, from gross billing to a net revenue basis in fiscal year
2003. Accordingly, reported PEO revenues and related cost of sales for fiscal years 2002 and 2001 have been
reduced by $20.1 million and $33.6 million, respectively, with no effect on operating profit or the net results
to the Company.
Note 2 - Pursuant to the Company's previously announced adoption of SFAS No.145, results for fiscal year 2002
have been restated to give effect to the reclassification of a charge of $2.1 million arising from March 2002
early payment of the Company's 7.92% Senior Notes to Other Expense, previously presented as an extraordinary item.
See Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements.
-61-59
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
Accumulated Other
Comprehensive (Loss) Income
---------------------------------------------------------------------
Common Stock Foreign Unrealized
$.10 Par Value CurrencyForeign Gain (Loss)
-------------------- Currency On
--------------
Paid-In Retained Translation Marketable Comprehensive
Shares Amount Capital Earnings Adjustment Securities Income (Loss)
------ ------ ------- -------- ---------- ---------- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at November 4, 20013, 2000 - as previously
reported 15,215,665 $1,522 $41,002 $227,76615,208,015 $1,521 $40,862 $221,922 ($468)550) ($10)400)
Adjustment of reported balance due to
restatement (260)
----------- --------- ------- --------- ------ -----(898)
--------------------------------------------------------------
Balance at November 3, 2000 - restated 15,208,015 $1,521 $40,862 $221,024 ($550) ($400)
Stock options exercised, net of tax
benefit of $3 7,650 1 140
Unrealized foreign currency translation
adjustment-net of taxes of $36 82 $82
Unrealized loss on marketable securities -
net of taxes of $24 (38) (38)
Reclassification adjustment for loss included
in net income-net of taxes of $282 428 428
Net income for the year - restated 6,482 6,482
-----------------------------------------------------------------------------
Balance at November 4, 2001 - restated 15,215,665 1,522 41,002 227,506 (468) (10) $6,954
===============
Stock optionoptions exercised, - net of tax
benefit of $3 1,750 34
Unrealized foreign currency translation
adjustment - netadjustment-net of tax benefit of $10 (22) ($22)
Unrealized gain on marketable securities - 28
net of taxes of $11 17 17
Net loss for the year - restated (32,713) (32,713)
----------- --------- ------- --------- ------ ----- ----------(32,713
-----------------------------------------------------------------------------
Balance at November 3, 2002 - restated 15,217,415 1,522 41,036 194,793 (490) 7 ($32,718)
=========================
Stock options exercised, - net of a diminutive
tax benefit 3,000 55
Unrealized foreign currency translation
adjustment - netAdjustment-net of tax benefit of $8 (18) ($18)
Unrealized gain on marketable securities -
net of taxes of $56 85 85
Net income for the year - restated 4,205 4,205
----------- --------- ------- --------- ------ ----- ---------------------------------------------------------------------------------------
Balance at November 2, 2003 - restated 15,220,415 1,522 41,091 198,998 (508) 92$1,522 $41,091 $198,998 ($508) $92 $4,272
==========
Stock options exercised - net of a tax
benefit of $214 62,210 6 1,362
Unrealized foreign currency
translation adjustment - net of
taxes of $126 294 $294
Unrealized gain on marketable
securities - net of tax benefit of
$37 (56) (56)
Net income for the year 33,716 33,716
----------- --------- ------- --------- ------ ----- ----------
Balance at October 31, 2004 15,282,625 $1,528 $42,453 $232,714 ($214) $36 $33,954
=========== ========= ======= ========= ====== ===== ==========
=============================================================================
There were no shares of preferred stock issued or outstanding in any of the reported periods.
See Notes to Consolidated Financial Statements.
-62-
60
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
--------------------------------------------------------
October 31,----------------------------------------------
November November November
2, November2003 3, 2004 2003 2002 ---------- ----------- -----------4, 2001
----------------------------------------------
(Restated) (Restated) (Restated)
(In thousands)
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $33,716 $4,205 ($32,713) $6,482
Adjustments to reconcile net income (loss) to cash
provided by operating activities
Discontinued operations (9,520) (4,310) 814
Loss on early payment of debt 2,093
Cumulative effect of a change in accounting -
goodwill impairment 31,927
Depreciation and amortization 25,537 24,331 22,166 24,582
Equity in net income(income) loss of joint ventures (25) 49
Gain on sale of partnership interest (4,173)
Gain on securities-net (5,552)
Accounts receivable provisions 7,784 6,227 10,188 Minority interest 2,4208,462
(Gain) loss on foreign currency translation (43) (10) 231 (Gain) loss64
Loss on dispositions of property, plant and equipment (3,432) 151 100 118
Deferred income tax (benefit) expense (4,240) 82 3,898 2,620
Other (98) 100
Changes in operating assets and liabilities, net of assets acquired:liabilities:
Accounts receivable (101,672) (28,612) (8,641) 61,878
Proceeds from securitization program 10,000 60,000
Inventories 6,662 (7,193) 6,548 29,480
Prepaid expenses and other assets 2,553 59 (1,033) 3,894
Deposits and other assets 667 687 1,318 2,153
Accounts payable 37,149 (864) 40,076 (29,603)
Accrued expenses 24,748 14,599 (18,655) 449
Deferred income and other liabilities 6,119 8,927 2,197 Income(6,330)
Recoverable income taxes 2,754 3,586 (6,805) ------- ------ -------(6,229)
----------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 31,202 36,175 108,462 ------- ------ -------89,258
----------------------------------------------
-63-61
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
Year Ended
----------------------------------------------------------
October 31,----------------------------------------------
November November November
2, November2003 3, 2004 2003 2002 ---------- ----------- -----------4, 2001
----------------------------------------------
(Restated) (Restated) (Restated)
(In thousands)
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Sales of investments 1,476 870 840 7,326
Purchases of investments (1,419) (833) (1,089) (2,001)
Distributions from joint ventures 49 3,271
Acquisitions (1,864)(76)
Net proceeds from sale of partnership interest 4,017
Proceeds from disposals of property, plant and equipment net 3,933 469 633 1,174
Purchases of property, plant and equipment (30,737) (17,990) (14,692) Proceeds from sale of real estate (discontinued operations) 18,500(27,112)
Proceeds from sale of subsidiary 24,233
Other - - 317 ------- ------ -------(5)
----------------------------------------------
NET CASH (USED IN)(APPLIED TO) PROVIDED BY INVESTING ACTIVITIES (10,111) (17,435) 13,513 ------- ------ -------(16,677)
----------------------------------------------
CASH (USED IN)(APPLIED TO) PROVIDED BY FINANCING ACTIVITIES
Proceeds from long-term debt 15,100
Payment of long-term debt (340) (1,524) (33,476) (13,674)
Exercises of stock options 1,368 55 34 Notes141
Increase (decrease) in notes payable-bank 3,591 1,523 (62,306) ------- ------ -------(77,568)
----------------------------------------------
NET CASH PROVIDED BY (USED IN)(APPLIED TO) FINANCING ACTIVITIES 4,619 54 (95,748) ------- ------ -------(76,001)
----------------------------------------------
Effect of exchange rate changes on cash 264 (357) (1,081) ------- ------ -------(304)
----------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
25,974FROM CONTINUING OPERATIONS 18,437 25,146 (3,724)
Net decrease in cash and cash equivalents from
discontinued operations (11,901)
----------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,437 25,146 (15,625)
Cash and cash equivalents, including restricted cash,
beginning of year 62,057 43,620 18,474 ------- ------ -------34,099
----------------------------------------------
CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED CASH,
END OF YEAR $88,031 $62,057 $43,620 ======= ======= =======$18,474
==============================================
SUPPLEMENTAL INFORMATION
Cash paid during the year:
Interest expense $1,616 $2,131 $5,357 $12,624
Income taxes $15,934 $2,360 $3,200 The Company purchased certain assets and certain specified liabilities
in exchange for a 24% interest in Volt Delta. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired $41,508
Fair value of 24% interest 34,000
-------
Liabilities assumed $7,508
=======$8,012
See Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements.
-64-62
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--Summary of Significant Accounting Policies
Business: The Company operates in two major businesses, Staffing Services
and Telecommunications and Information Solutions, consisting of four operating
segments: Staffing Services; Telephone Directory; Telecommunications Services
and Computer Systems.
Restatement: The Company has restated its previously issued financial statements
for fiscal years 20001999 through 2003 as a result of inappropriate application of
accounting principles for revenue recognition by its telephone directory
publishing operation in Uruguay. The operation in Uruguay printed and
distributed its Montevideo directory each year during the October - November
time frame, and the Company has determined that revenue recognition should have
been taken in the first six months of each year instead of in the fourth quarter
of the prior fiscal year. The restatement involves only the timing of when
certain advertising revenue and related costs and expenses are recognized, and
the cumulative results of the Company do not change. All prior year information
included in these financial statements has been restated to reflect the
corrected information. The tables below reflect the restatements that were made
to the consolidated balance sheetsheets at the two years ended November 2, 2003 and
the consolidated statements of operations for the twothree years ended November 2,
2003. The tables reflect only items that have changed in these financial
statements.
November 2, 2003
-------November
Consolidated Balance Sheet (dollars in2, 2003 3, 2002
--------------------------------------------
(in thousands)
Inventories-as previously reported $37,357 Increase$29,690
Change 430 -------904
--------------------------------------------
Inventories-as restated $37,787 =======$30,594
============================================
Recoverable income taxes-as previously reported $2,596 Increase$6,552
Change 484 -------113
--------------------------------------------
Recoverable income taxes-as restated $3,080 =======$6,665
============================================
Prepaid expenses and other assets-as previously reported $16,132 Increase$15,212
Change 876 -------962
--------------------------------------------
Prepaid expenses and other assets-as restated $17,008 =======$16,174
============================================
Deferred income and other liabilities-as previously reported $27,665 Increase$19,009
Change 2,515 -------2,148
--------------------------------------------
Deferred income and other liabilities-as restated $30,180 =======$21,157
============================================
Retained earnings-as previously reported $199,723 Decrease$194,962
Change (725) -------(169)
--------------------------------------------
Retained earnings-as restated $198,998 ========$194,793
============================================
-6563
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Restatement:--Continued
- -----------
Year Ended
-------------------------------------------------
November November November
Consolidated Statements of Operations 2, 2003 3, 2002 ---------- ----------
Consolidated Statements of Operations4, 2001
-------------------------------------------------
(dollars in thousands)
Net sales- as previously reported $1,609,857 $1,467,786 (Decrease) increase$1,898,681
Change (366) 307 ---------- ----------2,810
-------------------------------------------------
Net sales-as restated $1,609,491 $1,468,093 ========== ==========$1,901,491
=================================================
Cost of sales-as previously reported $1,502,148 $1,370,976 Increase$1,778,491
Change 474 51 ---------- ----------1,081
-------------------------------------------------
Cost of sales-as restated $1,502,622 $1,371,027 ========== ==========$1,779,572
=================================================
Selling and administrative-as previously reported $71,607 $74,514 Increase$83,136
Change 86 105 ---------- ----------665
-------------------------------------------------
Selling and administrative-as restated $71,693 $74,619 ========== ==========$83,801
=================================================
Operating profit-as previously reported $11,771 $130 (Decrease) increase$12,472
Change (926) 151 ---------- ----------1,064
-------------------------------------------------
Operating profit-as restated $10,845 $281 ========== ==========$13,536
=================================================
Income (loss) from continuing operations-as previously
reported $8,047 ($7,507) (Decrease)$11,018
Change (926) 151 ---------- ----------1,064
-------------------------------------------------
Income (loss) from continuing operations-as restated $7,121 ($7,356) ========== ==========$12,082
=================================================
Income tax (provision) benefit-as previously reported ($3,286) $2,320 (Decrease)($4,360)
Change 370 (60) ---------- ----------(426)
-------------------------------------------------
Income tax (provision) benefit-as restated ($2,916) $2,260 ========== ==========($4,786)
=================================================
Net income (loss)-as previously reported $4,761 ($32,804) (Decrease)$5,844
Change (556) 91 ---------- ----------638
-------------------------------------------------
Net income (loss)-as restated $4,205 ($32,713) ========== ==========$6,482
=================================================
Per share data:
Income (loss) from continuing operations- as
previously reported $0.31 ($0.34) (Decrease)$0.44
Change (0.03) 0.01 ---------- ----------0.04
-------------------------------------------------
Income (loss) from continuing operations- as restated $0.28 ($0.33) ========== ==========$0.48
=================================================
Net income (loss)- as previously reported $0.31 ($2.16) (Decrease)$0.38
Change (0.03) 0.01 ---------- ----------0.04
-------------------------------------------------
Net income (loss)- as restated $0.28 ($2.15) ========== ==========$0.42
=================================================
-66-64
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Fiscal Year: The Company's fiscal year ends on the Sunday nearest October
31. The 20022001 through 20042003 fiscal years each consisted of 52 weeks.
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
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (see Note B). In January 2003, the
Financial Accounting Standards Board ("FASB") issued FASB issued Interpretation No. 46,No.46,
"Consolidation of Variable Interest Entities," ("FIN 46") which providesEntities" to provide new guidance on identifying and assessing interests in variable interest entitieswith respect to decide whether to consolidate that entity. FIN 46 requiresthe
consolidation of existingall previously unconsolidated variable interest entities, if the entities do not
effectively disperse risk among parties involved. In October 2003, the FASB
issued FASB Staff Position No. FIN 46-6, deferring the effective date for
applying the provision of FIN 46 for variable interest entities created before
February 1, 2003. In December 2003, the FASB issued Interpretation No. 46R ("FIN
46R"), a revision which clarifies some provisions of FIN 46.including special
purpose entities. The Company has no unconsolidated subsidiaries. Thesubsidiaries, however, the
Company will continue to evaluate the impact of the adoption of FIN 46R did not have a material
impactthe
interpretation on the Company's consolidated financial position and results of
operations.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States, requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Stock-Based Compensation: The Company has elected to follow Accounting
Principles Board ("APB")APB Opinion 25,
"Accounting for Stock Issued to Employees," to account for its stock options
under which no compensation cost is recognized because the option exercise price
is equal to at least the market price of the underlying stock on the date of
grant. Had compensation cost for these plans been determined at the grant dates
for awards under the alternative accounting method provided for in SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASBAmendment
for FSAB Statement No. 123," net income and earnings per share, on a pro forma
basis, would have been:
-67-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Stock-Based Compensation: --Continued
2004
2003 2002 ---- ---- ----2001
---------------------------------------------
(Restated) (Restated) (In(Restated)
(in thousands except per share data)
Net income (loss) as reported $33,716 $4,205 ($32,713) $6,482
Pro forma compensation expense, net of taxes (130) (67) (309) -------- ------- ---------(501)
---------------------------------------------
Pro forma net income (loss) $33,586 $4,138 ($33,022) ======== ======= =========
Basic:$5,981
=============================================
Net income (loss) as reported per share $2.21share-basic and diluted $0.28 ($2.15) $0.42
Pro forma compensation expense, net of taxes per share (0.1)share-basic
and diluted (0.01) (0.02) -------- ------- ---------(0.03)
---------------------------------------------
Pro forma net income (loss) per share $2.20share-basic and diluted $0.27 ($2.17) ======== ======= =========
Diluted:
Net income (loss) as reported per share $2.20 $0.28 ($2.15)
Pro forma compensation expense, net of taxes (0.01) (0.01) (0.02)
-------- ------- ---------
Pro forma net income (loss) per share $2.19 $0.27 ($2.17)
======== ======= =========$0.39
=============================================
The fair value of each option grant is estimated using the Multiple
Black-Scholes option pricing model, with the following weighted-average
assumptions used for grants in fiscal 2004, 2003, 2002 and 2002,2001, respectively:
risk-free interest rates of 4.1%2.0%, 2.0%2.7% and 2.7%5.0%, respectively; expected
volatility of .47, .50, .52 and .52,.65, respectively; an expected life of the options of
five years; and no dividends. The weighted average fair value of stock options
granted during fiscal years 2004, 2003, 2002 and 2002 was $14.62,2001 were $6.59, $10.59 and $10.59,$13.00,
respectively.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," which
replaces the superseded SFAS No. 123, "Accounting for Stock-Based Compensation."
This Statement requires that all entities apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and
suppliers when the entity acquires goods or services. The provisions65
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of this
Statement are effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005, with early adoption of this
Statement permitted for any interim period whose financial statements are not
yet issued. The Company is currently assessing the impact that the adoption will
have on the Company's consolidated financial position and results of operations.Significant Accounting Policies--Continued
Revenue Recognition: - The Company derives its revenues from several sources.
The revenue recognition methods, which are consistent with those prescribed in
Staff Accounting Bulletin 104101 ("SAB 104"101"), entitled "Revenue Recognition in
Financial Statements," are described below in more detail for the significant
types of revenue within each of its segments.
Staffing Services:
Traditional Staffing: In fiscal 2004,2003, this revenue comprised approximately
76%74% of consolidated sales. Sales are derived from the Company's Staffing
Solutions Group supplying its own temporary personnel to its customers, for
which the Company assumes the risk of acceptability of its employees to its
customers, and has credit risk for collecting its billings after it has paid
its employees. The Company reflects revenues for these services on a gross
basis in the period the services are rendered.
-68-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Revenue Recognition: --Continued
- --------------------
Managed Services: In fiscal 2004,2003, this revenue comprised approximately 2%5% of
consolidated sales. Sales are generated by the Company's E-Procurement
SolutionsSolutions' subsidiary, ProcureStaff, and for certain contracts, sales are
generated by the Company's Staffing Solutions Group's managed services
operations. The Company receives an administrative fee for arranging for,
billing for and collecting the billings related to other staffing companies
("associate vendors") who have supplied personnel to the Company's
customers. The administrative fee is either charged to the customer or
subtracted from the Company payment to the associate vendor. The customer is
typically responsible for assessing the work of the associate vendor, andwho
has responsibility for the acceptability of itstheir personnel to the customer,
and in most instances the customer and associate vendor have agreed thatto the
Company not paypaying the associate vendor until the customer pays the Company.
Based upon the revenue recognition principles prescribed in Emerging Issues
Task Force 99-19 ("EITF 99-19"), entitled "Reporting Revenue Gross as a
Principal versus Net as an Agent,"Agent", revenue for these services, where the
customer has agreed, is recognized net of associated costs in the period the
services are rendered.
Outsourced Projects: In fiscal 2004,2003, this revenue comprised approximately 5%4%
of consolidated sales. Sales are derived from the Company's Information
Technology SolutionsSolutions' operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables. The Company's employees perform the services and the Company
has credit risk for collecting its billings. Revenue for these services is
recognized on a gross basis in the period the services are rendered, and
when the Company is responsible for project completion, revenue is
recognized when the project is complete and the customer has approved the
work.
Shaw & Shaw: In fiscal 2004,2003, this revenue comprised less than 1% of
consolidated sales, due to the Company's reporting of these revenues on a
net basis. Sales are generated by the Company's Shaw & Shaw subsidiary, for
which the Company provides professional employer organizational services
("PEO") to certain customers. Generally, the customers transfer their entire
workforce or employees of specific departments or divisions to the Company,
but the customers maintain control over the day-to-day job duties of the
employees. Based upon the revenue recognition principles prescribed in EITF
99-19, effective with the Company's second fiscal quarter of 2003, the
Company has changed its method of reporting revenue from these services from
a gross basis to a net basis. The change in reporting, which is reflected in
all current and prior periods, resulted in a reduction in both reported PEO
revenues and related costs of sales, with no effect on the Company's
operating results.
66
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Revenue Recognition: --Continued
- --------------------
Telephone Directory:
Directory Publishing: In fiscal 2004,2003, this revenue comprised approximately
3% of consolidated sales. Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher or for a telephone company in Uruguay. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period the books are printed and delivered.
Ad Production and Other:Production: In fiscal 2004,2003, this revenue comprised approximately 1% of
consolidated sales. Sales are generated when the Company performs design production and
printingproduction services, and database management for other publishers' telephone
directories. The Company's employees perform the services and the Company
has credit risk for collecting its billings. Revenue for these services is
recognized on a gross basis in the period the Company has completed its ad
production work and upon customer acceptance.
-69-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Revenue Recognition: --Continued
- --------------------
Telecommunications Services:
Construction: In fiscal 2004,2003, this revenue comprised approximately 4%3% of
consolidated sales. Sales are derived from the Company supplying aerial and
underground construction services.services related to telecommunications and cable
operations. The Company's employees perform the services, and the Company
takes title to all inventory, and has credit risk for collecting its
billings. The Company relies upon the principles in American Institute of Certified Public Accountants ("ACIPA") Statement of Position
81-1 ("SOP 81-1"), entitled "Accounting for Performance of Construction-Type
Contracts," using the completed-contract method, to recognize revenue on a
gross basis upon customer acceptance of the project.
Non-Construction: In fiscal 2004,2003, this revenue comprised approximately 3%4% of
consolidated sales. Sales are derived from the Company performing design,
engineering and business systems integrations work. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which services are performed, and if applicable, any completed
units are delivered and accepted by the customer.
Computer Systems:
Database Access: In fiscal 2004,2003, this revenue comprised approximately 4%3% of
consolidated sales. Sales are derived from the Company granting access to
its proprietary telephone listing databases to telephone companies,
inter-exchange carriers and non-telco enterprise customers. The Company
uses its own databases and has credit risk for collecting its billings. The
Company recognizes revenue on a gross basis in the period in which the
customers access the Company's databases.
IT Maintenance: In fiscal 2004,2003, this revenue comprised approximately 2% of
consolidated sales. Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who have our systems. The Company uses its own employees and inventory in
the performance of the services, and has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which the services are performed, contingent upon customer
acceptance.
67
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Revenue Recognition: --Continued
- --------------------
Computer Systems--Continued:
Telephone Systems: In fiscal 2004,2003, this revenue comprised less thanapproximately 1%
of consolidated sales. Sales are derived from the Company providing
telephone operator services-related systems and enhancements to existing
systems, equipment and software to customers. The Company uses its own
employees and has credit risk for collecting its billings. The Company
relies upon the principles in AICPA Statement of Position 97-2 ("SOP 97-2"),
entitled "Software Revenue Recognition" and Emerging Issues Task Force
00-21 ("EITF 00-21"), entitled "Revenue Arrangements with Multiple
Deliverables" to recognize revenue on a gross basis upon customer
acceptance of each part of the system based upon its fair value.
The Company records provisions for estimated losses on contracts when losses
become evident. Accumulated unbilled costs on contracts are carried in inventory
at the lower of actual cost or estimated realizable value.
Cash Equivalents: Cash equivalents consist of investments in short-term, highly
liquid securities having an initial maturity of three months or less.
-70-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Investments: The Company determines the appropriate classification of marketable
equity and debt securities at the time of purchase and re-evaluates its
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Marketable equity securities and debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. Losses
considered to be other than temporary are charged to earnings.
Inventories: Accumulated unbilled costs on contracts related to performing
services are carried at the lower of actual cost or realizable value (see Note
D).
Goodwill: Under Statement of Financial Accounting Standards ("SFAS")Long-Lived and Intangible Assets: The Company, in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets," goodwill is no longer amortized, but is
subject to annual impairment testing using fair value methodologies. The
impairment test for goodwill is a two-step process. Step one consists of a
comparison of a reporting unit with its carrying amount, including the goodwill
allocated to the reporting unit. Measurement of the fair value of a reporting
unit is based on one or more fair value measures including present value
techniques of estimated future cash flows and estimated amounts at which the
unit as a whole could be bought or sold in a current transaction between willing
parties. If the carrying amount of the reporting unit exceeds the fair value,
step two requires the fair value of the reporting unit to be allocated to the
underlying assets and liabilities of that reporting unit, resulting in an
implied fair value of goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
equal to the excess is recorded in net earnings (loss). The Company performs its
impairment testing using comparable multiples of sales and EBITDA and other
valuation methods to assist the Company in the determination of the fair value
of the reporting units measured.
Long-Lived Assets: Property, plant and equipment is recorded at cost, and
depreciation and amortization are provided on the straight-line and accelerated
methods at rates calculated to depreciate the cost of the assets over their
estimated lives. Intangible assets, other than goodwill, and property, plant and
equipment are reviewed for impairment in accordance with SFAS No. 144, "Accounting for
the Impairment oron Disposal of Long-Lived Assets.Long-lived Assets," Under SFAS No.
144, thesereviews for impairment long-lived
assets are tested for recoverabilityand certain identifiable intangibles annually in the Company's second
fiscal quarter and whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; the accumulation of costs
significantly in excess of the amount originally expected for the acquisition of
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and a current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life. Recoverability is assessed based on the
carrying amount of the asset and
the sum of the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset or asset group. An impairment loss is recognized
when the carrying amount ismay not be recoverable and exceeds the fair value of the
asset or asset group. The impairment loss is measured as the amount by which the
carrying amount exceeds fair value. The weighted-average amortization periods
for other intangible assets in fiscal 2004 and 2003 were 15 and 3 years,
respectively.
-71-(see Note H).
68
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Property, Plant and Equipment: 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 useful lives. Fully depreciated assets are
retained in property and depreciation accounts until they are removed from
service. In the case of disposals, assets and related depreciation are removed
from the accounts, and the net amounts less proceeds from disposal, are included
in income. Maintenance and repairs are expensed as incurred. Property, plant and equipment isThe assets are
depreciated over the following periods:
Buildings 25 to 31-1/2 years
Machinery and equipment 3 to 15 years
Leasehold improvements length of lease or life
of the asset, whichever
is shorter
Enterprise Resource Planning system 5 to 7 years
Property, plant and equipment consisted of: October 31,November November
2, 2004 2003 ----------- -----------3, 2002
------------- ------------
(In thousands)
Land and buildings $22,807 $33,847 $33,797
Machinery and equipment 141,765 114,167 102,301
Leasehold improvements 10,460 10,818 9,049
Enterprise Resource Planning system 34,896 33,371 ----------- -----------
209,92831,916
------- ------
192,203 177,063
Less allowances for depreciation and amortization 124,890 109,751 ----------- -----------
$85,03887,769
------- ------
$82,452 =========== ===========$89,294
======= =======
A term loan is secured by a deed of trust on land and buildings with a carrying
amount at October 31, 2004November 2, 2003 of $10.6$11.0 million (see Note F).
In fiscal year 2004, the Company sold land and buildings in California. One
property was previously leased to the Company's formerly 59% owned subsidiary,
Autologic Information International, Inc. (see Note J) and the other property
was no longer being used by the Company (see Note M).
Primary Insurance Casualty Program: The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds and thefunds. The
experience-rated premiums in these state plans relieve the Company of additional
liability. In the loss sensitive program, initialInitial premium accruals are established based upon the underlying
exposure, such as the amount and type of labor utilized, number of vehicles,
etc. The Company establishes accruals utilizing actuarial methods to estimate
the undiscounted future cash payments that will be made to satisfy the claims,
including an allowance for incurred-but-not-reported claims. This process also
includes establishing loss development factors, based on the historical claims
experience of the Company and the industry, and applying those factors to
current claims information to derive an estimate of the Company's ultimate
premium liability. In preparing the estimates, the Company also considers the
nature and severity of the claims, analyses provided by third party actuaries,
as well as current legal, economic and regulatory factors. The insurance
policies have various premium rating plans that establish the ultimate premium
to be paid. Prior to March 31, 2002, the amount of the additional or return
premium was finalized. Subsequent thereto, adjustments to premium will be made
based upon the level of claims incurred at a future date up -72-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Primary Insurance Casualty Program: --Continued
- ----------------------------------
to three years after
the end of the respective policy period. For the policy year ended March 31,
2003, a maximum premium has been predetermined and accrued.predetermined. At October 31, 2004 and November 2, 2003, the
Company's net liability for the outstanding policyplan year ended
69
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
March 31, 2003 was $4.3 million ($4.1 million is due in 2006) and the Company's
prepayment for the plan year ending March 31, 2004 was $2.5 million.
Reclassification: Certain amounts in fiscal years was $8.32002 and 2001 have been
reclassified to conform to the 2003 presentation. Pursuant to Company's adoption
of Statement of Financial Accounting Standards ("SFAS") No. 145, results for the
fiscal year 2002 have been restated to give effect to the reclassification of a
charge of $2.1 million ($1.3 million, net of taxes) arising from the March 2002
early payment of the Company's 7.92% Senior Notes to Other Expense, previously
presented as an extraordinary item. In addition, as previously reported, the
Company has changed the method of reporting the revenues of its Professional
Employer Organization ("PEO") subsidiary from gross billing to a net revenue
basis. Accordingly, reported PEO revenues and related cost of sales for fiscal
years 2002 and 2001 have been reduced by $20.1 million and $1.8$33.6 million,
respectively. The
balance sheet classifications were as follows:
October 31, November 2,
2004 2003
------------ ------------
(In thousands)
Prepaid Insurance $2,229 $2,526
Accrued Insurance - Current (10,396) (190)
Accrued Insurance - Long-term (86) (4,098)
------------ ------------
($8,253) ($1,762)
============ ============
Medical Insurance Program: Beginning in April 2004,respectively, with no effect on operating profit or the Company became
self-insured for the majority of its medical benefit programs. The Company
remains insured for a portion of its medical program (primarily HMO's) as well
as the entire dental program. The Company provides the self-insured medical
benefits through an arrangement with a third party administrator. However, the
liability for the self-insured benefits is limited by the purchase of stop loss
insurance. The funds and related liabilities for the self-insured program
together with unpaid premiums for the insured programs, other than the current
provision, are held in a 501(c)9 employee welfare benefit trust and do not
appear on the balance sheetnet results of the
Company. In order to establish the
self-insurance reserves, the Company utilized actuarial estimates of expected
losses based on statistical analyses of historical data. The provision for
future payments is initially adjusted by the enrollment levels in the various
plans. Periodically, the resulting liabilities are monitored and will be
adjusted as warranted by changing circumstances. Should the amount of claims
occurring exceed what was estimated or medical costs increase beyond what was
expected, liabilities might not be sufficient, and additional expense may be
recorded.
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 to be 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 placed
in operation, 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.
Income Taxes: Income taxes are provided using the liability method. Deferred
taxes reflect the tax consequencesmethod (see
Note G).
Foreign Exchange Contracts: Gains and losses on future yearsforeign currency option and
forward contracts designated as hedges of differences between the
tax bases ofexisting assets and liabilities and their financial reporting amounts. The
carrying valueof
identifiable firm commitments are deferred and included in the measurement of
the Company's deferred tax assets is dependent upon the
Company's ability to generate sufficient future taxable income in certain tax
jurisdictions. Should the Company determine that it would not be able to realize
all or part of its deferred tax assets in the future, a valuation allowance to
the deferred tax assets would be established in the period such determination
was maderelated foreign currency transaction (see Note G)O).
-73-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Translation of Foreign Currencies: The U.S. dollar is the Company's functional
currency throughout the world, except by certain European subsidiaries. Where the
U.S. dollar is used as the functional currency, foreign currency gains and
losses are included in operations. The translation adjustments recorded as a
separate component of stockholders' equity result from changes in exchange rates
affecting the reported assets and liabilities of the European subsidiaries whose
functional currency is not the U.S. dollar.
Earnings Per Share: Basic earnings per share is calculated by dividing net
earnings by the weighted-average number of common shares outstanding during the
period. The diluted earnings per share computation includes the effect, if any,
of shares that would be issuable upon the exercise of outstanding stock options,
reduced by the number of shares which are assumed to be purchased by the Company
from the resulting proceeds at the average market price during the period (see
Note I).
70
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Comprehensive Income: Comprehensive income is the net income of the Company
combined with other changes in stockholders' equity not involving ownership
interest changes. For the Company, such other changes include foreign currency
translation and mark-to-market adjustments related to held-for-sale securities.
Derivatives and Hedging Activities: Gains and losses on foreign currency option
and forward contracts designated as hedges of existing assets and liabilities
and of identifiable firm commitments are deferred and included in the
measurement of the related foreign currency transaction. The Company enters into derivative financial
instrument contracts only for hedging purposes and accounts for them in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and its amendments SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133," SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities" and SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." (see Note O).
New Accounting Pronouncements: In November 2004,May 2003, the FASB issued SFAS No. 151,
"Inventory Costs-an Amendment150,
"Accounting for Certain Financial Instruments with Characteristics of ARB No. 43, Chapter 4," which clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs,Both
Liabilities and spoilage. This Statement requires thatEquity", to provide new guidance with respect to how an issuer
classifies and measures these items be recognized as
period costs even if the amounts are not considered to be abnormal. The
provisions of this Statement arein its financial statements. SFAS No. 150 is
effective for inventory costs incurred in
fiscal yearsfinancial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2005.2003, except for mandatorily redeemable financial
instruments of nonpublic entities. The Company does not believe that
theCompany's adoption of this StatementSFAS No. 150 in fiscal 2006 willthe
fourth quarter did not have a materialan impact on the Company's consolidated financial
position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets-an Amendment of APB Opinion No. 29," to eliminate the exception for
nonmonetary exchanges of similar productive assets and replace it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. The provisions of this Statement are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005, with early
application permitted for exchanges beginning after November, 2004. The Company
does not believe that the adoption of this Statement in fiscal 2005 will have a
material impact on the Company's consolidated financial position or results of
operations.
-74-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--Securitization Program
Effective April 15, 2002, the Company entered into a $100.0 million, three-year
accounts receivable securitization program (the "Securitization Program"). In
April 2004, the Company amended its Securitization Program which increased the
capacity of its accounts receivable securitization program to $150.0 million and
extended its maturity to April 2006. Under
the Securitization Program, receivables related to the United States operations
of the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A. and unaffiliated with the Company, an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company (subject to a maximum purchase by TRFCO in the
aggregate of $150.0$100.0 million). The Company retains the servicing responsibility
for the accounts receivable. At October 31, 2004,November 2, 2003, TRFCO had purchased from Volt
Funding a participation interest of $70.0 million out of a pool of approximately
$248.7$189.3 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company. Accounts
receivable are only reduced to reflect the fair value of receivables actually
sold. The Company entered into this arrangement as it provided a low-cost
alternative to other financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt
71
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--Securitization Program--Continued
Funding, to satisfy the Company's creditors (subject also, as described in Note
E,F, to the security interest that the Company has granted in the common stock of
Volt Funding in favor of the lenders under the Company's new Credit Facility).
TRFCO has no recourse to the Company (beyond its interest in the pool of
receivables owned by Volt Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases in a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to TRFCO. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts incurred by
TRFCO on the issuance of its commercial paper, are charged to the Company's
consolidated statement of operations.
The Company incurred charges, in connection with the sale of receivables under
the Securitization Program, of $1.7$1.6 million in the fiscal year ended October 31,
2004November 2,
2003 compared to $1.6 million and $0.9 million in the fiscal yearsyear ended November 2, 2003 and November 3, 2002, respectively, which
are included in Other Expense on the consolidated statement of operations. The
equivalent cost of funds in the Securitization Program was 2.7%, 2.6% and 2.5% per
annum in the fiscal years 2004, 2003 and 2002, respectively. The Company's carrying
retained interest in the receivables approximated fair value due to the
relatively short-term nature of the receivable collection period. In addition,
the Company performed a sensitivity analysis, changing various key assumptions,
which also indicated the retained interest in receivables approximated fair
value.
-75-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--Securitization Program--Continued
At October 31, 2004November 2, 2003 and November 2, 2003,3, 2002, the Company's carrying retained
interest, in a revolving pool of receivables of approximately $248.7$189.3 million and
$189.3$168.2 million, respectively, net of a service fee liability, was approximately
$178.2$119.0 million and $119.0$108.1 million, respectively. The outstanding balance of the
undivided interest sold to TRFCO was $70.0 million and $60.0 million at October 31, 2004November
2, 2003 and November 2, 2003.3, 2002, respectively. Accordingly, the trade accounts
receivable included on the October 31, 2004November 2, 2003 and November 2, 20033, 2002 balance sheet,
has been reduced to reflect the $70.0 million and $60.0 million, respectively,
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. At October 31, 2004, the CompanyThe Company's most recent long-term debt rating
was in
compliance"BBB-" with all requirements of the Securitization Program.a neutral rating outlook.
72
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE C--Short-Term Investments and Investments in Securities
At October 31, 2004November 2, 2003, and November 2, 2003,3, 2002, short-term investments consisted of
$4.2$4.1 million and $4.1$3.8 million, respectively, invested in mutual funds for the
Company's deferred compensation plan (see Note N).
At October 31, 2004November 2, 2003 and November 2, 2003,3, 2002, the Company had an available-for-sale
investment in equity securities of $100,000$193,000 and $193,000,$52,000, respectively. The gross
unrealized gains of $60,500$153,500 and $153,500$12,000 at October 31, 2004November 2, 2003 and November 2, 2003,3,
2002, respectively, were included as a component of accumulated other
comprehensive (loss) income.
During fiscal 2001, the Company sold an investment in equity securities,
previously written off in 1997, resulting in a pre-tax gain of $6.3 million and
wrote down a non-current investment in marketable securities resulting in a
charge to earnings and an adjustment to other comprehensive income (loss).of $0.7
million ($0.4 million, net of taxes) as the decline in market value was
considered other than temporary.
NOTE D--Inventories
Inventories of accumulated unbilled costs and materials by segment are as
follows:
October 31, November 2, 2004November 3,
2003 ------------2002
----------- -----------
(Restated) (Restated)
(In thousands)
Staffing Services $32
Telephone Directory $11,313 $13,328 12,259
Telecommunications Services 14,505 18,320 14,394
Computer Systems 6,858 6,139 ------------ -----------3,909
-------- --------
Total $32,676 $37,787 ============ ===========$30,594
======= =======
The cumulative amounts billed under service contracts at October 31, 2004 and
November 2, 2003 and
November 3, 2002 of $13.9$3.6 million and $3.6$2.1 million, respectively, are credited
against the related costs in inventory.
-76-NOTE E--Short-Term Borrowings
At November 2, 2003, the Company had total outstanding bank borrowings of $4.1
million under credit lines. These credit lines with foreign banks that provide
for borrowings and letters of credit up to an aggregate of $11.1 million expire
during fiscal year 2004, unless renewed. The weighted average interest rate of
short-term borrowings at each year-end was 9.9% at the end of fiscal 2003 and
62% at the end of fiscal 2002. Borrowings in foreign currencies provide a hedge
against devaluation in foreign currency denominated assets. The weighted average
interest rate in fiscal 2002 was significantly higher as the borrowings were
primarily by the Company's Uruguayan operation from Uruguayan banks, whose
interest rates reflected the country's high inflation level.
73
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE E--Short-Term BorrowingsF--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
November November
2, 2003 3, 2002
-------- --------
(In thousands)
8.2% term loan (a) $14,469 $14,810
Notes payable (b) 1,183
------- -----
14,469 15,993
Less amounts due within one year 371 1,524
------- -------
Total long-term debt $14,098 $14,469
======= =======
(a) In April 2004,September 2001, a subsidiary of the Company amended itsentered into a $15.1 million
loan agreement with General Electric Capital Business Asset Funding
Corporation. The 20-year loan, which bears interest at 8.2% per annum and
requires principal and interest payments of $0.4 million per quarter, is
secured by a deed of trust on certain land and buildings that had a
carrying amount at November 2, 2003 of $11.0 million. The obligation is
guaranteed by the Company.
(b) 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 provided for interest, calculated at 6%,
and principal payments in five equal annual installments of $1.3 million,
which began in February 1999. The final payment was made in February 2003.
Effective April 15, 2002, the Company entered into a $40.0 million, two-year,
secured, syndicated, revolving credit agreement ("Credit Agreement") which was to expire in April
2004, to, among other things, extend the term for 364 days (to now expire in
April 2005) and reduce the line to $30.0 million, as a result of the increase in
its Securitization Program (see Note B). Additionally, in July 2004, this
program was further amended to release Volt Delta Resources, LLC ("Volt Delta")
as a guarantor and collateral grantor under the Credit Agreement due to the
previously announced agreement between Volt Delta and Nortel Networks Inc.
("Nortel Networks") (see Note J). At October 31, 2004, the Company had credit
lines with domestic and foreign banks which provided for borrowings and letters
of credit up to an aggregate of $41.5 million, including $30.0 million under the
Credit Agreement.
The Credit Agreement
established a credit facility ("Credit Facility") in favor of the Company and
designated subsidiaries, of which up to $15.0 million may be used for letters of
credit. Borrowings by subsidiaries are limited to $25.0 million in the
aggregate. The administrative agent arranger for the secured Credit Facility is
JP Morgan Chase Bank. The other banks participating in the Credit Facility are
Mellon, Bank, NA, Wells Fargo, NA and Lloyds TSB Bank PLC. Borrowings and letters of
credit under the Credit Facility are limited to a specifiedspecific borrowing base, which
is based upon the level of specified receivables generally at the endtime of the fiscal month preceding a borrowing.each
calculation. At October 31, 2004, all $30.0 million was available underNovember 2, 2003, the borrowing base formula of which $3.7 million was borrowed.approximately $40.0
million. Borrowings under the Credit Facility are to bear interest at various
rate options selected by the Company at the time of each borrowing. Certainborrowing, certain of
which rate options together with a facility fee, are based on a leverage ratio, as defined.defined, as is the annual
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 October 31, 2004,November 2, 2003, if a three-month LIBO rate werewas the interest
rate option selected by the Company, borrowings would have borne interest at the
rate of 2.8%3.0% per annum. At October 31, 2004,November 2, 2003, the facility fee was 0.3%0.4% per
annum. The Company has not borrowed, and no letters of credit have been issued,
under the Credit Facility since its inception in April 2002.
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;defined, of $220.0 million (the
Company's consolidated tangible net worth, as defined, as of November 2, 2003
was $234.2 million); a limitation on cash dividends and capital stock
repurchases and redemptions by the Company in any one fiscal year to 50%25% of
consolidated net income, as defined, for the prior fiscal year; and a
requirement that the Company
74
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Note F--Long-Term Debt--Continued
maintain a ratio of EBIT, as defined, to interest expense, as defined, of 1.25
to 1.0 for the twelve months ending as of the last day of eachthe fiscal quarter.year. As a
result of the loss sustained by the Company in fiscal year 2002, the Company was
restricted from paying dividends in fiscal 2003. The Credit Agreement also
imposes limitations on, among other things, the incurrence of additional
indebtedness, the incurrence of additional liens, sales of assets, the level of
annual capital expenditures and the amount of investments, including business
acquisitions and investments in joint ventures, and loans that may be made by
the Company and its subsidiaries. At October 31, 2004,November 2, 2003 the Company was in
compliance with all covenants in the Credit Agreement.Agreement and believes it will be in
compliance throughout its remaining term.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are now guarantors of all
loans made to the Company or to subsidiary borrowers under the Credit Facility.
At October 31, 2004,November 2, 2003, four of those guarantors have pledged approximately $62.6$52.4
million of accounts receivable, other than those in the Securitization Program,
as collateral for the guarantee obligations. Under certain circumstances, other
subsidiaries of the Company also may be required to become guarantors under the
Credit Facility. -77
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE E--Short-Term Borrowings--Continued
At October 31, 2004,The Company has pledged all of the Company had total outstanding foreign currency bank
borrowingsstock of $8.0 million, $3.7 million of which wereVolt Funding (see
Note B) as collateral security for the Company's obligations under the Credit
Agreement. These bank borrowings provide a hedge against devaluation in foreign
currency denominated assets.
NOTE F--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
October 31, November 2,
2004 2003
----------- -----------
(In thousands)
8.2% term loan (a) $14,130 $14,469
Payable to Nortel Networks(b) 1,857 -
----------- -----------
15,987 14,469
Less amounts due within one year 399 371
----------- -----------
Total long-term debt $15,588 $14,098
=========== ===========
(a) In September 2001, a subsidiary of the Company entered into a $15.1 million
loan agreement with General Electric Capital Business Asset Funding
Corporation. Principal payments have reduced the loan to $14.1 million at
October 31, 2004. The fair value of the loan was approximately $15.3
million at October 31, 2004. The 20-year loan, which bears interest at 8.2%
per annum and requires principal and interest payments of $0.4 million per
quarter, is secured by a deed of trust on certain land and buildings that
had a carrying amount at October 31, 2004 of $10.6 million. The obligation
is guaranteed by the Company.
(b) Represents the present value of a $2.0 million payment due to Nortel
Networks in February 2006, discounted at 6% per annum, as required in an
agreement closed on August 2, 2004 (see Note J).Facility.
Principal payment maturities on long-term debt outstanding at October 31, 2004November 2, 2003
are:
Fiscal Year Amount
----------- ------
(In thousands)
2004 $371
2005 $399402
2006 2,291436
2007 470474
2008 510
2009 554514
Thereafter 11,763
-------
$15,98712,272
------
$14,469
=======
-78-75
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE G--Income Taxes
The components of the Company's income (loss) from continuing operations before
income taxes and minority interest by location, and the related income tax provision (benefit) are as
follows:
Year Ended
--------------------------------------------------------------
October 31,---------------------------------------------------------
November 2, November 3, 2004November 4,
2003 2002 -------------------- -------------------- --------------------2001
---------------------------------------------------------
(Restated) (Restated) (Restated)
(In thousands)
The components of income (loss) from
continuing operations before income taxes,
and minority interest,
based on the location of operations, consist
of the following:
Domestic $36,530 $3,523 ($6,123) $10,421
Foreign 5,603 3,598 (1,233) ------- ------ --------
$42,1331,661
--------------------------------------------------
$7,121 ($7,356) ======= ====== ========$12,082
==================================================
The components of the income tax provision
(benefit) include:
Current:
Federal (a) $13,040 $518 ($5,539) $1,110
Foreign 2,608 1,716 546 543
State and local 4,109 600 (1,165) ------- ------ --------513
--------------------------------------------------
Total current 19,757 2,834 (6,158) ------- ------ --------2,166
--------------------------------------------------
Deferred:
Federal ($3,450) $232 $3,345 $2,366
Foreign (19) (202) 128 (145)
State and local (771) 52 425 ------- ------ --------399
--------------------------------------------------
Total deferred (4,240) 82 3,898 ------- ------ --------2,620
--------------------------------------------------
Total income tax provision (benefit) $15,517 $2,916 ($2,260) ======= ====== ========
$4,786
==================================================
(a) Reduced in 2004 and 2003 and 2001 and increased in 2002 by benefits of $0.9 million, $0.8 million,
$1.0 million and $0.2 million, respectively, from general business credits.
The consolidated effective tax rates are different than the U.S. Federal
statutory rate. The differences result from the following:
Year Ended
---------------------------------------------------------------
October 31,--------------------------------------------------
November November November
2, November2003 3, 2004 2003 2002 --------------------- -------------------- --------------------4, 2001
--------------------------------------------------
(Restated) (Restated)
Statutory rate 35.0% 35.0% (35.0%) 35.0%
State and local taxes, net of federal
tax benefit 6.3 6.4 (7.8) 5.1
Tax effect of foreign operations 2.4 3.8 14.9 2.1
Goodwill (1.3)amortization (3.3) 2.6
General business credits (2.2) (4.5) (3.5) Minority interest (2.2)(5.7)
Other-net, principally non deductiblenon-deductible items (1.2) 3.5 0.7 ----- ----- -----0.5
--------------------------------------------------
Effective tax rate 36.8% 40.9% (30.7%) ===== ===== =====39.6%
==================================================
-79-76
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE G--Income Taxes--Continued
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and also include foreign
operating loss carryforwards. Significant components of the Company's deferred
tax assets and liabilities are as follows:
October 31,November November
2, 2003 3, 2002
----------- -------------
(In thousands)
Deferred Tax Assets:
Allowance for doubtful accounts $3,626 $4,144
Inventory valuation 19 19
Foreign loss carryforwards 830 687
Goodwill 2,805 3,069
Compensation accruals and deferrals 4,355 3,644
Warranty accruals 74 99
Foreign asset bases 357 155
Other-net 1,040 1,110
---------------------------------
Total deferred tax assets 13,106 12,927
Less valuation allowance for deferred tax
assets 3,635 3,756
---------------------------------
Deferred tax assets, net of valuation
allowance 9,471 9,171
---------------------------------
Deferred Tax Liabilities:
Software development costs 8,682 12,520
Earnings not currently taxable 131 100
Accelerated book depreciation 7,188 2,951
---------------------------------
Total deferred tax liabilities 16,001 15,571
---------------------------------
Net deferred tax liabilities ($6,530) ($6,400)
=================================
Balance sheet classification:
Current assets $8,722 $8,343
Non-current liabilities (15,252) (14,743)
---------------------------------
Net deferred tax liabilities ($6,530) ($6,400)
=================================
At November 2,
2004 2003,
---------- -----------
(In thousands)
Deferred Tax Assets:
Allowance for doubtful accounts $3,573 $3,626
Inventory valuation 526 19
Foreign loss carryforwards 1,692 830
Goodwill 2,256 2,805
Compensation accruals and deferrals 4,551 4,355
Warranty accruals 76 74
Foreign asset bases 377 357
Other-net 878 1,040
---------- -----------
Total deferred tax assets 13,929 13,106
Less valuation allowance for deferred tax assets 3,948 3,635
---------- -----------
Deferred tax assets, net of valuation allowance 9,981 9,471
---------- -----------
Deferred Tax Liabilities:
Software development costs 4,526 8,682
Earnings not currently taxable 146 131
Accelerated book depreciation 7,688 7,188
---------- -----------
Total deferred tax liabilities 12,360 16,001
---------- -----------
Net deferred tax liabilities ($2,379) ($6,530)
========== ===========
Balance sheet classification:
Current assets $9,385 $8,722
Non-current liabilities (11,764) (15,252)
---------- -----------
Net deferred tax liabilities ($2,379) ($6,530)
========== ===========
At October 31, 2004, deferred tax assets included $1.7$0.8 million related to
foreign loss carryforwards, with no limitation on the carry forward period and
$2.2$2.8 million related to goodwill written off as impaired. For financial
statement purposes, a full valuation allowance of $3.9$3.6 million has been
recognized due to the uncertainty of the realization of the foreign loss
carryforwards and future tax deductions related to goodwill. The valuation
allowance increaseddecrease during 2004 by $0.3 million.2003 of $0.1 million was principally due to the
goodwill.
Substantially all of the undistributed earnings of foreign subsidiaries of $9.8$8.3
million at October 31, 2004November 2, 2003 are considered permanently invested and,
accordingly, no federal income taxes thereon have been provided. Should these
earnings be distributed, foreign tax credits would reduce the additional federal
income tax that would be payable. Availability of credits is subject to
limitations; accordingly, it is not practicable to estimate the amount of the
ultimate deferred tax liability, if any, on accumulated earnings.
The American Jobs Creation Act of 2004 (the "Act") provided for a special
one-time tax deduction of 85% of certain foreign earnings that are repatriated.
The Company is currently assessing the impact the Act will have on the Company's
consolidated financial position or results of operations.
-80-77
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE H--Goodwill and Other Intangibles
GoodwillAs 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 annually and whenever events or changes in circumstances indicate that
their carrying amounts may not be recoverable, using fair value methodology.
AnIntangible 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 charge is recognizedin accordance with SFAS No. 144, "Accounting for
the amount, if any, by which the carrying valueImpairment or Disposal of an
indefinite-life intangible asset exceeds its fair value. The test for goodwill,
which is performed in the Company's second fiscal quarter, primarily uses
comparable multiples of sales and EBITDA and other valuation methods to assistLong-Lived Assets." As a result, the Company did
not incur any expense for the amortization of goodwill in fiscal years 2003 and
2002 (however, as discussed below, the determinationCompany did record a charge for the
impairment of goodwill as of the fair valuebeginning of fiscal 2002). The pretax expense
for the amortization of goodwill and the
reporting units measured.included in continuing operations was $3.0
million in fiscal year 2001.
The Company engaged independent valuation firms to assist in the determination
of impairment, which may have existed in the $39.8 million of goodwill recorded
as of the beginning of fiscal 2002. 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." Using the same valuations methods
employed by the independent valuation firms, the Company completed its annual
impairment tests on the remaining $9.0 million of goodwill during the second
quarter of fiscal 2003 and determined that no impairment existed, since its fair
value exceeded the carrying value.
The fiscal 2002 impairment charge in the Staffing Services segment related to
the Company's European Technical Placement division and the Administrative and
Industrial division, which had been adversely affected by the economic declines
in Europe and the United States, respectively. Accordingly, an impairment charge
of $23.9 million (including $2.6 million, the total carrying amount of goodwill
for the Administrative and 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 then-owned 50% interest in the westVista joint
venture ($1.1 million), which also publishes independent directories (see Note
J). Due to the fact that some of the directories purchased had not performed as
well as projected, and in some cases had incurred losses, an impairment charge
of $8.0 million was recognized.
UsingThe changes in the same valuation methods employed as in prior years, the Company
completed its annual impairment tests on the then remaining $9.0 millioncarrying amount of goodwill by segment during the second quarter of fiscal
2003 and 2004 and determined that
no impairment existed, since the reporting units' fair value exceeded the
carrying value.
The following table represents the balance of other intangible assets subject to
amortizationyear ended November 3, 2002 were as of the end of fiscal 2004 and the amortization expense for the
year.
October
31, 2004
--------follows:
November Impairment November
4, 2001 Charge (1) 3, 2002
---------------------------------------
(In thousands)
Other intangible assets $16,286
Accumulated amortization 288
-------
Net Carrying Value $15,998
=======
Annual amortization expense $288
=======
In each ofStaffing 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 did not include the succeeding five years,$1.1 million charge related to
the amount of amortization expense for
other intangible assets is estimated to be $1.1 million. In fiscal 2004,goodwill associated with the total other intangible assets acquired was $16.3 million, as noted in Note J. In
fiscal 2003, $0.4 million of other intangible assets were fully amortized and
were written off. Amortization expense in fiscal 2003 was $92,000.
-81westVista joint venture, discussed above.
78
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE H--Goodwill and Other Intangibles--Continued
The following table representstables reflect the change inimpact that the carrying amountelimination of goodwill
(see Note J) for each segment during eachthe amortization
pursuant to SFAS No. 142 would have had on prior year net income and net income
per share, if SFAS No. 142 had been adopted at the beginning of fiscal year.year
2001:
Carrying Carrying Carrying
Value Value ValueYear Ended
November Additions November Additions October
Segment 3, 2002 2003 2, 2003 2004 31, 2004
------- --------- -------- -------- --------- --------4, 2001
----------------
(In thousands)thousands, except per share data)
Staffing Services $8,340 $8,340 $8,340
Computer Systems 642 642 $20,162 20,804
------ ------ ------- -------
Total $8,982 $8,982 $20,162 $29,144Reported net income $6,482
Add back: Goodwill amortization, net of taxes (a) 2,303
-----
Adjusted net income $8,785
======
====== ======= =======Per Share Data
Basic and Diluted: --------------
Reported net income per share $0.42
Add back: Goodwill amortization per share (a) 0.15
----
Adjusted net income per share $0.57
=====
(a) Includes goodwill amortization applicable to discontinued operations of and
$1.1 million, net of taxes, or $0.07 per share, for the fiscal year ended
November 4, 2001.
NOTE I--Per Share Data
In calculating basic earnings per share, the effect of dilutive securities is
excluded. Diluted earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding and the assumed exercise of
dilutive outstanding stock options based on the treasury stock method.
Year Ended
--------------------------------------------------------------
October 31,--------------------------------------------------
November November November
2, November2003 3, 2004 2003 2002 -------------------- -------------------- --------------------
(In thousands)
4, 2001
--------------------------------------------------
Denominator for basic earnings per share -
Weighted average number of shares 15,234 15,218 15,217 15,212
Effect of dilutive securities:
Employee stock options 120 7 -
------ ------ ------32
--------------------------------------------------
Denominator for diluted earnings per share -
Adjusted weighted average number of shares 15,354 15,225 15,217 ====== ====== ======15,244
==================================================
Options to purchase 45,400, 582,539, 566,359 and 566,359573,241 shares of the Company's common
stock were outstanding at October 31, 2004, November 2, 2003, and November 3, 2002 and November 4,
2001, respectively but were not included in the computation of diluted earnings
per share because the effect of inclusion would have been antidilutive.
NOTE J--Acquisition and Sales of Businesses and Subsidiaries
On August 2, 2004, Volt Delta, a wholly-owned subsidiary of the Company, closed
a Contribution Agreement (the "Contribution Agreement") with Nortel Networks
under which Nortel Networks contributed certain of the assets (consisting
principally of a customer base and contracts, intellectual property and
inventory) and certain specified liabilities of its directory and operator
services ("DOS") business to Volt Delta in exchange for a 24% minority equity
interest in Volt Delta. Together with subsidiaries, Volt Delta is reported as
the Company's Computer Systems Segment. Volt Delta is using the assets acquired
from Nortel Networks to enhance the operation of its DOS business. The
acquisition allows Volt Delta to provide the newly combined customer base with
new solutions, an expanded suite of products, content and enhanced services. As
a result of this transaction, approximately 155 DOS business employees in North
America joined VoltDelta.
-82-79
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--AcquisitionJ--Sale of Subsidiaries and SalesBusinesses
On November 30, 2001, the Company's 59% owned publicly-held subsidiary,
Autologic Information International, Inc. ("Autologic"), which comprised the
Company's Electronic Publication and Typesetting segment, was acquired by Agfa
Corporation through a tender offer for all of BusinessesAutologic's outstanding shares and
Subsidiaries--Continued
In addition, the companies entered into a ten-year relationship agreement to
maintain the compatibility and interoperability between future releases of
Nortel Networks' Traffic Operator Position System ("TOPS") switching platform
and Volt Delta's IWS/MWS operator workstations and associated products. Nortel
Networks and Volt Delta will work together developing feature content and
release schedules for, and to ensure compatibility between, any TOPS changes
that require a change in Volt Delta's products or workstations.
Also, on August 2, 2004, thesubsequent merger. The Company and certain subsidiaries entered into a
Members' Agreement (the "Members' Agreement") with Nortel Networks which defined
the management of Volt Delta and the respective rights and obligations of the
equity owners thereof. The Members' Agreement provides that commencing two years
from the date thereof, Nortel Networks may exercise a put option or Volt Delta
may exercise a call option, in each case to affect the purchase by Volt Delta of
Nortel Networks' minority interest in Volt Delta ("Contingent Liability"). If
either party exercises its option between the second and third year from the
date of the Members' Agreement, the price paid to Nortel Networksreceived $24.2 million for its 24%
minority equity interest will be the product of the revenue of Volt Delta for
the twelve-month period ended as of the fiscal quarter immediately preceding the
date of option exercise (the "Volt Delta Revenue Base") multiplied by 70% of the
enterprise value-to-revenue formula index of specified comparable companies
(which index shall not exceed 1.8), times Nortel Networks' ownership interest in
Volt Delta (the amount so calculated would not exceed 30.24% of the Volt Delta
Revenue Base), with a minimum payment of $25.0 million and a maximum payment of
$70.0 million. Basedshares. The
Company's gain on the pro forma financial resultssale of Volt Delta for the
year ended October 31, 2004, the Contingent Liability for this put/call would be
$45.1$4.5 million, at October 31, 2004. If the option is exercised after three years
from the dateincluding a tax benefit of the Members' Agreement, the price paid will be a mutually
agreed upon amount.
The Company engaged an independent valuation firm to assist$1.7
million, was reflected in the determination
of the purchase price (the value of the 24% equity interest in Volt Delta) of
the acquisition and its allocation. The preliminary allocation was completed in
the fourthCompany's first quarter of fiscal 2004, subject to finalization of certain
adjustments.
The assets and liabilities of the acquired business are accounted for under the
purchase method of accounting at the date of acquisition, recorded at their fair
values, with the recognition of a minority interest to reflect Nortel Networks'
24% investment in Volt Delta.2002. The
results of operations of Autologic have been includedclassified as discontinued and
Autologic's prior period results have been reclassified.
Included in discontinued operations, as a result of the Consolidated Statementssale of Operations sinceAutologic, for
the acquisition date.
-83-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--Acquisition and Sales of Businesses and Subsidiaries--Continued
Preliminary Purchase Allocation
Fair Value of Assets Acquired and Liabilities Assumed and Established
---------------------------------------------------------------------two fiscal years ended November 3, 2002 are:
November November
3, 2002 4, 2001
-----------------------------
(In thousands)
Cash 3,491
Inventories 1,551
DepositRevenue $3,296 $68,518
=============================
Loss before taxes and other assets 404
Goodwill 20,162
Intangible assets 15,900
-------
Total assets $41,508
=======
Accrued wages and commissions $700
Other accrued expenses 2,189
Other liabilities 2,791
Long-term debt 1,828minority interest ($488) ($1,412)
Income taxes (benefit) 153 110
Minority interest 34,000
-------
Total liabilities $41,508
=======
The other intangible assets represent the fair value of customer relationships138 488
-----------------------------
Loss from operations (197) (814)
-----------------------------
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 ($15.1 million) and product technology ($0.8 million), and are being amortized
over 16 years and 10 years, respectively. Since the members interests in Volt
Delta are treated as partnership interests, the tax deduction for amortization
will not commence until the Contingent Liability is final and determined.
The following unaudited pro forma information combines the consolidated results
of operations of the Company with those of the DOS Business as if the
acquisition had occurred at the beginning of fiscal 2003. This pro forma
financial information is presented for comparative purposes only and is not
necessarily indicative of the operating results that actually would have
occurred had this acquisition been consummated at the start of fiscal 2003. In
addition, these results are not intended to be a projection of future results
and do not reflect any synergies that might be achieved from the combined
operations.
Pro Forma Results (Unaudited)
-----------------------------
Year Ended
----------
October November
31, 2004 2, 2003
-------- --------
(Restated)
(In thousands of dollars, except per share data)
Net sales $1,953,842 $1,649,939
========== ==========
Operating income $51,326 $18,512
======= =======
Net income $34,678 $5,922
======= =======
Earnings per share:
Basic $2.27 $0.39
======= =======
Diluted $2.25 $0.39
======= =======
-84-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--Acquisition and Sales of Businesses and Subsidiaries--Continued
In May 2004, DataNational, a wholly-owned subsidiary of the Company, purchased
certain of the assets of an independent telephone directory publisher for $0.4
million. The assets consisted of the rights to produce and sell certain
independent telephone directories in the state of Georgia. The entire purchase
price represents the fair value of the acquired customer listings, prospect
listings and documentation, which is reflected in other intangible assets, and
is being amortized over 5 years.814)
=============================
In August 2002, the Company's 50% owned joint venture, westVista, was liquidated
with one operation sold to an unaffiliated third party and the other operation
acquired by the Company. The terms of the initial purchase agreement required
the Company and its partner to make future payments to the previous owner.
Accordingly, 50% of this liability has been accrued by the Company and the gain
on the sale of approximately $0.1 million has been deferred.
Prior to the sale, the Company's portion of net income was $25,000 in fiscal
2002 and the portion of net loss was $49,000 in fiscal 2001, which is included
in Other Income (Expense)other income (expense). In addition in fiscal 2002, 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 effectEffect of a changeChange in accounting in
fiscal 2002.
On November 30,Accounting (see
Note H).
In April 2001, the Company's 59% owned publicly-held subsidiary,
Autologic Information International, Inc. ("Autologic"), which 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 sale of $4.5 million, including a tax benefit of $1.7
million, was reflected in fiscal 2002. The results of operations of Autologic
for fiscal 2002 (revenue of $3.3 million and a net loss of $0.2 million) have
been classified as discontinued. In fiscal 2004, the Company sold its interest in a real estate previously leased to Autologic. The cash transaction resultedpartnership,
resulting in a $9.5 millionpre-tax gain net of taxes of $4.6 million, which was recorded in discontinued
operations.$4.2 million.
80
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE K--Stock Option Plans
In May 1995, the Company adopted a new Non-Qualified Stock Option Plan, which
initially enabled the granting of options to acquire up to 1.2 million shares of
common stock to key employees and, as amended in January 1998, directors of the
Company. Option exercise prices may not be less than 100% of the market price of
the shares on the date the options are granted. The term of each option, which
may not exceed ten years, and vesting period of each option are at the
discretion of the Company. Currently outstanding options become fully vested
within one to five years after the date of grant. At October 31, 2004,November 2, 2003, options
to purchase 460,943 (488,039488,039 (457,105 at November 2, 2003)3, 2002) shares were vested and 340,430
(347,854347,854
(367,034 at November 2, 2003)3, 2002) shares were available for future grants under the
plan.
-85-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE K--Stock Option Plans--Continued
Transactions involving outstanding stock options under the plan were:
Number of Weighted Average
Shares Exercise Price
----------------------- ----------------
Outstanding-November 3, 2000 581,350 $21.08
Granted 31,650 18.49
Exercised (7,650) 18.08
Forfeited (31,609) 19.33
--------------
Outstanding November 4, 2001 573,741 $21.0821.08
Granted 4,500 18.13
Exercised (1,750) 18.01
Forfeited (10,132) 20.16
---------------------
Outstanding-November 3, 2002 566,359 21.08
Granted 38,750 12.02
Exercised (3,000) 18.08
Forfeited (19,570) 21.43
----------------------
Outstanding-November 2,3, 2003 582,539 20.48
Granted 13,800 25.39
Exercised (62,210) 18.55
Forfeited (6,376) 25.67
-------
Outstanding-October 31, 2004 527,753 $20.77
=======$20.48
==============
Price ranges of outstanding and exercisable options as of October 31, 2004November 2, 2003 are
summarized below:
Outstanding Options Exercisable Options
-------------------------------------------------------- ---------------------------------------
Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices of Shares Life (Years) Exercise Price of Shares Exercise Price
- -------------------------------- --------- ----------- ---------------------------- ------------------- --------- -----------------
$10.67 - $17.50 65,03071,300 7 $13.73 35,830 $15.62$13.99 27,900 $16.69
$18.08 - $18.08 218,663262,633 2 $18.08 218,663262,633 $18.08
$18.13 - $23.06 127,310 5 $20.88 104,940$24.22 153,506 6 $21.14 $23.17 - $40.03 114,750 4 $29.26 99,510 $29.71
$50.56106,006 $21.46
$25.42 - $50.56 2,000 3 $50.56 2,000 $50.5695,100 4 $30.90 91,500 $30.84
81
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures
Financial data concerning the Company's sales, segment profit (loss) and
identifiable assets by reportable operating segment for fiscal years 2004, 2003, 2002
and 20022001 are presented in tables below.
Total sales include both sales to unaffiliated customers, as reported in the
Company's consolidated statements of operations, and intersegment sales. Sales
between segments are generally priced at fair market value. The Company
evaluates performance based on segment profit or loss from operations before
general corporate expenses, interest income and other expense, interest expense,
foreign exchange gains and losses and income taxes.
-86-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Therefore, the
Company's operating profit is the total segment profit less general corporate
expenses. Identifiable assets are those assets that are used in the Company's
operations in the particular operating segment. Corporate assets consist
principally of cash and cash equivalents, investments and an Enterprise Resource
Planning system.
The Company operates in two major businesses, which are primarily focused on the
markets they serve: staffing services and telecommunications and information
solutions. The Company's internal reporting structure is based on the services
and products provided to customers which results in the following four
reportable operating segments:
Staffing Services - This segment provides a broad range of employee staffing
services to a wide range of customers throughout the United States, Canada and
Europe. These services fall within three major functional areas: Staffing
Solutions, Information Technology Solutions and E-Procurement Solutions.
Staffing Solutions provides a full spectrum of managed staffing,
temporary/alternative personnel employment and direct hire placement and
professional employer organization services. Information Technology Solutions
provides a wide range of information technology services, including consulting,
turnkey project management and software and web development. E-Procurement
Solutions provides global vendor neutral procurement and management solutions
for supplemental staffing using web-based software systems.
Telephone Directory - This segment publishes independent telephone directories
in the United States and publishes telephone directories in Uruguay;Uruguay under a
contract with the government-owned telephone company; provides telephone
directory production, commercial printing, database management, sales and
marketing services; licenses directory production and contract management
software systems to directory publishers and others; and provides services,
principally computer-based projects, to public utilities and financial
institutions.
Telecommunications Services - This segment provides telecommunications services,
including design, engineering, construction, installation, maintenance and
removals in the outside plant and central office of telecommunications and cable
companies, and within their customers' premises, as well as for both large
commercial and governmental entities requiring telecommunications services; and
also provides complete turnkey services for wireless and wireline
telecommunications companies.
82
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
Computer Systems - This segment provides directory assistance services, both
traditional and enhanced, to wireline and wireless telecommunications companies;
provides directory assistance content; designs, develops, integrates, markets,
sells and maintains computer-based directory assistance systems and other
database management and telecommunications systems, primarily for the
telecommunications industry; and provides IT services to the Company's other
businesses and third parties.
-87-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
Sales, operating profit and identifiable assets by the Company's reportable
operating segment are as follows:
October 31,November November November
2, November2003 3, 2004 2003 2002 ----------- ----------- ------------4, 2001
------------------------------------------
(Restated) (Restated) (Restated)
Net Sales (Restated) (Restated)
(In thousands)
Staffing Services:
Traditional Staffing Services:
Staffing $1,580,225 $1,266,875 $1,141,717 $1,251,282
Managed Services 1,148,116 1,043,572 745,667 ----------- ----------- -----------737,417
------------------------------------------
Total gross sales 2,728,341 2,310,447 1,887,384 1,988,699
Less Non-recourse Managed Services (1,120,079) (967,379) (679,110) (503,027)
Intersegment sales 3,839 2,367 2,044 ----------- ----------- -----------
1,612,10112,169
------------------------------------------
1,345,435 1,210,318 ----------- ----------- -----------1,497,841
------------------------------------------
Telephone Directory:
Sales to unaffiliated customers 72,194 69,750 83,519 102,492
Intersegment sales 1 43 114 ----------- ----------- -----------
72,195264
------------------------------------------
69,793 83,633 ----------- ----------- -----------102,756
------------------------------------------
Telecommunications Services:
Sales to unaffiliated customers 134,266 112,201 104,039 246,892
Intersegment sales 1,132 638 4,833 ----------- ----------- -----------
135,3982,040
------------------------------------------
112,839 108,872 ----------- ----------- -----------248,932
------------------------------------------
Computer Systems:
Sales to unaffiliated customers 110,055 84,472 72,261 66,435
Intersegment sales 9,962 9,167 6,535 ----------- ----------- -----------
120,0174,863
------------------------------------------
93,639 78,796 ----------- ----------- -----------71,298
------------------------------------------
Elimination of intersegment sales (14,934) (12,215) (13,526) ----------- ----------- -----------(19,336)
------------------------------------------
Total Net Sales $1,924,777 $1,609,491 $1,468,093 =========== =========== ===========$1,901,491
==========================================
Segment Profit (Loss)
Staffing Services $36,718 $21,072 $20,469 $16,558
Telephone Directory 10,115 6,748 6,863 3,302
Telecommunications Services (2,838) (3,986) (13,259) 7,353
Computer Systems 30,846 14,679 8,912 ----------- ----------- -----------10,739
------------------------------------------
Total segment profit 74,841 38,513 22,985 37,952
General corporate expenses (30,812) (27,668) (22,704) ----------- ----------- -----------(24,416)
------------------------------------------
Total Operating Profit $44,029 $10,845 $281 =========== =========== ===========$13,536
==========================================
-88-83
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
October 31,November November
2, 2004 2003 ---------- ------------3, 2002
------------------------------
(Restated) (Restated)
(In thousands)
Assets:
Staffing Services $422,658 $350,796 $332,482
Telephone Directory 55,740 61,942 62,084
Telecommunications Services 52,770 49,053 46,666
Computer Systems 102,487 39,006 --------- --------
633,65531,860
------------------------------
500,797 473,092
Cash, investments and other corporate assets 56,381 39,686 --------- --------38,477
------------------------------
Total assets $690,036 $540,483 ========= ========$511,569
==============================
As noted in Note A, the Company has restated its previously issued financial
statements for fiscal years 20001999 through 2003. The restatement of the Telephone
Directory net sales, operating profit and identifiable assets are reflected in
the table below.
November November November
2, 2003 3, 2002 -------- --------4, 2001
-----------------------------------------
(In thousands)
Telephone Directory net sales - as previously reported $70,159 $83,326 (Decrease) increase$99,946
Change (366) 307 -------- -------2,810
-----------------------------------------
Telephone Directory net sales - as restated $69,793 $83,633 ======== =======$102,756
=========================================
Telephone Directory operating profit - as previously
reported $7,674 $6,712 (Decrease) increase$2,238
Change (926) 151 -------- -------1,064
------------------------------------------
Telephone Directory operating profit - as restated $6,748 $6,863 ======== =======$3,302
==========================================
Telephone Directory identifiable assets - as
previously reported $60,152 $60,105
IncreaseChange 1,790 1,979
-------- -------------------------------------------------
Telephone Directory identifiable assets - as restated $61,942 $62,084
======== =================================================
-89-84
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--ContinuedDisclosures--Continued.
Sales to external customers and assets of the Company by geographic area are as
follows:
Year Ended
---------------------------------------------------------
October 31, November 2, November 3,
2004 2003 2002
------------------- ------------------ ------------------
(Restated) (Restated)
(In thousands)
Sales:
Domestic $1,769,181 $1,484,720 $1,349,319
International, principally Europe 155,596 124,771 118,774
---------- ---------- ----------
$1,924,777 $1,609,491 $1,468,093
========== ========== ==========
Year Ended
--------------------------------------
October 31, November 2,
2004 2003
------------------- ------------------
(Restated)
(In thousands)
Assets:
Domestic $634,454 $492,903
International, principally Europe 55,582 47,580
-------- --------
$690,036 $540,483
======== ========
In fiscal 2004, the Telecommunications Services segment'sYear Ended
-----------------------------------------------
November November November
2, 2003 3, 2002 4, 2001
-----------------------------------------------
(Restated) (Restated) (Restated)
(In thousands)
Sales:
Domestic $1,484,720 $1,349,319 $1,765,237
International 124,771 118,774 136,254
----------------------------------------------
$1,609,491 $1,468,093 $1,901,491
==============================================
Year Ended
-------------------------------
November November
2, 2003 3, 2002
-------------------------------
(Restated) (Restated)
(In thousands)
Assets:
Domestic $492,903 $467,303
International 47,580 44,266
------------------------------
$540,483 $511,569
==============================
Sales for all periods exclude sales to four
customers accounted for approximately 17%, 15%, 12%, and 11% respectively, of
the total sales of that segment; the Computer Systems segment's sales to one
customer accounted for approximately 28% of the total sales of that segment; the
Staffing Services segment's sales to one customer accounted for approximately
14% of the total sales of that segment; and the Telephone Directory segment's
sales to one customer accounted for approximately 10% of the total sales of that
segment. In fiscal 2004, the sales to seven operating units of one customer,
Microsoft Corporation, accounted for 12% of the Company's consolidated net
sales.by Autologic, which was reclassified as
a discontinued operation. (see Note J)
In fiscal 2003, the Telecommunications Services segment's sales to three
customers accounted for approximately 23%, 18%, and 12%, respectively, of the
total sales of that segment; the Computer Systems segment's sales to two
customers accounted for approximately 27% and 13% of the total sales of that
segment; the Staffing Services segment's sales to one customer accounted for
approximately 13% of the total sales of that segment; and the Telephone
Directory segment's sales to one customer accounted for approximately 10% of the
total sales of that segment. In fiscal 2003, the sales to seven operating units
of one customer, Microsoft Corporation, accounted for 10.6% of the Company's
consolidated net sales.
-90-85
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
In fiscal 2002, the Telecommunications Services segment's sales to three
customers accounted for approximately 24%, 20%, and 12%, respectively, of the
total sales of that segment; and the Computer Systems segment's sales to one
customer accounted for approximately 30% of that segment. In fiscal 2002, there
were no customers to which sales accounted for over 10% of the Company's
consolidated net sales.
In fiscal 2001, the Telecommunications Services segment's sales to three
customers accounted for approximately 23%, 17%, and 12%, respectively, of the
total sales of that segment; and the Computer Systems segment's sales to one
customer accounted for approximately 35% of that segment. In fiscal 2002,2001, there
were no customers to which sales accounted for over 10% of the Company's
consolidated net sales.
The loss of one or more of these customers, unless the business is replaced by
the segment, could result in an adverse effect on the results for that segment's
business.business, although the Company does not believe that there would be a material
adverse effect on the results of the Company and its subsidiaries taken as a
whole.
Capital expenditures and depreciation and amortization by the Company's
operating segments are as follows:
Year Ended
---------------------------------------------------------
October 31, November 2, November 3,
2004 2003 2002
----------- ----------- -----------
(In thousands)
Capital Expenditures:
Staffing Services $9,270 $8,026 $9,063
Telephone Directory 391 2,104 403
Telecommunications Services 1,803 1,766 960
Computer Systems 17,491 4,768 3,041
----------- ----------- -----------
Total segments 28,955 16,664 13,467
Corporate 1,782 1,326 1,225
----------- ----------- -----------
$30,737 $17,990 $14,692
=========== =========== ===========
Depreciation and Amortization (a):
Staffing Services $9,365 $8,942 $7,339
Telephone Directory 2,067 2,024 2,202
Telecommunications Services 2,862 3,870 4,102
Computer Systems 5,744 3,770 2,978
----------- ----------- -----------
Total segments 20,038 18,606 16,621
Corporate 5,499 5,725 5,545
----------- ----------- -----------
$25,537 $24,331 $22,166
=========== =========== ===========
Year Ended
--------------------------------------------
November November November
2, 2003 3, 2002 4, 2001
--------------------------------------------
(In thousands)
Capital Expenditures:
Staffing Services $8,026 $9,063 $12,062
Telephone Directory 2,104 403 2,891
Telecommunications Services 1,766 960 3,491
Computer Systems 4,768 3,041 3,520
--------------------------------------------
Total segments 16,664 13,467 21,964
Corporate 1,326 1,225 5,148
--------------------------------------------
$17,990 $14,692 $27,112
============================================
Depreciation and Amortization (a):
Staffing Services $8,942 $7,339 $8,275
Telephone Directory 2,024 2,202 3,665
Telecommunications Services 3,870 4,102 4,716
Computer Systems 3,770 2,978 2,979
--------------------------------------------
Total segments 18,606 16,621 19,635
Corporate 5,725 5,545 4,947
--------------------------------------------
$24,331 $22,166 $24,582
============================================
(a) Includes depreciation and amortization of property, plant and equipment for
fiscal years 2004, 2003, 2002 and 20022001 of $25.2 million, $24.2 million, and $21.8 million and $20.5
million, respectively.
-91-86
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE M--Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for the
fiscal years ended October 31, 2004November 2, 2003 and November 2, 2003.3, 2002. Each quarter contained
thirteen weeks.
Fiscal 20042003 Quarter (Note 1)
-----------------------------------------------------------------(Notes 1 and 2)
-----------------------------------------------------
First Second Third Fourth
--------- ---------- ----- -----------------------------------------------------------
(Restated) (Restated) (Restated)
(In thousands, except per share data)
Net sales $413,959 $478,479 $500,732 $531,607
======== ======== ======== ========
Gross profit $24,111 $34,240 $43,738 $50,601
======== ======== ======== ========
Income (loss) from continuing operations ($1,153) $4,608 $9,239 $11,502
Discontinued operations, net of taxes - 9,520 - -
-------- -------- -------- --------
Net (loss) income ($1,153) $14,128 $9,239 $11,502
======== ======== ======== ========
Per share data:
Income (loss) from continuing operations-basic ($0.08) $0.28
======== ========
Income (loss) from continuing operations-diluted ($0.07) $0.08
======== ========
Net (loss) income-basic ($0.08) $0.93 $0.61 $0.75
======== ======== ======== ========
Net (loss) income-diluted ($0.07) $0.92 $0.60 $0.75
======== ======== ======== ========
Fiscal 2003 Quarter
-----------------------------------------------------------------
First Second Third Fourth
-------- ------- ------ -------
(Restated) (Restated) (Restated)
(In thousands, except per share data)
Net sales $353,973 $404,117 $415,158 $436,243
======== ======== ======== =============================================================
Gross profit $17,362 $24,800 $30,384 $34,323
======== ======== ======== =============================================================
Net (loss) income ($3,690) ($376) $2,111 $6,160
======== ======== ======== =============================================================
Basic and Diluted earnings per share:
Net (loss) income ($0.24) ($0.02) $0.14 $0.40
======== ======== ======== =============================================================
Fiscal 2002 Quarter (Notes 1, 2 and 3)
-----------------------------------------------------
First Second Third Fourth
-----------------------------------------------------
(In thousands, except per share data)
(Restated) (Restated) (Restated)
Net sales $335,361 $363,465 $371,849 $397,418
=====================================================
Gross profit $12,551 $21,325 $26,835 $36,355
=====================================================
(Loss) income from continuing operations ($6,588) ($4,285) $1,133 $4,644
Discontinued operations 4,310
Cumulative effect of a change in accounting (31,927)
-------------
Net (loss) income ($34,205) ($4,285) $1,133 $4,644
=====================================================
Basic and Diluted earnings per share:
(Loss) income from continuing operations ($0.43) ($0.28) $0.07 $0.31
Discontinued operations 0.28
Cumulative effect of a change in accounting (2.10)
-------------
Net (loss) income ($2.25) ($0.28) $0.07 $0.31
=====================================================
Note 1 - In the fourth quarter of fiscal 2004, the Company recognized a gain on
sale of real estate from the sale of land and a building in Anaheim,
California for cash. The property was no longer used by the Company.
Note 2 - The Company has restated its previously issued financial
statements for fiscal years 20001999 through 2003 and the first two quarters of fiscal year
2003as a result of
inappropriate applicationapplications of accounting principles for revenue
recognition by its telephone directory publishing operation in
Uruguay. The restated figures for the quarters of fiscal years 20032002
and 20042003 are reflected in the two tables above. For those items that
have changed, a reconciliation from an "As Reported" basis to an "As
Restated" basis is reflected in the tables on the following page.
-92-Note 2 - As previously announced, the Company has changed the method of
reporting revenues of its Professional Employer Organization ("PEO")
subsidiary, Shaw & Shaw, from gross billing to a net revenue basis in
fiscal year 2003. Accordingly, reported PEO revenues and related cost
of sales for the first quarter of fiscal 2003 and the fiscal year 2002
have been reduced, with no effect on gross profit or the net results
to the Company.
Note 3 - Pursuant to the Company's previously announced adoption of SFAS
No.145, results for fiscal year 2002 have been restated to give effect
to the reclassification of a charge of $2.1 million arising from March
2002 early payment of the Company's 7.92% Senior Notes to Other
Expense, previously presented as an extraordinary item.
87
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE M--Quarterly Results of Operations (Unaudited)--Continued
Fiscal 2004 Quarter
--------------------------------
First Second
------- -------
(In thousands, except
per share data)
Net sales - as previously reported $412,681 $477,242
Increase 1,278 1,237
-------- --------
Net sales - as restated $413,959 $478,479
======== ========
Gross profit - as previously reported $23,051 $33,215
Increase 1,060 1,025
-------- --------
Gross profit - as restated $24,111 $34,240
======== ========
Loss (income) from continuing operations - as previously
reported ($1,767) $4,013
Increase 614 595
-------- --------
Loss (income) from continuing operations - as restated ($1,153) $4,608
======== ========
Net (loss) income - as previously reported ($1,521) $13,771
Increase 368 357
-------- --------
Net (loss) income - as restated ($1,153) $14,128
======== ========
Per share data:
(Loss) income from continuing operations-basic - as
previously reported ($0.10) $0.90
Increase 0.02 $0.03
-------- --------
(Loss) income from continuing operations-basic - as
restated ($0.8) $0.93
======== ========
(Loss) income from continuing operations-diluted - as
previously reported ($0.10) $0.90
Increase 0.03 $0.02
-------- --------
(Loss) income from continuing operations-diluted - as
restated ($0.07) $0.92
======== ========
Net (loss) income-basic - as previously reported ($0.10) $0.90
Increase $0.02 $0.03
-------- --------
Net (loss) income-basic - as restated ($0.08) $0.93
======== ========
Net (loss) income-diluted - as previously reported ($0.10) $0.90
Increase $0.03 0.02
-------- --------
Net (loss) income-diluted - as restated ($0.07) $0.92
======== ========
-93-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE M--Quarterly Results of Operations (Unaudited)--Continued
Fiscal 2003 Quarter
---------------------------------------------------------------------------------------
First Second Fourth
----- ------ ---------------------------------------------
(In thousands, except per share data)
Net sales - as previously reported $352,535 $403,406 $438,758
Increase (decrease)Change 1,438 711 (2,515)
-------- -------- -----------------------------------------------
Net sales - as restated $353,973 $404,117 $436,243
======== ======== ===============================================
Gross profit - as previously reported $16,529 $24,388 $36,408
Increase (decrease)Change 833 412 (2,085)
-------- -------- -----------------------------------------------
Gross profit - as restated $17,362 $24,800 $34,323
======== ======== ===============================================
Net (loss) income (loss) - as previously reported ($3,803) ($432) $6,885
Increase (decrease)Change 113 56 (725)
-------- -------- -----------------------------------------------
Net (loss) income (loss) - as restated ($3,690) ($376) $6,160
======== ======== ===============================================
Basic and diluted earnings per share:
Net (loss) income - as previously reported ($0.25) ($0.03) $0.45
Increase (decrease)Change 0.01 0.01 (0.05)
-------- -------- -----------------------------------------------
Net (loss) income - as restated ($0.24) ($0.02) $0.40
======== ======== ===============================================
Fiscal 2002 Quarter
------------------------------------------
First Second Fourth
------------------------------------------
(In thousands, except per share data)
Net sales - as previously reported $334,096 $362,274 $399,567
Change 1,265 1,191 (2,149)
------------------------------------------
Net sales - as restated $335,361 $363,465 $397,418
==========================================
Gross profit - as previously reported $11,778 $20,598 $37,599
Change 773 727 (1,244)
------------------------------------------
Gross profit - as restated $12,551 $21,325 $36,355
==========================================
(Loss) income from continuing operations - as
previously reported ($6,723) ($4,411) $4,814
Change 135 126 (170)
------------------------------------------
(Loss) income from continuing operations - as
restated (6,588) ($4,285) $4,644
==========================================
Net (loss) income - as previously reported ($34,340) ($4,411) $4,814
Change 135 126 (170)
------------------------------------------
Net (loss) income - as restated ($34,205) ($4,285) $4,644
==========================================
Basic and diluted earnings per share:
(Loss) income from continuing operations - as
previously reported ($0.44) ($0.29) $0.32
Change 0.01 0.01 (0.01)
------------------------------------------
(Loss) income from continuing operations - as
restated ($0.43) ($0.28) $0.31
==========================================
Net (loss) income - as previously reported ($2.26) ($0.29) $0.32
Change 0.01 0.01 (0.01)
------------------------------------------
Net (loss) income - as restated ($2.25) ($0.28) $0.31
==========================================
88
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE M--Quarterly Results of Operations (Unaudited)--Continued
Historically, the Company's results of operations have been lowest in its first
fiscal quarter as a result of reduced requirements for the Staffing Services
segment's personnel due to the Thanksgiving, Christmas and New Year holidays as
well as certain customer facilities closing for one to two weeks. In addition,
the Telephone Directory segment's DataNational division publishes more
directories during the second half
Uruguay division of the Telephone Directory segment produces a major portion of
its revenues and most of its profits in the Company's fourth fiscal year.quarter.
During the third and fourth quarter of the fiscal year, the Staffing Services
segment benefits from a reduction of payroll taxes and increased use of
Administrative and Industrial services during the summer vacation period.
NOTE N--Employee Benefits
The Company has various savings plans that permit eligible employees to make
contributions on a pre-tax salary reduction basis in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. In January 2000, the
Company amended the savings plan for permanent employees to provide a Company
contribution in the form of a 50% match of the first 3% of salary contributed by
eligible participants. For participants with less than five years of service,
the Company's matching contributions vest at 20% per year over a five-year
period. Company contributions to the plan are made semi-annually. Under the
plan, the Company's contributions of $1.4$1.3 million, $1.3 million and $1.3$1.2 million
in fiscal 2004,2003, fiscal 20032002 and fiscal 2002,2001, respectively, were accrued and
charged to compensation expense.
The Company has a non-qualified deferred compensation and supplemental savings
plan, which permits eligible employees to defer a portion of their salary. This
plan consists solely of participant deferrals and earnings thereon, which are
reflected as a current liability under accrued wages and commissions. The
Company invests the assets of the plan in mutual funds based upon investment
preferences of the participants.
-94-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE O--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap contracts
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
October 31, 2004,November 2, 2003, the Company had outstanding foreign currency option and
forward contracts in the aggregate notional amount equivalent to $5.7$10.0 million,
which approximated its net investment in foreign operations and is accounted for
as a hedge under SFAS No. 52.52 "Foreign Currency Translation."
89
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE N--Employee Benefit--Continued
Included in cash and cash equivalents at October 31, 2004 and November 2, 2003 and November 3, 2002
was approximately $43.7$18.9 million and $18.9$11.5 million, respectively, that was
restricted to cover obligations that were reflected in accounts payable at that
date. These amounts primarily related to certain contracts with customers, for
whom the Company manages the customers' alternative staffing requirements,
including the payment of associate vendors.
NOTE P--Commitments
The future minimum rental commitments as of October 31, 2004November 2, 2003 for all
non-cancelablenon-cancellable operating leases were as follows:
Fiscal Year Total Office Space Equipment
----------- ----- ------------ ---------
(In thousands)
2005 $18,975 $17,799 $1,176
2006 13,486 12,580 906
2007 9,198 8,741 457
2008 3,716 3,687 29
2009 2,020 2,020
Thereafter 1,644 1,644
------- ------- ------
$49,039 $46,471 $2,568
======= ======= ======
Fiscal Year Total Office Space Equipment
----------- ----- ------------ ---------
(In thousands)
2004 $18,619 $17,012 $1,607
2005 12,974 12,355 619
2006 8,058 7,903 155
2007 4,859 4,859
2008 1,845 1,845
Thereafter 3,001 3,001
-------------------------------------------------------
$49,356 $46,975 $2,381
=======================================================
Many of the leases also required the Company to pay or contribute to property
taxes, insurance and ordinary repairs and maintenance.
Rental expense for all operating leases for fiscal years 2004, 2003, 2002 and 20022001 was
$25.6 million,
$24.0 million, and $23.6 million and $24.3 million, respectively.
-95-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--ContinuedIn 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 cost to develop and install this system
is currently anticipated to be approximately $12.0 million, (reduced from the
$16.0 million, previously reported due to anticipated cost savings) of which
$8.1 million has been incurred and capitalized to date. The Company has no other
material capital commitments.
NOTE Q--Related Party Transactions
During fiscal 2004,2003, the Company paid $1.3 million and accrued $0.6$0.5 million to the law firm of which Lloyd
Frank, a director and member of the Company's Audit Committee (until April
2004), is of counsel,a member, primarily for the services rendered and expenses reimbursed including $0.9 million related to the
transaction with Nortel Networks Inc (see Note J).rendered. During that year, Thethe
Company also paid $13,000$47,700 to the law firm of which Bruce Goodman, a director, is
a partner for services rendered to the Company.Company and paid $16,500 to Irwin B.
Robins, a director, for legal consulting services.
The Company rents approximately 2,6002,500 square feet (previously 2,500 square feet)
of office space to a corporation
owned by Steven A. Shaw, an officer and director, in the Company's El Segundo,
California facility, which the Company does not require for its own use, on a
month-to-month basis at a rental of $1,750 per month (previously $1,500 per month), effective March 1, 2004.month. Based on the nature of the
premises and a recent market survey conducted forby the Company, the Company
believes the rent is the fair market rental for such space.
-9690
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
In mid-December 2004 the Company discovered that revenue had not
been properly recognized in its Uruguayan operation (which is part
of the Telephone Directory Services segment) in accordance with the
Company's policies. The Company's operation in Uruguay printed and
distributed its Montevideo telephone directory each year during the
October/November time frame and revenue recognition should have
taken place in the first six months of each fiscal year instead of
in the fourth quarter of the preceding fiscal year. This involves
only the timing of when certain advertising revenue and related
costs and expenses are recognized. Among other things, this
required adjusting $2.5 million in net sales and $0.7 million in
net income from the fourth quarter of fiscal 2003 to the first half
of fiscal 2004, $2.1 million in net sales and $0.2 million in net
income from the fourth quarter of fiscal 2002 to the first half of
fiscal 2003, and $2.5 million in net sales and $0.3 million in net
income from the fourth quarter of fiscal 2001 to the first half of
fiscal 2002. For fiscal year 2004 Uruguay
reported a net loss of $2.32002, and $5.3 million onin net sales and $0.9 million in net
income from the fourth quarter of $6.2 million, comparedfiscal 2000 to the Company's net incomefirst half of
$33.7 million on net sales of $1.9 billion.fiscal 2001 For fiscal year 2003 Uruguay reported a net loss of
$1.6 million on net sales of $6.8 million, compared to the
Company's net income of $4.2 million on net sales of $1.6 billion.
For fiscal year 2002 Uruguay reported a net loss of $3.0 million on
net sales of $11.4 million, compared to the Company's net loss of
$32.7 million on net sales of $1.5 billion. As a result of the
discovery of such improper revenue recognition, the Company has
restated in this Annual Report on Form 10-K its previously issued
financial results for the fiscal years 20001999 through 2003 and the first two quarters of fiscal 2004 and will also file
an amended Annual Report on Form 10-K for the fiscal year ended November 2, 2003. This
restatement constitutes a material weakness (within the standards
established by the American Institute of Certified Public
Accountants and the Public Company Accounting Oversight Board)
within the Company's systems of internal control.
In the course of their audit of the Company's financial statements as at
and for the fiscal year ended October 31, 2004, the Company's internal
auditors and Ernst & Young LLP, the Company's independent registered public
accounting firm, identified and reported an additional material weakness as
it relates to numerous adjusting entries which were undetected due to
deficiencies in the Company's financial statement close process, and, as a
result of the audit, were recorded by the Company during the course of the
audit to correct the underlying books and records.
The Company carried out an evaluation of the effectiveness of the
design and operation of its "disclosure controls and procedures,"
as defined in, and pursuant to, Rule 13a-15 of the Securities
Exchange Act of 1934, as of October 31, 2004November 2, 2003 under the supervision
and with the participation of the Company's management, including
the Company's Chairman of the Board, President and Principal
Executive Officer and its Senior Vice President and Principal
Financial Officer. Based on that evaluation and the events
described above, the Company's Chairman of the Board, President and
Principal Executive Officer and its Senior Vice President and
Principal Financial Officer concluded that, as of the date of their
evaluation, the Company's disclosure controls and procedures were
not effective to ensure that material information relating to the
Company and its subsidiaries was made known to them on a timely
basis.
-97-
ITEM 9A. CONTROLS AND PROCEDURES--Continued
Management of the Company, the Company's internal auditors and
Ernst & Young LLP have discussed the material weaknessesweakness referred to
above with the Audit Committee of the Board of Directors of the
Company. Management of the Company has instituted a review of the
Company's internal controls in order to correct these and any other
deficiencies which the review may bring to light and to strengthen
the accounting infrastructure if required.
Ernst & Young LLP, the Company's independent registered public
accounting firm, issued on December 22, 2003, except for the second
paragraph of Note A, which is as of January 10, 2005, an
unqualified opinion on the Company's financial statements for the
fiscal year ended October 31, 2004.November 2, 2003.
Internal control over financial reporting.
Beginning with ourits annual report on Form 10-K for fiscal 2005,
the Company will be subject to the provisions of Section 404 of
the Sarbanes-Oxley Act that require an annual management
assessment of its internal control over financial reporting and
related attestation by the Company's independent registered
public accounting firm.
91
Changes in internal controls
There were no significant changes during the Company's fourth
fiscal quarter in the Company's internal controls over financial
reporting that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
The information called for by Part III (Items 10, 11, 12, 13 and 14) of
Form 10-K will bewas included in the Company's Proxy Statement for the Company's 20042003
Annual Meeting of Shareholders, which the Company intends to file within 120
days after the close of its fiscal year ended October 31,filed on March 1, 2004, and is
hereby incorporated by reference to such Proxy Statement, except that the
information as to the Company's executive officers which follows Item 4 in this
Report and the information as to the Company's equity compensation plans
contained in the last paragraph of Item 5 in this Report are incorporated by
reference into Items 10 and 12, respectively, of this Report.
-98-92
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
15(a)(1). Financial Statements
--------------------
The following consolidated financial statements of Volt Information
Sciences, Inc. and subsidiaries are included in Item 8 of this
Report:
Page
----
Page
Consolidated Balance Sheets--October 31, 2004 and November 2, 2003 60
Consolidated Statements of Operations--Years ended October 31, 2004,
NovemberSheets--November 2, 2003 and November 3, 2002 6158
Consolidated Statements of Operations--Years ended November 2, 2003,
November 3, 2002 and November 4, 2001 59
Consolidated Statements of Stockholders' Equity--Years ended
October 31, 2004, November 2, 2003, and November 3, 2002 62and November 4, 2001 60
Consolidated Statements of Cash Flows--Years ended October 31, 2004,
November 2, 2003,
and November 3, 2002 63and November 4, 2001 61
Notes to Consolidated Financial Statements 6563
15(a)(2). Financial Statement Schedules
-----------------------------
The following consolidated financial statement schedule of Volt
Information Sciences, Inc. and subsidiaries is included in response
to Item 15(d):
Schedule II--Valuation and qualifying accounts S-1
Other schedules (Nos. I, III, IV and V) for which provision is made
in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions
or are not required under the related instructions
or are not applicable and, therefore, have been omitted.
-99-
applicable and, therefore, have been omitted.
15(a)(3). Exhibits
--------
Exhibit Description
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company, as filed with the Department of State of New York on
January 29, 1997. (Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended
November 1, 1996)1996, File No. 1-9232).
3.2 By-Laws of the Company. (Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended October
30, 1998, File No. 1-9232).
4.1(a) Receivables Purchase Agreement, dated as of April 12, 2002. among Volt Funding Corp., Three Rivers Funding
Corporation and Volt Information Sciences, Inc. (Exhibit 99.1(b) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(b) Second Amendment to Receivables Purchase Agreement dated as of March 31, 2004 among Volt Funding Corp., Three Rivers
Funding and Volt Information Sciences, Inc. (Exhibit 4.02 to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 2, 1004, File No. 1-9232).
4.1(c) Amended and Restated Credit Agreement dated as of April 12, 2004 among Volt Information Sciences, Inc., Gatton Volt
Consulting Group Limited, the guarantors party thereto, the lenders party thereto, and JP Morgan Chase Bank, as
administrative agent. (Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1004,
File No. 1-9232).
10.1+ 1995 Non-Qualified Stock Option Plan, as amended. (Exhibit 10.1(b) to the Company's Annual Report on Form 10-K for
the fiscal year ended October 30, 1998, File No. 1-9232).
10.2(a)+ Employment Agreement, dated as of May 1, 1987, between the Company and William Shaw. (Exhibit 19.01 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.2(b)+ Amendment, dated January 3, 1989, to Employment Agreement between the Company and William Shaw. (Exhibit 19.01(b) to the Company's Annual Report on Form 10-K for the fiscal year ended October
28, 1988, File No. 1-9232).
10.3(a)+ Employment Agreement, dated as of May 1, 1987, between the Company and Jerome Shaw (Exhibit 19.02 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.3(b)+ Amendment, dated January 3, 1989, to Employment Agreement between the Company and Jerome Shaw (Exhibit 19.02(b) to
the Company's Annual Report on Form 10-K for the fiscal year ended October 28, 1988, File No. 1-9232).
14.30, 1998, File No. 1-9232).
93
15(a)(3). Exhibits--Continued
Exhibit Description
4.1(a) Credit Agreement, dated April 12, 2002, among the Company, Gatton
Volt Consulting Group Limited, as borrowers, Volt Delta Resources,
Inc., Volt Information Sciences Funding, Inc., Volt Directories S.
A., Ltd., DataNational, Inc., Volt Telecommunications Group, Inc.
and DataNational of Georgia, Inc., as guarantors, the lenders
party thereto, and JP Morgan Chase Bank, as administrative agent.
(Exhibit 4.1(a) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(b) Joint and Several Guaranty of Payment, dated as of April 12, 2002,
by Volt Delta Resources, Inc., Volt Information Sciences Funding,
Inc., Volt Directories S.A., Ltd., DataNational, Inc., Volt
Telecommunications Group, Inc. and DataNational of Georgia, Inc.
in favor of JP Morgan Chase Bank, as administrative agent.
(Exhibit 4.1(b) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(c) Volt Security Agreement, dated as of April 12, 2002, by the
Company in favor of JP Morgan Chase Bank, as collateral agent.
(Exhibit 4.1(c) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(d) Subsidiary Security Agreement, dated as of April 12, 2002, among
Volt Telecommunications Group, Inc., Volt Delta Resources, Inc.,
DataNational Inc. and DataNational of Georgia, Inc. in favor of JP
Morgan Chase Bank, as collateral agent. (Exhibit 4.1 (d) to the
Company's Current Report on Form 8-K dated April 22, 2002, File
No. 1-9232).
4.1(e) Pledge Agreement, dated as of April 12, 2002, by the Company in
favor of JP Morgan Chase Bank, as collateral agent. (Exhibit
4.1(e) to the Company's current Report on Form 8-K dated April 22,
2002, File No. 1-9232).
10.1+ 1995 Non-Qualified Stock Option Plan, as amended. (Exhibit
10.1(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended October 30, 1998, File No. 1-9232).
10.2(a)+ Employment Agreement, dated as of May 1, 1987, between the Company
and William Shaw. (Exhibit 19.01 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.2(b)+ Amendment, dated January 3, 1989, to Employment Agreement
between the Company and William Shaw. (Exhibit 19.01(b) to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 28, 1988, File No. 1-9232).
10.3(a)+ Employment Agreement, dated as of May 1, 1987, between the
Company and Jerome Shaw (Exhibit 19.02 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 1, 1987,
File No. 1-9232).
10.3(b)+ Amendment, dated January 3, 1989, to Employment Agreement between
the Company and Jerome Shaw (Exhibit 19.02(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended October 28,
1988, File No. 1-9232).
14 Volt Information Sciences, Inc. and Subsidiaries Code of Ethical
Conduct for Financial Managers
-100-(Exhibit 14 to the Company's Annual
Report on Form 10-K for the fiscal year ended November 2, 2003,
File No. 1-9232).
21 Subsidiaries of the Registrant (Exhibit 21 to the Company's Annual
Report on Form 10-K for the fiscal year ended November 2, 2003,
File No. 1-9232).
94
15(a)(3). Exhibits--Continued
--------
Exhibit Description
- ------- -----------
21.* Subsidiaries of the Registrant.
23.* Consent of Independent Registered Public Accounting Firm
31.1* Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes -Oxley Act of 2002.
32.2* Certification of Principal Financial Officer15(a)(3). Exhibits--Continued
Exhibit Description
- ------- -----------
31.1* Certification of principal executive officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of principal financial officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* 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.
32.2* Certification of Principal executive financial officer pursuant to
18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
+ Management contract or compensation plan or arrangement.
* Filed herewith. All other exhibits are incorporated herein by reference to the
exhibit indicated in the parenthetical references.
15 (b). Reports on Form 8-K
-------------------
During the quarter ended November 2, 2003, the Company filed Current Report on
Form 8-K dated September 9, 2003 (date earliest event reported) reporting Item
7. Financial Statements and Exhibits and Item 9. Regulation FD Disclosure.
UNDERTAKING
The Company hereby undertakes to furnish to the Securities and Exchange
Commission, upon request, all constituent instruments defining the rights of
holders of long-term debt of the Company and its consolidated subsidiaries not
filed herewith. Such instruments have not been filed since none are, nor are
being, registered under Section 12 of the Securities Exchange Act of 1934 and
the total amount of securities authorized under any such instruments does not
exceed 10% of the total assets of the Company and its subsidiaries on a
consolidated basis.
-101-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Amended Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
Dated: New York, New York By:/s/William Shaw
---------------
January 13, /s/Jack Egan
-------------
February 4, 2005 William Shaw
Chairman of the Board,Jack Egan
Vice President, Corporate Accounting
and Chief ExecutivePrincipal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.95
Signature Title Date
- --------- ----- ----
/s/William Shaw Chairman of the Board, January 13, 2005
- ---------------
William Shaw President and Chief Executive
Officer and Director
/s/James J. Groberg Senior Vice President January 13, 2005
- -------------------
James J. Groberg (Principal Financial Officer)
/s/Jack Egan Vice President, Corporate Accounting January 13, 2005
- ------------
Jack Egan (Principal Accounting Officer)
/s/Steven A. Shaw Director January 13, 2005
- -----------------
Steven A. Shaw
/s/Lloyd Frank Director January 13, 2005
- --------------
Lloyd Frank
/s/Theresa A. Havell Director January 13, 2005
- --------------------
Theresa A. Havell
/s/Mark N. Kaplan Director January 13, 2005
- -----------------
Mark N. Kaplan
/s/Bruce G. Goodman Director January 13, 2005
- -------------------
Bruce G. Goodman
/s/William H. Turner Director January 13, 2005
- --------------------
William H. Turner
-102-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
------------------------------------------ -------------- --------------- ----------------------------------------------------------------------------------------- ----------- ------------
Additions
-----------------------------------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
of Period Expenses Accounts Deductions Periond
---------- --------- --------- ---------- ----------Period
--------------------------------------- ----------- ------------
(In thousands)
Year ended October 31, 2004
Deducted from asset accounts:
Allowance for uncollectable accounts $10,498 $7,784 $8,072 (a,b) $10,210
Allowance for deferred tax assets 3,635 $313 (c) 3,948
Unrealized gain on marketable securities (153) 93 (d) (60)
Year ended November 2, 2003
Deducted from asset accounts:
Allowance for uncollectable accounts $10,994 $6,227 $6,723 (a,b) $10,498
Allowance for deferred tax assets 3,756 ($121)(c) 3,635
Unrealized (gain)gain on marketable securities (12) (141) (85)(d) (153)(97)
Year ended November 3, 2002
Deducted from asset accounts:
Allowance for uncollectable accounts $9,376 $10,188 $8,570 (a,b) $10,994
Allowance for deferred tax assets 602 $3,291 (e) 137 (f) 3,756
Unrealized loss (gain) on marketable securities 16 (28)(d) (12)
(a)--Includes write-off ofYear ended November 4, 2001
Deducted from asset accounts:
Allowance for uncollectable accounts.
(b)--Includes foreign currency translation gains of $117 in 2004 and $22 in 2003 and aaccounts $8,952 $8,462 $8,038 (a,b,g) $9,376
Allowance for deferred tax assets 548 $396 (c) 342 (g) 602
Unrealized loss of $27 in 2002.on marketable
securities 664 62 (d) 710 (h) 16
(a)--Includes write-off of uncollectable accounts.
(b)--Includes a foreign currency translation gain of $22 in 2003 and losses of
$27 in 2002 and $16 in 2001.
(c)--Charge to income tax provision.
(d)--Charge (credit) to stockholders' equity.
(e)--Charge to cumulative effect of a change in accounting of $3,069 and income
tax provision of $222.
(f)--Principally write-off of unutilized foreign tax credits.
(g)--Pertains to the reclassification of assets of discontinued operations,
including allowance for uncollectible accounts of $1,188 and allowance for
deferred tax assets of $342.
(h)--Reclassification adjustment for write down of marketable securities
included in net income.
S-1
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company, as filed with the Department of State of New York on January
29, 1997. (Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 1, 1996).
3.2 By-Laws of the Company. (Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended October
30, 1998, File No. 1-9232).
4.1(a) Receivables Purchase Agreement, dated as of April 12, 2002. among Volt Funding Corp., Three Rivers Funding
Corporation and Volt Information Sciences, Inc. (Exhibit 99.1(b) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(b) Second Amendment to Receivables Purchase Agreement dated as of March 31, 2004 among Volt Funding Corp., Three Rivers
Funding and Volt Information Sciences, Inc. (Exhibit 4.02 to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 2, 1004, File No. 1-9232).
4.1(c) Amended and Restated Credit Agreement dated as of April 12, 2004 among Volt Information Sciences, Inc., Gatton Volt
Consulting Group Limited, the guarantors party thereto, the lenders party thereto, and JP Morgan Chase Bank, as
administrative agent. (Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1004,
File No. 1-9232).
10.1+ 1995 Non-Qualified Stock Option Plan, as amended. (Exhibit 10.1(b) to the Company's Annual Report on Form 10-K for
the fiscal year ended October 30, 1998, File No. 1-9232).
10.2(a)+ Employment Agreement, dated as of May 1, 1987, between the Company and William Shaw. (Exhibit 19.01 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.2(b)+ Amendment, dated January 3, 1989, to Employment Agreement between the Company and William Shaw. (Exhibit 19.01(b) to
the Company's Annual Report on Form 10-K for the fiscal year ended
October 28, 1988, File No. 1-9232).
10.3(a)+ Employment Agreement, dated as of May 1, 1987, between the Company and Jerome Shaw (Exhibit 19.02 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.3(b)+ Amendment, dated January 3, 1989, to Employment Agreement between the Company and Jerome Shaw (Exhibit 19.02(b) to
the Company's Annual Report on Form 10-K for the fiscal year ended October 28, 1988, File No. 1-9232).
14. Volt Information Sciences, Inc. and Subsidiaries Code of Ethical Conduct for Financial Managers
21.* Subsidiaries of the Registrant.
23.* Consent of Independent Registered Public Accounting Firm.
31.1* Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Principal Financial OfficerINDEX TO EXHIBITS
15(a)(3). Exhibits
--------
Exhibit Description
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company, as filed
with the Department of State of New York on January 29, 1997.
(Exhibit 3.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended November 1, 1996, File No. 1-9232).
3.2 By-Laws of the Company. (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 30, 1998,
File No. 1-9232).
4.1(a) Credit Agreement, dated April 12, 2002, among the Company, Gatton
Volt Consulting Group Limited, as borrowers, Volt Delta Resources,
Inc., Volt Information Sciences Funding, Inc., Volt Directories S.
A., Ltd., DataNational, Inc., Volt Telecommunications Group, Inc.
and DataNational of Georgia, Inc., as guarantors, the lenders
party thereto, and JP Morgan Chase Bank, as administrative agent.
(Exhibit 4.1(a) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(b) Joint and Several Guaranty of Payment, dated as of April 12, 2002,
by Volt Delta Resources, Inc., Volt Information Sciences Funding,
Inc., Volt Directories S.A., Ltd., DataNational, Inc., Volt
Telecommunications Group, Inc. and DataNational of Georgia, Inc.
in favor of JP Morgan Chase Bank, as administrative agent.
(Exhibit 4.1(b) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(c) Volt Security Agreement, dated as of April 12, 2002, by the
Company in favor of JP Morgan Chase Bank, as collateral agent.
(Exhibit 4.1(c) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(d) Subsidiary Security Agreement, dated as of April 12, 2002, among
Volt Telecommunications Group, Inc., Volt Delta Resources, Inc.,
DataNational Inc. and DataNational of Georgia, Inc. in favor of JP
Morgan Chase Bank, as collateral agent. (Exhibit 4.1 (d) to the
Company's Current Report on Form 8-K dated April 22, 2002, File
No. 1-9232).
4.1(e) Pledge Agreement, dated as of April 12, 2002, by the Company in
favor of JP Morgan Chase Bank, as collateral agent. (Exhibit
4.1(e) to the Company's current Report on Form 8-K dated April 22,
2002, File No. 1-9232).
10.1+ 1995 Non-Qualified Stock Option Plan, as amended. (Exhibit
10.1(b) to the Company's Annual Report on Form 10-K for the fiscal
year ended October 30, 1998, File No. 1-9232).
10.2(a)+ Employment Agreement, dated as of May 1, 1987, between the Company
and William Shaw. (Exhibit 19.01 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.2(b)+ Amendment, dated January 3, 1989, to Employment Agreement between
the Company and William Shaw. (Exhibit 19.01(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended October 28,
1988, File No. 1-9232).
10.3(a)+ Employment Agreement, dated as of May 1, 1987, between the Company
and Jerome Shaw (Exhibit 19.02 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.3(b)+ Amendment, dated January 3, 1989, to Employment Agreement
between the Company and Jerome Shaw (Exhibit 19.02(b) to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 28, 1988, File No. 1-9232).
15(a)(3). Exhibits--Continued
--------
Exhibit Description
- ------- -----------
14 Volt Information Sciences, Inc. and Subsidiaries Code of Ethical
Conduct for Financial Managers (Exhibit 14 to the Company's Annual
Report on Form 10-K for the fiscal year ended November 2, 2003,
File No. 1-9232)
21 Subsidiaries of the Registrant (Exhibit 21 to the Company's
Annual Report on Form 10-K for the fiscal year ended November 2,
2003, File No. 1-9232).
31.1* Certification of principal executive officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of principal financial officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1* Certification of principal executive officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2* Certification of principal executive financial officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
+ Management contract or compensation plan or arrangement.
* Filed herewith. All other exhibits are incorporated herein by reference
to the exhibit indicated in the parenthetical references.
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
The following is a list of the subsidiaries and joint ventures of Volt as of
January 7, 2005 (exclusive of certain subsidiaries which, if considered in the
aggregate, would not, as of October 31, 2004, constitute a significant
subsidiary within the meaning of Rule 1-02(v) of Regulation S-X). All of such
subsidiaries, to the extent they were active and owned by the Company during
fiscal 2004, are included as consolidated subsidiaries in the Registrant's
consolidated financial statements as of October 31, 2004.
Name (1) Jurisdiction of Incorporation
- -------- -----------------------------
Volt Delta Resources, LLC. (2) Nevada
Volt Real Estate Corporation Delaware
Volt Directories S.A., Ltd. Delaware
Volt Holding Corp. Nevada
Volt Realty Two, Inc. Nevada
500 South Douglas Realty Corp. Delaware
14011 So. Normandie Ave. Realty Corp. Nevada
Volt Orangeca Real Estate Corp. Delaware
Shaw & Shaw, Inc. Delaware
Volt Technical Resources, LLC. Delaware
Volt ATRD Corp. Delaware
Sierra Technology Corporation California
Volt Opportunity Road Realty Corp. Delaware
Nuco II, Ltd. Delaware
Volt Management Corp. Delaware
Volt Technical Corp. Delaware
Fidelity National Credit Services Ltd. California
Nuco I, Ltd. Nevada
Volt Information Sciences Funding, Inc. Delaware
Volt Viewtech, Inc. Delaware
Volt Asia Enterprises, Ltd. Delaware
Volt STL Holdings, Inc. Delaware
DataNational of Georgia, Inc. Georgia
DataNational, Inc. Delaware
Volt Road Boring Corp. Florida
Volt Telecommunications Group, Inc. Delaware
Volt Publications, Inc. Delaware
Volt Gatton Holding, Inc. Delaware
Maintech, Incorporated Delaware
Volt SRS Limited Delaware
Information Management Associates, Inc. Delaware
ProcureStaff, Ltd. Delaware
VMC Consulting Corporation Delaware
Volt Funding Corp. Delaware
Volt Delta Resources Holding, Inc (3) Nevada
Volt Delta Canada Holdings, LLC. Nevada
Volt Delta Company (3) Canada
Volt Delta Resources of Mexico, S. de R.L. de C.V. (3) Mexico
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT--Continued
Name (1) Jurisdiction of Incorporation
Volt Delta B.V. (3) Netherlands
Volt Delta Europe, Limited (3) United Kingdom
Volt Resource Management Limited United Kingdom
Tainol, S.A. Uruguay
Volt Human Resources (VHRI), Inc. Canada
Volt Services Group (Netherlands) B.V. Netherlands
Volt Directory Marketing, Ltd. (4) Delaware
Volt Europe Limited (formerly Gatton Volt
Computing Group Limited) United Kingdom
Gatton Volt Consulting Group Limited United Kingdom
Gatton Volt Computastaff Limited United Kingdom
Volt Europe (Belgium) SPRL Belgium
Volt Europe (Espana) S.A. Spain
Volt Europe Temporary Services Limited United Kingdom
VMC Consulting Europe Limited United Kingdom
Volt Europe (France) SARL France
Volt Europe (Italia) SRL Italy
Volt Europe (Deutschland) GmbH Germany
Volt Netherlands Holding BV Netherlands
Volt Telecom BV Netherlands
Volt Europe (Nederland) BV Netherlands
ProcureStaff Pty Limited Australia
ProcureStaff Canada, Ltd. Canada
Volt Service K.K. Japan
Volt Service Corporation PTE, Ltd. Singapore
- -------------------------------------------------------------------------------
(1) Except as noted, each named subsidiary is wholly owned, directly or
indirectly, by Volt Information Sciences, Inc., except that, in the case of
certain foreign subsidiaries, qualifying shares may be registered in the
name of directors.
(2) 76% owned subsidiary
(3) Wholly owned by Volt Delta Resources, LLC
(4) 80% owned subsidiary.