UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For The Three Months Ended January 29, 2006.
Or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
------------------------------
Commission File No. 1-9232
VOLT INFORMATION SCIENCES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
New York 13-5658129
- ------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
- --------------------------------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 704-2400
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Indicate by check mark whether Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.
Large Filer Accelerated Filer X Non-Accelerated Filer
----- ----- -----
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares of the Registrant's common stock, $.10 par value,
outstanding as of March 3, 2006 was 15,390,345.
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Three Months Ended January 29, 2006 and January 30, 2005 3
Condensed Consolidated Balance Sheets -
January 29, 2006 and October 30, 2005 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended January 29, 2006 and January 30, 2005 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 43
Item 4. Controls and Procedures 45
PART II - OTHER INFORMATION
Item 1A. Risk Factors 46
Item 6. Exhibits 46
SIGNATURE 47
2
Introduction and Purpose of Amendment
In the Form 10-Q for the six months ended April 30, 2006, the Company reported
cash and cash equivalents and restricted cash as separate line items on its
condensed consolidated balance sheets, and reported changes in restricted cash
and changes in payables related to restricted cash on its condensed consolidated
statements of cash flows. The changes noted herein, which are intended to
conform the Form 10-Q for the three months ended January 29, 2006 to this
format, do not have an effect on the Company's results of operations or
financial condition. In addition, Note J of the Notes to the Condensed
Consolidated Financial Statements has been revised to provide disclosures that
explain the method and assumptions used by management to determine the valuation
of business acquisitions. With the exception of the changes in the consolidated
statements of cash flows, as described below, and the change to Note J, there
were no other changes to the financial statements.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
--------------------------------
January 29, January 30,
2006 2005
--------------- ----------------
(In thousands, except per share amounts)
NET SALES $549,508 $497,835
COSTS AND EXPENSES:
Cost of sales 515,467 468,173
Selling and administrative 24,460 20,824
Depreciation and amortization 7,862 7,500
--------- ---------
547,789 496,497
--------- ---------
OPERATING INCOME 1,719 1,338
OTHER INCOME (EXPENSE):
Interest income 1,038 560
Other expense-net (1,611) (1,016)
Foreign exchange loss-net (253) (162)
Interest expense (456) (512)
-------- --------
Income before minority interest and income taxes 437 208
Minority interest (1,021) (1,494)
-------- --------
Loss before income taxes (584) (1,286)
Income tax benefit 207 478
-------- --------
NET LOSS ($377) ($808)
==== ====
Per Share Data
--------------
Basic and Diluted:
Net loss per share ($0.02) ($0.05)
===== =====
Weighted average number of shares 15,343 15,291
====== ======
See accompanying notes to condensed consolidated financial statements.
3
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 29, October 30,
2006 2005 (a)
-------------- ------------
ASSETS (Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $46,591 $61,988
Restricted cash 22,532 26,131
Short-term investments 4,265 4,213
Trade accounts receivable less allowances of $7,809 (2006) and $7,527 (2005) 361,065 399,677
Inventories 36,127 33,758
Recoverable income taxes 1,641 -
Deferred income taxes 10,653 10,246
Prepaid expenses and other assets 24,610 19,788
------- -------
TOTAL CURRENT ASSETS 507,484 555,801
Investment in securities 164 141
Property, plant and equipment-net 83,387 83,272
Deposits and other assets 1,717 1,961
Goodwill 52,085 32,623
Intangible assets-net 33,777 14,914
------ ------
TOTAL ASSETS $678,614 $688,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $6,621 $6,622
Note payable - other 36,750 -
Current portion of long-term debt 2,442 2,404
Accounts payable 155,812 172,788
Accrued wages and commissions 53,127 55,081
Accrued taxes other than income taxes 23,481 17,586
Accrued insurance and other accruals 34,992 35,173
Deferred income and other liabilities 42,018 30,628
Income tax payable - 1,686
------- -------
TOTAL CURRENT LIABILITIES 355,243 321,968
Accrued insurance 1,467 1,630
Long-term debt 13,183 13,297
Deferred income taxes 12,858 13,358
Minority interest - 43,444
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--500,000 shares; issued--none
Common stock, par value $.10; Authorized--30,000,000 shares; issued and
outstanding--15,378,545 shares (2006) and 15,339,255 shares (2005) 1,538 1,534
Paid-in capital 44,514 43,694
Retained earnings 249,377 249,754
Accumulated other comprehensive income 434 33
------- -------
TOTAL STOCKHOLDERS' EQUITY 295,863 295,015
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $678,614 $688,712
======== ========
(a) The balance sheet at October 30, 2005 has been derived from the audited
financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
-----------------------------------------
January 29, January 30,
2006 2005
------------ -----------
(Restated) (Restated)
(Dollars in thousands)
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES
Net loss ($377) ($808)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization 7,862 7,500
Accounts receivable provisions 1,117 1,516
Minority interest 1,021 1,494
Loss on dispositions of fixed assets 36 27
(Gain) loss on foreign currency translation (4) 42
Deferred income tax benefit (542) (573)
Changes in operating assets and liabilities:
Accounts receivable 41,727 28,536
Reduction in securitization of accounts receivable - (10,000)
Inventories (1,074) (60)
Prepaid expenses and other current assets (4,192) 1,554
Other assets 242 (46)
Accounts payable (13,401) (2,002)
Accrued expenses 95 (4,716)
Deferred income and other liabilities 8,347 (245)
Income taxes payable (4,222) (6,834)
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 36,635 15,385
------- -------
5
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)--Continued
Three Months Ended
-----------------------------------------
January 29, January 30,
2006 2005
------------ -----------
(Restated) (Restated)
(Dollars in thousands)
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES
Sales of investments $450 $600
Purchases of investments (320) (176)
Decrease in restricted cash 3,599 11,178
Decrease in payables related to restricted cash (3,599) (11,178)
Acquisitions (46,753) -
Proceeds from disposals of property, plant and equipment 341 919
Purchases of property, plant and equipment (6,470) (6,798)
------- -------
NET CASH APPLIED TO INVESTING ACTIVITIES (52,752) (5,455)
------- --------
CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (105) (95)
Exercise of stock options 824 824
Increase (decrease) in notes payable to banks 26 (767)
------ -----
NET CASH PROVIDED BY (APPLIED TO) FINANCING ACTIVITIES 745 (38)
------ -----
Effect of exchange rate changes on cash (25) (581)
------ -----
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,397) 9,311
Cash and cash equivalents, beginning of period 61,988 44,309
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $46,591 $53,620
======= =======
SUPPLEMENTAL INFORMATION
Cash paid during the period:
Interest expense $456 $528
Income taxes $4,489 $6,791
The Company purchased certain assets and assumed certain specified
liabilities. In conjunction with the acquisition, liabilities were assumed
as follows:
Fair value of assets acquired $32,867
Cash paid 24,813
--------
Liabilities assumed $8,054
See accompanying notes to condensed consolidated financial statements.
6
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X and, therefore, do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Company's consolidated financial position at January 29, 2006 and consolidated
results of operations and consolidated cash flows for the three months ended
January 29, 2006 and January 30, 2005.
Prior to October 31, 2005, the Company elected to follow Accounting Principles
Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," to account
for its Non-Qualified Stock Option Plan under which no compensation cost is
recognized because the option exercise price is equal to at least the market
price of the underlying stock on the date of grant. Effective October 31, 2005,
the Company adopted the fair-value recognition provisions of statement of
Financial Accounting Standards ("SFAS") No. 123R and the Securities and Exchange
Commission Staff Accounting Bulletin No. 107 using the modified-prospective
transition method; therefore, prior periods have not been restated. Compensation
cost recognized in the three-month period ended January 29, 2006 includes
compensation cost for all share-based payments granted prior to, but not yet
vested as of October 31, 2005, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123.
The Company has reclassified restricted cash as a separate line on the condensed
consolidated balance sheet at October 30, 2005 and the statement of cash flows
for the three months ended January 30, 2005. The condensed consolidated
statement of cash flows now presents the changes in restricted cash and the
changes in payables related to restricted cash as changes in investing
activities, as compared to its previous inclusion in the net change in cash and
cash equivalents (See Note I).
These statements should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended October 30, 2005. The accounting policies used in preparing these
financial statements are the same as those described in that Report. The
Company's fiscal year ends on the Sunday nearest October 31.
Restatement: The Company has restated its previously issued financial statements
for the three month periods ended January 29, 2006 and January 30, 2005 as a
result of conforming the Company's previously presented condensed consolidated
statements of cash flows to that presented in the Form 10-Q for the six months
ended April 30 2006, as related to restricted cash. Conforming changes have also
been made in the Management's Discussion and Analysis section. The tables below
reflect the restatements that were made to the condensed consolidated statements
of cash flows for the three months ended January 29, 2006 and January 30, 2005.
The tables reflect only items that have changed in these financial statements.
7
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) --Continued
NOTE A--Basis of Presentation--Continued
Restatement:--Continued
- -----------
Year Ended
----------
January January
Consolidated Statements of Cash Flows 29, 2006 30, 2005
-------- --------
Cash provided by (applied to) operating activities:
Changes in operating assets and liabilities:
Accounts payable - as previously reported ($17,000) ($13,180)
Change 3,599 11,178
-------- -------
Accounts payable - as restated ($13,401) ($2,002)
======== =======
Net cash provided by operating activities - as previously reported $33,036 $4,207
Change 3,599 11,178
------- -------
Net cash provided by operating activities - as restated $36,635 $15,385
======= =======
Net cash (applied to) provided by investing activities
- as previously reported ($49,153) $5,723
Decrease in payables related to restricted cash (3,599) (11,178)
-------- -------
Net cash applied to investing activities - as restated ($52,752) ($5,455)
======== =======
8
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) --Continued
NOTE B--Securitization Program
The Company has an accounts receivable securitization program ("Securitization
Program"), which was amended in the first quarter of fiscal year 2006 and
effective January 31, 2006 to increase the level from $150.0 million to $200.0
million and extend the maturity date to April 2008. 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 $200.0 million). The Company retains the servicing responsibility
for the accounts receivable. At January 29, 2006, TRFCO had purchased from Volt
Funding a participation interest of $100.0 million out of a pool of
approximately $257.5 million of receivables
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company. Accounts
receivable are only reduced to reflect the fair value of receivables actually
sold. The Company entered into this arrangement as it provided a low-cost
alternative to other financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors. TRFCO has no recourse to
the Company (beyond its interest in the pool of receivables owned by Volt
Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the condensed consolidated balance sheet (no debt is recorded) and the proceeds
from the sale are reflected as cash provided by operating activities. Losses and
expenses associated with the transactions, primarily related to discounts
incurred by TRFCO on the issuance of its commercial paper, are charged to the
consolidated statement of operations.
The Company incurred charges, in connection with the sale of receivables under
the Securitization Program, of $1.3 million and $0.5 million in the first
quarters of fiscal 2006 and fiscal 2005 respectively, which are included in
Other Expense on the condensed consolidated statement of operations. The
equivalent cost of funds in the Securitization Program was 5.2% and 3.8% per
annum in the first quarters of fiscal 2006 and fiscal 2005, 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
9
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) --Continued
NOTE B--Securitization Program--Continued
sensitivity analysis, changing various key assumptions, which also indicated the
retained interest in receivables approximated fair value.
At January 29, 2006 and October 30, 2005, the Company's carrying retained
interest in a revolving pool of receivables was approximately $156.6 million and
$182.5 million, respectively, net of a service fee liability, out of a total
pool of approximately $257.5 million and $283.3 million, respectively. The
outstanding balance of the undivided interest sold to TRFCO was $100.0 million
at January 29, 2006 and October 30, 2005. Accordingly, the trade accounts
receivable included on the January 29, 2006 and October 30, 2005 balance sheets
have been reduced to reflect the participation interest sold of $100.0 million.
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 January 29, 2006, the Company was in
compliance with all requirements of the Securitization Program.
NOTE C--Inventories
Inventories of accumulated unbilled costs and materials by segment are as
follows:
January 29, October 30,
2006 2005
----------- -----------
(Dollars in thousands)
Telephone Directory $10,616 $10,508
Telecommunications Services 17,815 17,734
Computer Systems 7,696 5,516
------- -------
Total $36,127 $33,758
======= =======
The cumulative amounts billed under service contracts at January 29, 2006 and
October 30, 2005 of $1.6 million and $9.6 million, respectively, are credited
against the related costs in inventory.
NOTE D--Short-Term Borrowings
In the first quarter of fiscal 2006, the Company's $40.0 million secured,
syndicated revolving credit agreement ("Credit Agreement") was amended to (i)
permit the consummation of the acquisition by the Company of Varetis Solutions
GmbH ("Varetis Solutions") and the twenty-four percent interest in Volt Delta
Resources LLC ("Volt Delta") owned by Nortel Networks Inc. ("Nortel Networks"),
(ii) modify certain of the financial covenants contained in the Credit Agreement
and (iii) increase the amount of financing permitted under the securitization
program. The Credit Agreement expires in April 2008.
10
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE D--Short-Term Borrowings--Continued
The Credit Agreement established a secured credit facility ("Credit Facility")
in favor of the Company and designated subsidiaries, of which up to $15.0
million may be used for letters of credit. Borrowings by subsidiaries are
limited to $25.0 million in the aggregate. The administrative agent for the
Credit Facility is JPMorgan Chase Bank, N.A. The other banks participating in
the Credit Facility are Mellon Bank, N.A., Wells Fargo Bank, N.A., Lloyds TSB
Bank PLC and Bank of America, N.A.
Borrowings under the Credit Facility are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the rating of the facility, as provided by a
nationally recognized rating agency. As amended, in lieu of the previous
borrowing base formulation, the Credit Agreement now requires the maintenance of
specified accounts receivable collateral in excess of any outstanding
borrowings. Based upon the Company's leverage ratio and debt rating at January
29, 2006, if a three-month U.S. Dollar LIBO rate was the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
5.5% per annum. At January 29, 2006, the facility fee was 0.3% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock purchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ended as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At January 29, 2006, the Company was in compliance with all
covenants in the Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Five subsidiaries of the Company are guarantors of
all loans made to the Company or to subsidiary borrowers under the Credit
Facility. At January 29, 2006, four of those guarantors have pledged
approximately $52.5 million of accounts receivable, other than those in the
Securitization Program, as collateral for the guarantee obligations. Under
certain circumstances, other subsidiaries of the Company also may be required to
become guarantors under the Credit Facility.
At January 29, 2006, the Company had total outstanding foreign currency bank
borrowings of $6.6 million, $2.4 million of which were under the Credit
Agreement. These bank borrowings provide a hedge against devaluation in foreign
currency denominated assets.
Note payable-other represents the amount due to Nortel Networks on February 15,
2006 (see Note J)
11
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE E--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
January 29, October 30,
2006 2005
----------- -----------
(Dollars in thousands)
8.2% term loan (a) $13,625 $13,730
Payable to Nortel Networks(b) 2,000 1,971
------- -------
15,625 15,701
Less amounts due within one year 2,442 2,404
------- -------
Total long-term debt $13,183 $13,297
======= =======
(a) In September 2001, a subsidiary of the Company entered into a $15.1 million
loan agreement with General Electric Capital Business Asset Funding
Corporation. Principal payments have reduced the loan to $13.6 million at
January 29, 2006. 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 January 29, 2006 of $10.1 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.
NOTE F--Stockholders' Equity
Changes in the major components of stockholders' equity for the three months
ended January 29, 2006 are as follows:
Common Paid-In Retained
Stock Capital Earnings
------ ------- --------
(In thousands)
Balance at October 30, 2005 $1,534 $43,694 $249,754
Stock options exercised - 39,290 shares 4 820
Net loss for the three months (377)
------ ------- --------
Balance at January 29, 2006 $1,538 $44,514 $249,377
====== ======= ========
12
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE F--Stockholders' Equity--Continued
Another component of stockholders' equity, the accumulated other comprehensive
loss, consists of cumulative unrealized foreign currency translation gain, net
of taxes, of $0.4 million at January 29, 2006 compared to a loss of $28,000 at
October 30, 2005, and an unrealized gain, net of taxes, of $75,000 and $61,000
in marketable securities at January 29, 2006 and October 30, 2005, respectively.
Changes in these items, net of income taxes, are included in the calculation of
comprehensive loss as follows:
Three Months Ended
---------------------------------
January 29, January 30,
2006 2005
----------- -----------
(In thousands)
Net loss ($377) ($808)
Foreign currency translation adjustments-net 387 (114)
Unrealized gain on marketable securities-net 14 19
------ ------
Comprehensive income (loss) $24 ($903)
===== =====
NOTE G--Per Share Data
In calculating basic earnings per share, the dilutive effect of stock options is
excluded. Diluted earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding and the assumed exercise of
dilutive outstanding stock options based on the treasury stock method.
Three Months Ended
----------------------------------
January 29, January 30,
2006 2005
----------- -----------
Denominator for basic and diluted earnings per share -
Weighted average number of shares 15,343,038 15,291,166
Options to purchase 399,178 and 490,373 shares of the Company's common stock
were outstanding at January 29, 2006 and January 30, 2005, respectively, but
were not included in the computation of diluted earnings per share because the
effect of inclusion would have been antidilutive.
NOTE H--Segment Disclosures
Financial data concerning the Company's sales and segment operating profit
(loss) by reportable operating segment for the three months ended January 29,
2006 and January 30, 2005, included on page 28 of this Report, is an integral
part of these condensed consolidated financial statements. During the three
months ended January 29, 2006, consolidated assets decreased by $13.9 million
primarily due to a decrease in receivables of the Staffing Services segment
offset by an increase in goodwill and intangible assets in the Computer Systems
segment due to acquisitions (see Note J).
13
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE I--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts, foreign currency options and exchange contracts, are recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting, and
if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are
recorded in income along with the portions of the changes in the fair values of
the hedged items that relate to the hedged risks. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in other comprehensive income, net of deferred taxes.
Changes in fair values of derivatives not qualifying as hedges are reported in
the results of operations.
Restricted cash at January 29, 2006 and October 30, 2005 of $22.5 million and
$26.1 million, respectively, was restricted to cover obligations that were
reflected in accounts payable at such dates. These amounts primarily relate to
contracts with customers in which the Company manages the customers' alternative
staffing requirements, including the payment of associate vendors.
NOTE J--Acquisition of Businesses
On December 29, 2005, Volt Delta purchased from Nortel Networks its 24% minority
interest in Volt Delta. Under the terms of the agreement, Volt Delta was
required to pay Nortel Networks approximately $56.4 million for its minority
interest in Volt Delta, and a cash distribution of approximately $5.4 million.
Under the terms of the agreement, Volt Delta paid $25.0 million on December 29,
2005 and paid the remaining $36.8 million on February 15, 2006. The transaction
resulted in an increase of approximately $8.2 million in goodwill and $9.3
million in intangible assets.
On December 30, 2005, Volt Delta acquired varetis AG's Varetis Solutions
subsidiary for $24.8 million. The acquisition of Varetis Solutions allows the
two companies to combine resources to focus on the evolving global market for
directory information systems and services. Varetis Solutions adds technology in
the area of wireless and wireline database management, directory
assistance/enquiry automation, and wireless handset information delivery to Volt
Delta's significant technology portfolio.
The Company is presently valuing both transactions to determine the final
allocation of the purchase price to various types of potential intangible
assets. The types of intangible assets being reviewed which might exist as of
the consummation of the transactions are: the existing technology of the
businesses, the value of their customer relationships, the value of trade names,
the value of contract backlogs, the value of non-compete agreements and the
value of their reseller network. The value of each of the intangible assets
identified will be determined with the use of a discounted cash flow
methodology. This methodology involves discounting forecasted revenues and
earnings attributable to each of the potential intangible assets. The
allocation, which is subject to finalization of certain adjustments, is expected
to be completed before the end of fiscal 2006.
14
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE J--Acquisition of Businesses--Continued
The assets and liabilities of Varetis Solutions are accounted for under the
purchase method of accounting at the date of acquisition at their fair values.
The results of operations have been included in the Consolidated Statements of
Operations since the acquisition date.
Preliminary Purchase Price Allocation
Fair Value of Assets Acquired and Liabilities Assumed and Established
---------------------------------------------------------------------
(In thousands)
Cash $3,310
Accounts receivable 4,263
Inventories 1,295
Prepaid and other assets 564
Property, plant and equipment 1,318
Goodwill 12,117
Intangible assets 10,000
Accrued wages and commissions (1,314)
Other accrued expenses (2,588)
Other liabilities (2,886)
Income taxes (1,266)
-------
Purchase price $24,813
=======
The following unaudited pro forma information reflects the purchase from Nortel
Networks of its 24% minority interest in Volt Delta and combines the
consolidated results of operations of the Company with those of the Varetis
Solutions business as if the transactions had occurred in November 2004. 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 2005. 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
Three Months Ended
------------------
January 29, January 30,
2006 2005
----------- -----------
(In thousands, except per share data)
Net sales $553,447 $503,702
======== ========
Operating income $2,475 $3,292
====== ======
Net income $667 $1,220
==== ======
Earnings per share
Basic and Diluted $0.04 $0.08
===== =====
15
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE K--Goodwill and Intangible Assets
Goodwill and intangibles with indefinite lives are no longer amortized, but are
subject to annual testing using fair value methodology. An impairment charge is
recognized for the amount, if any, by which the carrying value of an
indefinite-life intangible asset exceeds its fair value. The test for goodwill,
which is performed in the Company's second fiscal quarter, primarily uses
comparable multiples of sales and EBITDA and other valuation methods to assist
the Company in the determination of the fair value of the goodwill and the
reporting units measured.
The following table represents the balance of intangible assets subject to
amortization:
January 29, October 30,
2006 2005
----------- -----------
(Dollars in thousands)
Intangible assets $35,610 $16,310
Accumulated amortization 1,833 1,396
------- -------
Net carrying value $33,777 $14,914
======= =======
The amortization of intangible assets was $0.4 million and $0.3 million in the
first quarters of fiscal 2006 and fiscal 2005, respectively.
NOTE L--Primary Insurance Casualty Program
The Company is insured with a highly rated insurance company under a program
that provides primary workers' compensation, employer's liability, general
liability and automobile liability insurance under a loss sensitive program. In
certain mandated states, the Company purchases workers' compensation insurance
through participation in state funds and the experience-rated premiums in these
state plans relieve the Company of additional liability. In the loss sensitive
program, initial premium accruals are established based upon the underlying
exposure, such as the amount and type of labor utilized, number of vehicles,
etc. The Company establishes accruals utilizing actuarial methods to estimate
the undiscounted future cash payments that will be made to satisfy the claims,
including an allowance for incurred-but-not-reported claims. This process also
includes establishing loss development factors, based on the historical claims
experience of the Company and the industry, and applying those factors to
current claims information to derive an estimate of the Company's ultimate
premium liability. In preparing the estimates, the Company also considers the
nature and severity of the claims, analyses provided by third party actuaries,
as well as current legal, economic and regulatory factors. The insurance
policies have various premium rating plans that establish the ultimate premium
to be paid. Adjustments to premium are made based upon the level of claims
incurred at a future date up to three years after the end of the respective
policy period. At January 29, 2006, the Company's net prepaid for the
outstanding plan years was $5.6 million compared to $1.6 million at October 30,
2005.
16
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--Continued
NOTE M--Stock Options
The Non-Qualified Option Plan adopted by the Company in fiscal 1995 terminated
on May 16, 2005 except for options previously granted under the plan.
Unexercised options expire ten years after grant. Outstanding options at January
29, 2006 were granted at 100% of the market price on the date of grant and
become fully vested within one to five years after the grant date.
As a result of adopting SFAS No. 123R, the Company's income before taxes for the
three month period ended January 29, 2006 is $23,000 lower than if the Company
had continued to account for stock-based compensation under APB No. 25.
Compensation expense is recognized in the selling and administrative expenses in
the Company's statement of operations on a straight-line basis over the vesting
periods. Basic and dilutive net loss per share for the three-month period ended
January 29, 2006 would not have been different if the Company had not adopted
SFAS No. 123R, compared to the reported basic and dilutive income per share of
$0.02. As of January 29, 2006, there was $0.1 million of total unrecognized
compensation cost related to non-vested share-based compensation arrangements to
be recognized over a weighted average period of 1.7 years.
The intrinsic values of options exercised during the periods ended January 29,
2006 and January 30, 2005 were not significant. The total cash received from the
exercise of stock options was $0.8 million in each of the three-month periods
ended January 29, 2006 and January 30, 2005, and is classified as financing cash
flows in the statement of cash flows. Prior to the adoption of SFAS 123R, the
Company presented all tax benefit deductions resulting from the exercise of
stock options as operating cash flows. SFAS 123R requires that cash flows from
tax benefits attributable to tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) be classified as financing
cash flows. The Company did not have significant tax benefits from the expense
of stock options for the three-month period ended January 29, 2006.
There were no options granted during either quarter ended January 29, 2006 or
January 30, 2005.
The table below presents the pro forma effect on net loss and loss per share if
the Company had applied the fair value recognition provision to options granted
under the Company's stock option plan for the three-month period ended January
30, 2005. For purposes of this pro forma disclosure, the value of the options
granted is estimated using the Black-Scholes option-pricing model and amortized
to expense over the options vesting periods. If the Company had adopted the fair
value based method for the quarter ended January 30, 2005, additional net
compensation expense of $52,000 would have been recognized in the statement of
operations.
Three Months Ended
January 30, 2005
------------------
(In thousands, except
per share amounts)
Net loss as reported ($808)
Pro forma compensation expense, net of taxes (31)
------
Pro forma net loss ($839)
======
Pro forma net loss per share-basic and diluted ($0.05)
=======
17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
- --------------------------
This report and other reports and statements issued by the Company and its
officers from time to time contain certain "forward-looking statements." Words
such as "may," "should," "likely," "could," "seek," "believe," "expect,"
"anticipate," "estimate," "project," "intend," "strategy," "design to," and
similar expressions are intended to identify forward-looking statements about
the Company's future plans, objectives, performance, intentions and
expectations. These forward-looking statements are subject to a number of known
and unknown risks and uncertainties including, but are not limited to, those set
forth below under "Factors That May Affect Future Results." Such risks and
uncertainties could cause the Company's actual results, performance and
achievements to differ materially from those described in or implied by the
forward-looking statements. Accordingly, readers should not place undue reliance
on any forward-looking statements made by or on behalf of the Company. The
Company does not assume any obligation to update any forward-looking statements
after the date they are made.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY'S BUSINESS IS DEPENDENT UPON GENERAL ECONOMIC, COMPETITIVE AND OTHER
BUSINESS CONDITIONS INCLUDING THE EFFECTS OF THE UNITED STATES AND EUROPEAN
ECONOMIES AND OTHER GENERAL CONDITIONS, SUCH AS CUSTOMERS OFF-SHORING ACTIVITIES
TO OTHER COUNTRIES.
The demand for the Company's services in all segments is dependent upon general
economic conditions. Accordingly, the Company's business tends to suffer during
economic downturns. In addition, in the past few years major United States
companies, many of which are customers of the Company, have increasingly
outsourced business to foreign countries with lower labor rates, less costly
employee benefit requirements and fewer regulations than the United States.
There could be an adverse effect on the Company if customers and potential
customers 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 to certain
additional countries, in a limited manner and to serve existing customers in
such countries, and has established subsidiaries in some foreign countries,
there can be no assurance that this effort will be successful or that the
Company can successfully compete with competitors based overseas or who have
established foreign operations.
The Company's business is dependent upon the continued financial strength of its
customers. Customers that experience economic downturns or other negative
factors are less likely to use the Company's services.
In the staffing services segment, a weakened economy results in decreased demand
for temporary and permanent personnel. When economic activity slows down, many
of the Company's customers reduce their use of temporary employees before they
reduce the number of their regular employees. There is less need for contingent
workers by all potential customers, who are less inclined to add to their costs.
Since employees are reluctant to risk changing employers, there are fewer
openings and reduced activity in permanent placements as well. In addition,
while in many fields there are ample applicants for available positions,
variations in the rate of unemployment and higher wages sought by temporary
workers in certain technical fields particularly
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
- --------------------------------------
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 margin erosion caused by increased competition, electronic
auctions and customers leveraging their buying power by consolidating the number
of vendors with whom they deal. Increased workers' compensation costs and
unemployment insurance, other payroll taxes and business taxes, some of which
the Company is unable to pass on to customers, also place pressures 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.
Actions by major long-distance telephone companies regarding local residential
service and consolidation in the telecommunications industry could also
negatively impact both sales and margins of the segment.
Additionally, the degree and timing of customer acceptance of systems and of
obtaining new contracts and the rate of renewals of existing contracts, as well
as customers' degree of utilization of the Company's services, could adversely
affect the Company's businesses.
MANY OF THE COMPANY'S CONTRACTS EITHER PROVIDE NO MINIMUM PURCHASE REQUIREMENTS
OR ARE CANCELABLE DURING THE TERM.
In all segments, many of the Company's contracts, even those master service
contracts whose duration spans a number of years, provide no assurance of any
minimum amount of work that will actually be available under any contract. Most
staffing services contracts are not sole source, so the segment must compete for
each placement at the customer. Similarly many telecommunications master
contracts require competition in order to obtain each individual work project.
In addition, many of the Company's long-term contracts contain cancellation
provisions under which the customer can cancel the contract, even if the Company
is not in default under the contract. Therefore, these contracts do not give the
assurances that long-term contracts typically provide.
THE COMPANY'S STAFFING SERVICES BUSINESS AND ITS OTHER SEGMENTS SUBJECT IT TO
EMPLOYMENT-RELATED AND OTHER CLAIMS.
The Company's staffing services business employs individuals on a temporary
basis and places them in a customer's workplace. The Company's ability to
control the customer workplace is limited, and the Company
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
- --------------------------------------
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.
The Company may incur fines or other losses and negative publicity with respect
to any litigation in which it becomes involved. Although the Company maintains
insurance for many such actions, there can be no assurance that its insurance
will cover future actions or that the Company will continue to be able to obtain
such insurance on acceptable terms, if at all.
NEW AND INCREASED GOVERNMENT REGULATION COULD HAVE A MATERIAL ADVERSE EFFECT ON
THE COMPANY'S BUSINESS, ESPECIALLY ITS CONTINGENT STAFFING BUSINESS.
Certain of the Company's businesses are subject to licensing and regulation in
many states and certain foreign jurisdictions. Although the Company has not had
any difficulty complying with these requirements in the past, there can be no
assurance that the Company will continue to be able to do so, or that the cost
of compliance will not become material. Additionally, the jurisdictions in which
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 would adversely impact the
Company's ability to conduct its business;
o require the Company to obtain additional licenses to provide its services;
or
o increase taxes (especially payroll and other employment related taxes) or
enact new or different taxes payable by the providers of services such as
those offered by the Company, thereby increasing costs, some of which may
not be able to be passed on to customers or which would cause customers to
reduce their use of the Company's services, especially in its staffing
services segment, which would adversely impact the Company's ability to
conduct its business.
In addition, certain private and governmental entities have focused on the
contingent staffing industry in particular and, in addition to their potential
to impose additional requirements and costs, they and their supporters could
cause changes in customers' attitudes toward the use of outsourcing and
temporary personnel in general. This could have an adverse effect on the
Company's contingent staffing business.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
- --------------------------------------
THE COMPANY IS DEPENDENT UPON ITS ABILITY TO ATTRACT AND RETAIN CERTAIN
TECHNOLOGICALLY QUALIFIED PERSONNEL.
The Company's future success is dependent upon its ability to attract and retain
certain classifications of technologically qualified personnel for its own use,
particularly in the areas of research and development, implementation and
upgrading of internal systems, as well as in its staffing services segment. The
availability of such personnel is dependent upon a number of economic and
demographic conditions. The Company may in the future find it difficult or more
costly to hire such personnel in the face of competition from other companies.
THE INDUSTRIES IN WHICH THE COMPANY DOES BUSINESS ARE VERY COMPETITIVE.
The Company operates in very competitive markets with, in most cases, limited
barriers to entry. In many markets, small competitors can offer similar services
at lower prices because of lower overheads. Some of the Company's principal
competitors are larger and have substantially greater financial resources than
the Company. Accordingly, these competitors may be better able than the Company
to attract and retain qualified personnel and may be able to offer their
customers more favorable pricing terms than the Company.
The Company, in all segments, has experienced intense price competition and
pressure on margins and lower renewal markups for customers' contracts than
previously obtained. While the Company has and will continue to take action to
meet competition in its highly competitive markets with minimal impact on
margins, there can be no assurance that the Company will be able to do so.
The Company, in certain businesses in all segments, must obtain or produce
products and systems, principally in the IT environment, to satisfy customer
requirements and to remain competitive. While the Company has been able to do so
in the past, there can be no assurance that in the future the Company will be
able to foresee changes and to identify, develop and commercialize innovative
and competitive products and systems in a timely and cost effective manner and
to achieve customer acceptance of its products and systems in markets
characterized by rapidly changing technology and frequent new product
introductions. In addition, the Company's products and systems are subject to
risks inherent in new product introductions, such as start-up delays, cost
overruns and uncertainty of customer acceptance, the Company's dependence on
third parties for some product components and in certain technical fields
particularly characterized by labor shortages, the Company's ability to hire and
retain such specialized employees, all of which could affect the Company's
ability to meet its customers' demands in these fields and the Company's profit
margins.
In addition to these general statements, the following information applies to
the specific segments identified below.
The Company's Staffing Services segment is in a very competitive industry with
few significant barriers to entry. There are many temporary service firms in the
United States and Europe, many with only one or a few offices that service only
a small market. On the other hand, some of this segment's principal competitors
are larger and have substantially greater financial resources than Volt and
service the multinational 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.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
- --------------------------------------
The results of the Company's Computer Systems segment are highly dependent on
the volume of calls to this segment's customers which are processed by the
segment under existing contracts, the segment's ability to continue to secure
comprehensive listings from others at acceptable pricing, its ability to obtain
additional customers for these services and 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 Services segment faces substantial competition
with respect to all of its telecommunications services from other suppliers and
from in-house capabilities of present and potential customers. Since many of our
customers provide the same type of services as the segment, the segment faces
competition from its own customers and potential customers as well as from third
parties. The telecommunications service segment performs much of its services
outdoors, and its business can be adversely affected by the degree and effects
of inclement weather. Some of this segment's significant competitors are larger
and have substantially greater financial resources than the Company. There are
relatively few significant barriers to entry into certain of the markets in
which the segment operates, and many competitors are small, local companies that
generally have lower overhead. In August 2005, the Company restructured the
Telecommunications Services segment which is expected to result in a reduction
of future overhead within the segment, including reduction of the headcount,
consolidating two divisions and closing and consolidating two divisions and
closing and consolidating several of its leased locations. The Company's ability
to compete in this segment depends upon its reputation, technical capabilities,
pricing, quality of service and ability to meet customer requirements in a
timely manner. The Company believes that its competitive position in this
segment is augmented by its ability to draw upon the expertise and resources of
other Volt segments.
THE COMPANY MUST SUCCESSFULLY INTEGRATE THE PURCHASED VARETIS SOLUTIONS INTO THE
COMPANY'S COMPUTER SYSTEMS SEGMENT.
On December 30, 2005, Volt Delta Resources, LLC ("Volt Delta"), a now
wholly-owned subsidiary of the Company, acquired varetis AG's Varetis Solutions
subsidiary, which is engaged in the business of providing directory assistance
solutions to customers. Together with its subsidiaries, Volt Delta is reported
as the Company's Computer Systems Segment. In addition to the factors described
elsewhere herein, the Company's results in this segment are dependent upon the
Company's ability to successfully integrate the acquisition into Volt Delta's
business with minimal interference with the segment's business.
THE COMPANY MUST STAY IN COMPLIANCE WITH ITS SECURITIZATION PROGRAM AND OTHER
LOAN AGREEMENTS.
The Company is required to maintain a sufficient credit rating to enable it to
continue its Securitization Program and maintain its existing credit rating in
order to avoid any increase in fees under other credit agreements. In addition,
the Company must also comply with the financial and other covenants applicable
under the various agreements and other borrowing instruments.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
- --------------------------------------
While the Company was in compliance with all such requirements at the end of the
first fiscal quarter of 2006 and believes it will remain in compliance
throughout the next twelve months, there can be no assurance that will be the
case or that waivers may not be required.
THE COMPANY MUST STAY IN COMPLIANCE WITH THE SARBANES-OXLEY ACT.
The Company believes it is in compliance with the Sarbanes-Oxley Act of 2002
("Act"), except for the single material weakness described in Item 9A of the
Company's Annual Report on Form 10-K for fiscal year 2005. The cost of
compliance adversely affected the Company's operating results for the first
quarter of fiscal 2006 and the costs of continued compliance with the Act will
adversely affect the Company's operating results in the future. While the
Company expects to be in compliance with the Act, there can be no assurance that
it will be able to do so.
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 February 15, 2006, the Company's principal shareholders and members of
their family controlled in excess of 45% of the Company's outstanding common
stock. Accordingly, these shareholders are able to control the composition of
the Company's board of directors and many other matters requiring shareholder
approval and will continue to have significant influence over the Company's
affairs. This concentration of ownership also could have the effect of delaying
or preventing a change in control of the Company or otherwise discouraging a
potential acquirer from attempting to obtain control of the Company.
THE COMPANY'S STOCK PRICE COULD BE EXTREMELY VOLATILE AND, AS A RESULT,
INVESTORS MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID
FOR THEM.
Among the factors that could affect the Company's stock price are:
o limited float and a low average daily trading volume, notwithstanding that
the Company's stock is traded on the New York Stock Exchange;
o industry trends and the business success of the Company's customers;
o loss of a key customer;
o fluctuations in the Company's results of operations;
o the Company's failure to meet the expectations of the investment community
and changes in investment community recommendations or estimates of the
Company's future results of operations;
o strategic moves by the Company's competitors, such as product
announcements or acquisitions;
o regulatory developments, including compliance with The Sarbanes-Oxley Act
of 2002;
o litigation;
o general market conditions; and
o other domestic and international macroeconomic factors unrelated to the
Company's performance.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Factors That May Affect Future Results --Continued
- --------------------------------------
The stock market has and may in the future experience extreme volatility that
has often been unrelated to the operating performance of particular companies.
These broad market fluctuations may adversely affect the market price of the
Company's common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. If a
securities class action suit is filed against the Company, it would incur
substantial legal fees and management's attention and resources would be
diverted from operating its business in order to respond to the litigation.
Critical Accounting Policies
- ----------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments.
Staffing Services:
Staffing: Sales are derived from the Company's Staffing Solutions Group
supplying its own temporary personnel to its customers, for which the
Company assumes the risk of acceptability of its employees to its customers,
and has credit risk for collecting its billings after it has paid its
employees. The Company reflects revenues for these services on a gross basis
in the period the services are rendered. In the first quarter of fiscal
2006, this revenue comprised approximately 76% of net consolidated sales.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
- ----------------------------
Managed Services: Sales are generated by the Company's E-Procurement
Solutions subsidiary, ProcureStaff, and for certain contracts, sales are
generated by the Company's Staffing Solutions Group's managed services
operations. The Company receives an administrative fee for arranging for,
billing for and collecting the billings related to other staffing companies
("associate vendors") who have supplied personnel to the Company's
customers. The administrative fee is either charged to the customer or
subtracted from the Company payment to the associate vendor. The customer is
typically responsible for assessing the work of the associate vendor, and
has responsibility for the acceptability of its personnel, and in most
instances the customer and associate vendor have agreed that the Company
does not pay the associate vendor until the customer pays the Company. Based
upon the revenue recognition principles prescribed in Emerging Issues Task
Force ("EITF") 99-19, "Reporting Revenue Gross as a Principal versus Net as
an Agent," revenue for these services, where the customer and the associate
vendor have agreed that the Company is not at risk for payment, is
recognized net of associated costs in the period the services are rendered.
In the first quarter of fiscal 2006, this revenue comprised approximately 2%
of net consolidated sales.
Outsourced Projects: Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables. The Company's employees perform the services and the Company
has credit risk for collecting its billings. Revenue for these services is
recognized on a gross basis either in the period the services are rendered
when on a time and material basis, or in the period when the project is
complete and the customer has approved the work when the Company is
responsible for project completion. In the first quarter of fiscal 2006,
this revenue comprised approximately 5% of net consolidated sales.
Telephone Directory:
Directory Publishing: Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher in the United States and Uruguay. The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
books are printed and delivered. In the first quarter of fiscal 2006, this
revenue comprised approximately 2% of net consolidated sales.
Ad Production and Other: Sales are generated when the Company performs
design, production and printing services, and database management for other
publishers' telephone directories. The Company's employees perform the
services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
Company has completed its production work and upon customer acceptance. In
the first quarter of fiscal 2006, this revenue comprised approximately 1% of
net consolidated sales.
Telecommunications Services:
Construction: Sales are derived from the Company supplying aerial and
underground construction services. The Company's employees perform the
services, and the Company takes title to all inventory, and has credit risk
for collecting its billings. The Company relies upon the principles in AICPA
Statement of Position 81-1 ("SOP 81-1"), "Accounting for Performance of
Construction-Type Contracts," using the completed-contract method, to
recognize revenue on a gross basis upon customer acceptance of the project.
In the first quarter of fiscal 2006, this revenue comprised approximately 5%
of net consolidated sales.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
- ----------------------------
Non-Construction: Sales are derived from the Company performing design,
engineering and business systems integrations work. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which services are performed, and if applicable, any completed
units are delivered and accepted by the customer. In the first quarter of
fiscal 2006, this revenue comprised approximately 2% of net consolidated
sales.
Computer Systems:
Database Access: Sales are derived from the Company granting access to its
proprietary telephone listing databases to telephone companies,
inter-exchange carriers and non-telco enterprise customers. The Company
uses its own databases and has credit risk for collecting its billings. The
Company recognizes revenue on a gross basis in the period in which the
customers access the Company's databases. In the first quarter of fiscal
2006, this revenue comprised approximately 5% of net consolidated sales.
IT Maintenance: Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who have our systems, on a time and material basis or a contract basis. The
Company uses its own employees and inventory in the performance of the
services, and has credit risk for collecting its billings. Revenue for
these services is recognized on a gross basis in the period in which the
services are performed, contingent upon customer acceptance when on a time
and material basis, or over the life of the contract, as applicable. In the
first quarter of fiscal 2006, this revenue comprised approximately 2% of
net consolidated sales.
Telephone Systems: Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in AICPA Statement of Position 97-2 ("SOP 97-2"), "Software
Revenue Recognition" and EITF 00-21, "Revenue Arrangements with Multiple
Deliverables" to recognize revenue on a gross basis upon customer
acceptance of each part of the system based upon its fair value. In the
first quarter of fiscal 2006, this revenue comprised less than 1% of net
consolidated sales.
The Company records provisions for estimated losses on contracts when losses
become evident. Accumulated unbilled costs on contracts are carried in inventory
at the lower of actual cost or estimated realizable value.
Allowance for Uncollectable Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for accounts receivable are maintained based
upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company believes that its allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required and a related charge or credit to earnings.
Goodwill - Under Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill is no longer amortized, but is
subject to annual impairment testing using fair value methodologies. The
impairment test for goodwill is a two-step process. Step one consists of a
comparison of a reporting unit with its carrying amount, including the goodwill
allocated to the reporting unit. Measurement of the fair value of a reporting
unit is based on one or more fair value measures including present value
techniques of estimated future cash flows and estimated amounts at which the
unit as a whole could be bought or sold in a current transaction between willing
parties. If the carrying amount of the reporting unit exceeds the fair value,
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
- ----------------------------
step two requires the fair value of the reporting unit to be allocated to the
underlying assets and liabilities of that reporting unit, resulting in an
implied fair value of goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
equal to the excess is recorded in net earnings (loss). The Company performs its
impairment testing using comparable multiples of sales and EBITDA and other
valuation methods to assist the Company in the determination of the fair value
of the reporting units measured.
Long-Lived Assets - Property, plant and equipment are recorded at cost, and
depreciation and amortization are provided on the straight-line and accelerated
methods at rates calculated to depreciate the cost of the assets over their
estimated useful lives. Intangible assets, other than goodwill, and property,
plant and equipment are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No.
144, these assets are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; the accumulation of costs
significantly in excess of the amount originally expected for the acquisition or
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and a current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life. Recoverability is assessed based on the carrying amount of the asset and
the sum of the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset or asset group. An impairment loss is recognized
when the carrying amount is not recoverable and exceeds the fair value of the
asset or asset group. The impairment loss is measured as the amount by which the
carrying amount exceeds fair value.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with AICPA 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
receivable in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A, was $100.0 million at
January 29, 2006 and October 30, 2005. Accordingly, the trade receivables
included on the January 29, 2006 and October 30, 2005 balance sheets have been
reduced to reflect the participation interest sold. TRFCO has no recourse to the
Company (beyond its interest in the pool of receivables owned by Volt Funding
Corp., a wholly-owned special purpose subsidiary of the Company) for any of the
sold receivables.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
- ----------------------------
Primary Casualty Insurance Program - The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Adjustments to premiums are made based upon the
level of claims incurred at a future date up to three years after the end of the
respective policy period. For each policy year, management evaluates the
accrual, and the underlying assumptions, regularly throughout the year and makes
adjustments as needed. The ultimate premium cost may be greater or less than the
established accrual. While management believes that the recorded amounts are
adequate, there can be no assurances that changes to management's estimates will
not occur due to limitations inherent in the estimation process. In the event it
is determined that a smaller or larger accrual is appropriate, the Company would
record a credit or a charge to cost of services in the period in which such
determination is made.
Medical Insurance Program - Beginning in April 2004, the Company became
self-insured for the majority of its medical benefit programs. The Company
remains insured for a portion of its medical program (primarily HMOs) as well as
the entire dental program. The Company provides the self-insured medical
benefits through an arrangement with a third party administrator. However, the
liability for the self-insured benefits is limited by the purchase of stop loss
insurance. The contributed and withheld funds and related liabilities for the
self-insured program together with unpaid premiums for the insured programs,
other than the current provision, are held in a 501(c)9 employee welfare benefit
trust and do not appear on the balance sheet of the Company. In order to
establish the self-insurance reserves, the Company utilized actuarial estimates
of expected losses based on statistical analyses of historical data. The
provision for future payments is initially adjusted by the enrollment levels in
the various plans. Periodically, the resulting liabilities are monitored and
will be adjusted as warranted by changing circumstances. Should the amount of
claims occurring exceed what was estimated or medical costs increase beyond what
was expected, liabilities might not be sufficient, and additional expense may be
recorded.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 29, 2006 COMPARED
TO THE THREE MONTHS ENDED JANUARY 30, 2005
The information, which appears below, relates to current and prior periods, the
results of operations for which periods are not indicative of the results which
may be expected for any subsequent periods.
Three Months Ended
-------------------
January 29, January 30,
2006 2005
----------- -----------
(Dollars in thousands)
Net Sales:
- ---------
Staffing Services
Traditional Staffing $445,627 $414,094
Managed Services 251,076 297,432
-------- --------
Total Gross Sales 696,703 711,526
Less: Non-recourse Managed Services (239,061) (291,193)
-------- --------
Net Staffing Services Sales 457,642 420,333
Telephone Directory 15,785 15,704
Telecommunications Services 40,114 25,204
Computer Systems 41,274 41,194
Elimination of intersegment sales (5,307) (4,600)
-------- --------
Total Net Sales $549,508 $497,835
======== ========
Segment Operating Profit (Loss):
- --------------------------------
Staffing Services $4,829 $2,453
Telephone Directory 2,261 2,107
Telecommunications Services 768 (2,429)
Computer Systems 5,749 7,514
-------- --------
Total Segment Operating Profit 13,607 9,645
General corporate expenses (11,888) (8,307)
-------- --------
Total Operating Profit 1,719 1,338
Interest income and other (expense)-net (573) (456)
Foreign exchange loss-net (253) (162)
Interest expense (456) (512)
-------- --------
Income Before Minority Interest and Income Taxes
$437 $208
======== ========
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 29, 2006 COMPARED
TO THE THREE MONTHS ENDED JANUARY 30, 2005--Continued
EXECUTIVE OVERVIEW
- ------------------
Volt Information Sciences, Inc. ("Volt") is a leading national provider of
staffing services and telecommunications and information solutions with a
material portion of its revenue coming from Fortune 100 customers. The Company
operates in four segments and the management discussion and analysis addresses
each. A brief description of these segments and the predominant source of their
sales follow:
Staffing Services: This segment is divided into three major functional
areas and operates through a network of over 300 branch offices.
o Staffing Solutions fulfills IT and other technical, commercial
and industrial placement requirements of its customers, on both
a temporary and permanent basis together with managed staffing.
o E-Procurement Solutions provides global vendor neutral
procurement and management solutions for supplemental staffing
using web-based tools through the Company's ProcureStaff
subsidiary.
o Information Technology Solutions provides a wide range of
information technology consulting and project management
services through the Company's VMC Consulting subsidiary.
Telephone Directory: This segment publishes independent telephone
directories, provides telephone directory production services, database
management and printing.
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
quarter. The sales and profits of the Staffing Services segment, in addition to
the factors noted above, were positively impacted by a continued increase in
contingent staffing. Operating profits for the quarter were higher than in the
comparable quarter of fiscal 2005 due to the sales increase and a reduction in
overhead costs as a percentage of sales, partially offset by continued pressure
on the operating margins in the VMC Consulting division.
The sales and operating results of the Telecommunications segment increased in
the first quarter of fiscal 2006 compared to the comparable quarter in fiscal
2005 due to the sales growth and improvement in gross margins in the
Construction and Engineering division. As explained in the Company's year-end
financial statements, this
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 29, 2006 COMPARED
TO THE THREE MONTHS ENDED JANUARY 30, 2005--Continued
EXECUTIVE OVERVIEW--Continued
- -----------------------------
segment restructured its operations in the prior quarter, and now operates in
two divisions, Construction and Engineering and Network Enterprise Solutions.
The restructuring reduced overhead headcount, consolidated two divisions and
closed several leased locations.
The Computer Systems segment's operating profits decreased in the first quarter
of fiscal 2006 from the comparable quarter of fiscal 2005 primarily from
increases in overhead costs.
During the current quarter, Volt Delta, the principal business unit of the
Computer Systems segment, purchased from Nortel Networks its 24% minority
interest in Volt Delta for $62.0 million. Nortel Networks had originally
purchased its 24% interest in August of 2004, and under the terms of the
original purchase agreement, each party had an option to cause Nortel Networks
to sell and Volt Delta to buy the minority interest for an amount ranging from
$25 million to $70 million. During the quarter, Volt Delta also purchased
Varetis Solutions GmbH from varetis AG for $24.8 million. The acquisition allows
Volt Delta to combine resources to focus on the evolving global market for
directory information systems and services. Varetis Solutions adds technology in
the area of wireless and wireline database management, directory
assistance/inquiry automation, and wireless handset information delivery to Volt
Delta's significant technology portfolio.
The Company has focused, and will continue to focus, on aggressively increasing
its market share while attempting to maintain margins in order to increase
profits. All segments have emphasized cost containment measures, along with
improved credit and collections procedures designed to improve the Company's
cash flow.
The Company continues its effort to streamline its processes to manage the
business and protect its assets through the continued deployment of its Six
Sigma initiatives, upgrading its financial reporting systems, its compliance
with the Sarbanes-Oxley Act, and the standardization and upgrading of IT
redundancy and business continuity for corporate systems and communications
networks. In the first quarter of fiscal 2006, outside costs of compliance with
this Act, including software licenses, equipment, temporary staff, consultants
and professional fees amounted to $3.1 million as compared to $0.2 million in
the comparable quarter in fiscal 2005.
RESULTS OF OPERATIONS - SUMMARY
- -------------------------------
In the first quarter of fiscal 2006, consolidated net sales increased by $51.7
million, or 10%, to $549.5 million, from the comparable period in fiscal 2005.
The significant increases were in the Staffing Services segment, $37.3 million,
and in the Telecommunications Services segment, $14.9 million.
The net loss for the first three-months of fiscal 2006 was $0.4 million compared
to a net loss of $0.8 million in the comparable 2005 first quarter. The Company
reported a pre-tax profit before minority interest for the first quarter of
fiscal 2006 of $0.4 million, compared to $0.2 million in the prior year's first
quarter.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 29, 2006 COMPARED
TO THE THREE MONTHS ENDED JANUARY 30, 2005--Continued
RESULTS OF OPERATIONS - SUMMARY--Continued
- ------------------------------------------
The Company's operating segments reported an operating profit of $13.6 million
in the fiscal 2006 quarter, an increase of $4.0 million, or 41%, from the
comparable 2005 quarter. The significant variances from the comparable 2005
quarter were increases in the Telecommunications Services segment of $3.2
million and the Staffing Services segment of $2.4 million, partially offset by a
decrease in the Computer Systems segment of $1.8 million.
General corporate expenses increased by $3.6 million, or 43%, due to costs
incurred related to compliance with the Sarbanes-Oxley Act, and 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.
RESULTS OF OPERATIONS - BY SEGMENT
- ----------------------------------
STAFFING SERVICES
- -----------------
Three Months Ended
------------------
January 29, 2006 January 30, 2005
---------------- ----------------
Staffing Services % of % of Favorable Favorable
- ------------------ Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $445.6 $414.1 $31.5 7.6%
- -----------------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $251.1 $297.4 ($46.3) (15.6%)
- -----------------------------------------------------------------------------------------------------------------------------------
Sales (Net) * $457.6 $420.3 $37.3 8.9%
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $66.2 14.5% $61.7 14.7% $4.5 7.4%
- -----------------------------------------------------------------------------------------------------------------------------------
Overhead $61.4 13.4% $59.2 14.1% ($2.2) (3.7%)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Profit $4.8 1.1% $2.5 0.6% $2.3 96.0%
- -----------------------------------------------------------------------------------------------------------------------------------
*Sales (Net) only includes the gross margin on managed service sales.
The net sales increase of the Staffing Services segment in the fiscal 2006 first
quarter from the comparable fiscal 2005 quarter was due to increased staffing
business in both the Technical Placement and the Administrative and Industrial
divisions.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 29, 2006 COMPARED
TO THE THREE MONTHS ENDED JANUARY 30, 2005--Continued
STAFFING SERVICES --Continued
- -----------------------------
The increase in operating profit in the segment was derived from the
Administrative and Industrial division, partially offset by a decrease in the
Technical Placement division.
Three Months Ended
------------------
January 29, 2006 January 30, 2005
---------------- ----------------
Technical Placement
Division % of % of Favorable Favorable
- -------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $522.5 $543.2 ($20.7) (3.8%)
- ----------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $289.3 $257.9 $31.4 12.2%
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $43.6 15.1% $41.5 16.1% $2.1 5.1%
- ----------------------------------------------------------------------------------------------------------------------------------
Overhead $38.3 13.2% $36.1 14.0% ($2.2) (6.2%)
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Profit $5.3 1.8% $5.4 2.1% ($0.1) (2.4%)
- ----------------------------------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in net sales in the first quarter of
fiscal 2006 from the comparable fiscal 2005 quarter was due to a $27.7 million,
or 12%, sales increase in traditional alternative staffing, and a $5.0 million,
or 88%, increase in net managed service associate vendor sales, partially offset
by a $1.3 million, or 5%, decrease in higher margin VMC Consulting project
management and consulting sales. The sales increase resulted from both new
accounts and increased business from existing accounts. The decrease in the
operating profit was the result of the decreased gross margin percentage,
partially offset by the increase in sales and a decrease in overhead as a
percentage of sales.
Three Months Ended
------------------
January 29, 2006 January 30, 2005
---------------- ----------------
Administrative &
Industrial Division % of % of Favorable Favorable
- ------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $174.2 $168.3 $5.9 3.7%
- ----------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $168.3 $162.4 $5.9 3.5%
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $22.6 13.4% $20.2 12.4% $2.4 12.2%
- ----------------------------------------------------------------------------------------------------------------------------------
Overhead $23.1 13.7% $23.1 14.2% - (0.3%)
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Loss ($0.5) (0.3%) ($2.9) (1.8%) $2.4 84.1%
- ----------------------------------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in net sales in the first
quarter of fiscal 2006 resulted from both new accounts and increased business
from existing accounts. The decreased operating loss was a result of the sales
increase, increased gross margins, and the decrease in overhead as a percentage
of sales. The increase in gross margin was due to lower workers' compensation
costs resulting from improvements in claims experience, as well as payroll taxes
and benefit costs.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 29, 2006 COMPARED
TO THE THREE MONTHS ENDED JANUARY 30, 2005--Continued
STAFFING SERVICES --Continued
- -----------------------------
Although the markets for the segment's services include a broad range of
industries throughout the Americas, Asia 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
- -------------------
Three Months Ended
------------------
January 29, 2006 January 30, 2005
---------------- ----------------
Telephone Directory % of % of Favorable Favorable
- ------------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $15.8 $15.7 $0.1 0.5%
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $7.8 49.3% $8.3 53.0% ($0.5) (6.5%)
- ----------------------------------------------------------------------------------------------------------------------------------
Overhead $5.5 35.0% $6.2 39.6% $0.7 11.2%
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Profit $2.3 14.3% $2.1 13.4% $0.2 7.3%
- ----------------------------------------------------------------------------------------------------------------------------------
The major components of the Telephone Directory segment's slight sales increase
for the first quarter of fiscal 2006 compared to the comparable 2005 quarter
were increases of $2.1 million, or 186%, in printing sales in Uruguay, $0.7
million, or 21%, in the telephone production operation, partially offset by a
$1.8 million reduction in publishing sales and $0.9 million reduction in other
sales. The decrease in publishing sales was comprised of a $1.2 million decrease
in the sales of the DataNational community telephone directory operation, and a
$0.6 million decrease in the Uruguayan directory publishing operation due to the
timing of the delivery of its directories. The decrease in other sales was
predominantly due to the sale of the ViewTech division in the third quarter of
fiscal 2005, resulting in a sales reduction of $0.8 million in the current
quarter. The segment's increased operating profit was predominantly the result
of the decrease in overhead and slight increase in sales, partially offset by
the lower margins recognized on the Uruguayan telephone directories published in
the period.
Other than the DataNational division, which accounted for 51% of the segment's
fiscal 2006 first quarter sales, the segment's business is obtained through
submission of competitive proposals for production and other contracts. These
short and long-term contracts are re-bid after expiration. Many of this
segment's long-term contracts contain cancellation provisions under which the
customer can cancel the contract, even if the segment is not in default under
the contract and generally do not provide for a minimum amount of work to be
awarded to the segment. While the Company has historically secured new contracts
and believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurance that contracts will be renewed or extended, or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms. In addition, this segment's sales and profitability are
highly dependent on advertising revenue for DataNational's directories, which
could be affected by general economic conditions.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 29, 2006 COMPARED
TO THE THREE MONTHS ENDED JANUARY 30, 2005--Continued
TELECOMMUNICATIONS SERVICES
- ---------------------------
Three Months Ended
------------------
January 29, 2006 January 30, 2005
---------------- ----------------
Telecommunications % of % of Favorable Favorable
- ------------------ Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $40.1 $25.2 $14.9 59.2%
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Profit $9.8 24.5% $4.5 17.7% $5.3 120.0%
- ----------------------------------------------------------------------------------------------------------------------------------
Overhead $9.0 22.5% $6.9 27.3% ($2.1) (30.9%)
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $0.8 2.0% ($2.4) (9.6%) $3.2 131.6%
- ----------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in the first quarter of
fiscal 2006 over the comparable 2005 quarter was due to increases of $14.7
million, or 115%, in the Construction and Engineering division and a $0.2
million increase in the Network Enterprise Solutions division. The sales
increase was primarily due to the customer acceptance and the recognition in the
current quarter of a large construction job accounted for on a
completed-contract basis. The improvement in operating profit was due to the
sales increase, the increase in gross margins, and the decrease in overhead as a
percentage of sales. 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. Actions by major long-distance telephone companies regarding local
residential service have negatively impacted margins of the segment.
A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically expire within
one to three years and are re-bid. Many of this segment's long-term contracts
contain cancellation provisions under which the customer can cancel the
contract, even if the segment is not in default under the contract, and
generally do not provide for a minimum amount of work to be awarded to the
segment. While the Company believes it can secure renewals and/or extensions of
most of these contracts, some of which are material to this segment, and obtain
new business, there can be no assurances that contracts will be renewed or
extended or that additional or replacement contracts will be awarded to the
Company on satisfactory terms.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 29, 2006 COMPARED
TO THE THREE MONTHS ENDED JANUARY 30, 2005--Continued
COMPUTER SYSTEMS
- ----------------
Three Months Ended
------------------
January 29, 2006 January 30, 2005
---------------- ----------------
Computer Systems % of % of Favorable Favorable
- ---------------- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $41.3 $41.2 $0.1 0.2%
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $21.9 53.1% $21.9 53.1% - 1.0%
- ----------------------------------------------------------------------------------------------------------------------------------
Overhead $16.2 39.1% $14.4 34.9% ($1.8) (12.4%)
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Profit $5.7 14.0% $7.5 18.2% ($1.8) (23.5%)
- ----------------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's slight sales increase in the first quarter of
fiscal 2006 over the comparable 2005 quarter was due to growth in the Maintech
division's IT maintenance services of $2.5 million, or 25%, along with $0.7
million of new business as a result of its acquisition of Varetis Solutions GmbH
("Varetis Solutions") (described in more detail below), partially offset by a
decrease in the segment's operator services business, including ASP directory
assistance, which reflected a $1.2 million, or 5%, sales decrease, a sales
decrease of $1.1 million, or 35%, in product revenue recognized, and a sales
decrease of $0.8 million in DataServ's data services which are provided to
non-telco enterprise customers. The decrease in operating profit from the
comparable 2005 fiscal quarter was the result of the increase in overhead due to
the addition of Varetis Solutions, and increased overhead within Maintech to
support its expansion.
During the current quarter, Volt Delta, the principal business unit of the
Computer Systems segment, purchased from Nortel Networks its 24% minority
interest in Volt Delta for $62.0 million, including a cash distribution of
approximately $5.4 million. Nortel Networks had originally purchased its 24%
interest in August of 2004, and under the terms of the original purchase
agreement, each party had an option to cause Nortel Networks to sell and Volt
Delta to buy the minority interest for an amount ranging from $25 million to $70
million. During the quarter, Volt Delta also purchased Varetis Solutions from
varetis AG for $24.8 million. The acquisition allows Volt Delta to focus on the
evolving global market for directory information systems and services. Varetis
Solutions adds technology in the area of wireless and wireline database
management, directory assistance/inquiry automation, and wireless handset
information delivery to Volt Delta's significant technology portfolio.
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.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 29, 2006 COMPARED
TO THE THREE MONTHS ENDED JANUARY 30, 2005--Continued
RESULTS OF OPERATIONS -- OTHER
- ------------------------------
Three Months Ended
------------------
January 29, 2006 January 30, 2005
---------------- ----------------
Other % of % of Favorable Favorable
- ----- Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $24.5 4.5% $20.8 4.2% ($3.7) (17.5%)
- ----------------------------------------------------------------------------------------------------------------------------------
Depreciation& Amortization $7.9 1.4% $7.5 1.5% ($0.4) (4.8%)
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Income $1.0 0.1% $0.6 0.1% $0.4 85.4%
- ----------------------------------------------------------------------------------------------------------------------------------
Other Expense ($1.6) (0.2%) ($1.0) (0.2%) ($0.6) (58.6%)
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Loss ($0.3) - ($0.2) - ($0.1) (55.6%)
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Expense ($0.5) (0.1%) ($0.5) (0.1%) - (10.9%)
- ----------------------------------------------------------------------------------------------------------------------------------
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 the first quarter of
fiscal 2006 from the comparable 2005 quarter was a result of a $2.9 million
increase in the expenses related to compliance with the Sarbanes-Oxley Act. In
addition, the Company incurred increased salaries, professional fees and costs
to meet the disaster recovery requirements of redundancy and business continuity
for corporate systems and communications networks.
The increase in depreciation and amortization for the first quarter of fiscal
2006 from the comparable 2005 quarter was attributable to increases in fixed
assets, primarily in the Staffing Services and Computer Systems segments.
Interest income increased due to higher interest rates together with additional
funds available for investment.
The increase in other expense for the first quarter of fiscal 2006 from the
comparable 2005 quarter was attributable to an increase in the amount of
accounts receivables sold under to the Company's Securitization Program, and an
increased average cost of funds rate.
The Company's effective tax benefit rate on its financial reporting pre-tax loss
was 35.4% in the first fiscal quarter of 2006 compared to an effective tax
benefit rate of 37.2% in the comparable fiscal 2005 quarter. The effective
benefit rate was lower in 2006 due to higher foreign losses for which no tax
benefit was provided.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
THREE MONTHS ENDED JANUARY 29, 2006 COMPARED
TO THE THREE MONTHS ENDED JANUARY 30, 2005--Continued
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents decreased by $15.4 million to $46.6 million in the
three months ended January 29, 2006.
Operating activities provided $36.6 million of cash in the first three-months of
fiscal 2006 compared to $15.4 million in the first three months of fiscal 2005.
Operating activities in the first three months of fiscal 2006, exclusive of
changes in operating assets and liabilities, produced $9.1 million of cash, as
the Company's net loss of $0.4 million included non-cash charges primarily for
depreciation and amortization of $7.9 million, accounts receivable provisions of
$1.1 million, minority interest of $1.0 million and a deferred tax benefit of
$0.5 million. In the first three months of fiscal 2005, operating activities,
exclusive of changes in operating assets and liabilities, produced $9.2 million
of cash, as the Company's net loss of $0.8 million included non-cash charges
primarily for depreciation and amortization of $7.5 million, accounts receivable
provisions of $1.5 million, minority interest of $1.5 million and a deferred tax
benefit of $0.6 million.
Changes in operating assets and liabilities produced $27.5million of cash, net,
in the first three months of fiscal 2006 principally due to a decrease in the
level of accounts receivable of $41.7 million and an increase in deferred income
and other liabilities of $8.4 million, partially offset by a decreases in
accounts payable of $13.4 million and income taxes payable of $4.2 million, and
increases in prepaid expenses and other current assets of $4.2 million and
inventories of $1.1 million. In the first three months of fiscal 2005, changes
in operating assets and liabilities provided $6.2 million of cash, net,
principally due to a decrease in the level of accounts receivable of $28.5
million and a decrease in prepaid expenses and other current assets of $1.6
million, partially offset by a reduction in securitization of receivables of
$10.0 million, a decrease in income taxes payable of $6.8 million, a decrease in
accrued expenses of $4.7 million and a decrease in the level of accounts payable
of $2.0 million
The principal factors in the $52.8 million of cash applied to investing
activities for the first three months of fiscal 2006 was expenditures of $46.8
million for acquisitions and net additions of $6.1 million for the property,
plant and equipment. The principal factor in the $5.5 million of cash applied to
investing activities for the first three months of fiscal 2005 was net additions
of $5.9 million to property, plant and equipment.
The principal factors in the $0.7 million of cash provided by financing
activities in the first three months of fiscal 2006 were cash provided from
exercises of stock options totaling $0.8 million. The principal factors in the
$38,000 of cash applied to financing activities in the first three months of
fiscal 2005 were cash provided from exercises of stock options totaling $0.8
million partially offset by a decrease in notes payable to banks of $0.8
million.
Commitments
- -----------
There has been no material change through January 29, 2006 in the Company's
contractual cash obligations and other commercial commitments from that reported
in the Company's Annual Report on Form 10-K for the fiscal year ended October
30, 2005.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Off-Balance Sheet Financing
- ---------------------------
The Company has no off-balance sheet financing arrangements, as that term has
meaning in Item 303(a) (4) of Regulation S-K.
Securitization Program
- ----------------------
The Company has an accounts receivable securitization program ("Securitization
Program"), which was amended in the first quarter of fiscal year 2006 and
effective January 31, 2006 to increase the level from $150.0 million to $200.0
million and extend the maturity date to April 2008. 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 $200.0 million). The Company retains the servicing responsibility
for the accounts receivable. At January 29, 2006, TRFCO had purchased from Volt
Funding a participation interest of $100.0 million out of a pool of
approximately $257.5 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. TRFCO has no recourse to
the Company (beyond its interest in the pool of receivables owned by Volt
Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts incurred by
TRFCO on the issuance of its commercial paper, are charged to the consolidated
statement of operations.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Securitization Program--Continued
- ----------------------
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, 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 January 29, 2006, the Company was in
compliance with all requirements of its Securitization Program.
In February 2006, the Company increased the amount of participation interest
sold to $140.0 million from $100.0 million to pay the note payable to Nortel
Networks.
Credit Lines
- ------------
In the first quarter of fiscal 2006, the Company's $40.0 million secured,
syndicated revolving credit agreement ("Credit Agreement") was amended to (i)
permit the consummation of the acquisition by the Company of Varetis Solutions
and the twenty-four percent interest in Volt Delta owned by Nortel Networks (ii)
modify certain of the financial covenants contained in the Credit Agreement and
(iii) increase the amount of financing permitted under the securitization
program. The Credit Agreement expires in April 2008.
The Credit Agreement established a secured credit facility ("Credit Facility")
in favor of the Company and designated subsidiaries, of which up to $15.0
million may be used for letters of credit. Borrowings by subsidiaries are
limited to $25.0 million in the aggregate. The administrative agent for the
Credit Facility is JPMorgan Chase Bank, N.A. The other banks participating in
the Credit Facility are Mellon Bank, N.A., Wells Fargo Bank, N.A., Lloyds TSB
Bank PLC and Bank of America, N.A.
Borrowings under the Credit Facility are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the rating of the facility, as provided by a
nationally recognized rating agency. As amended, in lieu of the previous
borrowing base formulation, the Credit Agreement now requires the maintenance of
specified accounts receivable collateral in excess of any outstanding
borrowings. Based upon the Company's leverage ratio and debt rating at January
29, 2006, if a three-month U.S. Dollar LIBO rate was the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
5.5% per annum. At January 29, 2006, the facility fee was 0.3% per annum
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined, a limitation on cash
dividends, capital stock repurchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ending as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
- ------------
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 January 29,
2006, the Company was in compliance with all covenants in the Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Five subsidiaries of the Company are guarantors of
all loans made to the Company or to subsidiary borrowers under the Credit
Facility. At January 29, 2006, four of those guarantors have pledged
approximately $52.5 million of accounts receivable, other than those in the
Securitization Program, as collateral for the guarantee obligations. Under
certain circumstances, other subsidiaries of the Company also may be required to
become guarantors under the Credit Facility.
At January 29, 2006, the Company had credit lines with domestic and foreign
banks which provided for borrowings and letters of credit up to an aggregate of
$51.4 million, including $40.0 million under the Credit Agreement and the
Company had total outstanding foreign currency bank borrowings of $6.6 million,
$2.4 million of which were under the Credit Agreement. These bank borrowings
provide a hedge against devaluation in foreign currency denominated assets.
In December 2005, the Company paid approximately $50.0 million, principally from
cash on hand, for the Nortel Networks and Varetis Solutions acquisitions. The
remaining $36.8 million was paid February 15, 2006.
In February 2006, the Company borrowed an additional four million Euros ($4.8
million) to offset its Euro exposure.
Summary
- -------
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program will be sufficient to fund its presently contemplated
operations and satisfy its obligations through, at least, the next twelve
months.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements to be Effective in Fiscal 2006
- ------------------------------------------------------------
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, - a replacement of APB Opinion No. 20 and FASB Statement No. 3".
This Statement establishes, unless impracticable, retrospective application as
the required method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to the newly adopted
accounting principle. The provisions of this Statement are effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not believe that the adoption of this
Statement in fiscal 2006 will have a material impact on the Company's
consolidated financial position or results of operations.
In February 2006, the FASB has issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140".
This Statement, among other things, allows a preparer to elect fair value
measurement of instruments in cases in which a derivative would otherwise have
to be bifurcated. The provisions of this Statement are effective for all
financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. Early adoption is permitted for instruments that an entity
holds at the date of adoption on an instrument-by-instrument basis. The Company
does not believe that the adoption of this Statement in fiscal 2007 will have a
material impact on the Company's consolidated financial position or results of
operations.
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 does not believe the Act will have a material impact on the
Company's consolidated financial position or results of operations.
Related Party Transactions
- --------------------------
During the first quarter of fiscal 2006, the Company paid or accrued $0.2
million to the law firm of which Lloyd Frank, a director, is of counsel,
primarily for services rendered.
The Company rents approximately 2,600 square feet of office space to a
corporation owned by Steven A. Shaw, an officer and director, in the Company's
El Segundo, California facility, which the Company does not require for its own
use, on a month-to-month basis at a rental of $1,750 per month. Based on the
nature of the premises and a recent market survey conducted for the Company, the
Company believes the rent is the fair market rental for such space.
42
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The Company`s earnings, cash flows
and financial position are exposed to market risks relating to fluctuations in
interest rates and foreign currency exchange rates. The Company has cash and
cash equivalents on which interest income is earned at variable rates. The
Company also has credit lines with various domestic and foreign banks, which
provide for borrowings and letters of credit, as well as a $200 million accounts
receivable securitization program to provide the Company with additional
liquidity to meet its short-term financing needs.
The interest rates on these borrowings and financing are variable and,
therefore, interest and other expense and interest income are affected by the
general level of U.S. and foreign interest rates. Based upon the current levels
of cash invested, notes payable to banks and utilization of the securitization
program, on a short-term basis, as noted below in the tables, a hypothetical
100-basis-point (1%) increase or decrease in interest rates would increase or
decrease its annual net interest expense and securitization costs by $0.4
million, respectively.
The Company has a term loan, as noted in the table below, which consists of
borrowings at fixed interest rates, and the Company's interest expense related
to these borrowings is not affected by changes in interest rates in the near
term. The fair value of the fixed rate term loan was approximately $14.3 million
at January 29, 2006. 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 January 29, 2006, the total market value of these
investments was $4.3 million, all of which are being held for the benefit of
participants in a non-qualified deferred compensation plan with no risk to the
Company.
The Company has a number of overseas subsidiaries and is, therefore, subject to
exposure from the risk of currency fluctuations as the value of foreign
currencies fluctuates against the dollar, which may impact reported earnings. As
of January 29, 2006, the total of the Company's net investment in foreign
operations was $8.1 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
January 29, 2006, the Company had a balance of net foreign assets exposed of
$8.1 million, which was reduced to $4.8 million on February 9, 2006 when the
Company increased its Euro borrowing under the Credit Agreement. 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 January 29, 2006 by 10%
would result in a pretax gain of $0.8 million related to these positions.
Similarly, a hypothetical strengthening of the U.S. dollar against these
currencies at January 29, 2006 by 10% would result in a pretax loss of $0.8
million related to these positions.
43
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at January 29,
2006. For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
Interest Rate Market Risk Payments Due By Period as of January 29, 2006
- ------------------------- ---------------------------------------------
Less than 1-3 3-5 After 5
Total 1 year Years Years Years
----- --------- ----- ----- -------
(Dollars in thousands of US$)
Cash and Cash Equivalents and
- -----------------------------
Restricted Cash
---------------
Money Market and Cash Accounts $69,123 $69,123
Weighted Average Interest Rate 3.9% 3.9%
------- -------
Total Cash, Restricted Cash and
Cash Equivalents $46,591 $46,591
======= =======
Securitization Program
- ----------------------
Accounts Receivable Securitization $100,000 $100,000
Finance Rate 5.0% 5.0%
-------- --------
Securitization Program $100,000 $100,000
======== ========
Debt
- ----
Term Loan $13,625 $442 $1,567 $1,279 $10,337
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Payable to Nortel Networks $2,000 $2,000
Weighted Average Interest Rate 6.0% 6.0%
Notes Payable to Banks $6,621 $6,621
Weighted Average Interest Rate 4.1% 4.1%
Note Payable - other $36,750 $36,750
Weighted Average Interest Rate - - - - -
------- ------- ------ ------ -------
Total Debt $58,996 $45,813 $1,567 $1,279 $10,337
======= ======= ====== ====== =======
44
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company's management is responsible for maintaining adequate internal
controls over financial reporting and for its assessment of the effectiveness of
internal controls over financial reporting.
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 January
29, 2006 under the supervision and with the participation of the Company's
management, including the Company's Chairman of the Board, President and
Co-Principal Executive Officer, its Executive Vice President and Co-Principal
Executive Officer and its Senior Vice President and Principal Financial Officer.
Based on that evaluation and the events described below, management concluded
that, as of the date of their evaluation the Company's disclosure controls and
procedures were effective as of January 29, 2006 to ensure that material
information relating to the Company and its subsidiaries is made known to them
on a timely basis.
As of October 30, 2005, the Company's management concluded that the Company did
not maintain effective internal controls over financial reporting at a single
subsidiary because of the effect of a material weakness in the Company's system
of internal controls, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The subsidiary did
not appropriately calculate and reconcile its fixed assets and related
depreciation detail records to the amounts recorded in its financial statements
and did not properly reconcile the deferred tax liability recorded in its
financial statements relating to depreciation timing differences to the
supporting documentation. These findings resulted in material adjustments to the
preliminary consolidated financial statements.
Remediation Efforts Related to the Material Weakness in Internal Controls
The Company's management reviewed and evaluated the design of the control
procedure relating to depreciation of assets and reconciliation of the deferred
tax liability, and is taking the following actions to remediate the reported
material weakness in internal controls over financial reporting by:
o The creation of additional positions within the affected subsidiary,
including an accounting and finance compliance officer to review and
coordinate with the subsidiary controller, the implementation and
maintenance of its internal controls over financial reporting.
o Requiring certain changes to the fixed asset sub-ledgers be reviewed
and approved in writing by the subsidiary controller.
o Adhering to the Company's financial statement closing process
monitoring controls and documentation procedures related to the
Company's fixed asset and income tax provision policies.
After the completion of the evaluation, the Company began its remediation
program to correct the material weakness in its processes reported above. The
Company's management has discussed this material weakness and initial corrective
actions and future plans with the Audit Committee and the Company's Board of
Directors who concurred with management's plans.
45
CONTROLS AND PROCEDURES--Continued
Changes in Internal Control over Financial Reporting
Except as set forth above, there were no changes in the Company's internal
control over financial reporting that occurred during the Company's most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1A - RISK FACTORS
There were no material changes from risk factors as previously disclosed in the
Company's Annual Report of Form 10-K for the year ended October 30, 2005. (See
also Part 1, Item 2 of the Report for risk factors.
ITEM 6 - EXHIBITS
(a) Exhibits:
Exhibit Description
- --------------------------------------------------------------------------------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of Independent
Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
46
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
(Registrant)
BY: /s/ Jack Egan
-------------
Date: June 21, 2006 Jack Egan
Senior Vice President and
Principal Financial Officer
47
EXHIBIT INDEX
- -------------
Exhibit
Number Description
- ------ -----------
15.01 Letter from Ernst & Young LLP regarding Report of Independent
Registered Public Accounting Firm
15.02 Letter from Ernst & Young LLP regarding Acknowledgement of Independent
Registered Public Accounting Firm
31.01 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002