UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of report (Date of earliest event reported): August 2, 2004
VOLT INFORMATION SCIENCES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
New York 1-9232 13-5658129
- ------------------------------ ----------------- --------------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
560 Lexington Avenue, New York, New York 10022
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 704-2400
------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Volt Information Sciences, Inc. ("Volt") hereby amends its Current Report
on Form 8-K, filed with the Securities and Exchange Commission on August 17,
2004, to delete Item 7 in its entirety and substitute Item 9.01. therefor.
Item 9.01. Financial Statements and Exhibits.
- ---------- ----------------------------------
The financial statements of the Directory & Operator Services business
("DOS") of Nortel Networks Corporation ("Nortel Networks") contained in this
Report have been prepared by, and provided to Volt by Nortel Networks. On August
2, 2004, among other things, Nortel Networks contributed substantially all of
DOS' operating assets (consisting principally of customer base and contracts,
intellectual property and inventory) and certain specified liabilities of DOS,
to Volt Delta Resources, LLC ("VoltDelta"), then a wholly owned subsidiary of
Volt Information Sciences, Inc. ("Volt"), in exchange for a 24% minority equity
interest in VoltDelta. The financial statements contained in this Report cover a
period prior to such contribution and all information relating to DOS has been
provided by Nortel Networks. While Volt has no reason to believe that the
financial statements and other information provided by Nortel Networks contained
in this Report are not accurate or complete, Volt does not assume any
responsibility of any kind for the accuracy or completeness of such financial
statements or other information.
All of the financial statements of the DOS operations for periods through
June 30, 2004 contained in this Report reflect the DOS operations as conducted
by Nortel Networks. The pro forma financial statements combine Nortel Network's
DOS Business' (as conducted by Nortel Networks) financial statements with Volt's
financial statements. The pro forma information is being furnished solely for
informational purposes and is not indicative of the combined results of
operations or financial position that might have been achieved for the periods
or dates indicated, nor is it necessarily indicative of the future results of
the combined company.
For further information concerning the financial statements of Nortel
Networks, see their filings under the Securities Exchange Act of 1934 (NYSE: NT)
including the most recent Form 8-K for Nortel Networks Corporation filed on
October 14, 2004, Results of Operations and Financial Condition, Other Events,
Financial Statements and Exhibits. See also Note 4 to the unaudited interim
financial statements contained in Appendix 2 to this report which states as
follows:
"Note (4) Financial Statements of Nortel Networks: As of this
date, Nortel Networks has not completed its consolidated financial
statements for the year ended December 31, 2003 or the six months ended
June 30, 2004. As publicly announced, the Nortel Networks Audit Committee
has undertaken an independent review of the circumstances leading to the
initial restatement of certain historical consolidated financial
statements of Nortel Networks in December 2003. As a result of the work
done in connection with the independent review, Nortel Networks has
announced that it will need to revise and restate its 2003 and certain
prior period consolidated financial statements. In connection with the
planned revisions and restatements, Nortel Networks procedures to
determine all adjustments to the year ended 2003 and certain prior
periods are ongoing. As a result, additional adjustments to the financial
statements may be identified. As at this date, to Nortel Networks'
knowledge, there are no transactions or other matters that may result in
material adjustments to the financial statements."
(a) Financial Statements of Businesses Acquired.
Appendix 1
----------
Index to Financial Statements
Report of Independent Registered Chartered Accountants
The following audited financial statements of the Directory
and Operator Services business acquired from Nortel Networks
(the "DOS Business"):
(i) Statement of Operations for the Year Ended December 31,
2003
(ii) Balance Sheet as at December 31, 2003
(iii) Statement of Net Investment for the Year Ended December
31, 2003
(iv) Statement of Cash Flows for the Year Ended December 31,
2003
(v) Notes to Financial Statements for the Year Ended
December 31, 2003
-1-
Appendix 2
----------
The following unaudited interim financial statements of the
DOS Business:
(i) Statement of Operations for the six months ended June
30, 2004 (unaudited)
(ii) Balance Sheet as at June 30, 2004 (unaudited)
(iii) Notes to Unaudited Interim Financial Statements for the
six months ended June 30, 2004 (unadited)
The unaudited interim financial statements of the DOS Business are
for informational purposes and have not been subjected to review
procedures by an Independent Registered Chartered Accountant.
(b) Pro Forma Financial Information.
Appendix 3
----------
The following unaudited pro forma condensed combined financial
statements of Volt giving effect to the acquisition as a
purchase of the DOS Business by Volt:
(i) Pro-Forma Condensed Combined Balance Sheet as of August
1, 2004 (unaudited)
(ii) Pro-Forma Condensed Combined Statements of Income for
the Nine Months Ended August 1, 2004 and for the Year
Ended November 2, 2003 (unaudited)
(iii) Notes to Pro-Forma Condensed Combined Financial
Statements (unaudited)
(c) Exhibits:
2.1* Contribution Agreement made and entered into as of June 11,
2004 by and between Volt Delta Resources, LLC and Nortel
Networks Inc.
2.2* Members' Agreement made and entered into as of August 2, 2004
by and between Volt Delta Resources, LLC, Nortel Networks
Inc., Volt Delta Resource Holdings, Inc., Nuco I, Ltd. and
Volt Information Sciences, Inc.
2.3* First Amendment dated as of July 29, 2004 to the 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 JPMorgan Chase Bank, as administrative agent.
23.1 Consent of Independent Registered Chartered Accountants.
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* Previously filed with the initial filing of this Report.
-2-
S I G N A T U R E
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Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
Date October 18, 2004 By: /s/ James J. Groberg
------------------------------------------
James J. Groberg, Senior Vice President
-3-
EXHIBIT INDEX
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Exhibit
Number Description
------ -----------
2.1* Contribution Agreement made and entered into as of June 11,
2004 by and between Volt Delta Resources, LLC and Nortel
Networks Inc.
2.2* Members' Agreement made and entered into as of August 2, 2004
by and between Volt Delta Resources, LLC, Nortel Networks
Inc., Volt Delta Resource Holdings, Inc., Nuco I, Ltd. and
Volt Information Sciences, Inc.
2.3* First Amendment dated as of July 29, 2004 to the 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 JPMorgan Chase Bank, as administrative agent.
23.1 Consent of Independent Registered Chartered Accountants.
-----------------
* Previously filed with the initial filing of this Report.
-4-
Appendix 1
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Financial Statements for the year ended
December 31, 2003
-5-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Index to Financial Statements
Page
----
Report of Independent Registered Chartered Accountants................ 7
Statement of Operations for the Year Ended
December 31, 2003 ................................................... 8
Balance Sheet as at December 31, 2003 ............................... 9
Statement of Net Investment for the Year Ended
December 31, 2003 ................................................... 10
Statement of Cash Flows for the Year Ended
December 31, 2003 ................................................... 11
Notes to Financial Statements for the Year Ended
December 31, 2003 ................................................... 12-23
-6-
Report of Independent Registered Chartered Accountants
To the Board of Directors of
Nortel Networks Corporation
We have audited the accompanying balance sheet of the Directory and Operator
Services business ("Directory and Operator Services") of Nortel Networks
Corporation ("Nortel Networks") as at December 31, 2003, and the related
statements of operations, net investment and cash flows for the year then ended.
These financial statements are the responsibility of Nortel Networks management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). 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
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Directory and Operator Services business
of Nortel Networks as at December 31, 2003, and the results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared from records maintained
by Nortel Networks and may not necessarily be indicative of the conditions that
would have existed or the results of operations if the Directory and Operator
Services business had been operated as an independent company. Portions of
certain expenses represent charges and allocations made from Nortel Networks
applicable to Directory and Operator Services, most of which are transacted at
amounts which approximate "cost" rather than market rates for similar
transactions with companies outside of the Nortel Networks group.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Toronto, Canada
October 8, 2004
-7-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Statement of Operations
Year Ended December 31,
(thousands of U.S. dollars)
2003
-------
Revenues ..................................... $40,448
Cost of revenues ............................. 26,467
-------
Gross profit ................................. 13,981
-------
Operating expenses:
Selling, general and administrative expense 1,228
Research and development expense .......... 4,062
-------
Total operating expenses .......... 5,290
-------
Earnings before income taxes ................. 8,691
Income taxes ................................. 3,249
-------
Net earnings ................................. $ 5,442
=======
The accompanying notes are an integral part of these financial statements.
-8-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Balance Sheet
As at December 31,
(thousands of U.S. dollars)
2003
-------
ASSETS
Current assets:
Accounts receivable, net of allowance for doubtful accounts
of $3 ............................................................ $ 2,489
Net receivable from Nortel Networks Corporation ....................... 44,957
Inventories - net ..................................................... 1,052
Other current assets .................................................. 2
-------
Total current assets ............................................. 48,500
Plant and equipment - net ................................................ 1,101
Deferred income taxes - net .............................................. 2,770
-------
Total assets ............................................................. $52,371
=======
LIABILITIES AND NORTEL NETWORKS
CORPORATION NET INVESTMENT
Current liabilities:
Accounts payable ...................................................... $ 518
Customer deposits ..................................................... 917
Other accrued liabilities ............................................. 3,152
-------
Total current liabilities ........................................ 4,587
Guarantees, contingencies and commitments (Note 10)
Nortel Networks Corporation net investment ............................... 47,784
-------
Total liabilities and Nortel Networks Corporation net investment ......... $52,371
=======
The accompanying notes are an integral part of these financial statements.
-9-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Statement of Net Investment
Year Ended December 31,
(thousands of U.S. dollars)
Nortel
Networks
Corporation
Net
Investment
----------
Balance, December 31, 2002 ............................... $42,288
Stock option compensation ............................ 54
Net earnings ......................................... 5,442
-------
Balance, December 31, 2003 ............................... $47,784
=======
The accompanying notes are an integral part of these financial statements.
-10-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Statement of Cash Flows
Year Ended December 31
(thousands of U.S. dollars)
2003
--------
Cash flows from (used in) operating activities:
Net earnings ................................................... $ 5,442
Adjustments to reconcile net earnings to net cash from (used in)
operating activities:
Depreciation ............................................. 1,456
Stock option compensation ................................ 54
Deferred income taxes recovery ........................... (794)
Loss on disposal of equipment ............................ 421
Provision for doubtful accounts .......................... (21)
Change in operating assets and liabilities:
Accounts receivable ................................... 3,234
Inventories ........................................... (2)
Accounts payable and other accrued liabilities ........ 1,649
Receivable from Nortel Networks Corporation ........... (10,147)
Customer deposits ..................................... (1,778)
--------
Net cash used in operating activities ............................. (486)
--------
Cash flows from investing activities:
Proceeds on disposition of plant and equipment ................. 546
Expenditures for plant and equipment ........................... (60)
--------
Net cash from investing activities ................................ 486
--------
Net increase (decrease) in cash and cash equivalents .............. -
--------
Cash and cash equivalents, at beginning of year ................... -
--------
Cash and cash equivalents, at end of year ......................... $ -
========
The accompanying notes are an integral part of these financial statements.
-11-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Notes to Financial Statements
(thousands of U.S. dollars, unless otherwise stated)
1. Description of the business
The accompanying financial statements reflect the carved-out operations
of the Directory and Operator Services business ("Directory and Operator
Services"), a business of Nortel Networks Corporation ("Nortel
Networks"). The financial statements include the assets, liabilities,
revenues and cost of revenues of Directory and Operator Services
products, as well as personnel, facilities and other expenses which were
attributable to Directory and Operator Services' general and
administrative, research and development, and sales and marketing
activities.
Expenses including, but not limited to, management salaries and
management stock compensation plans have been allocated to the Directory
and Operator Services business based on management's estimate of usage
based on headcount and other measures. Management considers the
allocation methodology used to allocate expenses reasonable.
The financial position, results of operation, and cash flows of Directory
and Operator Services may differ from those that would have been achieved
had the business operated independently.
The Directory and Operator Services business supplies systems (hardware
and software), as well as support, maintenance and associated
professional services, for directory-and-operator-services applications
and platform operator workstation-executable solutions from a database
via operator positions or automation systems. Directory and Operator
Services focuses on established products and on emerging market
opportunities such as location based services ("LBS"), directories,
enhanced services and web technologies.
Directory and Operator Services principal products and services include:
(i) System Sales (hardware and software) to implement one or more of
Directory Assistance, Enhanced Information Services, Operator Assistance,
or Intercept services; (ii) Database management services; and (iii)
maintenance service and support primarily from providing system upgrades,
maintenance support, training, remote support and repair services to
customers.
2. Significant accounting policies
Basis of presentation
The accompanying financial statements of Directory and Operator Services
have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). These financial
statements are expressed in United States dollars as the greater part of
the financial results and net assets of Directory and Operator Services
are denominated in United States dollars.
-12-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Notes to Financial Statements
(thousands of U.S. dollars, unless otherwise stated)
Use of estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates. Estimates are used when
accounting for items and matters such as allowance for uncollectible
accounts receivable, inventory obsolescence, product warranty, asset
valuations, impairment assessments, employee benefits, taxes, other
provisions and contingencies.
Financial instruments
The amounts reported for accounts receivable, accounts payable and other
financial instruments are considered to approximate fair value based upon
comparable market information available at the balance sheet date.
The financial instruments that potentially subject Directory and Operator
Services to concentrations of credit risk comprise principally trade
receivables. Traditionally, Directory and Operator Services' customer
base was dispersed across many different geographic areas throughout
North America consisting principally of telecommunication operators.
Directory and Operator Services performs ongoing credit evaluations of
its customers and maintains an allowance for potential credit losses.
Collateral, such as letters of credit and bank guarantees, is generally
not required.
In the normal course of business, Directory and Operator Services has
exposures to foreign currency fluctuations arising from, among other
activities, foreign currency sales and purchases and intercompany
transactions.
Translation of foreign currencies
The functional currency of Directory and Operator Services is the United
States dollar.
Transactions and financial statement items denominated in a currency
other than the functional currency are translated into the United States
dollar at the exchange rates in effect at the balance sheet date for
monetary assets and liabilities, and at historical exchange rates for
non-monetary assets and liabilities. Revenues and expenses are translated
at average rates for the period, except for depreciation which is
translated on the same basis as the related assets. Resulting gains or
losses are reflected in net earnings.
Revenue recognition
Directory and Operator Services revenue is derived primarily from three
sources: (i) System Sales (hardware and software) to implement one or
more of Directory Assistance, Enhanced Information Services, Operator
Assistance, or Intercept services; (ii) Database management services; and
(iii) maintenance service and support primarily from providing system
upgrades, maintenance support, training, remote support and repair
services to customers.
-13-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Notes to Financial Statements
(thousands of U.S. dollars, unless otherwise stated)
Directory and Operator Services recognizes revenue under Statement of
Position ("SOP") 81-1 "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts" ("SOP 81-1"), SOP 97-2 "Software
Revenue Recognition" ("SOP 97-2"), and Staff Accounting Bulletin ("SAB")
104 "Revenue Recognition in Financial Statements" ("SAB 104") depending
upon the terms of the contract. Revenue is recognized net of cash
discounts and allowances.
For contracts involving multiple deliverables, where the deliverables are
governed by more than one authoritative standard, Directory and Operator
Services generally applies the Financial Accounting Standards Board
("FASB") Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue
arrangements with multiple deliverables" ("EITF 00-21"), and evaluates
each deliverable to determine whether it represents a separate unit of
accounting based on the following criteria: (a) whether the delivered
item has value to the customer on a standalone basis, (b) whether there
is objective and reliable evidence of the fair value of the undelivered
item(s), and (c) if the contract includes a general right of return
relative to the delivered item, delivery or performance of the delivered
item(s) is considered probable and substantially in the control of
Directory and Operator Services. Directory and Operator Services
allocates revenue to each unit of accounting or element based on relative
fair values. Each unit of accounting is then accounted for under the
applicable revenue recognition guidance. For arrangements that include
hardware and software, provided that the software is not essential to the
functionality of the hardware and the hardware and software represent
separate units of accounting, revenue related to the software element is
recognized under SOP 97-2 and revenue related to the hardware element is
recognized under SOP 81-1 or SAB 104. For arrangements where the software
is essential to the functionality of the hardware, revenue is recognized
for the software and the hardware as one unit of accounting pursuant to
SOP 97-2 for off-the shelf products and pursuant to SOP 81-1 for
customized products.
For long-term contracts, primarily those related to customized network
solutions and network build outs, revenues are recognized under SOP 81-1
using the percentage-of-completion method. The percentage-of-completion
method measures the percentage of costs incurred to date on a contract
relative to the estimated total expected contract costs. Profit estimates
on long-term contracts are revised periodically based on changes in
circumstances and any losses on contracts are recognized in the period
that such losses become known. Generally, the terms of long-term
contracts provide for progress billing based on completion of certain
phases of work. Contract costs incurred towards the completion of the
project that are unbilled are accumulated in the contracts in progress
account included in accounts receivable - net. Billings in excess of
revenues recognized to date on long-term contracts are included in
advance billings in excess of revenues, a component of other accrued
liabilities.
Revenue for hardware sold separately that does not require significant
customization is recognized under SAB 104. Hardware revenue, net of trade
discounts and allowances, is recognized upon shipment and when all
significant contractual obligations have been satisfied and collection is
reasonably assured.
Engineering, installation and other services are recognized as the
services are performed.
Directory and Operator Services makes certain sales through multiple
distribution channels, primarily resellers and distributors. These
customers are generally given certain rights of return. For products sold
-14-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Notes to Financial Statements
(thousands of U.S. dollars, unless otherwise stated)
through these distribution channels, revenue is recognized from product
sales at the time of shipment to the distribution channel. Accruals for
estimated sales returns and other allowances are recorded at the time of
shipment and are based on contract terms and prior claims experience.
Software revenue is generally recognized under SOP 97-2. Software revenue
under SOP 97-2 is recognized when persuasive evidence of an arrangement
exists, when the software is delivered in accordance with all terms and
conditions of the customer contracts, when the fee is fixed or
determinable and when collection is reasonably assured. For software
arrangements involving multiple elements, Directory and Operator Services
allocates revenue to each element based on vendor specific objective
evidence of relative fair values, which are derived by allocating a value
to each element that is based upon the prices charged when the element is
sold separately.
Research and development
Research and development costs are charged to net earnings in the periods
in which they are incurred. Related investment tax credits are deducted
from the income tax provision.
Income taxes
Directory and Operator Services provides for income taxes using the asset
and liability method. This approach recognizes the amount of taxes
payable or refundable for the current year as well as deferred tax assets
and liabilities for the future tax consequence of events recognized in
the consolidated financial statements and tax returns. Deferred income
taxes are adjusted to reflect the effects of changes in tax laws or
enacted tax rates.
In establishing the appropriate income tax valuation allowances,
Directory and Operator Services assesses the realizability of its net
deferred tax assets quarterly and based on all available evidence, both
positive and negative, determines whether it is more likely than not that
the remaining net deferred tax assets or a portion thereof will be
realized.
Inventories
Inventories are valued at the lower of cost (calculated on a first-in,
first-out basis) or market. The cost of finished goods and work in
process is comprised of material, labor and manufacturing overhead.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the expected
useful lives of the related assets (generally three to five years). Upon
disposal, the assets and related accumulated depreciation are removed
from Directory and Operator Services accounts, and the resulting gains or
losses are reflected in the statement of operations.
Impairment or disposal of long-lived assets (property and equipment)
Long-lived assets held and used
Directory and Operator Services tests long-lived assets or asset groups
for recoverability when events or changes in circumstances indicate that
their carrying amount 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
-15-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Notes to Financial Statements
(thousands of U.S. dollars, unless otherwise stated)
in the business climate or legal factors; accumulation of costs
significantly in excess of the amount originally expected for the
acquisition or construction of the asset; current period cash flow or
operating losses combined with a history of losses or a forecast of
continuing losses associated with the use of the asset; and a current
expectation that the asset will more likely than not be sold or disposed
at a loss before the end of its estimated useful life.
Recoverability is assessed based on the carrying amount of the asset and
its fair value which is generally determined based on the sum of the
undiscounted cash flows expected to result from the use and the eventual
disposal of the asset. An impairment loss is recognized when the carrying
amount is not recoverable and exceeds fair value of the asset. The
impairment loss is measured as the amount by which the carrying amount
exceeds fair value.
Long-lived assets held for sale
Long-lived assets are classified as held for sale when certain criteria
are met, which include: management commitment to a plan to sell the
assets; the availability of the assets for immediate sale in their
present condition; whether an active program to locate buyers and other
actions to sell the assets has been initiated; whether the sale of the
assets is probable and their transfer is expected to qualify for
recognition as a completed sale within one year; whether the assets are
being marketed at reasonable prices in relation to their fair value; and
how unlikely it is that significant changes will be made to the plan to
sell the assets.
Directory and Operator Services measures long-lived assets to be disposed
of by sale at the lower of carrying amount and fair value less cost to
sell. These assets are no longer depreciated. Fair value is determined
using quoted market prices or the anticipated cash flows discounted at a
rate commensurate with the risk involved.
Long-lived assets to be disposed of other than by sale
Directory and Operator Services classifies an asset or asset group that
will be disposed of other than by sale as held and used until the
disposal transaction occurs. The asset or asset group continues to be
depreciated based on revisions to its estimated useful life until the
date of disposal or abandonment.
Recoverability is assessed based on the carrying amount of the asset and
the sum of the undiscounted cash flows expected to result from the
remaining period of use and the eventual disposal of the asset. An
impairment loss is recognized when the carrying amount is not recoverable
and exceeds the fair value of the asset.
Customer deposits
Customer deposits consist of amounts billed to customers for which
services will be performed over future periods.
Warranty costs
Directory and Operator Services products are covered by product warranty
plans generally for 90 days. A liability for the expected cost of
warranty-related claims is established when products are sold and the
related revenue is recognized. In estimating the warranty liability,
historical material replacement costs and the associated labor to correct
the product failure are considered. Revisions are made when actual
experience differs materially from historical experience. Known product
defects are specifically accrued for as Directory and Operator Services
becomes aware of such defects.
-16-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Notes to Financial Statements
(thousands of U.S. dollars, unless otherwise stated)
Pension, post-retirement and post-employment benefits
Pension expense, based on management's assumptions, consists of the:
actuarially computed costs of pension benefits in respect of the current
year's service; imputed returns on plan assets and imputed interest on
pension obligations; and straight-line amortization under the corridor
approach of experience gains and losses, assumption changes and plan
amendments over the expected average remaining service life of the
employee group.
The expected costs of post-retirement and certain post-employment
benefits, other than pensions, for active employees are accrued in the
consolidated financial statements of Nortel Networks during the years
employees provide service as the liabilities reside with Nortel Networks.
These costs are recorded based on actuarial methods and assumptions.
Other post-employment benefits are recognized when the event triggering
the obligation occurs. These costs have been allocated to the financial
statements of Directory and Operator Services based on headcount.
Stock-Based Compensation
Under various stock option programs of Nortel Networks, options may be
granted to various eligible employees of Directory and Operator Services
to purchase common shares of Nortel Networks.
In December 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of FASB Statement No. 123"
("SFAS 148"), which amended the transitional provisions of SFAS No. 123,
"Accounting for Stock-based Compensation" ("SFAS 123"), to allow the
recognition of stock-based compensation under the fair value based
method.
Prior to January 1, 2003, Directory and Operator Services, as permitted
under SFAS 123, applied Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting and providing disclosures for its
stock-based compensation plans. Under SFAS 123 and APB 25, Directory and
Operator Services did not expense employee stock-based compensation using
the fair value based method.
Effective January 1, 2003, Directory and Operator Services elected to
expense employee stock-based compensation relating to their employees who
hold options of Nortel Networks using the fair value based method
prospectively for all awards granted or modified on or after January 1,
2003. The fair value at grant date of stock options is estimated using
the Black-Scholes option-pricing model. Compensation expense is
recognized on a straight line basis over the stock option vesting period.
The impact of the adoption of the fair value based method for expenses
recognition of employee awards resulted in $54 (net of tax of nil) of
stock option expense during 2003.
Had Directory and Operator Services applied the fair value based method
to all stock-based awards, reported net earnings would have been adjusted
to the pro forma amount indicated below for the year ended December 31:
-------------------------------------------------------------------
2003
-------------------------------------------------------------------
Net eanings - reported $5,442
Stock based compensation - reported 54
Pro forma stock option expense (706)
-------------------------------------------------------------------
Net earnings - pro forma $4,790
-------------------------------------------------------------------
-17-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Notes to Financial Statements
(thousands of U.S. dollars, unless otherwise stated)
The following weighted average assumptions were used in computing the
fair value of stock options used to compute pro forma net earnings for
the year ended December 31:
-------------------------------------------------------------------
2003
-------------------------------------------------------------------
Black-Scholes weighted-average assumptions
Expected dividend yield 0.00%
Expected volatility 92.49%
Risk-free interest rate 2.81%
Expected option life in years 4
Weighted-average stock option fair value
per option granted in Nortel Networks $ 1.57
-------------------------------------------------------------------
Recent pronouncements
a) In March 2004, the EITF reached consensus on Issue No. 03-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-1"). EITF 03-1 provides guidance on determining
when an investment is considered impaired, whether that impairment is
other than temporary, and the measurement of an impairment loss. EITF
03-1 is effective for Nortel Networks investment evaluations for periods
commencing July 1, 2004. EITF 03-1 is applicable to marketable debt and
equity securities within the scope of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), and SFAS
No. 124, "Accounting for Certain Investments Held by Not-for-Profit
Organizations", and equity securities that are not subject to the scope
of SFAS 115 and not accounted for under the equity method of accounting.
On September 30, 2004 the FASB issued FSB EITF Issue 03-1-1, which
delayed the effective date of paragraph 10 to 20 of EITF 03-1 The
adoption of EITF 03-1 is not expected to have a material impact on
Directory and Operator Services results of operations and financial
position.
b) On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "MPDIM Act") was signed into law in the
United States. The MPDIM Act introduced a prescription drug benefit under
Medicare (specifically Medicare Part D) as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that
is at least actuarially equivalent to Medicare Part D. Nortel Networks
currently sponsors retiree health care plans that provide prescription
drug benefits to its U.S. retirees. On May 19, 2004, FASB Financial Staff
Position ("FSP") "Financial Accounting Standards" ("FAS") 106-2
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" ("FSP FAS
106-2") was issued, which addresses the accounting and disclosure
requirements associated with Medicare Part D. Directory and Operator
Services has elected to retroactively recognize the effects of the MPDIM
Act to the date of enactment effective for the three-month period ended
June 30, 2004. The adoption of the MPDIM Act did not have a material
impact on Directory and Operator Services' results of operation and
financial condition in 2003.
3. Accounting changes
(a) Determining whether an arrangement contains a lease
In May 2003, the EITF reached a consensus on Issue No. 01-8, "Determining
Whether an Arrangement Contains a Lease" ("EITF 01-8"). EITF 01-8
provides guidance on how to determine whether an arrangement contains a
lease that is within the scope of FASB Statement No. 13, "Accounting for
Leases." The guidance in EITF 01-8 is based on whether the arrangement
conveys to the purchaser (or the lessee) the right to use or control a
specific asset, and is effective for Directory and Operator Services for
arrangements entered into or modified after June 30, 2003. The guidance
in ETIF 01-8 did not have a material impact on Directory and Operator
Services results of operations and financial condition. The impact of
EITF 01-8 on Directory and Operator Services future results of operations
and financial condition will depend on the terms contained in contracts
signed or contracts amended in the future.
-18-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Notes to Financial Statements
(thousands of U.S. dollars, unless otherwise stated)
(b) Accounting for certain financial instruments with characteristics
of both liabilities and equity
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS 150"). SFAS 150 clarifies the accounting for certain
financial instruments with characteristics of both liabilities and equity
and requires that those instruments be classified as liabilities on the
balance sheets. Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for financial 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, 2003.
The adoption of SFAS 150 did not have a material impact on Directory and
Operator Services results of operations and financial condition.
(c) Amendment of SFAS 133 on derivative instruments and hedging
activities
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149
amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). In particular, SFAS 149: clarifies
under what circumstances a contract with an initial net investment meets
the characteristic of a derivative as discussed in SFAS 133; clarifies
when a derivative contains a financing component; amends the definition
of an "underlying" to conform it to the language used in FIN 45; and
amends certain other existing pronouncements. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003, except as stated
below, and for hedging relationships designated after June 30, 2003.
The provisions of SFAS 149 that relate to guidance in SFAS 133 that have
been effective for fiscal quarters which began prior to June 15, 2003
will continue to be applied in accordance with their respective effective
dates. In addition, certain provisions relating to forward purchases or
sales of when-issued securities or other securities that do not yet exist
will be applied to both existing contracts as well as new contracts
entered into after June 30, 2003.
Effective July 1, 2003, Directory and Operator Services applied the
requirements of SFAS 149 on a prospective basis to contracts entered into
or modified after June 30, 2003. The adoption of SFAS 149 did not have a
material impact on Directory and Operator Services results of operations
and financial condition.
(d) Consolidation of variable interest entities (VIE)
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities an interpretation of Accounting Research Bulletin No.
51, "Consolidated Financial Statements" ("FIN 46"). FIN 46 clarifies the
application of consolidation guidance to those entities defined as VIEs
(which includes, but is not limited to special purpose entities, trusts,
partnerships and other legal structures) in which equity investors do not
have the characteristics of a "controlling financial interest" or there
is not sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support. FIN 46 applies
immediately to all VIEs created after January 31, 2003 and by the
beginning of the first interim or annual reporting period commencing
after June 15, 2003 for VIEs created prior to February 1, 2003. In
October 2003, the FASB issued FSP No. FIN 46-6, deferring the effective
date for applying the provisions of FIN 46 for VIEs created prior to
February 1, 2003 to the end of the first interim or annual period ending
after December 15, 2003. While the criteria for deferral were met, Nortel
Networks elected early application of FIN 46. Effective July 1, 2003,
Nortel Networks prospectively began consolidating certain VIEs for which
Nortel Networks was considered the primary beneficiary following the
guidance of FIN 46. In December 2003, the FASB issued FIN 46R which
amends and supercedes the original FIN 46. The adoption of FIN 46R did
not have a material impact on Directory and Operator Services results of
operations and financial condition or their accounting treatment of VIEs.
-19-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Notes to Financial Statements
(thousands of U.S. dollars, unless otherwise stated)
4. Inventories - net
Inventories as at December 31 consist of the following:
2003
--------
Spare parts .............. $ 7,559
Less inventory provisions (6,507)
-------
Inventories - net ........ $ 1,052
=======
5. Plant and equipment - net
Property and equipment as at December 31 consists of the following:
2003
--------
Equipment ........................................ $ 25,703
Furniture and fixtures ........................... 540
--------
26,243
Less accumulated depreciation .................... (25,142)
--------
Property and equipment - net $ 1,101
========
During the 2003 fiscal year, Directory and Operator Services disposed of
equipment having a net book value of $421 for nil proceeds. The loss on
disposal has been included in the statement of operations as follows:
2003
--------
Selling, general and administrative expense....... $ 321
Research and development expense.................. 100
--------
$ 421
========
6. Other accrued liabilities
Other accrued liabilities at December 31 consist of the following:
2003
--------
Accrued compensation ............................. $ 1,656
Contractual liabilities .......................... 1,095
Cost of sales accruals ........................... 221
Selling, general and administrative accrual ...... 180
--------
Other accrued liabilities ........................ $ 3,152
========
7. Segment information and major customers
In accordance with SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information," Directory and Operator Services is required to
disclose information about its products, services, the geographic area in
which it operates, and major customers. Directory and Operator Services
operates in a single industry segment which supplies systems (hardware
and software), as well as support, maintenance and associated
professional services, for directory-and-operator-services applications
and platform operator workstation-executable solutions. The following are
revenues by geographic region based on the location of the customer for
the year ended December 31:
2003
--------
United States .................................... $ 34,422
Canada ........................................... 4,347
Other International............................... 1,679
--------
Total ............................................ $ 40,448
========
-20-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Notes to Financial Statements
(thousands of U.S. dollars, unless otherwise stated)
Revenue Streams
Total revenues are segregated between product sales and services as
follows: Revenues earned as a result of services provided were $29,973 or
74%; revenues earned as a result of product sales were $10,475 or 26%;
and the cost of revenue for services provided were 20,382 or 77% and cost
of revenue for product sales were $6,085 or 23%.
Major customers
External revenues include amounts from three separate customers located
in the United States in the amounts of $12,690, $11,245 and $5,419 or
31%, 28%, and 13% of total revenues respectfully, in 2003. All of
Directory and Operator Services customers operate in the
telecommunications industry.
Plant and Equipment - net
The following table sets forth plant and equipment - net by geographic
region as of December 31:
2003
--------
United States $ 1,017
Canada ........................................... 84
--------
Total ............................................ $ 1,101
========
8. Incomes taxes
Directory and Operator Services results of operations are included in the
income tax returns filed for Nortel Networks. Directory and Operator
Services income tax provision, deferred income tax balances and valuation
allowance have been determined for financial statement purposes as if
Directory and Operator Services filed separate tax returns. The following
is a reconciliation of income taxes, calculated at the Canadian combined
Federal and provincial income tax rates, to the income tax provision
included in the accompanying Statements of Operations for the year ended
December 31:
2003
--------
Income taxes at Canadian rates
(2003 - 33.28%) ............................... $ 2,892
Difference between Canadian rates
and rates in other jurisdictions .............. 339
Permanent and other differences .................. 18
--------
Income tax (benefit) provision ................... $ 3,249
========
Current .......................................... $ 4,043
Deferred ......................................... (794)
--------
$ 3,249
========
The following table shows the significant components included in deferred
income taxes as at December 31:
2003
--------
Provisions and reserves .......................... $ 2,559
Plant and equipment .............................. 211
--------
Net deferred income tax asset $ 2,770
========
The current tax provision of $4,043 was offset by losses and other
carry-forward amounts of Nortel Networks.
Since Directory and Operator Services results of operations are included
in the income tax returns filed for Nortel Networks, the deferred income
tax assets of $2,770 will be realized by Nortel Networks.
Investment tax credits of nil have been recorded as a reduction of the
income tax expense for the year.
-21-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Notes to Financial Statements
(thousands of U.S. dollars, unless otherwise stated)
9. Related Party Transactions - Nortel Networks
The following table presents intercompany balances between Directory and
Operator Services and Nortel Networks and its affiliates for the year
ended December 31:
2003
--------
Balance receivable at beginning of the year ............. $ 34,810
Net amounts received (paid) by Nortel Networks on
behalf of Directory and Operator Services ............. 10,147
--------
Balance receivable from Nortel Networks at end
of the year ........................................... $ 44,957
=======
The intercompany balances are non-interest bearing with no specific terms
of repayment.
Transactions with related parties for the year ended December 31 are
summarized as follows:
2003
--------
Billed to related parties
Proceeds on disposition of plant and equipment $ 546
Intercompany revenues ............................. 256
Billed from related parties
Cost of revenues .................................. $ 239
--------
10. Guarantees, contingencies and commitments
Guarantees
Directory and Operator Services has entered into agreements that contain
features which meet the definition of a guarantee under FIN 45. FIN 45
defines a guarantee to be a contract that contingently requires Directory
and Operator Services to make payments (either in cash, financial
instruments, other assets, common shares of Nortel Networks Corporation
or through the provision of services) to a third party based on changes
in an underlying economic characteristic (such as interest rates or
market value) that is related to an asset, a liability or an equity
security of the other party. Directory and Operator Services has the
following major type of guarantee that is subject to the disclosure
requirements of FIN 45.
Historically, Directory and Operator Services has not made any
significant indemnification payments under such agreements and no amount
has been accrued in the accompanying financial statements with respect to
these indemnification guarantees.
On February 14, 2003, Nortel Networks principal operating subsidiary,
Nortel Networks Limited ("NNL"), entered into an agreement with Export
Development Canada ("EDC") regarding arrangements to provide for support,
on a secured basis, of certain performance related obligations arising
out of normal course business activities for the benefit of Nortel
Networks (the "EDC Support Facility"). NNL's obligations under the EDC
Support Facility also became secured on an equal and ratable basis under
the security agreements entered into by NNL and various of its
subsidiaries that pledged substantially all of the assets of NNL,
including Directory and Operator Services business, in favor of the banks
under the NNL and Nortel Networks Inc. ("NNI") $750 April 2000 five year
credit facilities (the "Five Year Facilities") and the holders of Nortel
Networks public debt securities. This security became effective in favor
-22-
DIRECTORY AND OPERATOR SERVICES
(A Business of Nortel Networks Corporation)
Notes to Financial Statements
(thousands of U.S. dollars, unless otherwise stated)
of the banks and the public debt holders on April 4, 2002. On July 10,
2003, NNL and EDC amended the terms of the EDC Support Facility by
extending the termination date of the facility to December 31, 2005 from
June 30, 2004.
Operating lease commitments
At December 31, 2003, the future minimum payments under operating leases
for the years ending December 31 consisted of:
-------------------------------------------------------------------------
Operating
leases
-------------------------------------------------------------------------
2004 $ 723
2005 568
2006 596
2007 626
2008 321
Thereafter -
--------
-------------------------------------------------------------------------
Total future minimum payments $ 2,834
-------------------------------------------------------------------------
Rental expense on operating leases for the year ended December 31, 2003,
amounted to $445.
Contingencies
On January 29, 2003, Nortel Networks received a letter from Telecordia
Technologies ("Telecordia") which states "the Automated Directory
Assistance Service Plus ("ADAS Plus") line of products and services
associated with the Directory and Operator Services business infringe
United States patent laws.
Nortel Networks is unable to ascertain the ultimate monetary liability or
financial impact to Nortel Networks of the above matter which seek
damages of indeterminate amounts. Nortel Networks cannot determine
whether this action will have a material adverse effect on the business,
results of operations and financial conditions of Directory and Operator
Services business. Nortel Networks intends to vigorously defend this
action.
11. Subsequent Event
On August 2, 2004 Nortel Networks completed the contribution of certain
assets (excluding net receivable from Nortel Networks and deferred income
taxes) and certain liabilities of the Directory and Operator Services
business to VoltDelta, a wholly owned subsidiary of Volt Information
Sciences, Inc. ("VIS"), in return for a 24% interest in VoltDelta.
VoltDelta is a leading provider of directory and operator services in
North America and Europe. After a period of two years, Nortel Networks
and VIS each have an option to cause Nortel Networks to sell its
VoltDelta shares to VIS for proceeds ranging from $25 to $70 million. As
a result of this transaction, approximately 155 Nortel Networks Directory
and Operator Services employees in North America and Mexico joined
VoltDelta.
-23-
Appendix 2
Directory and Operator Services
(a Business of Nortel Networks Corporation)
Statement of Operations for the Six Months Ended June 30, 2004
(Unaudited)
(thousands of U.S. Dollars)
Revenues $ 18,012
Cost of revenues 10,348
- ----------------------------------------------------------------------------
Gross profit 7,664
Selling, general and administrative expense 616
Research and development expense 1,747
- ----------------------------------------------------------------------------
Earnings before income taxes 5,301
Income tax provision 1,981
- ----------------------------------------------------------------------------
Net earnings $ 3,320
============================================================================
The accompanying notes are an integral part of these financial statements.
-24-
Directory and Operator Services
(a Business of Nortel Networks Corporation)
Balance Sheet as at June 30, 2004
(Unaudited)
(thousands of U.S. Dollars)
ASSETS
Current assets
Accounts receivable - net $ 1,371
Receivable from Nortel Networks Corporation 46,991
Inventories - net 1,552
Other current assets 2
- ----------------------------------------------------------------------------
Total current assets 49,916
Plant and equipment - net 856
Deferred income taxes - net 2,746
- ----------------------------------------------------------------------------
Total assets $ 53,518
============================================================================
LIABILITIES
Current liabilities
Accounts payable $ 403
Customer deposits 907
Other accrued liabilities 1,074
- ----------------------------------------------------------------------------
Total current liabilities 2,384
Contingencies (Note 2)
Nortel Networks Corporation net investment 51,134
- ----------------------------------------------------------------------------
Total liabilities and Nortel Networks Corporation net investment $ 53,518
============================================================================
The accompanying notes are an integral part of these financial statements.
-25-
DIRECTORY AND OPERATOR SERVICES
(a business of Nortel Networks Corporation)
NOTES TO INTERIM FINANCIAL STATEMENTS
(unaudited)
Note (1) General: The accompanying unaudited interim financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial statements [and Article 1 of
Regulation S-X, promulgated by the Securities and Exchange Commission related to
interim period financial statements]. Accordingly, these interim financial
statements do not include certain information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, the accompanying unaudited interim financial statements contain all
adjustments (consisting only of normal recurring accruals) which, in the opinion
of management of Nortel Networks Corporation, are necessary in order to make the
financial statements not misleading. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year. For further information, refer to the audited financial statements
(including the footnotes thereto) for the year ended December 31, 2003 included
elsewhere in this report.
Note (2) Contingencies: On January 29, 2003, Nortel Networks received a
letter from Telecordia Technologies ("Telecordia") which states "the Automated
Directory Assistance Service Plus ("ADAS Plus") line of products and services
associated with the Directory and Operator Services business infringe United
States patent laws.
Nortel Networks is unable to ascertain the ultimate monetary liability or
financial impact to Nortel Networks of the above matter which seek damages of
indeterminate amounts. Nortel Networks cannot determine whether this action will
have a material adverse effect on the business, results of operations and
financial conditions of Directory and Operator Services business. Nortel
Networks intends to vigorously defend this action.
Note (3) Acquisition: On August 2, 2004 Nortel Networks completed the
contribution of certain assets (excluding net receivable from Nortel Networks
and deferred income taxes) and certain liabilities of the Directory and Operator
Services business to VoltDelta, a wholly owned subsidiary of Volt Information
Sciences, Inc. ("VIS"), in return for a 24% interest in VoltDelta. VoltDelta is
a leading provider of directory and operator services in North America and
Europe. After a period of two years, Nortel Networks and VIS each have an option
to cause Nortel Networks to sell its VoltDelta shares to VIS for proceeds
ranging from $25 to $70 million. As a result of this transaction, approximately
155 Nortel Networks Directory and Operator Services employees in North America
and Mexico joined VoltDelta.
Note (4) Financial Statements of Nortel Networks: As of this date, Nortel
Networks has not completed its consolidated financial statements for the year
ended December 31, 2003 or the six months ended June 30, 2004. As publicly
announced, the Nortel Networks Audit Committee has undertaken an independent
review of the circumstances leading to the initial restatement of certain
historical consolidated financial statements of Nortel Networks in December
2003. As a result of the work done in connection with the independent review,
Nortel Networks has announced that it will need to revise and restate its 2003
and certain prior period consolidated financial statements. In connection with
the planned revisions and restatements, Nortel Networks procedures to determine
all adjustments to the year ended 2003 and certain prior periods are ongoing. As
a result, additional adjustments to the financial statements may be identified.
As at this date, to Nortel Networks' knowledge, there are no transactions or
other matters that may result in material adjustments to the financial
statements.
-26-
Appendix 3
(b) Pro Forma Financial Information
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as of
August 1, 2004 and the unaudited pro forma condensed combined statements of
income for the nine months ended August 1, 2004 and for the year ended November
2, 2003 are based on the historical financial statements of Volt and the DOS
Business after giving effect to (i) the transaction as a purchase of the DOS
Business by Volt using the purchase method of accounting (ii) the recognition of
a minority interest to reflect Nortel Networks' 24% investment in VoltDelta, and
(iii) the assumptions and adjustments described in the accompanying notes to the
unaudited pro forma condensed combined financial statements. Financial and other
information regarding the DOS business which is incorporated in the Pro-Forma
information has been furnished by Nortel Networks (see first paragraph under
Item 9.01 above).
The pro forma information is preliminary, is being furnished solely for
informational purposes and is not indicative of the combined results of
operations or financial position that might have been achieved for the periods
or dates indicated, nor is it necessarily indicative of the future results of
the combined company. The pro forma information is based on preliminary
estimates and assumptions set forth in the notes to such information. It does
not reflect differences in the way the businesses were or will be conducted, nor
does it reflect cost savings that may be realized from the elimination of
certain expenses and from synergies that may be created or the costs to achieve
such cost savings or synergies. No assurance can be given that cost savings and
synergies will be realized.
Pro forma adjustments are necessary to reflect the purchase price, the
minority interest and to adjust Volt's net tangible and intangible assets and
liabilities to preliminary estimated fair values. Pro forma adjustments are also
necessary to reflect amortization expense related to amortizable intangible
assets, changes in depreciation and amortization expense resulting from fair
value adjustments to net tangible assets, interest expense and the income tax
effects related to the minority interest and the pro forma adjustments.
The pro forma adjustments and allocation of purchase price are
preliminary and are based on Volt's estimate of the fair value of the assets to
be acquired and liabilities to be assumed. The preliminary valuations have been
considered in the estimates of the fair values reflected in the unaudited pro
forma condensed combined financial statements.
The final purchase price allocation will be completed after asset and
liability valuations are finalized. A final determination of these fair values
will include Volt management's consideration of final valuations, which will be
based on the net tangible and intangible assets of the DOS Business that existed
as of the closing date. Any final adjustments may change the allocation of the
purchase price, which could affect the fair value assigned to the assets and
liabilities, and could result in a change to the unaudited pro forma condensed
combined financial statements presented. Amounts allocated to intangible assets
with definite lives may change, which could result in an increase or decrease in
amortization of intangible assets. Estimates related to the determination of the
lives of the assets acquired may also change, which could result in an increase
or decrease in depreciation or amortization expense.
The unaudited pro forma condensed combined balance sheet is presented as
if the transaction had been completed on August 1, 2004 and combines the
historical balance sheet of Volt at August 1, 2004 and the historical balance
sheet of the DOS Business (as it was conducted by Nortel Networks) at June 30,
2004.
-27-
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION - Continued
The unaudited pro forma condensed combined statements of income for the
nine months ended August 1, 2004 and for the year ended November 2, 2003 are
presented as if the transaction had been completed on November 4, 2002. The
unaudited pro forma condensed combined statement of income for the nine months
ended August 1, 2004 combines the historical results of Volt for the nine months
then ended, and the DOS Business (as it was conducted by Nortel Networks) for
the nine months ended June 30, 2004.
The unaudited pro forma condensed combined statement of income for the
year ended November 2, 2003 combines the historical results of Volt for the year
then ended and the DOS Business for the year ended December 31, 2003.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical consolidated financial statements and
accompanying notes contained in Volt's Annual Report on Form 10-K for the year
ended November 2, 2003; Volt's Quarterly Report on Form 10-Q for the nine months
ended August 1, 2004; the DOS Business' financial statements of the DOS Business
(as it was conducted by Nortel Networks) as of and for the year ended December
31, 2003; and the DOS Business' financial statements of the DOS Business (as it
was conducted by Nortel Networks) as of and for the six months ended June 30,
2004.
The unaudited pro forma condensed combined financial statements are not
intended to represent or to be indicative of the consolidated results of
operations or financial condition of the combined company that would have been
reported had the transaction been completed as of the dates presented and should
not be considered as representative of the future consolidated results of
operations or financial condition of the combined company.
The income tax rate applied to the pro forma adjustments is 40.0%, the
expected rate. The income tax rate applied to the earnings attributable to the
minority interest is 3.4% for the nine months ended August 1, 2004 and 7.8% for
the year ended November 2, 2003. This differs significantly from the expected
rate due to the structure of VoltDelta, which has been organized as a limited
liability company in which substantially all the taxable income earned in the
United States is taxed at the parent company level (Volt and Nortel Networks).
Intercompany balances or transactions between the combining companies
were not significant for any of the periods presented. No material pro forma
adjustments were required to conform the DOS Business' accounting policies to
Volt's accounting policies. Certain reclassifications have been made to conform
the Volt and the DOS Business historical amounts to the pro forma presentation.
-28-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
AUGUST 1, 2004
DOS Pro Forma Pro Forma
Volt(a) Business(a) Adjustments Consolidated
--------- -------- -------- ---------
(In thousands of dollars)
ASSETS
Cash and cash equivalents, including restricted
cash of $34,472 $ 68,736 $ 3,491 (b) $ 72,227
Short-term investments 4,187 4,187
Trade accounts receivable-net 378,368 $ 1,371 (1,371)(c) 378,368
Inventories 31,904 1,552 (113)(d) 33,343
Deferred income taxes 8,705 8,705
Prepaid expenses and other assets 15,654 2 (2)(c) 15,654
Due from Nortel Networks 46,991 (46,991)(c)
---------- ------ --------- ----------
TOTAL CURRENT ASSETS 507,554 49,916 (44,986) 512,484
Property, plant and equipment-net 83,400 856 779 (e) 85,035
Deposits and other assets 2,701 (1,252)(f) 1,449
Intangible assets-net 372 15,900 (g) 16,272
Goodwill 8,983 20,295 (c) 29,278
---------- ------ --------- ----------
TOTAL ASSETS $ 603,010 $50,772 $ (9,264) $ 644,518
========== ====== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 7,717 $ 7,717
Current portion of long-term debt 394 394
Accounts payable 170,329 $ 403 $ (403)(c) 170,329
Accrued wages and commissions 49,731 700 (b) 50,431
Other accrued expenses 41,797 1,074 1,115 (i) 43,986
Deferred income and other liabilities 35,122 907 2,791 (b) 37,913
(907)(h)
Income taxes payable 5,424 5,424
---------- ------ --------- ----------
TOTAL CURRENT LIABILITIES 310,514 2,384 3,296 316,194
Accrued insurance 4,012 4,012
Long-term debt 13,799 1,828 (j) 15,627
Deferred income taxes 10,770 (2,746) 2,746 (c) 10,770
Minority interests 34,000 (k) 34,000
STOCKHOLDERS' EQUITY
Common stock, par value $.10;
Authorized--30,000,000 shares; issued--15,225,425 shares 1,524 1,524
Paid-in capital 41,597 41,597
Retained earnings 221,212 221,212
Accumulated other comprehensive loss (418) (418)
Nortel Network's investment 51,134 (51,134)(c)
---------- ------ --------- ----------
TOTAL STOCKHOLDERS' EQUITY 263,915 51,134 (51,134) 263,915
---------- ------ --------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 603,010 $50,772 $ (9,264) $ 644,518
========== ======= ========= ==========
See Notes to Unaudited Pro Forma Condensed Financial Statements
-29-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
NINE MONTHS ENDED AUGUST 1, 2004
DOS Pro Forma Pro Forma
Volt (a) Business (a) Adjustments Consolidated
----- ---------- ------------ ------------
(In thousands, except per share data)
NET SALES $1,390,655 $29,065 $ 1,419,720
COST AND EXPENSES:
Cost of sales 1,290,650 19,854 1,310,504
Selling and administrative 57,640 1,146 58,786
Depreciation and amortization 18,832 $ 768 (b) 19,600
---------- ------ --------- ----------
1,367,122 21,000 768 1,388,890
---------- ------ --------- ----------
OPERATING PROFIT 23,533 8,065 (768) 30,830
OTHER INCOME (EXPENSE):
Interest income 684 684
Other expense - net (3,065) (3) (3,068)
Foreign exchange loss (98) (98)
Interest expense (1,321) (57)(e) (1,378)
---------- ------ --------- ----------
Income from continuing operations before income taxes 19,733 8,062 (825) 26,970
Income tax provision (7,764) (3,013) 307 (d) (8,214)
23 (e)
2,233 (f)
Minority interest in earnings of consolidated subsidiary (3,592)(c) (5,825)
(2,233)(f)
---------- ------ --------- ----------
INCOME FROM CONTINUING OPERATIONS $ 11,969 $ 5,049 $ (4,087) $ 12,931
========== ====== ========= ==========
Per Share Data
Basic:
Income from continuing operations per share $ 0.79 $ 0.85
========== ==========
Weighted average number of shares
outstanding-basic 15,226 15,226
========== ==========
Diluted:
Income from continuing operations per share $ 0.78 $ 0.84
========== ==========
Weighted average number of shares
outstanding-diluted 15,342 15,342
========== ==========
See Notes to Unaudited Pro Forma Condensed Financial Statements.
-30-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED NOVEMBER 2, 2003
DOS Pro Forma Pro Forma
Volt (a) Business (a) Adjustments Consolidated
----- ---------- ------------ ------------
(In thousands, except per share data)
NET SALES $1,609,857 $40,448 $ 1,650,305
COST AND EXPENSES:
Cost of sales 1,502,148 30,529 1,532,677
Selling and administrative 71,607 1,228 72,835
Depreciation and amortization 24,331 $ 1,024(g) 25,355
---------- ------ --------- ----------
1,598,086 31,757 1,024 1,630,867
---------- ------ --------- ----------
OPERATING PROFIT 11,771 8,691 (1,024) 19,438
OTHER INCOME (EXPENSE):
Interest income 708 708
Other expense (2,661) (2,661)
Foreign exchange loss 299 299
Interest expense (2,070) (174)(j) (2,244)
---------- ------ --------- ----------
Income before income taxes 8,047 8,691 (1,198) 15,540
Income tax provision (3,286) (3,249) 410 (i) (4,548)
69 (j)
1,508 (k)
Minority interest in earnings of consolidated
subsidiary (3,006)(h) (4,514)
(1,508)(k)
---------- ------ --------- ----------
NET INCOME $ 4,761 $ 5,442 $ (3,725) $ 6,478
========== ====== ========= ==========
Per Share Data
Basic and Diluted:
Net income per share $ 0.31 $ 0.43
========== ==========
Weighted average number of shares
outstanding-basic 15,218 15,218
========== ==========
Weighted average number of shares
outstanding-diluted 15,225 15,225
========== ==========
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
-31-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands of dollars)
Description of Transaction
On June 11, 2004, Volt Delta Resources, LLC ("VoltDelta"), then a
wholly-owned subsidiary of Volt Information Sciences, Inc. ("Volt") entered into
a Contribution Agreement with Nortel Networks Inc. ("Nortel Networks") under
which Nortel Networks agreed to contribute substantially all of the operating
assets (consisting principally of customer base and contracts, intellectual
property and inventory) and certain specified liabilities of its Directory and
Operator Services business ("DOS Business") to VoltDelta in exchange for a 24%
minority equity interest in VoltDelta.
Also, on August 2, 2004, Volt Delta Resources Holdings, Inc. and Nuco I,
Ltd., each a wholly-owned subsidiary of Volt, and VoltDelta and Volt entered
into a Members' Agreement (the "Members' Agreement") with Nortel Networks which
provided for the management of VoltDelta 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 VoltDelta may exercise a call option, in each case to effect the
purchase by VoltDelta of Nortel Networks' minority equity interest in VoltDelta.
If either party exercises its option between the second and third year from the
date of the Members' Agreement, the price to be paid to Nortel Networks for its
24% minority equity interest will be the product of the revenue of VoltDelta for
the twelve month period ended as of the fiscal quarter immediately preceding the
date of the option exercise (the "VoltDelta Revenue Base") multiplied by 70% of
the enterprise market value to revenue formula index of specified comparable
companies (which index shall not exceed 1.8), times Nortel Networks' ownership
interest in VoltDelta (the amount so calculated would not exceed 30% of the
VoltDelta Revenue Base), with a minimum payment of $25 million and a maximum
payment of $70 million. If the option is exercised after three years from the
date of the Members' Agreement, the price to be paid will be a mutually agreed
upon amount.
Pro Forma Adjustments
Balance Sheet
(a) Certain reclassifications have been made to the historical presentation
of Volt and the DOS Business financial information in order to conform to
the unaudited pro forma condensed combined presentation.
(b) Represents payment of $3,491 from Nortel Networks to VoltDelta to
compensate for accrued vacation ($700), which was included in other
accrued expenses at June 30, 2004, and transferred customer deposits
($2,791) (as estimated at August 2, 2004).
(c) Under the purchase method of accounting, the total estimated
consideration as shown in the table below is allocated to the DOS
Business' tangible and intangible assets and liabilities based on their
estimated fair values as of the closing date. The consideration in
preliminarily allocated as follows (in thousands):
Calculation of Consideration
Issuance of 24% of the membership interest of VoltDelta in
exchange for substantially all of the assets and
certain specified liabilities of the DOS Business (1) $34,000
Future payments to Nortel Networks from Volt (2) 3,769
Estimated direct fees and expenses (3) 1,500
-------
Total consideration $39,269
=======
(1) Represents the fair value of the assets and specified liabilities
of the DOS Business acquired. Volt engaged an independent
valuation firm to assist in the determination of the fair value of
the Nortel Networks' 24% interest in VoltDelta, including the
acquisition of substantially all the operating assets and certain
liabilities of Nortel Networks' DOS Business. The valuation firm
-32-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS-Continued
(in thousands of dollars)
Pro Forma Adjustments (continued)
Balance Sheet (continued)
used comparable multiples of revenue, EBITDA and EBIT and other
valuation methods to assist in the determination of the fair
value.
(2) Represents the present value (at six percent) of two mandatory
payments due to Nortel Networks from Volt of $2,000 each, one in
February 2005 and the other in February 2006 as required in an
agreement for joint marketing and product development between
Nortel Networks and VoltDelta. This agreement may be extended
beyond its initial two year term.
(3) Represents estimated direct transaction costs incurred by
VoltDelta, for legal, financial advisory, valuation, auditing,
accounting and other services. Included in such costs is
approximately $850 paid or accrued for services rendered and
expenses reimbursed to the law firm of which Lloyd Frank, a
director of Volt, is of counsel.
Increase
(Decrease)
Net Assets
DOS Business book value of net assets $ 51,134
Initial purchase allocation adjustment
Assets not acquired by VoltDelta
Accounts receivable, net (1,371)
Other current assets (2)
Due from Nortel Networks (46,991)
Deferred income taxes (2,746)
Liabilities not assumed by VoltDelta
Account payable 403
Inventories (see note d) (113)
Property, plant and equipment (see note e) 779
Deposits and other assets (see note f) (1,252)
Intangible assets (see note g) 15,900
Deferred income and other liabilities (see note h) 907
Other accruals (see note i) (1,115)
Long-term debt (see note j) (1,828)
Minority interest (see note k) (34,000)
----------
Adjustment to goodwill $ 20,295
==========
(d) Represents adjustment of spare parts and equipment. This amount was
estimated as part of the initial assessment of the fair value of assets
to be acquired and liabilities to be assumed. This adjustment is
preliminary and is based on VoltDelta's estimates and preliminary
valuations. The actual adjustment may differ materially and will be based
on final valuations.
(e) Reflects the estimated adjustments required to record property, plant and
equipment at its fair value based on a depreciated replacement value,
including equipment valued at $811, acquired subsequent to June 30, 2004.
This adjustment is preliminary and is based on VoltDelta's estimates and
preliminary valuations. The actual adjustment may differ materially and
will be based on final valuations.
-33-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)-Continued
(in thousands of dollars)
Pro Forma Adjustments (continued)
Balance Sheet (continued)
(f) Represents that portion of direct transaction costs incurred by VoltDelta
through August 1, 2004.
(g) Represents the fair value of customer relationships ($15,100) and product
technology ($800) to be amortized over 16 years and 10 years,
respectively. Volt engaged an independent valuation firm to assist in the
determination of the fair value of the intangible assets of the DOS
Business. The customer relationship intangible asset allocation reflects
the nature of the markets within which the DOS Business operates, the
price sensitivity of many of its customers, and the high probability of
customer renewal of relatively short-term contracts. A discounted free
cash flow methodology was used in the determination of the fair value and
life of the customer relationship intangible asset. The product
technology intangible assets are attributable to existing technology and
its fair value and life was determined based on an income approach in the
form of a relief from royalty methodology. No value has been assigned to
in-process research and development.
(h) Represents the DOS Business' customer deposits at June 30, 2004 (see note
a above) for those deposits at August 2, 2004 transferred to VoltDelta.
(i) Reflects the present value of the first payment due to Nortel Networks
($1,941) (see note c above) and direct transaction costs incurred since
August 2, 2004 ($248), partially offset by certain liabilities not
assumed by VoltDelta ($1,074).
(j) Represents the present value of the second of the two payments due to
Nortel Networks (see note c above).
(k) Reflects the fair value of 24% of the membership interest of VoltDelta
(see note c above).
-34-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands of dollars)
Pro Forma Adjustments (continued)
Statement of Income
For the nine
months ended
August 1, 2004(a)
Increase
(Decrease)
Income
-----------------
a) The unaudited pro forma condensed combined balance sheet and statement of
income, as of, and for the nine months ended August 1, 2004 include DOS's
results, as of, and for the nine months ended June 30, 2004. The
unaudited pro forma condensed combined statement of income for the year
ended November 2, 2003 includes DOS's results for the year ended December
31, 2003. Certain reclassifications have been made to the historical
presentation of Volt and the DOS Business financial information in order
to conform to the unaudited pro forma condensed combined presentation.
b) Represents an adjustment to reflect incremental amortization resulting
from a fair value adjustment to amortizable intangible assets as
illustrated:
Pro Forma
Useful Life 2004
Fair Value (in years) Amortization
---------- ----------- ------------
Customer Relationships $15,100 16 $ 708
Product Technology 800 10 60
------- ------
$15,900 $ 768 $ (768)
c) Recognition of 24% minority interest of Nortel Networks for fiscal 2004:
Historical net income - VoltDelta $11,185
DOS 5,049
-------
Historical combined net income $16,234
Allocation from Volt of
general and administrative costs (1,344)(1)
Tax effect of additional allocation 538
Amortization of intangible assets (768)
Tax effect of amortization 307
-------
Adjusted net income $14,967
24% minority (3,592)
(1) Represents estimated additional charges from Volt for
support, including financial reporting system expenses.
d) Reduction of tax provision due to recognizing tax benefit related to the
amortization of intangible assets. 307
e) Interest expense on present value of two payments
due to Nortel Networks. $ (57)
Reduction of tax provision due to recognizing
tax benefit of interest expense. 23 (34)
-------
Total effect on net income $(4,087)
=======
f) Represents the minority interest portion of estimated income taxes provided
on substantially all the taxable income earned in the United States, taxed
at the parent company level. $ 2,233
=======
-35-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)-Continued
(in thousands of dollars)
Pro Forma Adjustments (continued)
Statement of Income (continued)
For the
year ended
November 2, 2003(a)
Increase
(Decrease)
Income
-------------------
g) Represents an adjustment to reflect incremental amortization resulting
from a fair value adjustment to amortizable intangible assets as
illustrated:
Pro Forma
Useful Life 2004
Fair Value (in years) Amortization
---------- ----------- ------------
Customer Relationships $15,100 16 $ 944
Product Technology 800 10 80
------- ------
$15,900 $1,024 ($1,024)
h) Recognition of 24% minority interest of Nortel Networks for fiscal 2003:
Historical net income - VoltDelta $ 8,691
DOS 5,442
-------
Historical combined net income $14,133
Allocation from Volt of
general and administrative costs (1,656)(1)
Tax effect of additional allocation 662
Amortization of intangible assets (1,024)
Tax effect of amortization 410
-------
Adjusted net income $12,525
24% minority (3,006)
(1) Represents estimated additional charges from Volt for
support, including financial reporting system expenses.
i) Reduction of tax provision due to recognizing tax benefit
related to the amortization of intangible assets. 410
j) Interest expense on present value of two payments
due to Nortel Networks. $ (174)
Reduction of tax provision due to recognizing
tax benefit of interest expense. 69 (105)
--------
Total effect on net income $(3,725)
========
k) Represents the minority interest portion of estimated income taxes provided
on substantially all the taxable income earned in the United States, taxed
at the parent company level. $ 1,508
========
-36-