UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A Amendment No. 2
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended October 30, 2005
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________ to _________________
Commission file number: 1-9232
VOLT INFORMATION SCIENCES, INC.
-------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New York 13-5658129
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 704-2400
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.10 par value New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes___ No__X__
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes___ No__X__
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes__X__ No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes__X__ No___
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 aggregate market value of the common stock held by non-affiliates of the
Registrant was approximately $149 million, based on the closing price of $19.78
per share on the New York Stock Exchange on May 1, 2005 (the last business day
of the Registrant's fiscal second quarter). Shares of common stock held
beneficially by executive officers and directors and their spouses and the
Registrant's Savings Plan, have been excluded, without conceding that all such
persons or plans are "affiliates" of the Registrant).
The number of shares of common stock outstanding as of January 6, 2006 was
15,341,505.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 2006 Annual Meeting are
incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 2
Item 1A. Risk Factors 18
Item 1B. Unresolved Staff Comments 23
Item 2. Properties 24
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 29
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 53
Item 8. Financial Statements and Supplementary Data 57
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 92
Item 9A. Controls and Procedures 92
Item 9B. Other Information 95
PART III
Item 10. Directors and Executive Officers of the Registrant 95
Item 11. Executive Compensation 95
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters 95
Item 13. Certain Relationships and Related Transactions 95
Item 14. Principal Accountant Fees and Services 95
PART IV
Item 15. Exhibits and Financial Statement Schedules 96
1
Introduction and Purpose of Amendment
The second amended Form 10-K for the fiscal year ended October 30, 2005 is being
filed to correct the Introduction and Purpose of Amendment contained in the
Company's Form 10-K/A (Amendment No. 1) filed on June 22, 2006 to correct an
error in the Company's treatment of restricted cash to read as follows:
In the Form 10-K/A, the Company corrected an error in the way it had previously
reported (i) cash and cash equivalents and restricted cash to show them as
separate line items on its consolidated balance sheets and (ii) changes in
restricted cash and changes in payables related to restricted cash on its
consolidated statements of cash flows to show them under investing activities
rather than under operating activities. Conforming changes have also been made
in the Management Discussion and Analysis section and Note A to the consolidated
financial statements.
In addition, Form 10-K/A included Notes J and Q of the Notes to Consolidated
Financial Statements, which have 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
and the separation of restricted cash (previously reported parenthetically) in
the consolidated balance sheets, as described below, and the changes in Notes A,
J and Q, there were no other changes to the financial statements. The changes
noted herein, do not have an effect on the Company's results of operations or
financial condition.
PART I
ITEM 1. BUSINESS
General
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Volt Information Sciences, Inc. is a New York corporation, incorporated in 1957.
We sometimes refer to Volt Information Sciences, Inc. and its subsidiaries
collectively as "Volt" or the "Company," unless the context otherwise requires.
Volt operates in the following two businesses which have four operating
segments:
Staffing Services
- -----------------
(1) Staffing Services - This segment provides a broad range of employee
staffing services to a wide range of customers throughout the United
States, Canada and Europe and has commenced operations in Asia. These
services fall within three major functional areas:
o Staffing Solutions - provides a full spectrum of managed staffing,
temporary/alternative personnel employment and direct hire placement.
o Information Technology Solutions - provides a wide range of services
including consulting, outsourcing and turnkey project management in
the product development lifecycle, IT and customer contact arenas.
o E-Procurement Solutions - provides global vendor neutral procurement
and human capital management solutions by combining web-based tools
and business process outsourcing services.
Telecommunications and Information Solutions
- --------------------------------------------
(2) Telephone Directory - This segment publishes independent telephone
directories in the United States and publishes telephone directories in
Uruguay; provides telephone directory production, commercial printing,
database management, sales and marketing services; and licenses directory
production and contract management software systems to directory publishers
and others.
(3) Telecommunications Services - This segment provides telecommunications
services, including design, engineering, construction, installation,
maintenance and removals in the outside plant and central offices of
telecommunications and cable companies and within their customers'
premises, as well as for large commercial and governmental entities
requiring telecommunications services; and also provides complete turnkey
services for wireless and wireline telecommunications companies.
2
(4) Computer Systems - This segment provides directory and operator services,
both traditional and enhanced, to wireline and wireless telecommunications
companies; provides directory assistance content and data services;
designs, develops, integrates, markets, sells and maintains computer-based
directory assistance systems and other database management and
telecommunications systems, primarily for the telecommunications industry;
and provides IT services to the Company's other businesses and to third
parties.
3
Information as to Operating Segments
- ------------------------------------
The following tables set forth the contribution of each operating segment to the
Company's consolidated sales and operating profit for each of the three fiscal
years in the period ended October 30, 2005, and those assets identifiable within
each segment at the end of each of those fiscal years. This information should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements in
Items 7 and 8, respectively, of this Report.
October October November
30, 2005 31, 2004 2, 2003
-------- -------- --------
NET SALES (In thousands)
Staffing Services:
Staffing $1,759,683 $1,580,225 $1,266,875
Managed Services 1,157,168 1,148,116 1,043,572
---------- ---------- ----------
Total gross sales 2,916,851 2,728,341 2,310,447
Less Non-recourse Managed Services--Note 1 (1,121,196) (1,120,079) (967,379)
Intersegment sales 6,155 3,839 2,367
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1,801,810 1,612,101 1,345,435
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Telephone Directory:
Sales to unaffiliated customers 82,298 72,194 69,750
Intersegment sales - 1 43
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82,298 72,195 69,793
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Telecommunications Services:
Sales to unaffiliated customers 137,799 134,266 112,201
Intersegment sales 1,212 1,132 638
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139,011 135,398 112,839
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Computer Systems:
Sales to unaffiliated customers 161,867 110,055 84,472
Intersegment sales 11,252 9,962 9,167
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173,119 120,017 93,639
---------- ---------- ----------
Elimination of intersegment sales (18,619) (14,934) (12,215)
---------- ---------- ----------
TOTAL NET SALES $2,177,619 $1,924,777 $1,609,491
========== ========== ==========
SEGMENT PROFIT (LOSS)
Staffing Services $31,179 $36,718 $21,072
Telephone Directory 14,895 10,115 6,748
Telecommunications Services (2,429) (2,838) (3,986)
Computer Systems 35,801 30,846 14,679
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Total segment profit 79,446 74,841 38,513
General corporate expenses (38,839) (30,812) (27,668)
---------- ---------- ----------
TOTAL OPERATING PROFIT 40,607 44,029 10,845
Interest and other (expense) income (2,234) (3,471) (1,953)
Gain on sale of real estate - 3,295 -
Interest expense (1,825) (1,817) (2,070)
Foreign exchange (loss) gain (255) 97 299
---------- ---------- ----------
Income from continuing operations before
income taxes and minority interest $36,293 $42,133 $7,121
========== ========== ==========
4
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
OPERATING SEGMENT DATA--Continued
Note 1 Under certain contracts with customers, the Company manages the
customers' alternative staffing requirements, including transactions
between the customer and other staffing vendors ("associate vendors").
When payments to associate vendors are subject to receipt of the
customers' payment to the Company, the arrangements are considered
non-recourse against the Company and revenue, other than management
fees to the Company, is excluded from the net sales in the above table.
October October November
30, 2005 31, 2004 2, 2003
-------- -------- ----------
(In thousands)
IDENTIFIABLE ASSETS
Staffing Services $446,990 $422,658 $350,796
Telephone Directory 55,238 55,740 61,942
Telecommunications Services 53,173 52,770 49,053
Computer Systems 103,720 102,487 39,006
-------- -------- --------
659,121 633,655 500,797
Cash, investments and other corporate assets 29,591 56,381 39,686
-------- -------- --------
Total assets $688,712 $690,036 $540,483
======== ======== ========
Staffing Services Segment
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Volt's Staffing Services segment, through two divisions, the Technical Placement
division and the Administrative and Industrial division, provides a broad
spectrum of staffing services in three major functional areas: Staffing
Solutions, Information Technology ("IT") Solutions and E-Procurement Solutions,
to a wide range of customers throughout the world. The Technical Placement
division provides Staffing Solutions, IT Solutions and E-Procurement Solutions,
while the Administrative and Industrial division provides Staffing Solutions.
Staffing Solutions
- ------------------
Volt markets a full spectrum of staffing solutions, such as managed services,
alternative staffing services and direct hire services, through its Volt
Services Group, Volt Technical Services, Volt Human Resources and Volt Europe
divisions.
Volt Services Group/Volt Technical Services/Volt Europe/Volt Human
Resources (Staffing Solutions Group)
Staffing solutions provided by this segment are generally identified and
marketed throughout the United States as "Volt Services Group," and "Volt
Technical Services," throughout Europe as "Volt Europe," throughout Canada
as "Volt Human Resources" and throughout Asia as "Volt Asia Enterprises"
(the "Staffing Solutions Group"). The Staffing Solutions Group provides a
broad range of employee staffing and professional services, from over 300
branches, including dedicated on-site offices located on customer premises.
The Staffing Solutions Group is a single-source provider of all levels of
staffing, offering to customers an extensive range of alternative
employment services. Offerings include managed staffing programs, known as
VoltSource, in which the segment is responsible for fulfilling a customer's
entire alternative staffing requirements and engages subcontractors to
assist in satisfying those requirements; alternative staffing of clerical,
administrative, light industrial, technical, professional and information
technology personnel; employment, direct hire and professional personnel
placement services; referred employee management services; human resources
outsourcing; and specifically tailored recruitment services.
5
The Staffing Solutions Group provides skilled employees, such as computer
and other IT specialties, engineering, design, scientific and technical
support, in its Technical Placement division. This group also provides
lesser skilled employees, such as administrative, clerical, office
automation and accounting and financial personnel, call center, light
industrial and other personnel, in its Administrative and Industrial
division. The Staffing Solutions Group matches available workers to
employer assignments and, as a result, competes both to recruit and
maintain a database of potential employees and to attract customers to
employ contingent workers. Assignments are provided for varying periods of
time to companies and other organizations (including government agencies
and non-profit entities) in a broad range of industries that have a need
for such personnel, but are unable, or choose not to, engage certain
personnel as their own employees. Customers range from those that require
one or two temporary employees at a time to national accounts that require
as many as several thousand temporary employees at one time.
The Staffing Solutions Group furnishes contingent employees to meet
specific customer requirements, such as to complete a specific project
(with employees typically being retained until its completion), to enable
customers to scale their workforce according to business conditions, meet a
particular need that has arisen, substitute for regular employees during
vacation or sick leave, staff high turnover positions, fill in during the
full-time hiring process or during a hiring freeze, and staff seasonal
peaks, conversions, inventory taking and offices that are downsizing. Many
large organizations utilize contingent labor as a strategic element of
their overall workforce, allowing them to more efficiently meet their
fluctuating staffing requirements. In certain instances, the Staffing
Solutions Group also provides management personnel to coordinate and manage
special projects and to supervise temporary employees.
Many customers use more than one staffing services provider; however, in
recent years, the practice of using a limited number of temporary
suppliers, a sole temporary supplier or a primary supplier has become
increasingly important among the larger companies. The Staffing Solutions
Group has been successful in obtaining a number of large national
contracts, that typically require on-site Volt representation and
fulfilling requirements at multiple customer facilities. In addition to
contracting for traditional temporary staffing, many of the Company's
larger customers, particularly those with national agreements, have
contracted for managed services programs under which the Company, in
addition to itself providing staffing services, performs various
administrative functions. These include centralized and coordinated order
processing and procurement of other qualified staffing providers as
subcontractors, commonly referred to as "associate vendors," to provide
service in areas where the Company does not maintain an office or cannot
recruit sufficient qualified personnel and to supply secondary source
back-up recruiting or provide assistance in meeting the customer's stated
diversity and/or subcontracting goals. In other managed programs,
requisitions are sent simultaneously to a number of approved staffing
firms, and Volt must compete for each placement. Other features of managed
services programs include customized and consolidated billing to the
customer for all of Volt's and associate vendors' services, and detailed
management reports on staffing usage and costs. Some managed services
programs are tailored to the customer's unique needs for single source
consolidated billing, reporting and payment. In most cases, Volt is
required to pay the associate vendor only after Volt receives payment from
its customer. Volt also acts as an associate vendor to other national
providers in their managed services programs to assist them in meeting
their obligations to their customers. The bidding process for these managed
service and national contracts, in general, is very competitive. Many
contracts are for a one to three year time period, at which time they are
typically re-bid. Others are for shorter periods or may be for the duration
of a particular project or subproject or a particular need that has arisen,
which requires additional or substitute personnel. These contracts expire
upon completion of the project or when the particular need ends. Many of
these contracts typically require considerable start-up costs and usually
take from six to twelve months to reach anticipated revenue levels and
reaching those levels is dependent on the customer's requirements at that
time. The Staffing Solutions Group maintains a group dedicated to the
acquisition, implementation and service of national accounts; however,
there can be no assurance that Volt will be able to retain accounts that it
currently serves, or that Volt can obtain additional national accounts on
satisfactory terms.
6
Branch offices that have developed a specialty in one or more disciplines
often use the name "Volt" followed by their specialty disciplines to
identify themselves, e.g. "Volt Computer Services", "Volt Engineering and
Technical Services" and "Volt Scientific Services". Other branch offices
have adopted other names to differentiate themselves from traditional
temporary staffing when their focus is more project oriented.
The Staffing Solutions Group maintains centralized databases, containing
resumes of candidates from which it fills customer's job requirements.
Other candidates are referred by the customer itself for assignment as Volt
employees. Volt Europe maintains similar computerized databases containing
resumes of candidates from the United Kingdom and continental Europe.
Higher skilled individuals employed by the Staffing Solutions Group are
frequently willing to relocate to fill assignments while lesser skilled
employees are generally recruited and assigned locally. In addition to
maintaining its proprietary Internet recruiting sites, the segment has
numerous contracts with independent web-based job search companies.
Individuals hired by the Staffing Solutions Group typically become Volt
employees or contractors only during the period of their assignment. As
employer of record, Volt is responsible for the payment of wages, payroll
taxes, workers' compensation and unemployment insurance and other benefits,
which may include paid sick days, holidays, vacations and medical
insurance. Increases in payroll taxes and costs of workers' compensation
and unemployment insurance and other benefits have and could continue to
have an adverse effect on the Company's competitiveness and financial
performance. Class action lawsuits have been instituted in the United
States against some users of temporary services, including some customers
of the Company, by certain temporary employees assigned to the customers,
and a few have been threatened or commenced against providers of temporary
services, including one case instituted against the Company and other
temporary agencies. In general, these lawsuits claim that certain temporary
employees should be classified as the customers' employees and are entitled
to participate in certain of the customers' benefit programs. In the
Company's European markets, temporary services are more heavily regulated
than in the United States and litigation and governmental activity (at
European Union and national levels) directed at the way the industry does
business is also being conducted or considered. Volt does not know the
effect, if any, the resolution of these cases or the outcome of
governmental activity will have on the industry in general or upon the
Staffing Solutions Group's business.
The Staffing Solutions Group also provides direct placement services. In
the United States, these services are provided through Volt Professional
Placement, an employment search organization specializing in the
recruitment and direct hire of individuals, including in information
technology, engineering, technical, accounting, finance and administrative
support disciplines. The direct placement recruiters operate within Volt's
existing United States and European branch system.
7
Volt has made and will continue to make substantial investments in
technological solutions that focus on core recruiting competencies,
improving productivity and reducing administrative burdens for field
operations, including new efficiencies for the onboarding process by the
elimination of most paper forms. There can be no assurance that these
solutions will be competitive, that the segment will continue to develop
new solutions or that they will be successful.
Information Technology Solutions
- --------------------------------
VMC Consulting
VMC Consulting (VMC) offers a varied portfolio of project-based
professional services, often utilizing the pool of contingent employees of
the other divisions of the Staffing Services segment. Projects range from
product development and IT infrastructure to customer support in outsource,
insource or blended environments. VMC's customers are located in North
America, Asia and Europe.
This business unit, as part of the Technical Placement division, performs
outsource services in the form of project-based work, in which the Company
assumes responsibility for project milestones and deliverables. Services
include electronic games testing, hardware and software testing, software
development, data and/or call center management, project management,
information technology services, technical communications, extended sales,
technical support and technical communications. State-of-the-art technology
solutions are delivered to clients on a project basis, with the work
performed either on Volt's premises or at the client's location.
Although VMC Consulting continues its efforts to increase its customer base
and to broaden its services, there is no assurance that its present or
future services will be competitive, that it will continue to obtain new
customers or renew and/or extend existing customer contracts or develop new
services or that its present services or new services will continue to be
successfully marketed.
E-Procurement Solutions
- -----------------------
ProcureStaff
Increasingly, corporations, industry consortia and other buying communities
are leveraging the efficiencies of the Internet to maximize their buying
power. To take advantage of this e-commerce market, a wholly-owned
subsidiary, ProcureStaff, Ltd., provides managed service programs by means
of a web-based, vendor neutral procurement and management solution.
A vendor neutral program enables a customer to meet its requirements by
selecting a candidate from a number of competing firms, including Volt (if
a selected vendor), based upon the customer requirements and the skills of
the candidates. At the core of the ProcureStaff model are Consol and HRP,
patent pending business-to-business e-commerce procurement applications
that are designed to streamline client and vendor functions with increased
workflow efficiencies while significantly reducing costs and the risks of
non-compliance with client policies.
Utilizing proprietary technologies and management methodologies,
ProcureStaff provides procurement, management and consulting solutions for
supplemental or alternative staffing. ProcureStaff, as part of the
Technical Placement division, provides global services with operations in
North America, Europe and Asia.
8
Consol also automates and manages the source-to-settle process (from
identification of initial requirement through billing for final
deliverable) for resource-based services to provide visibility and
centralized control over all categories of enterprise-wide services
expenditures, including statement of work, project work and deliverable
based services. ProcureStaff provides this source-to-settle process to its
customers with web-based access the creation of project bid requests,
requisition management, electronic procurement, relationship management,
vendor management, time keeping, consolidated invoicing, consolidated
billing and payment, resource redeployment and sophisticated on-line
management reporting.
By adhering to open standards, ProcureStaff enables both customers and
vendors to facilitate solution implementation with minimal cost and
resources. Implementation of these programs typically requires considerable
start up costs by ProcureStaff and usually takes up to four months.
ProcureStaff competes with other companies which provide similar vendor
neutral solutions, some of which are affiliated with competitive staffing
companies.
Although ProcureStaff continues its efforts to obtain new customers and to
develop and enhance its services and systems, there is no assurance that
its present or future services will be competitive, that it will continue
to obtain new customers or renew existing customer contracts or develop new
services or that present services or new services will continue to be
successfully marketed.
During the week ended October 30, 2005, the entire Staffing Services segment
provided approximately 43,000 (40,000 in 2004) of its own temporary employees to
its customers, in addition to employees provided by subcontractors and associate
vendors.
While the markets for the entire Staffing Services segment's services include a
broad range of industries throughout the United States, Europe and Asia, general
economic conditions in specific geographic areas or industrial sectors affect
the profitability of the segment. The segment has also experienced margin
erosion caused by increased competition, increased unemployment insurance and
workers compensation rates, electronic auctions and customers leveraging their
buying power by consolidating the number of vendors with whom they deal. The
segment is committed to further efficiencies designed to increase profitability,
however, there can be no assurances that profitability will increase. In
addition, this segment could be adversely affected by changes in laws,
regulations and government policies, including the results of pending litigation
and governmental activity regarding the staffing services industry, and related
litigation expenses, customers' attitudes toward outsourcing and temporary
personnel, any decreases in rates of unemployment in the future and higher wages
sought by temporary workers, especially those in certain technical fields often
characterized by labor shortages.
Through VMC, the segment has increased the number of higher margin
project-oriented services to its customers and thus assumed greater
responsibility for the finished product in contrast to traditional staffing
services. The risks of unsuccessful performance, including claims by customers
and the potential for uncompensated rework and other liabilities are greater in
this division. While the Company believes that it can successfully implement its
project-based contracts, there can be no assurance that such claims and costs of
rework will not increase.
The ability of the entire Staffing Services segment to compete successfully for
customers depends on its reputation, pricing and quality of service provided and
its ability to engage, in a timely manner, personnel meeting customer
requirements. Competition varies from market to market and country to country.
In most areas there are few significant barriers to entry and no single provider
has a dominant share of the market. The staffing services market is highly
competitive. Pricing pressure from customers and competitors continues to be
9
significant and high state unemployment insurance and workers compensation rates
continue to impact margins. Many of the contracts entered into by this segment
are of a relatively short duration, and awarded on the basis of competitive
proposals that are periodically re-bid by the customer. Under many of these
contracts, there is no assurance of any minimum amount of work that will
actually be available and the Company is frequently required to compete for each
placement. Although the Company has been successful in obtaining various short
and long-term contracts in the past, in many instances margins under these
contracts have decreased. There can be no assurance that existing contracts will
be renewed on satisfactory terms or that additional or replacement contracts
will be awarded to the Company, or that revenues or profitability from an
expired contract will be replaced. Some of this segment's national contracts are
large, and the loss of any large contract could have a significantly negative
effect on this segment's business unless, and until, the business is replaced.
The segment competes with many staffing firms, some of which are larger and have
substantially greater financial resources than Volt, as well as with individuals
seeking direct employment with the Company's existing and potential customers.
Telephone Directory Segment
- ---------------------------
Volt's Telephone Directory segment publishes independent telephone directories
in the United States and publishes telephone directories in Uruguay; provides
telephone directory production, commercial printing, database management, sales
and marketing services; and licenses directory production and contract
management software systems to directory publishers and others. This segment has
transitioned in the United States from the production of telephone directories
for others to primarily publishing its own independent telephone directories and
in 2005 commenced doing the same in Uruguay. This segment consists of
DataNational, Directory Systems/Services and the Uruguay division.
DataNational
DataNational, Volt's independent telephone directory publisher, principally
publishes community-based directories, primarily in the mid-Atlantic and
southeastern portions of the United States. DataNational's community-based
directories provide consumers with information concerning businesses that
provide services within their local geographic area. The directories may
also include features that are unique to the community, such as school
information, maps and a calendar of events. All of the DataNational
directories are also available on the Internet at www.communitybook.info.
The division identifies markets where demographics and local shopping
patterns are favorable to the division's community-oriented product and
adjusts accordingly. During fiscal 2005, the division published 133
community, county and regional directories. DataNational's principal
competitors are regional telephone companies, whose directories typically
cover a much wider geographic area than the DataNational directories, as
well as other independent telephone directory companies, which compete on
the local level. DataNational's revenues are generated from yellow page
advertising sold in its directories. The Company believes that advertisers
are attracted to DataNational's community directories because the
directories enable them to specifically target their local markets at a
much lower cost than directories covering larger markets.
Directory Systems/Services
Directory Systems/Services develops and markets telephone directory systems
and services to directory publishers, using computer systems manufactured
by others, combined with proprietary software developed by the Company and
by third parties specifically for the division. These systems manage the
production and control of databases principally for directory and other
advertising media publishers and produce digitized display advertisements
and photocomposed pages, with integrated graphics for both printed and
electronic yellow and white pages directories. These systems incorporate
"workflow management," by which ads are automatically routed between
workstations, increasing throughput and control, including management of
additions and deletions of listings. These systems are licensed to, and the
services are performed for, publishers and others worldwide, including the
segment's DataNational division.
10
Uruguay
In 2005, Volt's Uruguay division published yellow pages telephone
directories as an independent publisher. Revenues are generated from the
sale of yellow pages advertising.
In addition to the directory business, Volt's Uruguay division owns and
operates an advanced directory printing facility, which includes, among
other presses, a high speed, four-color, heat set printing press that is
used to print not only its own telephone directories, but also directories
for publishers in other South American countries. In addition, this
facility does commercial printing, including magazines and periodicals, for
various customers in Uruguay and elsewhere in South and Central America.
The Telephone Directory segment's ability to compete depends on its reputation,
technical capabilities, price, quality of service and ability to meet customer
requirements in a timely manner. The segment faces intense competition for all
of its services and products from other suppliers and from in-house facilities
of potential customers. Some of this segment's significant competitors are
companies that are larger and have substantially greater financial resources
than the Company. This segment's sales and profitability are highly dependent on
advertising revenue, which has been and continues to be affected by general and
local economic conditions. Economic conditions in Uruguay and neighboring
countries continue to have a significant adverse impact on advertising and
printing revenue and operating profits of the Uruguay operation.
Other than DataNational, a substantial portion of this segment's business is
obtained through submission of competitive proposals for contracts. These short
and long-term contracts are re-bid after expiration. While the Company has
historically secured new contracts and believes it can secure renewals and/or
extensions of some of these contracts, some of which are material to this
segment, and obtain new business and customers, there can be no assurance that
contracts will be renewed or extended, that the segment can successfully obtain
new business and customers or that additional or replacement contracts will be
awarded to the Company on satisfactory terms.
Telecommunications Services Segment
- -----------------------------------
Volt's Telecommunications Services segment provides telecommunications and other
services, including design, engineering, construction, installation, maintenance
and removal of telecommunications equipment for the outside plant and central
offices of telecommunications and cable companies, and within end-user premises,
in the United States. This segment also provides complete turnkey services for
wireless telecommunications carriers and wireless infrastructure suppliers,
provides limited distribution of products and provides some
non-telecommunications engineering and construction services.
The Telecommunications Services segment is a full-service provider of turnkey
solutions to the telecommunications, cable and related industries, as well as
for large corporations and governmental entities. The segment's services
include:
o Engineering services, including feasibility studies, right-of-way
acquisition, network design and detailed engineering for copper, coaxial
and fiber systems, carrier systems design, conduit design, computer-aided
design drafting, digitizing records, building industry consultant
engineering (BICSI), turnkey design, program management, air pressure
design and record verification.
11
o Construction services, including both aerial and underground construction
services, using the Company's owned and leased vehicles and equipment.
These services include jack and bore, directional boring, trenching and
excavation, conduit and manhole systems, cable placement and splicing, pole
placement and wrecking, copper, coaxial and long- and short-haul fiber
optic cable installation, splicing, termination and testing, project
management and inspection services.
o Enterprise infrastructure solutions, including structured cabling and
wiring and field installation and repair services involving the design,
engineering, installation and maintenance of various types of local and
wide-area networks, utilizing copper wiring, coaxial and fiber optics, for
voice, data and video, and digital subscriber lines (DSL) and other
broadband installation and maintenance services to operating telephone
companies, telecommunications equipment manufacturers, cable companies and
large end-users, in both the government and private sectors.
o Central Office services, including engineering, furnishing and installing
(EF&I) services, maintenance and removal of transmission systems,
distribution frame systems, AC/DC power systems, wiring and cabling, switch
peripheral systems, equipment assembly and system integration and
controlled environment structures, and other network support services, such
as grounding surveys and asset management.
o Wireless services, including complete turnkey services to both fixed and
mobile wireless providers. This includes establishing or enhancing network
infrastructure, design, engineering and construction/installation services,
site selection, RF engineering, tower erection, antenna installation and
inside cabling and wiring services. In performing these services, the
segment employs the latest technologies, such as GPS mapping of facilities.
This segment also accommodates customers in the telecommunications industry that
require a full range of services from multiple Volt business segments, such as
human resources, systems analysis, network integration, software development and
turnkey applications. This segment also resells telecommunications equipment to
customers. In addition, this segment offers the added value of being able to
provide total management of multi-discipline projects because of its ability to
integrate efforts on a single project and to assume responsibility for programs
that require a single point of contact and uniform quality. The segment performs
these services on a project and/or contract personnel placement basis in the
outside plant, central offices, wireless sector and within end-user premises.
Customers include telephone operating companies, local exchange carriers,
wireless carriers, telecommunications equipment manufacturers, cable television
providers, electric, gas, water and water-services utilities, federal, state and
municipal government units and private industry.
This segment faces substantial competition with respect to all of its
telecommunications services from other suppliers and many customers provide the
same type of services as the segment, which means that the segment faces
competition from its own customers as well as from third parties. Construction
services have been, and could be in the future, adversely affected by weather
conditions, because much of the business is performed outdoors. Some of this
segment's significant competitors are larger and have substantially greater
financial resources than the Company. There are few significant barriers to
entry into certain of the markets in which the segment operates, and many
competitors are small, local companies that generally have lower overhead. The
Company's ability to compete in this segment depends upon its reputation,
technical capabilities, pricing, quality of service and ability to meet customer
requirements in a timely manner. The Company believes that its competitive
position in this segment is augmented by its ability to draw upon the expertise
and resources of other Volt segments.
12
A portion of the Company's business in this segment is obtained through the
submission of competitive proposals for contracts that typically expire within
one to three years and upon expiration are re-bid and price is often an
important factor in the award of such agreements. Many of this segment's
long-term contracts contain cancellation provisions under which the customer can
cancel the contract, even if the segment is not in default under the contract.
Under many of these contracts, including master service contracts, there is no
assurance of any minimum amount of work that will actually be available.
Therefore, these contracts do not give the assurance that long-term contracts
typically provide. While the Company believes it can secure renewals and/or
extensions of some of these contracts, some of which are material to this
segment, and obtain new business and customers, there can be no assurance that
contracts will be renewed or extended or that additional or replacement
contracts will be awarded to the Company on satisfactory terms or that the
Company can obtain new business and customers.
Computer Systems Segment
- ------------------------
Volt's Computer Systems segment provides its customers with telephone directory
services, information services and other operator services, and designs,
develops, sells, leases and maintains computer-based directory assistance
services along with other database management and related services, primarily to
the telecommunications industry. It also provides third party IT and data
services to others. This segment is comprised of three synergistic business
units: Volt Delta Resources ("VoltDelta"), DataServ and Maintech.
VoltDelta
VoltDelta markets information services to telephone companies and
inter-exchange carriers worldwide. The unit sells information service
systems to its customers and in addition, provides an Application Service
Provider ("ASP") model which also provides information services, including
infrastructure and database content, on a transactional use fee basis.
VoltDelta has service agreements with major telecommunications carriers in
North America, South America and Europe.
To meet the needs of customers who desire to upgrade their operator
services capabilities by procuring services as an alternative to making a
capital investment, the unit has deployed and is marketing enhanced
directory assistance and other information service capabilities as a
transaction-based ASP service, charging a fee per transaction. One ASP
service is marketed as DirectoryExpress, which provides access to over 180
million United States and Canadian business, residential and government
listings to directory assistance operators worldwide. Another ASP service
is Directory Assistance Automation ("DAA"), which is currently deployed by
major wireline and wireless carriers. VoltDelta owns and operates its own
proprietary systems and provides its customers access to a national
database sourced from listings obtained by Volt Delta from various
telephone companies and other independent sources. In addition, VoltDelta
continues to provide customers with new systems, as well as enhancements to
existing systems, equipment and software. The ASP model generally requires
significant capital expenditure before any revenue is realized, usually on
a transaction basis.
VoltDelta's InfoExpress suite of services includes iExpress, a service that
enables its transaction-based customers to offer, for example,
operator-assisted yellow pages, driving directions and location-based
information services. For consumers (the end-users), especially cellular
and PCS users, InfoExpress provides a more convenient and efficient level
of directory assistance service since, among other things, consumers may
obtain enhanced directory and yellow pages information without having to
know the correct area code or even the name of the business. Enhanced
information services are particularly attractive in the wireless market,
where there is no access to printed telephone directories. The unit's ASP
services are being delivered over the switched telephone and VoIP networks
to live operators, and recently, through DAA voice portals using speech
recognition technologies.
13
DataServ
DataServ was established in fiscal year 2002 as a separate division of Volt
Delta to target non-telco enterprise customers with enhanced directory
assistance and information services. The division's services utilize the
most accurate consumer and business databases to allow companies to improve
their operations and marketing capabilities. Working with Volt Delta and
other data aggregators, DataServ's information is updated daily and is
substantially augmented with specialized information unique to the
non-telco enterprise customer. DataServ integrates customer applications
access via XML and other advanced technologies with its various databases.
DataServ has agreements with several agents and resellers to distribute its
services into targeted industries.
In order to fulfill its commitments under its contracts, VoltDelta and DataServ
are required to develop advanced computer software programs and purchase
substantial amounts of computer equipment, as well as license data content, from
several suppliers. Most of the equipment and data content required for these
contracts is purchased as needed and is readily available from a number of
suppliers.
Although the VoltDelta unit was successful during fiscal year 2004 in obtaining
new customers for these services, including major telephone companies serving
the long distance and cellular markets, and DataServ expanded its customer base
and achieved significant revenue growth, there can be no assurance that it will
continue to be successful in marketing these services to additional customers,
or that the customers' volume of transactions will be at a level sufficient to
enable the segment to maintain profitability, nor that it will be able to
successfully integrate Varetis Solutions (see below) into its operations.
Maintech
Maintech, a division of Volt Delta Resources, LLC, provides managed IT
service solutions to mid-size and large corporate clients across the United
States and Canada, including many of those who have purchased systems from
Volt Delta. Its service offerings are tailored to mission-critical,
multi-platform operating environments where standards of system
availability of 99+% are the norm. Maintech's target markets include
banking and brokerage, telecommunications, aerospace, healthcare and higher
education.
Clients may engage Maintech for an enterprise-wide, single source IT
Outsourcing Solutions ("ITOS") commitment that includes program management,
technology planning, transition management, Wintel/UNIX system
administration, network administration, Network Operations Center ("NOC")
services, hardware maintenance and LAN/WAN/Voice services. Clients may also
choose Maintech for any subset of services including hardware maintenance
of large Wintel/UNIX server farms and corporate Desktop/Deskside support.
This segment operates in a business environment which is highly competitive.
Some of this segment's principal competitors are larger and have substantially
greater financial resources than the Company. This segment's results are highly
dependent on the volume of transactions which are processed by the segment under
existing contracts, the segment's ability to continue to secure comprehensive
listings from others, its ability to obtain additional customers for these
services and on its continued ability to sell products and services to new and
existing customers. This segment's position in its market depends largely upon
its reputation, quality of service and ability to develop, maintain and
implement information systems on a cost competitive basis. Although the segment
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.
14
Some of this segment's contracts expired in 2005, while others were renewed and
new contracts were awarded to the segment. Other contracts are scheduled to
expire in 2006 through 2008. Many of this segment's long-term contracts contain
cancellation provisions under which the customer can cancel the contract, even
if the segment is not in default under the contract. Therefore, these contracts
do not give the assurances that long-term contracts typically provide. While the
Company believes it can secure renewals and/or extensions of some of these
contracts, some of which are material to this segment, and obtain new business
and customers, there can be no assurance that contracts will be renewed or
extended or that additional or replacement contracts will be awarded to the
Company on satisfactory terms or that new business and customers can be
obtained.
The Company's Computer Systems segment consists of Volt Delta Resources, LLC,
and its subsidiaries. As of October 30, 2005, Volt Delta Resources, LLC was 76%
owned by the Company and 24% owned by Nortel Networks, which resulted from a
transaction on August 2, 2004, when Volt Delta Resources, LLC, which previously
was a wholly-owned subsidiary of the Company, consummated a contribution
agreement with Nortel Networks. Under the contribution agreement Nortel Networks
contributed substantially all of the assets (consisting principally of customer
base and contracts, intellectual property and inventory) and certain specified
liabilities of its directory and operator services ("DOS") business to Volt
Delta Resources, LLC in exchange for a 24% minority interest in Volt Delta
Resources, LLC. The Company and Nortel Networks also entered into agreements
which provided for the management of Volt Delta Resources, LLC and the
respective rights and obligations of the interest holders thereof. On December
29, 2005, Volt Delta Resources, LLC purchased that 24% minority interest from
Nortel Networks for $56.4 million.
On December 30, 2005, Volt Delta Resources, LLC. purchased Varetis Solutions
GmbH, headquartered in Munich Germany. The acquisition allows the company 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.
Research, Development and Engineering
- -------------------------------------
During fiscal years 2005, 2004 and 2003, the Company expended approximately $1.1
million, $4.7 million and $2.1 million, respectively, on research, development
and engineering for product and service development and improvement,
substantially all of which is Company sponsored, and none of which was
capitalized. The major portion of research and development expenditures was
incurred by the Computer Systems segment.
In addition, the Company invests in software for internal use, including
planning, coding, testing, deployment, training and maintenance. In fiscal 2005,
expenditures for internal-use software were $21.1 million of which $4.4 million
was capitalized.
Intellectual Property
- ---------------------
"Volt" is a registered trademark of the Company under a number of registrations.
The Company also holds a number of other trademarks and patents related to
certain of its products and services; however, it does not believe that any of
these are material to the Company's business or that of any segment. The Company
is also a licensee of technology from many of its suppliers, none of which
individually is considered material to the Company's business or the business of
any segment.
Customers
- ---------
In fiscal 2005, the Telecommunications Services segment's sales to two customers
accounted for approximately 30% and 14% of the total sales of that segment; the
15
Computer Systems segment's sales to two customers accounted for approximately
31% and 13% of the total sales of that segment and the Staffing Services
segment's sales to one customer accounted for approximately 13% of the total
sales of that segment. In fiscal 2005, the sales to seven operating units of one
customer, Microsoft Corporation, accounted for 11% of the Company's consolidated
net sales of $2.2 billion and 7% of the Company's consolidated gross billings of
$3.3 billion. The difference between net sales and gross billings is the
Company's associate vendor costs, which are excluded from sales due to the
Company's relationship with the customers and the Company's associate vendors,
who have agreed to be paid subject to receipt of the customers' payment to the
Company. Generally accepted accounting principles require these sales to be
reported net. The Company believes that gross billing is a meaningful measure,
which reflects actual volume by the customers.
In fiscal 2004, the Telecommunications Services segment's sales to four
customers accounted for approximately 17%, 15%, 12% and 11% of the total sales
of that segment; the Computer Systems segment's sales to one customer accounted
for approximately 28% of the total sales of that segment; the Staffing Services
segment's sales to one customer accounted for approximately 14% of the total
sales of that segment; and the Telephone Directory segment's sales to one
customer accounted for approximately 10% of the total sales of that segment. In
fiscal 2004, the sales to seven operating units of one customer, Microsoft
Corporation, accounted for 12% of the Company's consolidated net sales of $1.9
billion and 7.6% of the Company's consolidated gross billings of $3.0 billion.
In fiscal 2003, the Telecommunications Services segment's sales to three
customers accounted for approximately 23%, 18%, and 12% of the total sales of
that segment; and the Computer Systems segment's sales to two customers
accounted for approximately 27% and 13% of the total sales of that segment; the
Staffing Services segment's sales to one customer accounted for approximately
13% of the total sales of that segment; and the Telephone Directory segment's
sales to one customer accounted for approximately 10% of the total sales of that
segment. In fiscal 2003, the sales to seven operating units of one customer,
Microsoft Corporation, accounted for 10.6% of the Company's consolidated net
sales of $1.6 billion and 6.7% of the Company's consolidated gross billings of
$2.6 billion.
The loss of one or more of these customers, unless the business is replaced by
the segment, could result in an adverse effect on the results for that segment's
business.
Seasonality
- -----------
Historically, the Company's results of operations have been lowest in its first
fiscal quarter as a result of reduced requirements for the Staffing Services
segment's personnel due to the Thanksgiving, Christmas and New Year holidays as
well as certain customer facilities closing for one to two weeks. In addition,
the Telephone Directory segment's DataNational division publishes more
directories during the second half of the fiscal year. During the third and
fourth quarter of the fiscal year, the Staffing Services segment benefits from a
reduction of payroll taxes and increased use of Administrative and Industrial
services during the summer vacation period.
Employees
- ---------
During the week ended October 30, 2005, Volt employed approximately 48,000
persons, including approximately 43,000 persons who were on temporary assignment
for the Staffing Services segment. Volt is a party to two collective bargaining
agreements, which cover a small number of its employees. The Company believes
that its relations with its employees are satisfactory.
Certain services rendered by Volt's operating segments require highly trained
technical personnel in specialized fields, some of whom are currently in short
supply and, while the Company currently has a sufficient number of such
technical personnel in its employ, there can be no assurance that in the future,
these segments can continue to employ sufficient technical personnel necessary
for the successful conduct of their services without significantly higher costs.
16
Regulation
- ----------
Some states in the United States license and regulate temporary service firms,
employment agencies and construction companies. In Europe, the temporary service
business and employment agencies are subject to regulation at both country and
European levels. In connection with foreign sales by the Telephone Directory and
Computer Systems segments, the Company is subject to export controls, including
restrictions on the export of certain technologies. With respect to countries in
which the Company's Telephone Directory and Computer Systems segments presently
sell certain of their current products, the sale of their current products, both
hardware and software, are permitted pursuant to a general export license. If
the Company began selling to countries designated by the United States as
sensitive or developed products subject to restriction, sales would be subject
to more restrictive export regulations.
Compliance with applicable present federal, state and local environmental laws
and regulations has not had, and the Company believes that compliance with those
laws and regulations in the future will not have, a material effect on the
Company's earnings, capital expenditures or competitive position.
Access to Company Information
- -----------------------------
The Company electronically files its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those
reports with the Securities and Exchange Commission ("SEC"). These and other SEC
filings by the Company are available to the public over the Internet at the
SEC's website at http://www.sec.gov and at the Company's website at
http://www.volt.com in the Investor Information section as soon as reasonably
practicable after they are electronically filed with the SEC. Copies of the
Company's Code of Ethics and other significant corporate documents are also
available at the Company's website in the Investor Information section. Copies
are also available without charge upon request to Volt Information Sciences,
Inc., 560 Lexington Avenue, New York, New York 10022, 212-704-2400, Attention:
Shareholder Relations.
17
ITEM 1A. RISK FACTORS
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 UNITED STATES AND EUROPEAN ECONOMIES AND
OTHER GENERAL CONDITIONS, SUCH AS CUSTOMERS OFF-SHORING ACTIVITIES TO OTHER
COUNTRIES.
The demand for the Company's services in all segments is dependent upon general
economic conditions. Accordingly, the Company's business tends to suffer during
economic downturns. In addition, in the past few years major United States
companies, many of which are customers of the Company, have increasingly
outsourced business to foreign countries with lower labor rates, less costly
employee benefit requirements and fewer regulations than the United States.
There could be an adverse effect on the Company if customers and potential
customers continue to move manufacturing and servicing operations off-shore,
reducing their need for temporary workers within the United States. It is also
important for the Company to diversify its pool of available temporary personnel
to offer greater support to the service sector of the economy and other
businesses that have more difficulty in moving off-shore, as well as expanding
its retail customer base which generally affords higher margin opportunities. In
addition, the Company's other segments may be adversely affected if they are
required to compete from the Company's United States based operations against
competitors based in such other countries. Although the Company has begun to
expand its operations, in a limited manner and to serve existing customers, in
such countries, and has established subsidiaries in some foreign countries,
there can be no assurance that this effort will be successful or that the
Company can successfully compete with competitors based overseas or who have
established foreign operations.
The Company's business is dependent upon the continued financial strength of its
customers. Some 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,
18
variations in the rate of unemployment and higher wages sought by temporary
workers in certain technical fields with 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 which 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 pressure on margins.
Customer use of the Company's telecommunications services is similarly affected
by a weakened economy in that some of the Company's customers reduce their use
of outside services in order to provide work to their in-house departments.
Actions by major long-distance telephone companies to reduce marketing of local
residential service and consolidation in the telecommunications industry could
also negatively impact both sales and margins of the segment.
Additionally, in all segments, 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' 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, OR BOTH.
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 often 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 often limited, and the Company risks incurring
liability to its employees for injury (which results in increased workers'
compensation costs) or other harm that they suffer at the customer's workplace.
Increases in worker's compensation costs adversely affect the Company's
competitive position and its ability to retain business and obtain new business.
Although the Company has not historically suffered materially for such harm
suffered by its employees, other than increases in workers' compensation costs,
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 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 temporary employees. These same factors apply to all of the Company's
business units, although the risk may be reduced where the Company itself
controls the employees and/or 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.
19
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.
THE COMPANY IS DEPENDENT UPON ITS ABILITY TO ATTRACT AND RETAIN CERTAIN
TECHNOLOGICALLY QUALIFIED PERSONNEL.
The Company's future success is dependent upon its ability to attract and retain
certain classifications of technologically qualified personnel for its own use,
particularly in the areas of research and development, implementation and
upgrading of internal systems, as well as in its staffing services segment. The
availability of such personnel is dependent upon a number of economic and
demographic conditions. The Company may in the future find it difficult or more
costly to hire such personnel in the face of competition from other companies.
THE INDUSTRIES IN WHICH THE COMPANY DOES BUSINESS ARE VERY COMPETITIVE.
The Company operates in very competitive industries with, in most cases, limited
barriers to entry. Some of the Company's principal competitors are larger and
have substantially greater financial resources than the Company. Accordingly,
these competitors may be better able than the Company to attract and retain
qualified personnel and may be able to offer their customers more favorable
pricing terms than the Company. In many businesses, small competitors can offer
similar services at lower prices because of lower overheads.
20
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 with
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 and generally have lower overhead. On the other hand, some of
this segment's principal competitors are larger and have substantially greater
financial resources than the Company and service the multi-national accounts
whose business the Company solicits. Accordingly, these competitors may be
better able than the Company to attract and retain qualified personnel and may
be able to offer their customers more favorable pricing terms than the Company.
Furthermore, all of the staffing industry is subject to the fact that contingent
workers are provided to customers and most customers are more protective of
their full time workforce than contingent workers.
The results of the Company's Computer Systems segment are highly dependent on
the volume of directory assistance 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 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 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, as well as the economic health of the telecom
industry. Volt believes that its competitive position in this segment is
augmented by its ability to draw upon the expertise and resources of other Volt
segments.
21
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.
While the Company was in compliance with all such requirements at the end of the
fiscal year and believes it will remain in compliance throughout the 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,
except for the single material weakness described in Item 9A of this Form 10-K.
The cost of compliance adversely affected the Company's operating results for
its 2005 fiscal year. The costs of continued compliance with the Act will affect
the Company's operating results in the future, but not to the extent of the
Company's 2005 first year compliance. 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 December 31, 2005, 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.
22
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.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
23
ITEM 2. PROPERTIES
The Company occupies approximately 46,000 square feet of space at 560 Lexington
Avenue, New York, New York under leases that expire in 2009. The facility serves
as the Company's corporate headquarters, the headquarters for the Company's
Computer Systems segment and a base for certain operations of the Company's
Staffing Services segment. The following table sets forth certain information as
to each of the Company's other major facilities:
Approximate Sq. Ft. If Leased, Year of
Location Business Segment Leased Or Owned Lease Expiration
- -------- ---------------- --------------- ----------------
Orange, West Region Headquarters 200,000 Owned (1)
California Accounting Center
Staffing Services
Computer Systems
El Segundo, Staffing Services 20,000 Owned
California
San Diego, Staffing Services 20,000 Owned
California
Montevideo, Telephone Directory 96,000 2007
Uruguay
Blue Bell, Telephone Directory 55,000 2007
Pennsylvania Computer Systems
Redmond, Staffing Services 46,000 2010
Washington 40,000 2007
Edison, Telecommunications Services 42,000 2010
New Jersey
Wallington, Computer Systems 32,000 2008
New Jersey
(1) See Note F of Notes to Consolidated Financial Statements for information
regarding a term loan secured by a deed of trust on this property.
The Company leases space in approximately 250 other facilities worldwide
(excluding month-to-month rentals), each of which consists of less than 20,000
square feet. These leases expire at various times from 2006 until 2014.
At times, the Company leases space to others in the buildings that it owns or
leases, if it does not require the space for its own business. The Company
believes that its facilities are adequate for its presently anticipated uses and
that it is not dependent upon any individually leased premises.
For additional information pertaining to lease commitments, see Note O of Notes
to Consolidated Financial Statements.
24
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to certain claims and legal proceedings
which arise in the ordinary course of business, including those discussed in
Item 1 of this Report. There are no claims or legal proceedings pending against
the Company or its subsidiaries, which, in the opinion of management, would have
a material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
25
EXECUTIVE OFFICERS AS OF JANUARY 16, 2006
-----------------------------------------
WILLIAM SHAW, 81, a founder of the Company, has been President, co-Chief
Executive Officer and Chairman of the Board of the Company since September 2005
and prior thereto served as President, Chief Executive Officer and Chairman of
the Board of the Company since its inception in 1957. He has been employed in
executive capacities by the Company and its predecessors since 1950.
STEVEN A. SHAW, 46, has been Executive Vice President, co-Chief Executive
Officer and Chief Operating Officer of the Company since September 2005 and
prior thereto served as Executive Vice President and Chief Operating Officer of
the Company since March 2005, Senior Vice President of the Company from November
2000 until March 2005 and Vice President of the Company from April 1997 until
November 2000. He has been employed by the Company in executive capacities since
November 1995.
JEROME SHAW, 79, a founder of the Company, has been Executive Vice President and
Secretary of the Company since its inception in 1957 and has been employed in
executive capacities by the Company and its predecessors since 1950.
JAMES J. GROBERG, 77, has been a Senior Vice President and Principal Financial
Officer of the Company since September 1985 and was also employed in executive
capacities by the Company from 1973 to 1981.
HOWARD B. WEINREICH, 63, has been General Counsel of the Company since September
1985 and a Senior Vice President of the Company since May 2001. He has been
employed in executive capacities by the Company since 1981.
THOMAS DALEY, 51, has been Senior Vice President of the Company since March 2001
and has been employed in executive capacities by the Company since 1980.
LUDWIG M. GUARINO, 54, has been Treasurer of the Company since January 1994 and
has been employed in executive capacities by the Company since 1976.
JACK EGAN, 56, has been Vice President - Corporate Accounting and Principal
Accounting Officer since January 1992 and has been employed in executive
capacities by the Company since 1979.
DANIEL G. HALLIHAN, 57, has been Vice President - Accounting Operations since
January 1992 and has been employed in executive capacities by the Company since
1986.
RONALD KOCHMAN, 46, has been Vice President since March 2005 and has been
employed by the Company in executive capacities since 1987.
William Shaw and Jerome Shaw are brothers. Steven A. Shaw is the son of Jerome
Shaw. Bruce G. Goodman, a director of the Company, is the son-in-law of William
Shaw. There are no other family relationships among the executive officers or
directors of the Company.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the New York Stock Exchange (NYSE
Symbol-VOL). The following table sets forth the high and low prices of Volt's
common stock, as reported by the NYSE, during the Company's two fiscal years
ended October 30, 2005:
2005 2004
-------------------------------- --------------------------------
Fiscal Period High Low High Low
- ------------- ----- ---- ----- ----
First Quarter $31.99 $24.57 $23.55 $17.70
Second Quarter 32.51 19.67 27.79 21.20
Third Quarter 27.21 19.10 31.98 23.03
Fourth Quarter 27.59 17.52 31.23 22.28
As of January 6, 2006, there were approximately 341 holders of record of the
Company's common stock, exclusive of shareholders whose shares were held by
brokerage firms, depositories and other institutional firms in "street name" for
their customers.
Cash dividends have not been paid during the reported periods. The Company's
credit agreement contains financial covenants, one of which limits dividends in
any fiscal year to 50% of the prior year's consolidated net income, as defined.
Therefore, the amount available for dividends at October 31, 2005 was $8.5
million. The Company does not currently anticipate the payment of cash dividends
in fiscal 2006 beyond Volt Delta's distribution to Nortel Networks of $5.4
million, which was paid on December 29, 2005.
The following table sets forth certain information, as at October 30, 2005, with
respect to the Company's equity compensation plans:
Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options, outstanding options, future issuance under
Plan Category warrants and rights warrants and rights equity compensation plans
------------- ------------------- ------------------- -------------------------
Equity compensation plans approved
by security holders 440,898(a) $20.94 - (a)
Equity compensation plans not - - -
approved by security holders
------- ------ ------
Total 440,898 $20.94 -
======= ====== ======
(a) The Company's 1995 Non-Qualified Stock Option Plan, the Company's only
equity compensation plan terminated on May 16, 2005 except for options
previously granted under the plan.
No information of the type called for by Items 701 and 703 of Regulation S-K
(relating to unregistered sales of equity securities by the Company and
purchases of equity securities by the Company and affiliated purchasers) is
required to be included in this Form 10-K.
27
ITEM 6. SELECTED FINANCIAL DATA
Year Ended (Notes 1 and 2)
-------------------------------------------------------
October October November November November
30, 2005 31, 2004 2, 2003 3, 2002 4, 2001
-------------------------------------------------------
(In thousands, except per share data)
Net Sales $2,177,619 $1,924,777 $1,609,491 $1,468,093 $1,901,491
=======================================================
Income (loss) from continuing operations - before items shown
below--Note 3 $17,040 $24,196 $4,205 ($5,096) $7,296
Discontinued operations--Note 4 9,520 4,310 (814)
Cumulative effect of a change in accounting - goodwill
impairment--Note 3 (31,927)
-------------------------------------------------------
Net income (loss) $17,040 $33,716 $4,205 ($32,713) $6,482
=======================================================
Per Share Data
- --------------
Basic:
Income (loss) from continuing operations - before items shown
below $1.11 $1.59 $0.28 ($0.33) $0.48
Discontinued operations 0.62 0.28 (0.06)
Cumulative effect of a change in accounting (2.10)
-------------------------------------------------------
Net income (loss) $1.11 $2.21 $0.28 ($2.15) $0.42
=======================================================
Weighted average number of shares 15,320 15,234 15,218 15,217 15,212
=======================================================
Diluted:
Income (loss) income from continuing operations - before items
shown below $1.11 $1.58 $0.28 ($0.33) $0.48
Discontinued operations 0.62 0.28 (0.06)
Cumulative effect of a change in accounting (2.10)
-------------------------------------------------------
Net income (loss) $1.11 $2.20 $0.28 ($2.15) $0.42
=======================================================
Weighted average number of shares 15,417 15,354 15,225 15,217 15,244
=======================================================
Total assets $688,712 $690,036 $540,483 $511,569 $639,258
=======================================================
Long-term debt, net of current portion $13,297 $15,588 $14,098 $14,469 $15,993
=======================================================
Note 1--Fiscal years 2001 through 2005 consisted of 52 weeks.
Note 2--Cash dividends were not paid during the five-year period ended October
30, 2005.
Note 3--Fiscal 2004 included a gain from the sale of real estate of $3.3 million
($2.0 million, net of taxes, or $0.13 per share).
Fiscal 2002 included a non-cash charge of $31.9 million, or $2.10 per
share, recognized for goodwill impairment as of November 5, 2001 presented
as a cumulative effect of a change in accounting. Amortization of goodwill,
included in continuing operations net of taxes, which was not permitted to
be amortized beginning in fiscal year 2002 under Statement of Financial
Accounting Standards No. 142, is included in fiscal year 2001 as follows:
$2.0 million, or $0.13 per share.
Fiscal 2001 included a gain on the sale of the Company's interest in a real
estate partnership of $4.2 million ($2.5 million, net of taxes, or $0.16
per share) and a gain on the sale of securities, net of a write-down of
other securities, of $5.6 million ($3.4 million, net of taxes, or $0.22 per
share).
Note 4--Fiscal 2004 included a gain from discontinued operations of $9.5 million
(net of taxes of $4.6 million), or $0.62 per share, from the sale of
real estate previously leased to the Company's former 59% owned
subsidiary, Autologic International, Inc. ("Autologic").
Fiscal 2002 included a net gain of $4.3 million, or $0.28 per share,
including a tax benefit of $1.7 million (resulting from a taxable loss
versus a gain for financial statement purposes), from discontinued
operations resulting from the Company's sale of its 59% interest in
Autologic. This amount included a $4.5 million gain on the sale, partially
offset by a $0.2 million loss on operations. Accordingly, the results of
operations of Autologic have also been classified as discontinued in the
statements of income for fiscal year 2001.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies
- ----------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 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 fiscal 2005, this
revenue comprised approximately 75% of the Company's net sales.
Managed Services: Sales are generated by the Company's E-Procurement
Solutions subsidiary, ProcureStaff, and for certain contracts, sales are
generated by the Company's Staffing Solutions Group's managed services
operations. The Company receives an administrative fee for arranging for,
billing for and collecting the billings related to staffing companies
("associate vendors") who have supplied personnel to the Company's
customers. The administrative fee is either charged to the customer or
subtracted from the Company's payment to the associate vendor. The customer
is typically responsible for assessing the work of the associate vendor,
and has responsibility for the acceptability of its personnel, and in most
instances the customer and associate vendor have agreed that the Company
does not pay the associate vendor until the customer pays the Company.
Based upon the revenue recognition principles in Emerging Issues Task Force
("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 fiscal 2005, this revenue comprised approximately 2% of the Company's
net sales.
Outsourced Projects: Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables. The Company's employees perform the services and the Company
has credit risk for collecting its billings. Revenue for these services is
recognized on a gross basis in the period the services are rendered when on
a time and material basis, and when the Company is responsible for project
completion, revenue is recognized when the project is complete and the
customer has approved the work. In fiscal 2005, this revenue comprised
approximately 5% of the Company's net sales.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
- ----------------------------
Telephone Directory:
Directory Publishing: Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher in the United States and Uruguay. The Company's employees perform
the services and the Company has credit risk for collecting its billings.
Revenue for these services is recognized on a gross basis in the period the
books are printed and distributed. In fiscal 2005, this revenue comprised
approximately 3% of the Company's net 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
fiscal 2005, this revenue comprised approximately 1% of the Company's net
sales.
Telecommunications Services:
Construction: Sales are derived from the Company supplying aerial and
underground construction services. The Company's employees perform the
services, and the Company takes title to all inventory and has credit risk
for collecting its billings. The Company relies upon the principles in
AICPA Statement of Position ("SOP") 81-1, "Accounting for Performance of
Construction-Type Contracts," using the completed-contract method, to
recognize revenue on a gross basis upon customer acceptance of the project.
In fiscal 2005, this revenue comprised approximately 4% of the Company's
net sales.
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 fiscal 2005, this
revenue comprised approximately 2% of the Company's net 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 fiscal 2005, this revenue
comprised approximately 5% of the Company's net sales.
IT Maintenance: Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who utilize the Company's systems, on a time and material basis or a
contract basis. The Company uses its own employees and inventory in the
performance of the services, and has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which the services are performed, contingent upon customer
acceptance when on a time and material basis, or over the life of the
contract, as appropriate. In fiscal 2005, this revenue comprised
approximately 2% of the Company's net sales.
Telephone Systems: Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in AICPA SOP 97-2, "Software Revenue Recognition" and EITF
00-21, "Revenue Arrangements with Multiple Deliverables" to recognize
revenue on a gross basis upon customer acceptance of each part of the
system based upon its fair value. In fiscal 2005, this revenue comprised
approximately 1% of the Company's net sales.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
- ----------------------------
The Company records provisions for estimated losses on contracts when losses
become evident. Accumulated unbilled costs on contracts are carried in inventory
at the lower of actual cost or estimated realizable value.
Allowance for Uncollectable Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for doubtful accounts receivable are maintained
based upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company believes that its allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required, resulting in 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 the equity value ("fair value") of the reporting unit with its
book value ("carrying amount"), including the goodwill allocated to the
reporting unit. Measurement of the fair value of a reporting unit is based on
one or more fair value measures including present value techniques of estimated
future cash flows and estimated amounts at which the unit as a whole could be
bought or sold in a current transaction between willing parties. If the carrying
amount of the reporting unit exceeds the fair value, step two requires the fair
value of the reporting unit to be allocated to the underlying assets and
liabilities of that reporting unit, resulting in an implied fair value of
goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss equal to the excess is
recorded in earnings. The Company performs its impairment testing using
comparable multiples of sales and EBITDA and other valuation methods to assist
the Company in the determination of the fair value of the reporting units
measured.
Long-Lived Assets - Property, plant and equipment is recorded at cost, and
depreciation and amortization are provided on the straight-line and accelerated
methods at rates calculated to depreciate the cost of the assets over their
estimated lives. Intangible assets, other than goodwill, and property, plant and
equipment are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment 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 of
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and a current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life. Recoverability is assessed based on the carrying amount of the asset and
the sum of the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset or asset group. An impairment loss is recognized
when the carrying amount 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.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
- ----------------------------
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 million at
October 30, 2005 and $70 million at October 31, 2004, respectively. Accordingly,
the trade receivables included on the October 30, 2005 and October 31, 2004
balance sheets have been reduced to reflect the participation interest sold.
TRFCO has no recourse to the Company (beyond its interest in the pool of
receivables owned by Volt Funding, a wholly-owned special purpose subsidiary of
the Company) for any of the sold receivables.
Primary Casualty Insurance Program - The Company is insured with highly rated
insurance companies 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. Prior to March 31, 2002, the amount of the
additional or return premium was finalized. Subsequent thereto, adjustments to
premiums will be made based upon the level of claims incurred at a future date
up to three years after the end of the respective policy period. For the policy
year ended March 31, 2003, a maximum premium was predetermined and paid. For
subsequent policy years, management evaluates the accrual, and the underlying
assumptions, regularly throughout the year and makes adjustments as needed. The
ultimate premium cost may be greater or less than the established accrual. While
management believes that the recorded amounts are adequate, there can be no
assurance 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.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies--Continued
- ----------------------------
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, accrued liabilities might not be sufficient, and additional
expense may be recorded.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004
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 follows:
Staffing Services: This segment is divided into three major functional
areas and operates through a network of over 300 branch offices.
o Staffing Solutions fulfills IT and other technical, commercial and
industrial placement requirements of its customers, on both a
temporary and permanent basis, together with managed staffing
services.
o E-Procurement Solutions provides global vendor neutral procurement and
management solutions for supplemental staffing using web-based tools
through the Company's ProcureStaff subsidiary.
o Information Technology Solutions provides a wide range of information
technology consulting and project management services through the
Company's VMC Consulting subsidiary.
Telephone Directory: This segment publishes independent telephone
directories, provides telephone directory production services, database
management 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
year. In fiscal 2005, the sales of the Staffing Services segment, in addition to
the factors noted above, were positively impacted by a continued increase in the
use of contingent technical staffing. Operating profits for the year were lower
than in fiscal 2004 due to decreased margins and higher overhead costs incurred
to enable the continuation of the growth in the Technical Placement division,
including the VMC Consulting business.
In fiscal 2005, the operating profit of the Telephone Directory segment was the
highest in its history. The increase in operating profit from the prior year was
predominantly due to sales increases, and reductions in overhead throughout the
segment.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004--Continued
EXECUTIVE OVERVIEW--Continued
- ------------------
The sales and operating results of the Telecommunications Services segment have
improved in fiscal 2005. The decrease in the operating loss was due to the sales
increase and decreased overhead costs, partially offset by reduced segment
margins for the year. The Company continues to monitor the overhead within the
segment in order to partially mitigate the effect of the reduced margins.
As a result of recent losses in its Telecommunications Services segment, in
August 2005, the Company restructured the Telecommunications Services segment,
which is expected to result in a reduction of future overhead within the segment
of approximately $3.9 million on an annual basis. The restructuring resulted in
the segment reducing its overhead headcount, consolidating two business units
and closing and consolidating several of its leased locations. The Company
incurred a charge for employee severance and lease termination costs
approximating $0.4 million in the fourth quarter.
In 2005, the Computer Systems segment's sales and operating profit were the
highest in its history. The sales growth continues to be positively impacted by
the increase in the segment's ASP directory assistance outsourcing business, in
which there continues to be a substantial increase in transaction revenue, as
well as revenue from the business acquired from Nortel Networks.
The Company has, and will continue to focus on aggressively increasing its
market share, while attempting to maintain margins and minimize overhead
increases in order to increase profits.
The Company continues its effort to streamline its processes to manage the
business and protect its assets through the continued deployment of its Six
Sigma initiatives, upgrading its financial reporting systems, its compliance
with the Sarbanes-Oxley Act, and the standardization and upgrading of IT
redundancy and business continuity for corporate systems and communications
networks. To the extent possible, the Company has been utilizing, and will
continue to utilize, internal resources supplemented with temporary staff and
consultants to comply with the Sarbanes-Oxley Act by the end of fiscal year
2005. To-date, outside costs of compliance with this Act, including software
licenses, temporary staff, consultants and professional fees amounted to $3.1
million, and it is anticipated that an additional $1.8 million, excluding audit
fees, will be expended in the first quarter of fiscal 2006, related to
compliance for fiscal 2005.
RESULTS OF OPERATIONS
- ---------------------
The information that appears below relates to prior periods. The results of
operations for those periods are not necessarily indicative of the results which
may be expected for any subsequent period. The following discussion should be
read in conjunction with the Operating Segment Data in Item 1 of this Report and
the Consolidated Financial Statements and Notes thereto which appear in Item 8
of this Report.
RESULTS OF OPERATIONS - SUMMARY
- -------------------------------
In fiscal 2005, consolidated net sales increased by $252.8 million, or 13%, to
$2.2 billion, from fiscal 2004. The increase in fiscal 2005 net sales resulted
from increases in Staffing Services of $189.7 million, Computer Systems of $53.1
million, Telephone Directory of $10.1 million, and Telecommunications Services
of $3.6 million.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004--Continued
RESULTS OF OPERATIONS - SUMMARY--Continued
- ------------------------------------------
The net income for fiscal 2005 was $17.0 million compared to $33.7 million in
the prior fiscal year. The consolidated results for fiscal 2004 included income
from discontinued operations of $9.5 million (net of taxes of $4.6 million) from
the sale of real estate previously leased to the Company's former 59% owned
subsidiary, Autologic International, Inc.
The Company's fiscal 2005 income from continuing operations before income taxes
was $29.3 million compared to $39.7 million in fiscal 2004. The Company's
operating segments reported an operating profit of $79.4 million in fiscal 2005,
an increase of $4.6 million, or 6%, from the prior year. The change in operating
profit was due to the increased operating profits of the Telephone Directory
segment of $4.8 million and the Computer Systems segment of $5.0 million, the
reduced operating loss of the Telecommunications segment of $0.4 million,
partially offset by a reduction in the operating profit of the Staffing Services
segment of $5.5 million.
General corporate expenses increased by $8.0 million due to costs incurred
relating 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
Year Ended
October 30, 2005 October 31, 2004
% of % of Favorable Favorable
Staffing Services Net Net (Unfavorable) $ (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales Change % Change
- -----------------------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $1,765.8 $1,584.1 $181.7 11.5%
- -----------------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $1,157.2 $1,148.1 $9.1 0.8%
- -----------------------------------------------------------------------------------------------------------------------------------
Sales (Net) * $1,801.8 $1,612.1 $189.7 11.8%
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $276.3 15.3% $256.4 15.9% $19.9 7.7%
- -----------------------------------------------------------------------------------------------------------------------------------
Overhead $245.1 13.6% $219.7 13.6% ($25.4) (11.5%)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Profit $31.2 1.7% $36.7 2.3% ($5.5) (15.0%)
- -----------------------------------------------------------------------------------------------------------------------------------
* Sales (Net) only includes the gross margin on managed service sales.
The sales increase of the Staffing Services segment in the fiscal 2005 from the
prior year was due to increased staffing business in both the Technical
Placement and the Administrative and Industrial divisions, and the VMC
Consulting business of the Technical Placement division.
The decrease in the operating profit of the segment in fiscal 2005 was due to
decreased profits in the VMC Consulting operation within the Technical Placement
division, increased losses in the Administrative and Industrial division,
partially offset by increased operating profits in the other staffing and
managed service operations of the Technical Placement division.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
- ---------------------------------------------
STAFFING SERVICES--Continued
- ----------------------------
Year Ended
October 30, 2005 October 31, 2004
Technical Placement % of % of Favorable Favorable
Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- -----------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $2,226.5 $2,072.4 $154.1 7.4%
- -----------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $1,129.1 $974.9 $154.2 15.8%
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $188.8 16.7% $170.3 17.5% $18.5 10.9%
- -----------------------------------------------------------------------------------------------------------------------------------
Overhead $152.3 13.5% $130.5 13.4% ($21.8) (16.7%)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Profit $36.5 3.2% $39.8 4.1% ($3.3) (8.4%)
- -----------------------------------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in net sales in fiscal 2005 from the
prior year was due to a $135.0 million, or 16%, sales increase in traditional
alternative staffing, a $12.0 million, or 11%, increase in VMC Consulting
project management and consulting sales, and a $7.3 million, or 28% increase in
net managed service associate vendor sales. The decrease in the operating profit
was the result of the decrease in gross margin percentage and the increase in
overhead as a percentage of net sales, partially offset by the increased sales.
The decrease in gross margin percentage was due to higher payroll taxes
throughout the division and reduced markups within VMC Consulting. The increase
in overhead dollars was principally due to an increase in indirect labor and
related payroll costs incurred to sustain the sales growth of the division,
including the VMC Consulting business.
Year Ended
October 30, 2005 October 31, 2004
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $696.5 $659.7 $36.8 5.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $672.7 $637.2 $35.5 5.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit $87.5 13.0% $86.1 13.5% $1.4 1.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Overhead $92.8 13.8% $89.2 14.0% ($3.6) (4.0%)
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Loss ($5.3) (0.8%) ($3.1) (0.5%) ($2.2) (69.9%)
- ------------------------------------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in gross sales in fiscal
2005 resulted from revenue from both new accounts and increased business from
existing accounts. The increased operating loss was a result of the decreased
gross margin percentage, partially offset by the increased sales and the
decrease in overhead as a percentage of sales. The decrease in gross margin
percentage was primarily due to higher payroll taxes and the increase in
overhead dollars was due to increases in indirect labor.
Although the markets for the segment's services include a broad range of
industries throughout the United States, Europe and Asia, 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. Much of the
segment's business is obtained through submission of competitive proposals for
staffing services and other contracts which are
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
- ---------------------------------------------
STAFFING SERVICES--Continued
- ----------------------------
frequently 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.
TELEPHONE DIRECTORY
Year Ended
October 30, 2005 October 31, 2004
% of % of Favorable Favorable
Telephone Directory Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $82.3 $72.2 $10.1 14.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit $42.5 51.6% $39.4 54.6% $3.1 7.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Overhead $27.6 33.5% $29.3 40.6% $1.7 5.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Profit $14.9 18.1% $10.1 14.0% $4.8 47.3%
- ------------------------------------------------------------------------------------------------------------------------------------
The components of the Telephone Directory segment's sales increase for fiscal
2005 from the prior year were increases of $4.9 million in printing sales in
Uruguay, $3.1 million in publishing sales, $2.8 million in systems sales,
partially offset by a $0.7 million decrease in other sales. The increase in
publishing sales was comprised of a $2.2 million increase in the sales of the
DataNational community telephone directory operation and a $1.6 million increase
in the Uruguayan directory operation due to the timing of the delivery of its
directories, partially offset by a $0.7 million sales reduction related to the
elimination of a directory publication sold in fiscal 2004. The decrease in
other sales was predominantly due to the sale of the ViewTech division in the
third quarter, resulting in a sales reduction in the current year of $1.3
million. The gain on the sale of the division was $0.1 million in fiscal 2005.
The DataNational and Uruguayan variances in sales were due to the changes in the
number of directories printed and delivered. The increase in the segment's
operating profit from fiscal 2004 was the result of the sales increase and the
decrease in overhead, primarily due to $1.0 million of expenses incurred in
fiscal 2004 in connection with an investigation in Uruguay, partially offset by
lower margins recognized on the Uruguayan telephone directories published in the
period.
Other than the DataNational division, which accounted for 65% of the segment's
fiscal 2005 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,
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
- ---------------------------------------------
TELEPHONE DIRECTORY--Continued
- ------------------------------
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.
TELECOMMUNICATIONS SERVICES
- ---------------------------
Year Ended
October 30, 2005 October 31, 2004
% of % of Favorable Favorable
Telecommunications Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $139.0 $135.4 $3.6 2.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit $25.0 18.0% $31.0 22.9% ($6.0) (19.4%)
- ------------------------------------------------------------------------------------------------------------------------------------
Overhead $27.4 19.7% $33.8 25.0% $6.4 19.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Loss ($2.4) (1.7%) ($2.8) (2.1%) $0.4 14.4%
- ------------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase of $3.6 million, or 3%,
in fiscal 2005 from the prior year was due a to $24.5 million, or 40%, increase
in sales for the Construction and Engineering division, partially offset by a
sales reduction in the other divisions within the segment of $20.9 million, or
28%. The decrease in the operating loss was due to the sales increase, a
decrease in overhead (which in fiscal 2004 included a previously reported $1.3
million charge related to a domestic consulting contract for services),
partially offset by a gross margin decrease. The sales increase in the
Construction and Engineering division in fiscal 2005 resulted from customer
acceptance of several large construction jobs accounted for using the
completed-contract method. 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 to reduce
marketing of local residential service have negatively impacted sales and
continue to impact margins of the segment.
As a result of recent losses in its Telecommunications Services segment, in
August 2005, the Company restructured the Telecommunications Services segment
which is expected to result in a reduction of future overhead within the segment
of approximately $3.9 million on an annual basis. The restructuring resulted in
the segment reducing its overhead headcount, consolidating two divisions and
closing and consolidating several of its leased locations. In accordance with
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", the Company incurred a charge for employee severance and lease
termination costs of $0.4 million in the fourth quarter of fiscal 2005, which is
when the liabilities were incurred. It is not expected that substantial
adjustments to the fourth quarter charge will occur subsequent to fiscal
year-end.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
- ---------------------------------------------
TELECOMMUNICATIONS SERVICES--Continued
- --------------------------------------
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.
COMPUTER SYSTEMS
- ----------------
Year Ended
October 30, 2005 October 31, 2004
% of % of Favorable Favorable
Computer Systems Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $173.1 $120.0 $53.1 44.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit $91.8 53.0% $72.1 60.1% $19.7 27.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Overhead $56.0 32.4% $41.2 34.4% ($14.8) (35.6%)
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Profit $35.8 20.7% $30.9 25.7% $4.9 16.1%
- ------------------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in fiscal 2005 over the prior year
was due to improvements in the segment's operator services business, including
ASP directory assistance, which reflected a $31.8 million, or 48%, growth in
sales during the period, a sales increase of $2.9 million, or 36%, in DataServ's
data services which are provided to non-telco enterprise customers, a $5.5
million, or 14%, sales growth in the Maintech division's IT maintenance
services, and a $12.9 million, or 239%, increase in product revenue recognized.
The sales for the year included $31.1 million of the business acquired from
Nortel Networks, which represented 18% of the segment's sales for fiscal 2005,
as compared to $8.1 million of sales included in the prior year, representing 7%
of the segment's sales. The prior year results included only the fourth quarter
results of operation from the acquired business. The growth in operating profit
from fiscal 2004 was the result of the increase in sales and the decrease in
overhead as a percentage of sales, partially offset by the decrease in gross
margin percentage. The lower gross margin percentage in fiscal 2005, as compared
to fiscal 2004 was partially due to the favorable settlement of vendor disputes
and refunds in fiscal 2004 approximating $1.2 million, lower margins recognized
in fiscal 2005 related to product revenue recognition, and the increase in the
Nortel-related business in fiscal 2005, the margins of which are lower than the
segment average.
Volt Delta, the entity which operates the Computer Systems segment, acquired
certain assets and liabilities of Nortel Networks on August 2, 2004 in exchange
for a 24% equity interest in the segment (which was acquired on December 29,
2005). This acquisition permits Volt Delta to provide the combined customer base
with new solutions and an expanded suite of products, content and enhanced
services.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2005 COMPARED TO FISCAL 2004--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
- ---------------------------------------------
COMPUTER SYSTEMS--Continued
- ---------------------------
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.
RESULTS OF OPERATIONS - OTHER
Year Ended
October 30, 2005 October 31, 2004
% of % of Favorable Favorable
Other Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- -----------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $92.9 4.3% $83.1 4.3% ($9.8) (11.8%)
- -----------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $29.6 1.4% $25.5 1.3% ($4.1) (15.9%)
- -----------------------------------------------------------------------------------------------------------------------------
Interest Income $2.6 0.1% $0.9 - $1.7 185.7%
- -----------------------------------------------------------------------------------------------------------------------------
Other Expense ($4.9) 0.2% ($4.4) 0.2% ($0.5) (11.0%)
- -----------------------------------------------------------------------------------------------------------------------------
Gain on Sale of Real Estate - - $3.3 0.2% ($3.3) (100.0%)
- -----------------------------------------------------------------------------------------------------------------------------
Foreign Exchange (Loss) Gain ($0.3) - $0.1 - ($0.4) (362.9%)
- -----------------------------------------------------------------------------------------------------------------------------
Interest Expense ($1.8) 0.1% ($1.8) 0.1% - -
- -----------------------------------------------------------------------------------------------------------------------------
Other items, discussed on a consolidated basis, affecting the results of
operations for the fiscal years were:
The increase in selling and administrative expenses in fiscal 2005 from the
prior year was a result of increased corporate general and administrative
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 fiscal 2005 from the prior
year was attributable to increases in fixed assets, primarily in the Computer
Systems and Staffing Services segments, and the increased amortization of
intangible assets in the Computer Systems segment.
Interest income increased due to higher interest rates together with additional
funds available for investment.
Other expense in both fiscal years is primarily the charges related to the
Company's Securitization Program as well as business taxes and sundry expenses.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 33.7% in fiscal 2005 compared to 36.8% in fiscal 2004.
The reduced effective tax rate in fiscal 2005 was due to federal and state
income taxes attributable to the minority interest treated as a partnership
interest, higher general business credits, and lower taxes on foreign earnings,
partially offset by higher non-tax deductible items.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003
RESULTS OF OPERATIONS - SUMMARY
- -------------------------------
In fiscal 2004, consolidated net sales increased by $315.3 million, or 19.6%, to
$1.9 billion, from fiscal 2003. The primary increase in fiscal 2004 net sales
resulted from increases in Staffing Services of $266.7 million, Computer Systems
of $26.4 million, Telecommunications Services of $22.6 million, and Telephone
Directory of $2.4 million.
The net income for fiscal 2004 was $33.7 million compared to $4.2 million in the
prior fiscal year. The consolidated results for fiscal 2004 included income from
discontinued operations of $9.5 million (net of taxes of $4.6 million) from the
sale of real estate previously leased to the Company's former 59% owned
subsidiary, Autologic International, Inc.
The Company's fiscal 2004 income from continuing operations before income taxes
was $39.7 million compared to $7.1 million in fiscal 2003. The Company's
operating segments reported an operating profit of $74.8 million in fiscal 2004,
an increase of $36.3 million, or 94%, from the prior year. Contributing to the
$36.3 million increase were increases in the operating profit of the Computer
Systems segment of $16.2 million, the Staffing Services segment of $15.6
million, the Telephone Directory segment of $3.4 million, and a reduction in the
operating loss of the Telecommunications Services segment of $1.1 million.
General corporate expenses increased by $3.1 million due to costs incurred to
meet the disaster recovery requirements of redundancy and business continuity
for corporate systems and communication networks, as well as salary and
professional fee increases. In addition, the Company incurred costs related to
compliance with the Sarbanes-Oxley Act.
RESULTS OF OPERATIONS - BY SEGMENT
- ----------------------------------
STAFFING SERVICES
- -----------------
Year Ended
October 31, 2004 November 2, 2003
% of % of Favorable Favorable
Staffing Services Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- -----------------------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $1,584.0 $1,269.2 $314.8 24.8%
- -----------------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $1,148.1 $1,043.6 $104.5 10.0%
- -----------------------------------------------------------------------------------------------------------------------------------
Sales (Net) * $1,612.1 $1,345.4 $266.7 19.8%
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $256.4 15.9% $212.4 15.8% $44.0 20.8%
- -----------------------------------------------------------------------------------------------------------------------------------
Overhead $219.7 13.6% $191.3 14.2% ($28.4) (14.9%)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Profit $36.7 2.3% $21.1 1.6% $15.6 74.3%
- -----------------------------------------------------------------------------------------------------------------------------------
* Sales (Net) only includes the gross margin on managed service sales.
The sales increase of the Staffing Services segment in fiscal 2004 from fiscal
2003 was due to increased staffing business in both the Technical Placement and
the Administrative and Industrial divisions, and the VMC Consulting business of
the Technical Placement division.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
- ---------------------------------------------
STAFFING SERVICES--Continued
- ----------------------------
The increase in operating profit in the segment was derived from the staffing
and managed service operations of the Technical Placement division, including
VMC Consulting, together with reduced losses of the Administrative and
Industrial division.
Year Ended
October 31, 2004 November 2, 2003
Technical Placement % of % of Favorable Favorable
Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- -----------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $2,072.4 $1,791.8 $280.6 15.7%
- -----------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $974.9 $834.5 $140.4 16.8%
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $170.3 17.5% $143.1 17.1% $27.2 19.1%
- -----------------------------------------------------------------------------------------------------------------------------------
Overhead $130.5 13.4% $114.2 13.7% ($16.3) (14.3%)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Profit $39.8 4.1% $28.9 3.5% $10.9 37.8%
- -----------------------------------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in gross sales in fiscal 2004 from
fiscal 2003 was due to a 21% sales increase with traditional staffing customers,
a 16% increase in ProcureStaff volume due to new accounts and increased business
from existing accounts, and a 44% increase in higher margin VMC Consulting
project management and consulting sales. However, substantially all of the
ProcureStaff billings are deducted in arriving at net sales due to the use of
associate vendors who have contractually agreed to be paid only upon receipt of
the customers' payment to the Company. The increase in net sales was due to the
increase in gross sales. The increase in operating profit for the year was the
result of the increase in sales, the increase in gross margin and the decrease
in overhead costs as a percentage of sales. Partially offsetting the increases
in fiscal 2004 was $1.2 million in accruals for potential losses and employee
separation charges for Volt Europe.
Year Ended
October 31, 2004 November 2, 2003
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $659.7 $521.0 $138.7 26.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $637.2 $510.9 $126.3 24.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit $86.1 13.5% $69.3 13.6% $16.8 24.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Overhead $89.2 14.0% $77.1 15.1% ($12.1) (15.7%)
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Loss ($3.1) (0.5%) ($7.8) (1.5%) $4.7 60.0%
- ------------------------------------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in gross sales in fiscal
2004 resulted from both revenue from new accounts and increased business from
existing accounts. The decrease in operating loss was the result of the sales
increase, a 1.1 percentage point decrease in overhead costs as related to net
sales, partially offset by a decrease in gross margin of 0.1 percentage points
due to higher payroll taxes, increased competition and customers leveraging
their buying power by consolidating the number of vendors with whom they deal.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
- ---------------------------------------------
TELEPHONE DIRECTORY
- -------------------
Year Ended
October 31, 2004 November 2, 2003
% of % of Favorable Favorable
Telephone Directory Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $72.2 $69.8 $2.4 3.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit $39.4 54.6% $35.0 50.1% $4.4 12.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Overhead $29.3 40.6% $28.3 40.4% ($1.0) (3.9%)
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Profit $10.1 14.0% $6.7 9.7% $3.4 49.9%
- ------------------------------------------------------------------------------------------------------------------------------------
The Telephone Directory segment's sales increase for fiscal 2004 was due to an
increase of $10.2 million, or 22%, in publishing sales, partially offset by a
decrease of $7.8 million, or 32% in production, printing and other operations.
The publishing increase was due to the community telephone directory operation
of DataNational, whose sales increased by $10.8 million, or 26%, from the prior
year due to an increase in advertising sold for the year and an increase in the
number of directories printed and delivered. The most significant cause of the
revenue decrease in the production, printing and other operations was the $3.2
million in production revenue related to the previously reported loss of a
contract with a telecommunications company in the third quarter of fiscal 2003,
and a $1.8 million decrease in printing revenue in Uruguay. The segment's
improvement in operating results was the result of the sales increase, the
increase in gross margin, primarily due to the mix of directories published by
DataNational in the period, partially offset by the increase in overhead as a
percentage of sales. The Company has incurred $1.0 million of expenses in
connection with an investigation of a failure to comply with certain Company
policies at its operations in Uruguay, and possible litigation against certain
former management personnel at such operations. The operations in Uruguay are
not significant to the Company.
TELECOMMUNICATIONS SERVICES
- ---------------------------
Year Ended
October 31, 2004 November 2, 2003
% of % of Favorable Favorable
Telecommunications Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $135.4 $112.8 $22.6 20.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit $31.0 22.9% $31.0 27.5% - 0.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Overhead $33.8 25.0% $35.0 31.0% $1.2 3.2%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Loss ($2.8) (2.1%) ($4.0) (3.5%) $1.2 28.8%
- ------------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in fiscal 2004 was due
to increased business in the Business Systems and Construction and Engineering
divisions, partially offset by a decrease in the Central Office division. The
decrease in operating loss was due to the sales increase, the decrease in
overhead as a percentage of sales of (including a previously reported $1.3
million charge in the first quarter related to a domestic consulting contract
for services), partially offset by the decrease in gross margin. Despite an
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
- ---------------------------------------------
TELECOMMUNICATIONS SERVICES--Continued
- --------------------------------------
emphasis on cost controls, the results of the segment continue to be affected by
the decline in capital spending by telephone companies caused by the depressed
conditions within the segment's telecommunications industry customer base. This
factor has also increased competition for available work, pressuring pricing and
gross margins throughout the segment. The division most affected by reduced
sales and margins was Central Office, whose sales and margins decreased by 47%
and 16.8 percentage points, respectively. Sales in the Construction and
Engineering division of the segment, increased by 12% over the prior year while
margins decreased by 1.0 percentage point. The increase in sales was
attributable to the completion of several long-term contracts. Sales in the
Business Systems division increased by 78% due to revenue increases from two
large customers, while margins decreased by 5.8 percentage points. Actions by
major long-distance telephone companies regarding local residential service
could negatively impact sales and continue to impact margins of the Business
Systems division.
COMPUTER SYSTEMS
Year Ended
October 31, 2004 November 2, 2003
% of % of Favorable Favorable
Computer Systems Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $120.0 $93.6 $26.4 28.2%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit $72.1 60.1% $47.8 51.0% $24.3 50.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Overhead $41.2 34.4% $33.1 35.4% ($8.1) (24.5%)
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Profit $30.9 25.7% $14.7 15.7% $16.2 110.1%
- ------------------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in fiscal 2004 was primarily due
to improvements in the segment's operator services business, including ASP
directory assistance, which reflected a 47% growth in sales during the year, a
sales increase of 125% in DataServ's directory assistance services which are
provided to non-telco enterprise customers, a 13% sales growth in the Maintech
division's IT maintenance services, partially offset by a decrease in product
revenue recognized of 64%. The sales increase for the year also included $8.1
million of business acquired from Nortel Networks, which represented 7% of the
segment's sales for the year. The 2004 year results included only the fourth
quarter results of operations from the acquired business. The growth in
operating profit from the prior fiscal year was the result of the increase in
sales and gross margins, partially due to $1.2 million for the settlement of a
vendor dispute and vendor refunds related to prior periods, together with the
overhead decrease as a percentage of sales. Volt Delta, the principal business
unit of the Computer Systems segment, acquired certain assets and liabilities of
the DOS Business of Nortel Networks on August 2, 2004. This acquisition permits
Volt Delta to provide the newly combined customer base with new solutions and an
expanded suite of products, content and enhanced services. At October 31, 2004,
the Company owned 76% of Volt Delta, the entity which operates the Computer
Systems segment.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003--Continued
RESULTS OF OPERATIONS - OTHER
- -----------------------------
Year Ended
October 31, 2004 November 2, 2003
% of % of Favorable Favorable
Other Net Net (Unfavorable) (Unfavorable)
(Dollars in Millions) Dollars Sales Dollars Sales $ Change % Change
- -----------------------------------------------------------------------------------------------------------------------------
Selling & Administrative $83.1 4.3% $71.7 4.4% ($11.4) (15.9%)
- -----------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $25.5 1.3% $24.3 1.5% ($1.2) (5.0%)
- -----------------------------------------------------------------------------------------------------------------------------
Interest Income $0.9 - $0.7 - $0.2 30.9%
- -----------------------------------------------------------------------------------------------------------------------------
Other Expense ($4.4) 0.2% ($2.7) 0.2% ($1.7) (65.3%)
- -----------------------------------------------------------------------------------------------------------------------------
Gain on Sale of Real Estate $3.3 0.2% - - $3.3 100.0%
- -----------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Gain $0.1 - $0.3 - ($0.2) (67.6%)
- -----------------------------------------------------------------------------------------------------------------------------
Interest Expense ($1.8) 0.1% ($2.1) 0.1% $0.3 12.2%
- -----------------------------------------------------------------------------------------------------------------------------
Other items, discussed on a consolidated basis, affecting the results of
operations for the fiscal years were:
The increase in selling and administrative expenses in fiscal 2004 from the
prior year was a result of increased corporate general and administrative
expenses related to costs to meet the disaster recovery requirements of
redundancy and business continuity for corporate systems and communications
networks, in addition to increased selling expenses to support the increased
sales levels throughout the Company.
The increase in depreciation and amortization for fiscal 2004 from the prior
year was attributable to an increase in fixed assets, primarily in the Computer
Systems and Staffing Services segments.
Other expense in both fiscal years is primarily the charges related to the
Company's Securitization Program as well as sundry expenses.
The gain on sale of real estate is from the sale of land and a building in
Anaheim, California for cash. The property was no longer being used by the
Company.
The decrease in interest expense in fiscal 2004 from the prior year was the
result of lower borrowing levels and interest rates in Uruguay.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 36.8% in fiscal 2004 compared to an effective tax rate
of 40.9% in fiscal 2003. In fiscal 2004, the effective tax rate was lower due to
federal and state income taxes attributable to the minority interest treated as
a partnership interest, lower foreign losses for which no tax benefit was
provided and lower non-tax deductible items.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents increased by $17.7 million to $62.0 million in fiscal
2005, increased by $1.1 million to $44.3 million in fiscal 2004 and increased by
$11.0 million to $43.2 million in fiscal 2003. The Company previously reported
restricted cash of $26.1 million, $43.7 million and $18.9 million as part of
cash and cash equivalents as of October 30, 2005, October 31, 2004 and November
3, 2003, respectively. This restricted cash is held in escrow primarily for
ProcureStaff customers. The amendment corrects an error in the Company's
presentation of cash and cash equivalents and restricted cash to show them as
separate line items on its consolidated balance sheets, and changes in
restricted cash and payables related to restricted cash on its consolidated
statements of cash flows to present them as investing activities rather than to
present them as operating activities.
The cash provided by operating activities of continuing operations in fiscal
2005 was $45.1 million compared to $6.4 million and $28.8 million in fiscal
years 2004 and 2003, respectively.
The cash provided by operating activities in fiscal 2005, exclusive of changes
in operating assets and liabilities, was $54.5 million, as the Company's net
income of $17.0 million included non-cash charges primarily for depreciation and
amortization of $29.6 million, accounts receivable provisions of $3.8 million
and income attributable to the minority interest of $7.0 million, partially
offset by a deferred income tax benefit of $3.0 million. The cash provided by
operating activities in fiscal 2004, exclusive of changes in operating assets
and liabilities, was $52.2 million, as the Company's net income of $33.7 million
included non-cash charges primarily for depreciation and amortization of $25.5
million, accounts receivable provisions of $7.8 million and income attributable
to the minority interest of $2.4 million, partially offset by income from
discontinued operations of $9.5 million, a gain from dispositions of property,
plant and equipment of $3.4 million and a deferred income tax benefit of $4.2
million. In fiscal 2003, operating activities, exclusive of changes in operating
assets and liabilities, produced $35.0 million of cash, as the Company's net
income of $4.2 million included non-cash charges primarily for depreciation and
amortization of $24.3 million and accounts receivable provisions of $6.2
million.
Changes in operating assets and liabilities in fiscal 2005 used $9.4 million of
cash, net, principally due to increases in the level of accounts receivable of
$24.1 million, prepaid expenses and other assets of $5.1 million and inventories
of $1.1 million, decreases in the level of deferred income and other liabilities
of $5.2 million, income tax liability of $2.5 million, and accounts payable of
$1.5 million, partially offset by proceeds from the Securitization Program of
$30.0 million. In fiscal 2004, changes in operating assets and liabilities used
$45.8 million of cash, net, principally due to an increase in the level of
accounts receivable of $101.7 million, partially offset by increases in accrued
expenses of $24.7 million, accounts payable of $12.3 million, and deferred
income and other liabilities of $6.1 million, and decreases in the level of
inventories of $6.7 million, recoverable income taxes of $2.8 million and
prepaid expenses and other assets of $2.6 million. In fiscal 2003, changes in
operating assets and liabilities used $6.2 million of cash, net, principally due
to increases in the level of accounts receivable of $28.6 million, accounts
payable of $8.3 million, and inventory of $7.2 million, partially offset by
increases in accrued expenses of $14.6 million, proceeds from the Securitization
Program of $10.0 million, increases in deferred income and other liabilities of
$8.9 million, and an increase in income taxes of $3.6 million.
Cash used in investing activities in fiscal 2005 was $26.4 million, principally
due to purchases of property, plant and equipment totaling $28.5 million,
partially offset by proceeds from the sale of other assets of $1.9 million. In
fiscal 2004, the cash used in investing activities was $10.1 million,
principally due to purchases of property, plant and equipment totaling $30.7
million and acquisitions of businesses of $1.9 million, partially offset by
proceeds from the sale of real estate and other assets of $22.4 million. In
fiscal 2003, the cash used in investing activities was $17.4 million,
principally due to purchases of property, plant and equipment totaling $18.0
million.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
LIQUIDITY AND CAPITAL RESOURCES--Continued
- ------------------------------------------
The cash used in financing activities in fiscal 2005 of $0.6 million, primarily
resulted from a $1.4 million decrease in bank loans, partially offset by $1.2
million from employee exercises of stock options. In 2004, the cash provided by
financing activities of $4.6 million, primarily resulted from a $3.6 million
increase in bank loans and $1.4 million from employee exercises of stock
options. In 2003, the cash provided by financing activities of $0.1 million
resulted primarily from a $1.5 million increase in bank loans, offset by
payments of long-term debt totaling $1.5 million.
Off-Balance Sheet Arrangements
- ------------------------------
The Company has no off-balance sheet financing arrangements as that term is used
in Item 303(a)4 of Regulation S-K.
Commitments
- -----------
The Company has no material capital commitments. The following table summarizes
the Company's contractual cash obligations and other commercial commitments at
October 30, 2005:
Contractual Cash Obligations
- ----------------------------
Payments Due By Period
---------------------------------------------------------------------------------
Less than 1- 3 3 - 5 After 5
Total 1 year years years years
----- ------- ----- ----- -----
(In thousands)
Term Loan $13,730 433 $1,535 $1,253 $10,509
Payable to Nortel Networks 1,971 1,971 - - -
Notes Payable to Banks 6,622 6,622 - - -
Total Debt (a) 22,323 9,026 1,535 1,253 10,509
Accrued Insurance (b) 11,138 9,508 1,630
Deferred Compensation (c) 4,936 4,936
Operating Leases (d) 48,812 19,378 22,358 6,662 414
------- ------- ------- ------ -------
Total Contractual Cash Obligations (e) $87,209 $42,848 $25,523 $7,915 $10,923
======= ======= ======= ====== =======
(a) Debt does not include interest.
(b) Includes $5.9 million for the Company's Primary Insurance Casualty
Program and $5.2 million for the Company's Medical Insurance Program.
See Note A of Notes to Consolidated Financial Statements.
(c) Includes $4.2 million for the Company's non-qualified deferred
compensation and supplemental savings plan and $0.7 million for the
Company's other deferred compensation plan. See Note M to Consolidated
Financial Statements.
(d) See Note O of Notes to Consolidated Financial Statements.
(e) Amounts do not include amounts payable to Nortel Networks and varetis
AG for acquisitions made in December 2005.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Commitments--Continued
Other Contingent Commitments
Amount Expected by
Commitment Expiration Period
---------------------------------------------------
Less than 1-3
Total 1 year years
----- ------- -----
(In thousands)
Lines of Credit, available $7,122 $7,122 -
Revolving Credit Facility, available 37,587 - $37,587
Securitization Program, available 50,000 - 50,000
Payable to Nortel Networks 61,750 61,750 -
Standby Letters of Credit, outstanding 744 744 -
------------ ---------- --------
Total Commercial Commitments $157,203 $69,616 $87,587
============ ========== ========
Securitization Program
- ----------------------
In April 2005, the Company amended its $150.0 million accounts receivable
securitization program ("Securitization Program") to provide that the expiration
date be extended from April 2006 to April 2007. Under the Securitization
Program, receivables related to the United States operations of the staffing
solutions business of the Company and its subsidiaries are sold from
time-to-time by the Company to Volt Funding Corp., a wholly-owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A., an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $150.0 million). The
Company retains the servicing responsibility for the accounts receivable. At
October 30, 2005, TRFCO had purchased from Volt Funding a participation interest
of $100.0 million out of a pool of approximately $283.3 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100%-owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable the sale of receivables by the
Company to Volt Funding to constitute true sales of those receivables. As a
result, the receivables are available to satisfy Volt Funding's own obligations
to its own creditors before being available, through the Company's residual
equity interest in Volt Funding, to satisfy the Company's creditors (subject
also, as described above, to the security interest that the Company granted in
the common stock of Volt Funding in favor of the lenders under the Company's
Credit Facility). TRFCO has no recourse to the Company beyond its interest in
the pool of receivables owned by Volt Funding.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Securitization Program--Continued
- ---------------------------------
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts incurred by
TRFCO on the issuance of its commercial paper, are charged to the consolidated
statement of operations.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, among other things, the default rate, as
defined, on receivables exceeding a specified threshold, the rate of collections
on receivables failing to meet a specified threshold, the Company failing to
maintain a long-term debt rating of "B" or better or the equivalent thereof from
a nationally recognized rating organization or a default occurring and
continuing on indebtedness for borrowed money of at least $5.0 million. At
October 30, 2005, the Company was in compliance with all requirements of its
Securitization Program.
The Company is in the process of finalizing an increase in the Securitization
Program to $200.0 million but there can be no assurance that it will be
finalized.
Credit Lines
- ------------
In April 2005, the Company amended its secured, syndicated, revolving credit
agreement ("Credit Agreement") to, among other things, extend the term for three
years to April 2008 and increase the line from $30.0 million to $40.0 million.
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. The other banks participating in the
Credit Facility are Mellon Bank, N.A., Wells Fargo Bank, N.A., Lloyds TSB Bank
PLC and Bank of America, N.A..
Borrowings under the Credit Facility are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the Company's long-term debt rating provided by a
nationally recognized rating agency. As amended, in lieu of the previous
borrowing base formulation, the Credit Agreement now requires the maintenance of
specified accounts receivable collateral in excess of any outstanding
borrowings. Based upon the Company's leverage ratio and debt rating at October
30, 2005, if a three-month U.S. Dollar LIBO rate were the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
4.9% per annum. At October 30, 2005, the facility fee was 0.3% per annum.
50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
- ------------
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 ending as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At October 30, 2005, the Company was in compliance with all
covenants in the Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Under the April 2005 amendment, five subsidiaries of
the Company remain as guarantors of all loans made to the Company or to
subsidiary borrowers under the Credit Facility. At October 30, 2005, four of
those guarantors have pledged approximately $54.4 million of accounts
receivable, other than those in the Securitization Program, as collateral for
the guarantee obligations. Under certain circumstances, other subsidiaries of
the Company also may be required to become guarantors under the Credit Facility.
At October 30, 2005, the Company had credit lines with domestic and foreign
banks which provided for borrowings and letters of credit up to an aggregate of
$51.3 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 Credit Agreement was amended to consent to the
consummation of the acquisition by the Company of the twenty-four (24%) percent
interest in Volt Delta owned by Nortel Networks and to modify certain of the
financial covenants contained in the Credit Agreement and increase the amount of
financing permitted under the Securitization Program.
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 is due February 15, 2006.
Summary
- -------
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program will be sufficient to fund its presently contemplated
operations and satisfy its obligations through, at least, the next twelve
months.
New Accounting Pronouncements and New Laws to be Effective in Fiscal 2006
- -------------------------------------------------------------------------
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an Amendment of
ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and spoilage. This Statement
requires that these items be recognized as period costs even if the amounts are
not considered to be abnormal. The provisions of this Statement are effective
for inventory costs incurred in fiscal years beginning after June 15, 2005. The
Company does not believe that the adoption of this Statement in fiscal 2006 will
have a material impact on the Company's consolidated financial position or
results of operations.
51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements and New Laws to be Effective in Fiscal 2006
- --Continued
- -------------------------------------------------------------------------
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets-an Amendment of APB Opinion No. 29," to eliminate the exception for
nonmonetary exchanges of similar productive assets and replace it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. The provisions of this Statement are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005, with early
application permitted for exchanges beginning after November 2004. The adoption
of this Statement has not had a material impact on the Company's consolidated
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," which
replaces the superseded SFAS No. 123, "Accounting for Stock-Based Compensation."
This Statement requires that all entities apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and
suppliers when the entity acquires goods or services. The provisions of this
Statement are required to be adopted by the Company beginning October 31, 2005.
The Company is currently assessing the impact that the adoption will have on the
Company's consolidated financial position and results of operations. It will
require the Company to record an expense for share-based compensation.
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.
The American Jobs Creation Act of 2004 (the "Act") provided for a special
one-time tax deduction of 85% of certain foreign earnings that are repatriated.
The Company is currently assessing the impact the Act will have on the Company's
consolidated financial position and results of operations.
Related Party Transactions
- --------------------------
During fiscal 2005, 2004 and 2003, the Company paid or accrued $0.8 million,
$1.9 million and $0.5 million, respectively, to the law firms of which Lloyd
Frank, a director of the Company, is or was of counsel, for services rendered to
the Company and expenses reimbursed. During fiscal 2005, 2004 and 2003, the
Company also paid $5,000, $13,000 and $47,700, respectively, to the law firm of
which Bruce Goodman, a director of the Company, is a partner, for services
rendered to the Company.
The Company renders various payroll and related services to a corporation
primarily owned by Steven A. Shaw, an officer and director, for which the
Company received approximately $5,000 in excess of its direct costs in fiscal
2005. Such services are performed on a basis substantially similar to those
performed by the Company for and at substantially similar rates as charged by
the Company to unaffiliated third parties. In addition, the Company rents
approximately 2,600 square feet of office space to that corporation in the
Company's El Segundo, California facility (which is located within the Company's
facility and shares common areas), which the Company does not require for its
own use, on a month-to-month basis at a rental of $1,750 per month ($1,500 per
month prior to March 1, 2004). Based on the nature of the premises and a report
from a real estate broker, the Company believes the rent is a fair and
reasonable rate for the space.
52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Related Party Transactions--Continued
- -------------------------------------
In 2005, after an investigation conducted by independent counsel appointed by
the Audit Committee of the Board of Directors, the Audit Committee concluded
that Mr. Thomas Daley, an executive officer of the Company, had, in July, 2005,
exercised options and sold the underlying shares of stock of the Company in
violation of the Company's Insider Trading Policy. The Audit Committee required
Mr. Daley to pay $31,500, representing the difference between the price at which
Mr. Daley sold the stock and the average market price of the Company's stock
over the three days following the Company's release of its 3rd quarter results,
and pay a further penalty of $10,000. These moneys have been paid by Mr. Daley
to the Company's General Counsel's attorney escrow account. The matter was
self-reported on behalf of the Company to the Securities and Exchange
Commission, and is under review by that agency. In connection with this matter,
the Audit Committee recommended that the Company advance Mr. Daley's legal fees
upon his entering into a written agreement to repay such fees if it were
ultimately determined that he was not entitled to be indemnified for legal
expenses under applicable law. The Company has advanced to date $95,800 directly
to Mr. Daley's attorneys in connection with such matter. The Company has also
paid to date legal fees of the independent counsel to the Audit Committee of
approximately $260,000 associated with this matter.
The brother of Daniel Hallihan, an executive officer of the Company, was
employed during 2003, 2004 and 2005 in the Company's Computer Systems segment in
an inventory control position for a compensation that is less than specified in
Item 404 of Regulation S-K. The Company believes that he has been employed on
the same terms that the Company would employ a similarly situated unrelated
individual.
From time to time the Company has employed, and will continue to employ,
relatives of executive officers, as well as relatives of other full time
employees, during the summer months and in its Staffing Solutions Group. The
Company believes that it has always employed, and will continue to employ, those
individuals on the same terms that it employs unrelated individuals.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The Company`s earnings, cash flows
and financial position are exposed to market risks relating to fluctuations in
interest rates and foreign currency exchange rates. The Company has cash and
cash equivalents on which interest income is earned at variable rates. The
Company also has credit lines with various domestic and foreign banks, which
provide for borrowings and letters of credit, as well as a $150 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 $185,000,
respectively.
The Company has a term loan, as noted in the table below, which consists of
borrowings at fixed interest rates, and the Company's interest expense related
to these borrowings is not affected by changes in interest rates in the near
term. The fair value of the fixed rate term loan was approximately $14.3 million
at October 30, 2005. This fair value was calculated by applying the appropriate
fiscal year-end interest rate to the Company's present stream of loan payments.
53
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At October 30, 2005, the total market value of these
investments was $4.2 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 October 30, 2005, the total of the Company's net investment in foreign
operations was $1.5 million. The Company attempts to reduce these risks by
utilizing foreign currency option and exchange contracts, as well as borrowing
in foreign currencies, to hedge the adverse impact on foreign currency net
assets when the dollar strengthens against the related foreign currency. As of
October 30, 2005, the total of the Company's foreign exchange contracts was $2.9
million, leaving a balance of net foreign exposure of $1.4 million. The amount
of risk and the use of foreign exchange instruments described above are not
material to the Company's financial position or results of operations and the
Company does not use these instruments for trading or other speculative
purposes. Based upon the current levels of net foreign assets, a hypothetical
weakening of the U.S. dollar against these currencies at October 30, 2005 by 10%
would result in a pretax gain of $0.2 million related to these positions.
Similarly, a hypothetical strengthening of the U.S. dollar against these
currencies at October 30, 2005 by 10% would result in a pretax gain of $0.1
million related to these positions.
54
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at October 30,
2005. For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
Interest Rate Market Risk Payments Due By Period as of October 30, 2005
- ------------------------- ---------------------------------------------
Less than 1-3 3-5 After 5
Total 1 year Years Years Years
------ ------- ------ ------ -----
(Dollars in thousands of US$)
Cash and Cash Equivalents and
Restricted Cash
Money Market and Cash Accounts $88,119 $88,119
Weighted Average Interest Rate 3.6% 3.6%
------- ------
Total Cash, Restricted Cash and Cash
Equivalents $88,119 $88,119
======= =======
Securitization Program
Accounts Receivable Securitization $100,000 $100,000
Finance Rate 3.8% 3.8%
-------- --------
Securitization Program $100,000 $100,000
======== ========
Interest Rate Market Risk Payments Due By Period as of October 30, 2005
- ------------------------- ---------------------------------------------
Less than 1 - 3 3 - 5 After 5
Total 1 year Years Years Years
------ ------- ------ ------ -----
(Dollars in thousands of US$)
Debt
Term Loan (1) $13,730 433 $1,535 $1,253 $10,509
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Payable to Nortel Networks 1,971 1,971
Weighted Aveage Interest Rate 6.0% 6.0%
Notes Payable to Banks 6,622 6,622
Weighted Average Interest Rate 4.1% 4.1% - - -
------- ------ ------ ------ -------
Total Debt $22,323 $9,026 $1,535 $1,253 $10,509
======= ====== ====== ====== =======
55
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
Foreign Exchange Market Risk
- ----------------------------
Contract Values
Contractual Fair Value
Exchange Less than Option
Rate Total 1 Year Premium (1)
----- --------- -----------
(Dollars in thousands of US $)
Option Contracts
Canadian $ to US$ 1.37 $2,920 $2,920 $18
(1) Represents the cost of the options purchased on October 28, 2005.
56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ERNST & YOUNG LLP
5 Times Square
New York, New York 10036
212-773-3000
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
of Volt Information Sciences, Inc.
We have audited the accompanying consolidated balance sheets of Volt Information
Sciences, Inc. and subsidiaries as of October 30, 2005 and October 31, 2004, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended October 30, 2005. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a)(2). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Volt Information
Sciences, Inc. and subsidiaries at October 30, 2005 and October 31, 2004, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended October 30, 2005, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Volt
Information Sciences, Inc. and subsidiaries internal control over financial
reporting as of October 30, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated January 16, 2006 expressed an
unqualified opinion on management's assessment and an adverse opinion on the
effectiveness of internal control over financial reporting.
As described in Note A to the consolidated financial statements, the
accompanying consolidated financial statements of Volt Information Sciences,
Inc. as of October 30, 2005 and October 29, 2004 and for the three years in the
period ended October 30, 2005 have been restated.
/s/ Ernst & Young LLP
New York, New York
January 16, 2006, except for the second paragraph of Note A,
which is as of June 27, 2006
57
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 30, October 31,
2005 2004
----------------------------------------
(Restated) (Restated)
ASSETS (Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $61,988 $44,309
Restricted cash 26,131 43,722
Short-term investments 4,213 4,248
Trade accounts receivable less allowances of $7,527 (2005) and
$10,210 (2004) 399,677 409,130
Inventories 33,758 32,676
Deferred income taxes 10,246 9,385
Prepaid expenses and other assets 19,788 14,847
----------------------------------------
TOTAL CURRENT ASSETS 555,801 558,317
Investment in securities 141 100
Property, plant and equipment-net 83,272 85,038
Deposits and other assets 1,961 1,439
Goodwill 32,623 29,144
Other intangible assets-net of accumulated amortization of $1,396
(2005) and $288 (2004) 14,914 15,998
----------------------------------------
TOTAL ASSETS $688,712 $690,036
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $6,622 $7,955
Current portion of long-term debt 2,404 399
Accounts payable 172,788 192,163
Accrued wages and commissions 55,081 54,200
Accrued taxes other than income taxes 17,586 17,729
Accrued insurance and other accruals 35,173 36,036
Deferred income and other liabilities 30,628 36,909
Income taxes payable 1,686 4,270
----------------------------------------
TOTAL CURRENT LIABILITIES 321,968 349,661
Accrued insurance 1,630 86
Long-term debt 13,297 15,588
Deferred income taxes 13,358 11,764
Commitments and contingencies
Minority Interest 43,444 36,420
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--500,000 shares;
issued--none
Common stock, par value $.10; Authorized--30,000,000 shares; issued
and outstanding--15,339,255 shares (2005) and 15,282,625 shares (2004) 1,534 1,528
Paid-in capital 43,694 42,453
Retained earnings 249,754 232,714
Accumulated other comprehensive income (loss) 33 (178)
----------------------------------------
TOTAL STOCKHOLDERS' EQUITY 295,015 276,517
----------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $688,712 $690,036
========================================
See Notes to Consolidated Financial Statements
58
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
October 30, October 31, November 2,
2005 2004 2003
------------------------------------------------
(In thousands, except per share data)
NET SALES $2,177,619 $1,924,777 $1,609,491
COSTS AND EXPENSES:
Cost of sales 2,014,551 1,772,087 1,502,622
Selling and administrative 92,858 83,124 71,693
Depreciation and amortization 29,603 25,537 24,331
------------------------------------------------
2,137,012 1,880,748 1,598,646
------------------------------------------------
OPERATING PROFIT 40,607 44,029 10,845
OTHER INCOME (EXPENSE):
Interest income 2,648 927 708
Other expense-net (4,882) (4,398) (2,661)
Gain on sale of real estate - 3,295 -
Foreign exchange (loss) gain-net (255) 97 299
Interest expense (1,825) (1,817) (2,070)
------------------------------------------------
Income from continuing operations before items
shown below 36,293 42,133 7,121
Minority interest (7,024) (2,420) -
------------------------------------------------
Income from continuing operations before taxes 29,269 39,713 7,121
Income tax provision (12,229) (15,517) (2,916)
------------------------------------------------
Income from continuing operations 17,040 24,196 4,205
Discontinued operations, net of taxes - 9,520 -
------------------------------------------------
NET INCOME $17,040 $33,716 $4,205
================================================
Per Share Data
------------------------------------------------
Basic:
Income from continuing operations $1.11 $1.59 $0.28
Discontinued operations 0.62
------------------------------------------------
Net income $1.11 $2.21 $0.28
================================================
Weighted average number of shares-basic 15,320 15,234 15,218
================================================
Diluted:
Income from continuing operations $1.11 $1.58 $0.28
Discontinued operations 0.62
------------------------------------------------
Net income $1.11 $2.20 $0.28
================================================
Weighted average number of shares-diluted 15,417 15,354 15,225
================================================
See Notes to Consolidated Financial Statements.
59
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
Accumulated Other
Comprehensive (Loss) Income
----------------------------------
Unrealized
Common Stock Foreign Gain (Loss)
$.10 Par Value Currency On
-------------------Paid-In Retained Translation Marketable Comprehensive
Shares Amount Capital Earnings Adjustment Securities Income (Loss)
----------------------------------------------------------------------
(Dollars in thousands)
Balance at November 3, 2002 15,217,415 $1,522 $41,036 $194,793 ($490) $7
Stock options exercised - net of a
diminutive tax benefit 3,000 55
Unrealized foreign currency translation
adjustment - net of tax benefit of $8 (18) ($18)
Unrealized gain on marketable securities -
net of taxes of $56 85 85
Net income for the year 4,205 4,205
---------- ----- ------ ------- ----- ---- -------
Balance at November 2, 2003 15,220,415 1,522 41,091 198,998 (508) 92 $4,272
=======
Stock options exercised - net of a tax
benefit of $214 62,210 6 1,362
Unrealized foreign currency translation
adjustment - net of taxes of $126 294 $294
Unrealized gain on marketable securities -
net of tax benefit of $37 (56) (56)
Net income for the year 33,716 33,716
---------- ----- ------ ------- ----- ---- -------
Balance at October 31, 2004 15,282,625 1,528 42,453 232,714 (214) 36 $33,954
=======
Stock options exercised - net of a tax
benefit of $199 56,630 6 1,241
Unrealized foreign currency translation
adjustment - net of taxes of $80 186 $186
Unrealized gain on marketable securities -
net of taxes of $16 25 25
Net income for the year 17,040 17,040
---------- ----- ------ ------- ----- ---- -------
Balance at October 30, 2005 15,339,255 $1,534 $43,694 $249,754 ($28) $61 $17,251
========== ====== ======= ======== ===== ==== =======
There were no shares of preferred stock issued or outstanding in any of the
reported periods.
See Notes to Consolidated Financial Statements.
60
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
----------------------------------------------
October 30, October 31, November 2,
2005 2004 2003
----------------------------------------------
(Restated) (Restated) (Restated)
(In thousands)
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $17,040 $33,716 $4,205
Adjustments to reconcile net income to cash provided by
operating activities
Discontinued operations - (9,520) -
Depreciation and amortization 29,603 25,537 24,331
Accounts receivable provisions 3,838 7,784 6,227
Minority interest 7,024 2,420 -
Gain on foreign currency translation (16) (43) (10)
(Gain) loss on dispositions of property, plant
and equipment (9) (3,432) 151
Deferred income tax (benefit) expense (2,978) (4,240) 82
Changes in operating assets and liabilities, net of
assets acquired:
Accounts receivable (24,084) (101,672) (28,612)
Proceeds from securitization program 30,000 - 10,000
Inventories (1,082) 6,662 (7,193)
Prepaid expenses and other assets (5,063) 2,553 59
Deposits and other assets (520) 667 687
Accounts payable (1,519) 12,297 (8,276)
Accrued expenses 478 24,748 14,599
Deferred income and other liabilities (5,193) 6,119 8,927
Income taxes (2,451) 2,754 3,586
----------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 45,068 6,350 28,763
----------------------------------------------
61
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
Year Ended
----------------------------------------------
October 30, October 31, November 2,
2005 2004 2003
----------------------------------------------
(Restated) (Restated) (Restated)
(In thousands)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Sales of investments 1,119 1,476 870
Purchases of investments (904) (1,419) (833)
Decrease (increase) in restricted cash 17,591 (24,852) (7,412)
(Decrease) increase in payables related to restricted
cash (17,591) 24,852 7,412
Distributions from joint ventures - - 49
Acquisitions - (1,864) -
Proceeds from disposals of property, plant and
equipment, net 1,885 3,933 469
Purchases of property, plant and equipment (28,511) (30,737) (17,990)
Proceeds from sale of real estate (discontinued
operations) - 18,500 -
----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (26,411) (10,111) (17,435)
----------------------------------------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (399) (340) (1,524)
Exercises of stock options 1,247 1,368 55
Payment of notes payable-bank (84,750) (62,683) (30,194)
Proceeds from notes payable-bank 83,346 66,274 31,717
----------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (556) 4,619 54
----------------------------------------------
Effect of exchange rate changes on cash (422) 264 (357)
----------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,679 1,122 11,025
Cash and cash equivalents, beginning of year 44,309 43,187 32,162
----------------------------------------------
CASH AND CASH EQUIVALENTS,
CASH, END OF YEAR $61,988 $44,309 $43,187
==============================================
SUPPLEMENTAL INFORMATION
Cash paid during the year:
Interest expense $1,868 $1,616 $2,131
Income taxes $17,694 $15,934 $2,360
The Company purchased certain assets and certain
specified liabilities in exchange for a 24% interest in
Volt Delta. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired $46,484
Fair value of 24% interest 34,000
---------------
Liabilities assumed $12,484
===============
See Notes to Consolidated Financial Statements.
62
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--Summary of Significant Accounting Policies
Business: The Company operates in two major businesses, Staffing Services and
Telecommunications and Information Solutions, consisting of four operating
segments: Staffing Services; Telephone Directory; Telecommunications Services
and Computer Systems.
Restatement: The Company has restated its previously issued financial statements
for fiscal years 2003 through 2005 to correct an error in the way it had
previously presented (i) cash and cash equivalents and restricted cash to show
them as separate line items on its consolidated balance sheets and (ii) changes
in restricted cash and payables related to restricted cash on its consolidated
statements of cash flows to show them under investing activities rather than
under operating activities.
In addition, Note J and Q of the Notes to the Consolidated Financial Statements
have been revised to provide disclosures that explain the method and assumptions
used by management to determine the valuation of business acquisitions.
The tables below reflect the restatements that were made to the consolidated
balance sheets as of October 30, 2005 and October 31, 2004, and the consolidated
statements of cash flows for the three years ended October 30, 2005. The tables
reflect only items that have changed in these financial statements.
October 30, October 31,
2005 2004
--------------- ------------
Consolidated Balance Sheets (In thousands)
Cash and cash equivalents - as previously reported $88,119 $88,031
Change (26,131) (43,722)
------- -------
Cash and cash equivalents - as restated $61,988 $44,309
======= =======
Restricted cash - as previously reported $ 0 $ 0
Change 26,131 43,722
------- -------
Restricted cash - as restated $26,131 $43,722
======= =======
Year Ended
October 30, October 31, November 2,
2005 2004 2003
----------- ------------- --------------
Consolidated Statements of Cash Flows (In thousands)
Changes in operating assets and liabilities, net of assets acquired:
Accounts payable - as previously reported ($19,110) $37,149 ($864)
Change 17,591 (24,852) (7,412)
------- ------- --------
Accounts payable-as restated ($1,519) $12,297 ($8,276)
======= ======= ========
Net cash provided by operating activities - as previously reported
$27,477 $31,202 $36,175
Change 17,591 (24,852) (7,412)
------- ------- --------
Net cash provided by operating activities - as restated $45,068 $6,350 $28,763
======= ======= ========
63
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Restatement:--Continued
Year Ended
----------
October 30, October 31, November 2,
2005 2004 2003
Consolidated Statements of Cash Flows ----------- ----------- -----------
(In thousands)
Net cash used in investing activities --
- - as previously reported ($26,411) ($10,111) ($17,435)
Decrease (increase) in restricted cash 17,591 (24,852) (7,412)
(Decrease) increase in payables related to restricted cash (17,591) 24,852 7,412
----------- ----------- -----------
Net cash used in investing activities - as restated ($26,411) ($10,111) ($17,435)
=========== =========== ===========
Net increase in cash and cash equivalents
- - as previously reported $88 $25,974 $18,437
Change 17,591 (24,852) (7,412)
----------- ----------- -----------
Net increase in cash and cash equivalents
- - as restated $17,679 $1,122 $11,025
=========== =========== ===========
Fiscal Year: The Company's fiscal year ends on the Sunday nearest October 31.
The 2003 through 2005 fiscal years each consisted of 52 weeks.
Consolidation: The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions have
been eliminated upon consolidation. The Company accounts for the securitization
of accounts receivable in accordance with Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (see Note B).
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States, requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
64
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Stock-Based Compensation: The Company has elected to follow Accounting
Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees,"
to account for its stock options under which no compensation cost is recognized
because the option exercise price is equal to at least the market price of the
underlying stock on the date of grant. Had compensation costs for these plans
been determined at the grant dates for awards under the alternative accounting
method provided for in SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123,"
net income and earnings per share, on a pro forma basis, would have been:
2005 2004 2003
------------------------------------------
(In thousands, except per share data)
Net income as reported $17,040 $33,716 $4,205
Pro forma compensation expense, net of taxes (99) (130) (67)
------------------------------------------
Pro forma net income $16,941 $33,586 $4,138
==========================================
Basic:
Net income as reported per share $1.11 $2.21 $0.28
Pro forma compensation expense, net of taxes per share (0.01) (0.01) (0.01)
------------------------------------------
Pro forma net income per share $1.10 $2.20 $0.27
==========================================
Diluted:
Net income as reported per share $1.11 $2.20 $0.28
Pro forma compensation expense, net of taxes (0.01) (0.01) (0.01)
------------------------------------------
Pro forma net income per share $1.10 $2.19 $0.27
==========================================
The fair value of each option grant is estimated using the Multiple
Black-Scholes option pricing model, with the following weighted-average
assumptions used for grants in fiscal 2004 and 2003, respectively: risk-free
interest rates of 4.1% and 2.0%, respectively; expected volatility of .47 and
..50, respectively; an expected life of the options of five years; and no
dividends. The weighted average fair value of stock options granted during
fiscal years 2004 and 2003 was $14.62 and $6.59, respectively. There were no
options granted during fiscal 2005.
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R, "Share-Based Payment," which replaces the superseded SFAS No. 123,
"Accounting for Stock-Based Compensation." This Statement requires that all
entities apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees and suppliers when the entity
acquires goods or services. The provisions of this Statement are required to be
adopted by the Company beginning October 31, 2005. The Company is currently
assessing the impact that the adoption will have on the Company's consolidated
financial position and results of operations. It will require the Company to
record an expense for share-based compensation.
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"), entitled "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments.
65
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Revenue Recognition:--Continued
- -------------------
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 fiscal 2005, this
revenue comprised approximately 75% of the Company's net sales.
Managed Services: Sales are generated by the Company's E-Procurement
Solutions subsidiary, ProcureStaff, and for certain contracts, sales are
generated by the Company's Staffing Solutions Group's managed services
operations. The Company receives an administrative fee for arranging for,
billing for and collecting the billings related to staffing companies
("associate vendors") who have supplied personnel to the Company's
customers. The administrative fee is either charged to the customer or
subtracted from the Company's payment to the associate vendor. The customer
is typically responsible for assessing the work of the associate vendor,
and has responsibility for the acceptability of its personnel, and in most
instances the customer and associate vendor have agreed that the Company
does not pay the associate vendor until the customer pays the Company.
Based upon the revenue recognition principles in Emerging Issues Task Force
("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 fiscal 2005, this revenue comprised approximately 2% of the Company's
net sales.
Outsourced Projects: Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables. The Company's employees perform the services and the Company
has credit risk for collecting its billings. Revenue for these services is
recognized on a gross basis in the period the services are rendered when on
a time and material basis, and when the Company is responsible for project
completion, revenue is recognized when the project is complete and the
customer has approved the work. In fiscal 2005, this revenue comprised
approximately 5% of the Company's net 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 distributed. In fiscal 2005, this revenue comprised
approximately 3% of the Company's net 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
fiscal 2005, this revenue comprised approximately 1% of the Company's net
sales.
66
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Revenue Recognition:--Continued
- -------------------
Telecommunications Services:
Construction: Sales are derived from the Company supplying aerial and
underground construction services. The Company's employees perform the
services, and the Company takes title to all inventory and has credit risk
for collecting its billings. The Company relies upon the principles in
AICPA Statement of Position ("SOP") 81-1, "Accounting for Performance of
Construction-Type Contracts," using the completed-contract method, to
recognize revenue on a gross basis upon customer acceptance of the project.
In fiscal 2005, this revenue comprised approximately 4% of the Company's
net sales.
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 fiscal 2005, this
revenue comprised approximately 2% of the Company's net 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 fiscal 2005, this revenue
comprised approximately 5% of the Company's net sales.
IT Maintenance: Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who have the Company's systems, on a time and material basis or a contract
basis. The Company uses its own employees and inventory in the performance
of the services, and has credit risk for collecting its billings. Revenue
for these services is recognized on a gross basis in the period in which
the services are performed, contingent upon customer acceptance when on a
time and material basis, or over the life of the contract, as appropriate.
In fiscal 2005, this revenue comprised approximately 2% of the Company's
net sales.
Telephone Systems: Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in AICPA SOP 97-2, "Software Revenue Recognition" and EITF
00-21, "Revenue Arrangements with Multiple Deliverables" to recognize
revenue on a gross basis upon customer acceptance of each part of the
system based upon its fair value. In fiscal 2005, this revenue comprised
approximately 1% of the Company's net 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.
Cash Equivalents: Cash equivalents consist of investments in short-term, highly
liquid securities having an initial maturity of three months or less.
67
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Investments: The Company determines the appropriate classification of marketable
equity and debt securities at the time of purchase and re-evaluates its
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Marketable equity securities and debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. Losses
considered to be other than temporary are charged to earnings.
Inventories: Accumulated unbilled costs on contracts related to performing
services are carried at the lower of actual cost or realizable value (see Note
D).
Goodwill: Under Statement of Financial Accounting Standards ("SFAS") 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 the equity value ("fair value") of a reporting unit with its book
value ("carrying amount"), including the goodwill allocated to the reporting
unit. Measurement of the fair value of a reporting unit is based on one or more
fair value measures including present value techniques of estimated future cash
flows and estimated amounts at which the unit as a whole could be bought or sold
in a current transaction between willing parties. If the carrying amount of the
reporting unit exceeds the fair value, step two requires the fair value of the
reporting unit to be allocated to the underlying assets and liabilities of that
reporting unit, resulting in an implied fair value of goodwill. If the carrying
amount of the reporting unit goodwill exceeds the implied fair value of that
goodwill, an impairment loss equal to the excess is recorded in net earnings
(loss). The Company performs its impairment testing using comparable multiples
of sales and EBITDA and other valuation methods to assist the Company in the
determination of the fair value of the reporting units measured.
Long-Lived Assets: Property, plant and equipment 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.
68
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
-
The weighted-average amortization period for other intangible assets in fiscal
2005 and 2004 was 15 years.
Fully depreciated assets are retained in property and depreciation accounts
until they are removed from service. In the case of disposals, assets and
related depreciation are removed from the accounts, and the net amounts less
proceeds from disposal, are included in income. Maintenance and repairs are
expensed as incurred. Property, plant and equipment is depreciated over the
following periods:
Buildings 25 to 31-1/2 years
Machinery and equipment 3 to 15 years
Leasehold improvements length of lease or life of the
asset, whichever is shorter
Enterprise Resource Planning system 5 to 7 years
Property, plant and equipment consisted of: October 30, October 31,
2005 2004
---------- ----------
(In thousands)
Land and buildings $23,120 $22,807
Machinery and equipment 157,601 141,765
Leasehold improvements 12,021 10,460
Enterprise Resource Planning system 35,823 34,896
------ ------
228,565 209,928
Less allowances for depreciation and amortization 145,293 124,890
------- -------
$83,272 $85,038
======= =======
A term loan is secured by a deed of trust on land and buildings with a carrying
amount at October 30, 2005 of $10.2 million (see Note F).
In fiscal year 2004, the Company sold land and buildings in California. One
property was previously leased to the Company's formerly 59% owned subsidiary,
Autologic Information International, Inc. and the other property was no longer
being used by the Company. The gain on the sale of the building, leased to the
former subsidiary, was classified as a discontinued operation.
Primary Insurance Casualty Program: The Company is insured with highly rated
insurance companies under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Adjustments to premiums are made based upon the
level of claims incurred at a future date up to three years after the end of the
respective policy period. For the policy year ended March 31, 2003, a maximum
premium was predetermined and paid. For subsequent policy years, management
69
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Primary Insurance Casualty Program:--Continued
- ----------------------------------
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
sales in the period in which such determination is made.
At October 30, 2005, the Company's net prepaid for the outstanding policy years
was $1.6 million compared to a net liability of $8.3 million at October 31,
2004.
Medical Insurance Program: Beginning in April 2004, the Company became
self-insured for the majority of its medical benefit programs. The Company
remains insured for a portion of its medical program (primarily HMOs) as well as
the entire dental program. The Company provides the self-insured medical
benefits through an arrangement with a third-party administrator. However, the
liability for the self-insured benefits is limited by the purchase of stop loss
insurance. Contributed and withheld funds and related liabilities for the
self-insured program together with unpaid premiums for the insured programs,
other than the current provision, are held in a 501(c)(9) employee welfare
benefit trust and do not appear on the balance sheet of the Company. In order to
establish the self-insurance reserves, the Company utilizes 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
adjusted as warranted by changing circumstances. Should the amount of claims
occurring exceed what was estimated or medical costs increase beyond what was
expected, liabilities might not be sufficient, and additional expense may be
recorded.
Capitalized Software: The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with AICPA SOP No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use."
Subsequent to the preliminary project planning and approval stage, all
appropriate costs are capitalized until the point at which the software is ready
for its intended use. Subsequent to the software being used in operations, the
capitalized costs are transferred from costs-in-process to completed property,
plant and equipment, and are accounted for as such. All post-implementation
costs, such as maintenance, training and minor upgrades that do not result in
additional functionality, are expensed as incurred.
Securitization Program: The Company accounts for the securitization of accounts
receivable in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A., was $100.0 million at
October 30, 2005 and $70.0 million at October 31, 2004. Accordingly, the trade
receivables included on the October 30, 2005 and October 31, 2004 balance sheets
have been reduced to reflect the participation interest sold. TRFCO has no
recourse to the Company (beyond its interest in the pool of receivables owned by
Volt Funding Corp., a wholly-owned special purpose subsidiary of the Company)
for any of the sold receivables.
70
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Income Taxes: Income taxes are provided using the liability method. Deferred
taxes reflect the tax consequences on future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts. The
carrying value of the Company's deferred tax assets is dependent upon the
Company's ability to generate sufficient future taxable income in certain tax
jurisdictions. Should the Company determine that it would not be able to realize
all or part of its deferred tax assets in the future, a valuation allowance to
the deferred tax assets would be established in the period such determination
was made (see Note G).
Translation of Foreign Currencies: The U.S. dollar is the Company's functional
currency throughout the world, except for certain European and Canadian
subsidiaries. Where the U.S. dollar is used as the functional currency, foreign
currency gains and losses are included in operations. The translation
adjustments recorded as a separate component of stockholders' equity result from
changes in exchange rates affecting the reported assets and liabilities of the
European subsidiaries whose functional currency is not the U.S. dollar.
Earnings Per Share: Basic earnings per share is calculated by dividing net
earnings by the weighted-average number of common shares outstanding during the
period. The diluted earnings per share computation includes the effect, if any,
of shares that would be issuable upon the exercise of outstanding stock options,
reduced by the number of shares which are assumed to be purchased by the Company
from the resulting proceeds at the average market price during the period (see
Note I).
Comprehensive Income: Comprehensive income is the net income of the Company
combined with other changes in stockholders' equity not involving ownership
interest changes. For the Company, such other changes include foreign currency
translation and mark-to-market adjustments related to held-for-sale securities.
Derivatives and Hedging Activities: Gains and losses on foreign currency option
and forward contracts designated as hedges of existing assets and liabilities
and of identifiable firm commitments are deferred and included in the
measurement of the related foreign currency transaction. The Company enters into
derivative financial instrument contracts only for hedging purposes and accounts
for them in accordance with SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended. (see Note N).
New Accounting Pronouncements: In November 2004, the FASB issued SFAS No. 151,
"Inventory Costs-an Amendment of ARB No. 43, Chapter 4," which clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and spoilage. This Statement requires that these items be recognized as
period costs even if the amounts are not considered to be abnormal. The
provisions of this Statement are effective for inventory costs incurred in
fiscal years beginning after June 15, 2005. The Company does not believe that
the adoption of this Statement in fiscal 2006 will have a material impact on the
Company's consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets-an Amendment of APB Opinion No. 29," to eliminate the exception for
nonmonetary exchanges of similar productive assets and replace it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. The provisions of this Statement are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005, with early
application permitted for exchanges beginning after November 2004. The adoption
of this Statement has not had a material impact on the Company's consolidated
financial position or results of operations.
71
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," which
replaces the superseded SFAS No. 123, "Accounting for Stock-Based Compensation."
This Statement requires that all entities apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and
suppliers when the entity acquires goods or services. The provisions of this
Statement are required to be adopted by the Company beginning October 31, 2005.
The Company is currently assessing the impact that the adoption will have on the
Company's consolidated financial position and results of operations. It will
require the Company to record an expense for share-based compensation.
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.
The American Jobs Creation Act of 2004 (the "Act") provided for a special
one-time tax deduction of 85% of certain foreign earnings that are repatriated.
The Company is currently assessing the impact the Act will have on the Company's
consolidated financial position and results of operations.
NOTE B--Securitization Program
In April 2005, the Company amended its $150.0 million accounts receivable
securitization program ("Securitization Program") to provide that the expiration
date be extended from April 2006 to April 2007. Under the Securitization
Program, receivables related to the United States operations of the staffing
solutions business of the Company and its subsidiaries are sold from
time-to-time by the Company to Volt Funding Corp., a wholly-owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A. and unaffiliated with the Company, an
undivided percentage ownership interest in the pool of receivables Volt Funding
acquires from the Company (subject to a maximum purchase by TRFCO in the
aggregate of $150.0 million). The Company retains the servicing responsibility
for the accounts receivable. At October 30, 2005, TRFCO had purchased from Volt
Funding a participation interest of $100.0 million out of a pool of
approximately $283.3 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100%-owned consolidated subsidiary of the Company. Accounts
receivable are only reduced to reflect the fair value of receivables actually
sold. The Company entered into this arrangement as it provided a low-cost
alternative to other financing.
The Securitization Program is designed to enable the sale of receivables 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
72
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--Securitization Program--Continued
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.
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 $3.4 million in the fiscal year ended October 30,
2005 compared to $1.7 million and $1.6 million in the fiscal years ended October
31, 2004 and November 2, 2003, respectively, which are included in Other Expense
on the consolidated statement of operations. The equivalent cost of funds in the
Securitization Program was 4.2%, 2.7% and 2.6% per annum in the fiscal years
2005, 2004 and 2003, respectively. The Company's carrying retained interest in
the receivables approximated fair value due to the relatively short-term nature
of the receivable collection period. In addition, the Company performed a
sensitivity analysis, changing various key assumptions, which also indicated the
retained interest in receivables approximated fair value.
At October 30, 2005 and October 31, 2004, the Company's carrying retained
interest in a revolving pool of receivables was approximately $182.5 million and
$178.2 million, respectively, net of a service fee liability, out of a total
pool of approximately $283.3 million and $248.7 million, respectively. The
outstanding balance of the undivided interest sold to TRFCO was $100.0 million
and $70.0 million at October 30, 2005 and October 31, 2004, respectively.
Accordingly, the trade accounts receivable included on the October 30, 2005 and
October 31, 2004 balance sheets have been reduced to reflect the participation
interest sold of $100.0 million and $70.0 million, respectively.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold or the Company failing to maintain a long-term
debt rating of "B" or better, or the equivalent thereof, from a nationally
recognized rating organization. At October 30, 2005, the Company was in
compliance with all requirements of the Securitization Program.
73
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE C--Short-Term Investments and Investments in Securities
At October 30, 2005 and October 31, 2004 short-term investments consisted of
$4.2 million and $4.2 million, respectively, invested in mutual funds for the
Company's deferred compensation plan (see Note N).
At October 30, 2005 and October 31, 2004, the Company had an available-for-sale
investment in equity securities of $141,000 and $100,000, respectively. The
gross unrealized gains of $101,500 and $60,500 at October 30, 2005 and October
31, 2004, respectively, were included as a component of accumulated other
comprehensive income (loss).
NOTE D--Inventories
Inventories of accumulated unbilled costs and materials by segment are as
follows:
October 30, October 31,
2005 2004
----------- ------------
(In thousands)
Telephone Directory $10,508 $11,313
Telecommunications Services 17,734 14,505
Computer Systems 5,516 6,858
-------- --------
Total $33,758 $32,676
======= =======
The cumulative amounts billed under service contracts at October 30, 2005 and
October 31, 2004 of $9.6 million and $13.9 million, respectively, are credited
against the related costs in inventory.
NOTE E--Short-Term Borrowings
In April 2005, the Company amended its secured, syndicated, revolving credit
agreement ("Credit Agreement") to, among other things, extend the term for three
years to April 2008 and increase the line from $30.0 million to $40.0 million.
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. The other banks participating in the
Credit Facility are Mellon Bank, N.A., Wells Fargo Bank, N.A., Lloyds TSB Bank
PLC and Bank of America, N.A.
Borrowings under the Credit Facility are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the Company's long-term debt rating provided by a
nationally recognized rating agency. As amended, in lieu of the previous
borrowing base formulation, the Credit Agreement now requires the maintenance of
specified accounts receivable collateral in excess of any outstanding
borrowings. Based upon the Company's leverage ratio and debt rating at October
30, 2005, if a three-month U.S. Dollar LIBO rate were the interest rate option
selected by the Company, borrowings would have borne interest at the rate of
4.9% per annum. At October 30, 2005, the facility fee was 0.3% per annum.
74
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE E--Short-Term Borrowings--Continued
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 October 30, 2005, the Company was in compliance with all
covenants in the Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Under the April 2005 amendment, five subsidiaries of
the Company remain as guarantors of all loans made to the Company or to
subsidiary borrowers under the Credit Facility. At October 30, 2005, four of
those guarantors have pledged approximately $54.4 million of accounts
receivable, other than those in the Securitization Program, as collateral for
the guarantee obligations. Under certain circumstances, other subsidiaries of
the Company also may be required to become guarantors under the Credit Facility.
At October 30, 2005, the Company had credit lines with domestic and foreign
banks which provided for borrowings and letters of credit up to an aggregate of
$51.3 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.
NOTE F--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
October 30, October 31,
2005 2004
----------------------------------------
(In thousands)
8.2% term loan (a) $13,730 $14,130
Payable to Nortel Networks(b) 1,971 1,857
----------------------------------------
15,701 15,987
Less amounts due within one year 2,404 399
----------------------------------------
Total long-term debt $13,297 $15,588
========================================
(a) In September 2001, a subsidiary of the Company entered into a $15.1 million
loan agreement with General Electric Capital Business Asset Funding
Corporation. Principal payments have reduced the loan to $13.7 million at
October 30, 2005. The fair value of the loan was approximately $14.3
million at October 30, 2005. The 20-year loan, which bears interest at 8.2%
per annum and requires principal and interest payments of $0.4 million per
quarter, is secured by a deed of trust on certain land and buildings that
had a carrying amount at October 30, 2005 of $10.2 million. The obligation
is guaranteed by the Company.
(b) Represents the present value of a $2.0 million payment due to Nortel
Networks in February 2006, discounted at 6% per annum, as required in an
agreement closed on August 2, 2004 (see Note J).
75
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE F--Long-Term Debt and Financing Arrangements-- Continued
Principal payment maturities on long-term debt outstanding at October 30, 2005
are:
Fiscal Year Amount
----------- ------
(In thousands)
2006 $2,404
2007 470
2008 511
2009 554
2010 601
Thereafter 11,161
-------
$15,701
=======
NOTE G--Income Taxes
The components of the Company's income from continuing operations before income
taxes and minority interest by location, and the related income tax provision
are as follows:
Year Ended
------------------------------------------------
October 30, October 31, November 2,
2005 2004 2003
------------------------------------------------
(In thousands)
The components of income from continuing
operations before income taxes and minority
interest, based on the location of
operations, consist of the following:
Domestic $30,318 $36,530 $3,523
Foreign 5,975 5,603 3,598
------------------------------------------------
$36,293 $42,133 $7,121
================================================
The components of the income tax
provision include:
Current:
Federal (a) $9,880 $13,040 $518
Foreign 1,508 2,608 1,716
State and local 3,819 4,109 600
------------------------------------------------
Total current 15,207 19,757 2,834
------------------------------------------------
Deferred:
Federal ($2,711) ($3,450) $232
Foreign 201 (19) (202)
State and local (468) (771) 52
------------------------------------------------
Total deferred (2,978) (4,240) 82
------------------------------------------------
Total income tax provision $12,229 $15,517 $2,916
================================================
(a) Reduced in 2005, 2004 and 2003 by benefits of $1.4 million, $0.9 million
and $0.8 million, respectively, from general business credits.
76
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE G--Income Taxes--Continued
The consolidated effective tax rates are different than the U.S. Federal
statutory rate. The differences result from the following:
Year Ended
--------------------------------------------------
October 30, October 31, November 2,
2005 2004 2003
--------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of federal
tax benefit 8.0 6.3 6.4
Tax effect of foreign operations - 2.4 3.8
Goodwill (0.7) (1.3) (3.3)
General business credits (3.9) (2.2) (4.5)
Minority interest (7.5) (2.2) -
Other-net, principally non deductible items 2.8 (1.2) 3.5
--------------------------------------------------
Effective tax rate 33.7% 36.8% 40.9%
==================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and also include foreign
operating loss carryforwards. Significant components of the Company's deferred
tax assets and liabilities are as follows:
October 30, October 31,
2005 2004
------------------------------------------
(In thousands)
Deferred Tax Assets:
Allowance for doubtful accounts $2,688 $3,573
Inventory valuation 1,679 526
Foreign loss carryforwards 2,746 1,692
Goodwill 2,740 2,256
Compensation accruals and deferrals 4,803 4,551
Warranty accruals 105 76
Foreign asset bases 133 377
Other-net 578 878
------------------------------------------
Total deferred tax assets 15,472 13,929
Less valuation allowance for deferred tax
assets 4,760 3,948
------------------------------------------
Deferred tax assets, net of valuation
allowance 10,712 9,981
------------------------------------------
Deferred Tax Liabilities:
Software development costs 3,324 4,526
Earnings not currently taxable 53 146
Accelerated book depreciation 5,872 7,688
Intangible assets 4,575 -
------------------------------------------
Total deferred tax liabilities 13,824 12,360
------------------------------------------
Net deferred tax liabilities ($3,112) ($2,379)
==========================================
Balance sheet classification:
Current assets $10,246 $9,385
Non-current liabilities (13,358) (11,764)
------------------------------------------
Net deferred tax liabilities ($3,112) ($2,379)
==========================================
77
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE G--Income Taxes--Continued
At October 30, 2005, deferred tax assets included $2.8 million related to
foreign loss carryforwards, with no limitation on the carryforward period and
$2.0 million related to goodwill written off as impaired. For financial
statement purposes, a full valuation allowance of $4.8 million has been
recognized due to the uncertainty of the realization of the foreign loss
carryforwards and future tax deductions related to goodwill. The valuation
allowance increased during 2005 by $0.8 million.
Substantially all of the undistributed earnings of foreign subsidiaries of $12.6
million at October 30, 2005 are considered permanently invested and,
accordingly, no federal income taxes thereon have been provided. Should these
earnings be distributed, foreign tax credits would reduce the additional federal
income tax that would be payable. Availability of credits is subject to
limitations; accordingly, it is not practicable to estimate the amount of the
ultimate deferred tax liability, if any, on accumulated earnings.
The American Jobs Creation Act of 2004 (the "Act") provided for a special
one-time tax deduction of 85% of certain foreign earnings that are repatriated.
The Company is currently assessing the impact the Act will have on the Company's
consolidated financial position or results of operations. The Company does not
anticipate a material benefit upon completion of its evaluation of the Act in
fiscal 2006 due to the relative high tax rates in those countries with
undistributed earnings.
NOTE H--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 as of the end of fiscal 2005 and the amortization expense for the
year:
October 30, October 31,
2005 2004
-------------------------------
(In thousands)
Intangible assets $16,310 $16,286
Accumulated amortization 1,396 288
-------------------------------
Net Carrying Value $14,914 $15,998
===============================
Annual amortization expense $1,108 $288
===============================
78
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE H--Goodwill and Intangible Assets--Continued
In each of the succeeding five years, the amount of amortization expense for
other intangible assets is estimated to be as follows:
Fiscal Year Amount
----------- ------
2006 $1,109
2007 $1,109
2008 $1,101
2009 $1,069
2010 $1,024
In fiscal 2005, the total other intangible assets acquired was $24,000. In
fiscal 2004, the total other intangible assets acquired was $16.3 million, as
noted in Note J. Amortization expense in fiscal 2003 was $92,000.
The following table represents the change in the carrying amount of goodwill
(see Note J) for each segment during each fiscal year.
Carrying Carrying Carrying
Value Value Value
November Additions October Additions October
Segment 2, 2003 2004 31, 2004 2005 30, 2005
------- ----------- ----------- -------- ----------- --------
(In thousands)
Staffing Services $8,340 $8,340 $8,340
Computer Systems 642 $20,162 20,804 $3,479(a) 24,283
----- ------- -------- ------- -------
Total $8,982 $20,162 $29,144 $3,479 $32,623
====== ======= ======= ======= =======
(a) Adjustments to the purchase price allocation of the Nortel acquisition.
NOTE I--Per Share Data
In calculating basic earnings per share, the effect of dilutive securities is
excluded. Diluted earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding and the assumed exercise of
dilutive outstanding stock options based on the treasury stock method.
Year Ended
-------------------------------------------
October 30, October 31, November 2,
2005 2004 2003
-------------------------------------------
(In thousands)
Denominator for basic earnings per share -
Weighted average number of shares 15,320 15,234 15,218
Effect of dilutive securities:
Employee stock options 97 120 7
-------------------------------------------
Denominator for diluted earnings per share -
Adjusted weighted average number of shares 15,417 15,354 15,225
===========================================
79
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE I--Per Share Data--Continued
Options to purchase 163,700, 45,400 and 582,539 shares of the Company's common
stock were outstanding at October 30, 2005, October 31, 2004 and November 2,
2003, respectively, but were not included in the computation of diluted earnings
per share because the effect of inclusion would have been antidilutive.
NOTE J--Acquisition of Businesses
On August 2, 2004, Volt Delta, a wholly-owned subsidiary of the Company, closed
a Contribution Agreement (the "Contribution Agreement") with Nortel Networks
under which Nortel Networks contributed certain of the assets (consisting
principally of a customer base and contracts, intellectual property and
inventory) and certain specified liabilities of its directory and operator
services ("DOS") business to Volt Delta in exchange for a 24% minority equity
interest in Volt Delta. Together with its subsidiaries, Volt Delta is reported
as the Company's Computer Systems segment. Volt Delta is using the assets
acquired from Nortel Networks to enhance the operation of its DOS business.
In addition, the companies entered into a ten-year relationship agreement to
maintain the compatibility and interoperability between future releases of
Nortel Networks' Traffic Operator Position System ("TOPS") switching platform
and Volt Delta's IWS/MWS operator workstations and associated products. Nortel
Networks and Volt Delta will work together developing feature content and
release schedules for, and to ensure compatibility between, any TOPS changes
that require a change in Volt Delta's products or workstations.
Also, on August 2, 2004, the Company and certain subsidiaries entered into a
Members' Agreement (the "Members' Agreement") with Nortel Networks which defined
the management of Volt Delta and the respective rights and obligations of the
equity owners thereof. The Members' Agreement provides that, commencing two
years from the date thereof, Nortel Networks may exercise a put option or Volt
Delta may exercise a call option, in each case to affect the purchase by Volt
Delta of Nortel Networks' minority interest in Volt Delta ("Contingent
Liability"). The option was cancelled by an amendment to the Members' Agreement
on December 29, 2005 (See Note Q-Subsequent Events).
The Company estimated the value of Volt Delta as of August 2, 2004 at $141.5
million, which resulted in the 24% minority interest being valued at $34
million. The value of Volt Delta was estimated by using an average of three
recognized valuation methods referred to as the: market multiple methodology,
the comparable transaction methodology and the discounted cash flow methodology.
The market multiple methodology involved valuing Volt Delta at a multiple of its
recent historical and projected revenues, EBIT (earnings before interest and
taxes) and EBITDA (earnings before interest, taxes, depreciation and
amortization). The range of multiples used was determined from other companies
in similar industries. The comparable transaction methodology involved valuing
Volt Delta at a multiple of its recent historical revenues, EBIT and EBITDA. The
range of multiples used was determined from those present in recent acquisitions
of companies in similar industries. The discounted cash flow methodology
involved valuing Volt Delta at the discounted value of its projected future cash
flows.
Intangible assets of $15.1 million, were deemed to be the present values of the
acquired projected maintenance income and the acquired workstation technology.
In valuing the maintenance income, Volt Delta used the same discount rate as
used in the discounted cash flow methodology and an assumed attrition rate for
the acquired customer contracts. In valuing the workstation technology, it was
assumed that Volt Delta would benefit from the acquired technology by being
relieved from having to pay future royalties to a third-party for the software
acquired. The assumed savings of the royalty on projected future revenues was
based upon a royalty percent arrived at by a review of the marketplace and the
use of the same discount rate used in the discounted cash flow methodology. The
other assets acquired and liabilities assumed were valued at their fair value at
the date of acquisition.
80
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--Acquisition of Businesses--Continued
The assets and liabilities of the acquired business are accounted for under the
purchase method of accounting at the date of acquisition, recorded at their fair
values, with the recognition of a minority interest to reflect Nortel Networks'
24% investment in Volt Delta. The results of operations have been included in
the Consolidated Statements of Operations since the acquisition date.
Purchase Allocation
Fair Value of Assets Acquired and Liabilities Assumed and Established
(In thousands)
Cash 3,491
Inventories 1,551
Deferred taxes 1,497
Deposit and other assets 404
Goodwill 23,641
Intangible assets 15,900
-------
Total assets $46,484
=======
Accrued wages and commissions $ 700
Other accrued expenses 2,189
Other liabilities 2,791
Long-term debt 1,828
Deferred taxes 4,976
Minority interest 34,000
-------
Total liabilities $46,484
=======
The intangible assets represent the fair value of customer relationships ($15.1
million) and product technology ($0.8 million), and are being amortized over 16
years and 10 years, respectively. Since the members' interests in Volt Delta are
treated as partnership interests, the tax deduction for amortization will not
commence until the Contingent Liability is final and determined.
The following unaudited pro forma information combines the consolidated results
of operations of the Company with those of the DOS business as if the
acquisition had occurred at the beginning of fiscal 2003. This pro forma
financial information is presented for comparative purposes only and is not
necessarily indicative of the operating results that actually would have
occurred had this acquisition been consummated at the start of fiscal 2003. In
addition, these results are not intended to be a projection of future results
and do not reflect any synergies that might be achieved from the combined
operations.
81
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--Acquisition of Businesses--Continued
Pro Forma Results (Unaudited)
Year Ended
October November
31, 2004 2, 2003
---------- ----------
(In thousands of dollars, except per share data)
Net sales $1,953,842 $1,649,939
========== ==========
Operating income $51,326 $18,512
========== ==========
Net income $34,678 $5,922
========== ==========
Earnings per share:
Basic $2.27 $0.39
========== ==========
Diluted $2.25 $0.39
========== ==========
In May 2004, DataNational, a wholly-owned subsidiary of the Company, purchased
certain of the assets of an independent telephone directory publisher for $0.4
million. The assets consisted of the rights to produce and sell certain
independent telephone directories in the state of Georgia. The entire purchase
price represents the fair value of the acquired customer listings, prospect
listings and documentation, which is reflected in other intangible assets, and
is being amortized over 5 years.
NOTE K--Stock Option Plan
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 October
30, 2005 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.
82
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE K--Stock Option Plan--Continued
Transactions involving outstanding stock options under the plan were:
Number of Shares Weighted
Average
Exercise Price
--------------------------------
Outstanding-November 3, 2002 566,359 $21.08
Granted 38,750 12.02
Exercised (3,000) 18.08
Forfeited (19,570) 21.43
-----------------
Outstanding-November 2, 2003 582,539 20.48
Granted 13,800 25.39
Exercised (62,210) 18.55
Forfeited (6,376) 25.67
-----------------
Outstanding-October 31, 2004 527,753 20.77
Exercised (56,630) 18.49
Forfeited (30,225) 22.59
-----------------
Outstanding-October 30, 2005 440,898 $20.94
=================
Price ranges of outstanding and exercisable options as of October 30, 2005 are
summarized below:
Outstanding Options Exercisable Options
-------------------------------------------------------- ---------------------------------------
Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices of Shares Life (Years) Exercise Price of Shares Exercise Price
- ----------------- --------- ----------- ---------------- --------- --------------
$10.67 - $17.50 58,330 5.9 $13.39 37,180 $14.62
$18.08 - $18.08 175,968 0.5 $18.08 175,968 $18.08
$18.13 - $22.31 89,720 4.4 $20.25 80,690 $20.43
$22.47 - $33.94 88,680 2.9 $26.00 77,880 $26.07
$35.56 - $50.56 28,200 2.2 $40.70 28,200 $40.70
NOTE L--Segment Disclosures
Financial data concerning the Company's sales, segment profit (loss) and
identifiable assets by reportable operating segment for fiscal years 2005, 2004
and 2003 are presented in tables below.
Total sales include both sales to unaffiliated customers, as reported in the
Company's consolidated statements of operations, and intersegment sales. Sales
between segments are generally priced at fair market value. The Company
evaluates performance based on segment profit or loss from operations before
general corporate expenses, interest income and other expense, interest expense,
foreign exchange gains and losses and income taxes.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Therefore, the
Company's operating profit is the total segment profit less general corporate
expenses. Identifiable assets are those assets that are used in the Company's
operations in the particular operating segment. Corporate assets consist
principally of cash and cash equivalents, investments and an Enterprise Resource
Planning system.
83
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
The Company operates in two major businesses, which are primarily focused on the
markets they serve: staffing services and telecommunications and information
solutions. The Company's internal reporting structure is based on the services
and products provided to customers which results in the following four
reportable operating segments:
Staffing Services - This segment provides a broad range of employee staffing
services to a wide range of customers throughout the United States, Canada, and
Europe and has commenced operations in Asia. These services fall within three
major functional areas: Staffing Solutions, Information Technology Solutions and
E-Procurement Solutions. Staffing Solutions provides a full spectrum of managed
staffing and temporary/alternative personnel employment and direct hire
placement. Information Technology Solutions provides a wide range of information
technology services, including consulting, turnkey project management in the
product development lifecycle, IT and customer contact arenas. E-Procurement
Solutions provides global vendor neutral procurement and human capital
management solutions by combining web-based tools and business process
outsourcing services.
Telephone Directory - This segment publishes independent telephone directories
in the United States and publishes telephone directories in Uruguay; provides
telephone directory production, commercial printing, database management, sales
and marketing services and licenses directory production and contract management
software systems to directory publishers and others.
Telecommunications Services - This segment provides telecommunications services,
including design, engineering, construction, installation, maintenance and
removals in the outside plant and central office of telecommunications and cable
companies, and within their customers' premises, as well as for both large
commercial and governmental entities requiring telecommunications services; and
also provides complete turnkey services for wireless and wireline
telecommunications companies.
Computer Systems - This segment provides directory assistance services, both
traditional and enhanced, to wireline and wireless telecommunications companies;
provides directory assistance content; designs, develops, integrates, markets,
sells and maintains computer-based directory assistance systems and other
database management and telecommunications systems, primarily for the
telecommunications industry; and provides IT services to the Company's other
businesses and third parties.
84
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
Sales, operating profit and identifiable assets by the Company's reportable
operating segment are as follows:
October 30, October 31, November 2,
2005 2004 2003
-----------------------------------------------
Net Sales (In thousands)
Staffing Services:
Staffing $1,759,683 $1,580,225 $1,266,875
Managed Services 1,157,168 1,148,116 1,043,572
-----------------------------------------------
Total gross sales 2,916,851 2,728,341 2,310,447
Less Non-recourse Managed Services (1,121,196) (1,120,079) (967,379)
Intersegment sales 6,155 3,839 2,367
-----------------------------------------------
1,801,810 1,612,101 1,345,435
-----------------------------------------------
Telephone Directory:
Sales to unaffiliated customers 82,298 72,194 69,750
Intersegment sales - 1 43
-----------------------------------------------
82,298 72,195 69,793
-----------------------------------------------
Telecommunications Services:
Sales to unaffiliated customers 137,799 134,266 112,201
Intersegment sales 1,212 1,132 638
-----------------------------------------------
139,011 135,398 112,839
-----------------------------------------------
Computer Systems:
Sales to unaffiliated customers 161,867 110,055 84,472
Intersegment sales 11,252 9,962 9,167
-----------------------------------------------
173,119 120,017 93,639
-----------------------------------------------
Elimination of intersegment sales (18,619) (14,934) (12,215)
-----------------------------------------------
Total Net Sales $2,177,619 $1,924,777 $1,609,491
===============================================
Segment Profit (Loss)
Staffing Services $31,179 $36,718 $21,072
Telephone Directory 14,895 10,115 6,748
Telecommunications Services (2,429) (2,838) (3,986)
Computer Systems 35,801 30,846 14,679
-----------------------------------------------
Total segment profit 79,446 74,841 38,513
General corporate expenses (38,839) (30,812) (27,668)
-----------------------------------------------
Total Operating Profit $40,607 $44,029 $10,845
===============================================
85
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
October 30, October 31,
2005 2004
------------------------------
(In thousands)
Assets:
Staffing Services $446,990 $422,658
Telephone Directory 55,238 55,740
Telecommunications Services 53,173 52,770
Computer Systems 103,720 102,487
------------------------------
659,121 633,655
Cash, investments and other
corporate assets 29,591 56,381
------------------------------
Total assets $688,712 $690,036
==============================
Sales to external customers and assets of the Company by geographic area are as
follows:
Year Ended
----------------------------------------------
October 30, October 31, November 2,
2005 2004 2003
----------------------------------------------
Sales:
Domestic $2,058,661 $1,822,544 $1,484,720
International, principally Europe 118,958 102,233 124,771
----------------------------------------------
$2,177,619 $1,924,777 $1,609,491
==============================================
Year Ended
-------------------------------
October 30, October 31,
2005 2004
-------------------------------
(In thousands)
Assets:
Domestic $633,381 $634,454
International, principally Europe 55,331 55,582
-------------------------------
$688,712 $690,036
===============================
In fiscal 2005, the Telecommunications Services segment's sales to two customers
accounted for approximately 30% and 14% respectively, of the total sales of that
segment; the Computer Systems segment's sales to two customers accounted for
approximately 31% and 13% of the total sales of that segment; the Staffing
Services segment's sales to one customer accounted for approximately 13% of the
total sales of that segment. In fiscal 2005, the sales to seven operating units
of one customer, Microsoft Corporation, accounted for 11% of the Company's net
sales.
86
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
In fiscal 2004, the Telecommunications Services segment's sales to four
customers accounted for approximately 17%, 15%, 12%, and 11% respectively, of
the total sales of that segment; the Computer Systems segment's sales to one
customer accounted for approximately 28% of the total sales of that segment; the
Staffing Services segment's sales to one customer accounted for approximately
14% of the total sales of that segment; and the Telephone Directory segment's
sales to one customer accounted for approximately 10% of the total sales of that
segment. In fiscal 2004, the sales to seven operating units of one customer,
Microsoft Corporation, accounted for 12% of the Company's net sales.
In fiscal 2003, the Telecommunications Services segment's sales to three
customers accounted for approximately 23%, 18%, and 12%, respectively, of the
total sales of that segment; the Computer Systems segment's sales to two
customers accounted for approximately 27% and 13% of the total sales of that
segment; the Staffing Services segment's sales to one customer accounted for
approximately 13% of the total sales of that segment; and the Telephone
Directory segment's sales to one customer accounted for approximately 10% of the
total sales of that segment. In fiscal 2003, the sales to seven operating units
of one customer, Microsoft Corporation, accounted for 10.6% of the Company's net
sales.
The loss of one or more of these customers, unless the business is replaced by
the segment, could result in an adverse effect on the results for that segment's
business.
Capital expenditures and depreciation and amortization by the Company's
operating segments are as follows:
Year Ended
-----------------------------------------------
October 30, October 31, November 2,
2005 2004 2003
-----------------------------------------------
(In thousands)
Capital Expenditures:
Staffing Services $17,061 $9,270 $8,026
Telephone Directory 151 391 2,104
Telecommunications Services 2,973 1,803 1,766
Computer Systems 6,520 17,491 4,768
----------------------------------------------
Total segments 26,705 28,955 16,664
Corporate 1,806 1,782 1,326
----------------------------------------------
$28,511 $30,737 $17,990
==============================================
Depreciation and Amortization (a):
Staffing Services $10,399 $9,365 $8,942
Telephone Directory 1,848 2,067 2,024
Telecommunications Services 1,771 2,862 3,870
Computer Systems 9,840 5,744 3,770
----------------------------------------------
Total segments 23,858 20,038 18,606
Corporate 5,745 5,499 5,725
----------------------------------------------
$29,603 $25,537 $24,331
==============================================
(a) Includes depreciation and amortization of property, plant and equipment for
fiscal years 2005, 2004 and 2003 of $28.5 million, $25.2 million and $24.2
million, respectively.
87
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE M--Employee Benefits
The Company has various savings plans that permit eligible employees to make
contributions on a pre-tax salary reduction basis in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. In January 2000, the
Company amended the savings plan for permanent employees to provide a Company
contribution in the form of a 50% match of the first 3% of salary contributed by
eligible participants. For participants with less than five years of service,
the Company's matching contributions vest at 20% per year over a five-year
period. Company contributions to the plan are made semi-annually. Under the
plan, the Company's contributions of $1.7 million, $1.4 million and $1.3 million
in fiscal 2005, fiscal 2004 and fiscal 2003, respectively, were accrued and
charged to compensation expense.
The Company has a non-qualified deferred compensation and supplemental savings
plan, which permits eligible employees to defer a portion of their salary. This
plan consists solely of participant deferrals and earnings thereon, which are
reflected as a current liability under accrued wages and commissions. The
Company invests the assets of the plan in mutual funds based upon investment
preferences of the participants.
NOTE N--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts, foreign currency options and exchange contracts, are recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting, and
if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are
recorded in income along with the portions of the changes in the fair values of
the hedged items that relate to the hedged risks. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in other comprehensive income, net of deferred taxes.
Changes in fair values of derivatives not qualifying as hedges are reported in
the results of operations. At October 30, 2005, the Company had outstanding
foreign currency option contracts in the aggregate notional amount equivalent to
$2.9 million, which approximated its net investment in foreign operations and is
accounted for as a hedge under SFAS No. 52.
Restricted cash at October 30, 2005 and October 31, 2004 of $26.1 million and
$43.7 million, respectively, was restricted to cover obligations that were
reflected in accounts payable at that date. These amounts primarily related to
certain contracts with customers, for whom the Company manages the customers'
alternative staffing requirements, including the payment of associate vendors.
88
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE O--Leases
The future minimum rental commitments as of October 30, 2005 for all
non-cancelable operating leases were as follows:
Fiscal Year Total Office Space Equipment
- -------------------------------------------------------------
(In thousands)
2006 $19,378 $18,380 $998
2007 14,857 14,315 542
2008 7,501 7,423 78
2009 3,929 3,929 -
2010 2,733 2,733 -
Thereafter 414 414 -
-----------------------------------------------
$48,812 $47,194 $1,618
===============================================
Many of the leases also require the Company to pay and contribute to property
taxes, insurance and ordinary repairs and maintenance.
Rental expense for all operating leases for fiscal years 2005, 2004 and 2003 was
$29.9 million, $25.6 million and $24.0 million, respectively.
NOTE P--Related Party Transactions
During fiscal 2005, 2004 and 2003, the Company paid or accrued $0.8 million,
$1.9 million and $0.5 million, respectively, to the law firms of which Lloyd
Frank, a director of the Company, is or was of counsel, for services rendered to
the Company and expenses reimbursed. During fiscal 2005, 2004 and 2003, the
Company also paid $5,000, $13,000 and $47,700, respectively, to the law firm of
which Bruce Goodman, a director of the Company, is a partner, for services
rendered to the Company.
The Company renders various payroll and related services to a corporation
primarily owned by Steven A. Shaw, an officer and director, for which the
Company received approximately $5,000 in excess of its direct costs in fiscal
2005. Such services are performed on a basis substantially similar to those
performed by the Company for and at substantially similar rates as charged by
the Company to unaffiliated third parties. In addition, the Company rents
approximately 2,600 square feet of office space to that corporation in the
Company's El Segundo, California facility (which is located within the Company's
facility and shares common areas), which the Company does not require for its
own use, on a month-to-month basis at a rental of $1,750 per month ($1,500 per
month prior to March 31, 2004). Based on the nature of the premises and a report
from a real estate broker, the Company believes the rent is a fair and
reasonable rate for the space.
89
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE P--Related Party Transactions--Continued
In 2005, after an investigation conducted by independent counsel appointed by
the Audit Committee of the Board of Directors, the Audit Committee concluded
that Mr. Thomas Daley, an executive officer of the Company, had, in July, 2005,
exercised options and sold the underlying shares of stock of the Company in
violation of the Company's Insider Trading Policy. The Audit Committee required
Mr. Daley to pay $31,500, representing the difference between the price at which
Mr. Daley sold the stock and the average market price of the Company's stock
over the three days following the Company's release of its 3rd quarter results,
and pay a further penalty of $10,000. These moneys have been paid by Mr. Daley
to the Company's General Counsel's attorney escrow account. The matter was
self-reported on behalf of the Company to the Securities and Exchange
Commission, and is under review by that agency. In connection with this matter,
the Audit Committee recommended that the Company advance Mr. Daley's legal fees
upon his entering into a written agreement to repay such fees if it were
ultimately determined that he was not entitled to be indemnified for legal
expenses under applicable law. The Company has advanced to date $95,800 directly
to Mr. Daley's attorneys in connection with such matter. The Company has also
paid to date legal fees of the independent counsel to the Audit Committee of
approximately $260,000 associated with this matter.
NOTE Q--Subsequent Events
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 is required
to pay Nortel Networks approximately $56.4 million for its minority interest in
the LLC, and an excess cash distribution of approximately $5.4 million. Under
the terms of the agreement, Volt Delta paid $25.0 million on December 29, 2005
with the remaining $36.8 million due February 15, 2006. The transaction is
expected to result in an increase of approximately $18.0 million in goodwill and
intangible assets and elimination of the minority interest.
On December 30, 2005, Volt Delta acquired varetis AG's Varetis Solutions GmbH
subsidiary for $24.8 million. The acquisition of Varetis Solutions, GmbH 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 acquisition is expected to result
in an increase of approximately $20.0 million in goodwill and intangible assets.
The Company is presently valuing both transactions to determine the final
allocation of the purchase price to various types of potential intangible
assets. 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 is expected to be completed before
the end of fiscal 2006.
In December 2005, the credit agreement was amended to consent to the
consummation of the acquisition by the Company of the twenty-four (24%) percent
interest in Volt Delta owned by Nortel Networks and to modify certain of the
financial covenants contained in the Credit Agreement and increase the amount of
financing permitted under the Securitization Program.
90
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE R--Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for the
fiscal years ended October 30, 2005 and October 31, 2004. Each quarter contained
thirteen weeks.
Fiscal 2005 Quarter
-----------------------------------------------------
First Second Third Fourth
-----------------------------------------------------
(In thousands, except per share data)
Net sales $497,835 $546,045 $543,515 $590,224
=====================================================
Gross profit $29,662 $39,722 $40,943 $52,741
=====================================================
Net (loss) income ($808) $4,527 $4,966 $8,355
=====================================================
Net (loss) income-basic ($0.05) $0.30 $0.32 $0.54
=====================================================
Net (loss) income-diluted ($0.05) $0.29 $0.32 $0.54
=====================================================
Fiscal 2004 Quarter (Note 1)
-----------------------------------------------------
First Second Third Fourth
-----------------------------------------------------
(In thousands, except per share data)
Net sales $413,959 $478,479 $500,732 $531,607
=====================================================
Gross profit $24,111 $34,240 $43,738 $50,601
=====================================================
Income (loss) from continuing operations ($1,153) $4,608 $9,239 $11,502
Discontinued operations, net of taxes - 9,520 - -
-----------------------------------------------------
Net (loss) income ($1,153) $14,128 $9,239 $11,502
=====================================================
Per share data:
Income (loss) from continuing operations-
basic ($0.08) $0.31 $0.61 $0.75
=====================================================
Income (loss) from continuing operations-
diluted ($0.08) $0.30 $0.60 $0.75
=====================================================
Net (loss) income-basic ($0.08) $0.93 $0.61 $0.75
=====================================================
Net (loss) income-diluted ($0.08) $0.92 $0.60 $0.75
=====================================================
Note 1 - In the fourth quarter of fiscal 2004, the Company recognized a gain on
sale of real estate from the sale of land and a building in Anaheim,
California for cash. The property was no longer used by the Company.
Historically, the Company's results of operations have been lowest in its first
fiscal quarter as a result of reduced requirements for the Staffing Services
segment's personnel due to the Thanksgiving, Christmas and New Year holidays as
well as certain customer facilities closing for one to two weeks. In addition,
the Telephone Directory segment's DataNational division publishes more
directories during the second half of the fiscal year. During the third and
fourth quarter of the fiscal year, the Staffing Services segment benefits from a
reduction of payroll taxes and increased use of Administrative and Industrial
services during the summer vacation period.
91
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
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 October
30, 2005 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 their evaluation the Company did not maintain effective internal
controls over financial reporting as of October 30, 2005, 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), at a single subsidiary. 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 consolidated financial
statements.
Ernst & Young LLP, the Company's independent registered public accounting firm,
issued on January 16, 2006, except for the second paragraph of Note A, which is
as of June 21, 2006, an unqualified opinion on the Company's financial
statements for the fiscal year ended October 30, 2005.
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.
92
ITEM 9A. CONTROLS AND PROCEDURES--Continued
Management's Annual Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate "internal control over financial reporting" (as defined in Exchange
Act Rule 13a-15(f) and 15d-15(f)). Management, under the supervision and
with the participation of the Company's Co-Chief Executive Officers and
Chief Financial Officer, evaluated the effectiveness of the Company's
internal control over financial reporting using the COSO criteria as of
October 30, 2005.
In management's assessment the Company did not maintain effective internal
control over financial reporting, as of October 30, 2005, based on the COSO
criteria, because of the effect of the material weakness described above.
The Company's independent registered public accounting firm, Ernst & Young
LLP, had audited the effectiveness of the Company's internal control over
financial reporting and management's assessment of the effectiveness of such
controls as of October 30, 2005, as stated in their report which is included
herein.
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
93
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Volt Information Sciences, Inc.
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
Volt Information Sciences, Inc. did not maintain effective internal control over
financial reporting as of October 30, 2005, because of the effect of a material
weakness in the Company's system of internal control, at a subsidiary, as
discussed below, based on criteria established in Internal Control -Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Volt Information Sciences' management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment. The Company's subsidiary did not appropriately
calculate and reconcile its fixed assets and related depreciation detail records
to the amounts recorded in its financial statements. In addition, the Company
did not appropriately reconcile the deferred tax liability recorded in its
financial statements relating to depreciation
94
REPORT OF ERNST & YOUNG LLP--Continued
The Board of Directors and Shareholders
Volt Information Sciences, Inc.--Continued
timing differences at this subsidiary to the supporting documentation. These
findings resulted in material adjustments to the consolidated financial
statements. This material weakness was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the fiscal 2005
financial statements, and this report does not affect our report dated January
16, 2006 on those financial statements.
In our opinion, management's assessment that Volt Information Sciences, Inc. did
not maintain effective internal control over financial reporting as of October
30, 2005, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, because of the effect of the material weakness
described above on the achievement of the objectives of the control criteria,
Volt Information Sciences, Inc. has not maintained effective internal control
over financial reporting as of October 30, 2005, based on the COSO criteria.
/s/ ERNST & YOUNG LLP
New York, New York
January 16, 2006
ITEM 9B. OTHER INFORMATION
None.
PART III
The information called for by Part III (Items 10, 11, 12, 13 and 14) of Form
10-K will be included in the Company's Proxy Statement for the Company's 2005
Annual Meeting of Shareholders, which the Company intends to file within 120
days after the close of its fiscal year ended October 30, 2005 and is hereby
incorporated by reference to such Proxy Statement, except that the information
as to the Company's executive officers which follows Item 4 in this Report and
the information as to the Company's equity compensation plans contained in the
last paragraph of Item 5 in this Report are incorporated by reference into Items
10 and 12, respectively, of this Report.
95
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
15(a)(1). Financial Statements
The following consolidated financial statements of Volt Information
Sciences, Inc. and subsidiaries are included in Item 8 of this
Report:
Page
Consolidated Balance Sheets--October 30, 2005 and October 31, 2004 58
Consolidated Statements of Operations--Years ended October 30, 2005,
October 31, 2004 and November 2, 2003 59
Consolidated Statements of Stockholders' Equity--Years ended
October 30, 2005, October 31, 2004 and November 2, 2003 60
Consolidated Statements of Cash Flows--Years ended October 30, 2005,
October 31, 2004 and November 2, 2003 61
Notes to Consolidated Financial Statements 63
15(a)(2). Financial Statement Schedule
The following consolidated financial statement schedule of Volt
Information Sciences, Inc. and subsidiaries is included in response
to Item 15(d):
Schedule II--Valuation and qualifying accounts S-1
Other schedules (Nos. I, III, IV and V) for which provision is made
in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions
or are not applicable and, therefore, have been omitted.
96
15(a)(3). Exhibits
Exhibit Description
3.1 Restated Certificate of Incorporation of the Company, as
filed with the Department of State of New York on January 29,
1997. (Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended November 1, 1996).
3.2 By-Laws of the Company.
4.1(a) Receivables Purchase Agreement, dated as of April 12, 2002 among
Volt Funding Corp., Three Rivers Funding Corporation and Volt
Information Sciences, Inc. (Exhibit 99.1(b) to the Company's
Current Report on Form 8-K dated April 22, 2002, File No. 1-9232).
4.1(b) Second Amendment to Receivables Purchase Agreement dated as of
March 31, 2004 among Volt Funding Corp., Three Rivers Funding and
Volt Information Sciences, Inc. (Exhibit 4.02 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 2, 1004,
File No. 1-9232).
4.1(c) Third Amendment to Receivables Purchase Agreement dated as of
April 8, 2005 among Volt Funding Corp., Three Rivers Funding and
Volt Information Sciences, Inc. (Exhibit 99.1 to the Company's
Current Report on Form 8-K dated April 14, 2005, File No. 1-9232).
4.1(d) Amended and Restated Credit Agreement dated as of April 12, 2004
among Volt Information Sciences, Inc., Gatton Volt Consulting
Group Limited, the guarantors party thereto, the lenders party
thereto, and JP Morgan Chase Bank, as administrative agent.
(Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for
the quarter ended May 2, 1004, File No. 1-9232).
4.1(e) Second Amended and Restated Credit Agreement, dated as of April
14, 2005 among Volt Information Sciences, Inc. and Gatton Volt
Consulting Group Limited, the guarantor's party thereto, the
lenders party thereto and JP Morgan Chase Bank, as administrative
agent. (Exhibit 99.1 to the Company is Current Report on Form 8-K
dated April 19, 2005 File No. 1-9232).
4.1(f) Consent and First Amendment to the Second Amended and Restated
Credit Agreement dated as of November 15, 2005, among Volt
Information Sciences, Inc. and Gatton Volt Consulting Group
Limited, the guarantors party thereto, the lenders party thereto
and J.P. Morgan Chase Bank, as administrative agent.
4.1(g) Consent and Second Amendment to the Second Amended and Restated
Credit Agreement dated as of December 27, 2005, among Volt
Information Sciences, Inc. and Gatton Volt Consulting Group
Limited, the guarantors party thereto, the lenders party thereto
and J.P. Morgan Chase, as administrative agent (Exhibit 99.1 to
the Company's Current Report on Form 8-K dated January 4, 2006,
File No. 1-9232).
10.1+ 1995 Non-Qualified Stock Option Plan, as amended. (Exhibit
10.1(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended October 30, 1998, File No. 1-9232).
10.2(a)+ Employment Agreement, dated as of May 1, 1987, between the Company
and William Shaw. (Exhibit 19.01 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.2(b)+ Amendment, dated January 3, 1989, to Employment Agreement between
the Company and William Shaw. (Exhibit 19.01(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended October 28,
1988, File No. 1-9232).
97
15(a)(3). Exhibits--Continued
Exhibit Description
10.3(a)+ Employment Agreement, dated as of May 1, 1987, between the Company
and Jerome Shaw (Exhibit 19.02 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.3(b)+ Amendment, dated January 3, 1989, to Employment Agreement between
the Company and Jerome Shaw (Exhibit 19.02(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended October 28,
1988, File No. 1-9232).
10.4(a)+ Employment Agreement entered into on or about August 25, 2004
between the Company and Thomas Daley.
10.4(b)+ Undertaking dated August 5, 2005 from Thomas Daley to the Company.
10.5+ Form of Indemnification Agreement (Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31, 2005,
File No. 1-9232).
10.6 Sale and Purchase Agreement dated as of November 12, 2005 among
Blitz 05-282 GmbH (now known as Volt Delta GmbH), varetis AG and
varetis solutions GmbH.
10.7 Letter of Agreement dated December 28, 2005 among Volt Delta
Resources, LLC, Volt Information Sciences, Inc. Volt Delta
Resources Holdings, Inc. Nuco I, Ltd. And Nortel Networks, Inc.
(Exhibit 99.2 to the Company's Current Report on Form 8-K
dated January 4, 2006, File No. 1-9232).
10.8 Promissory Note and Security Agreement dated December 28, 2005
from Volt Delta Resources, LLC to Nortel Networks.
(Exhibit 99.3 to the Company's Current Report on Form 8-K dated
January 2, 2006, File No. 1-9232).
14. Volt Information Sciences, Inc. and Subsidiaries Code of Ethical
Conduct for Financial Managers.
21. Subsidiaries of the Registrant.
23.* Consent of Independent Registered Public Accounting Firm.
31.1* Certification of Co-Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Co-Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.3* Certification of Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Co-Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Co-Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.3* Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
+ Management contract or compensation plan or arrangement.
* Filed herewith. All other exhibits are incorporated herein by
reference to the exhibit indicated in the parenthetical
references.
98
UNDERTAKING
The Company hereby undertakes to furnish to the Securities and Exchange
Commission, upon request, all constituent instruments defining the rights of
holders of long-term debt of the Company and its consolidated subsidiaries not
filed herewith. Such instruments have not been filed since none are, nor are
being, registered under Section 12 of the Securities Exchange Act of 1934 and
the total amount of securities authorized under any such instruments does not
exceed 10% of the total assets of the Company and its subsidiaries on a
consolidated basis.
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
Dated: New York, New York By: /s/ Jack Egan
June 27, 2006 -------------
Jack Egan
Senior Vice President and
Principal Financial Officer
100
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------- ----------- -------------
Additions
------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
----------------------------------- ----------- -------------
(In thousands)
Year ended October 30, 2005
Deducted from asset accounts:
Allowance for uncollectable accounts $10,210 $3,838 $6,521 (a,b) $7,527
Allowance for deferred tax assets 3,948 $812 (c) 4,760
Unrealized gain on marketable (d)
securities (60) (41) (101)
Year ended October 31, 2004
Deducted from asset accounts:
Allowance for uncollectable accounts $10,498 $7,784 $8,072 (a,b) $10,210
Allowance for deferred tax assets 3,635 $313 (c) 3,948
Unrealized gain on marketable (d)
securities (153) 93 (60)
Year ended November 2, 2003
Deducted from asset accounts:
Allowance for uncollectable accounts $10,994 $6,227 $6,723 (a,b) $10,498
Allowance for deferred tax assets 3,756 ($121)(c) 3,635
Unrealized (gain) on marketable (d)
securities (12) (141) (153)
(a)--Includes write-off of uncollectable accounts.
(b)--Includes foreign currency translation gains of $91 in 2005, $117 in 2004
and $22 in 2003. (c)--Charge to income tax provision. (d)--Charge (credit) to
stockholders' equity.
S-1
INDEX TO EXHIBITS
Exhibit Description
3.1 Restated Certificate of Incorporation of the Company, as
filed with the Department of State of New York on January 29,
1997. (Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended November 1, 1996).
3.2 By-Laws of the Company.
4.1(a) Receivables Purchase Agreement, dated as of April 12, 2002 among
Volt Funding Corp., Three Rivers Funding Corporation and Volt
Information Sciences, Inc. (Exhibit 99.1(b) to the Company's
Current Report on Form 8-K dated April 22, 2002, File No. 1-9232).
4.1(b) Second Amendment to Receivables Purchase Agreement dated as of
March 31, 2004 among Volt Funding Corp., Three Rivers Funding and
Volt Information Sciences, Inc. (Exhibit 4.02 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 2, 1004,
File No. 1-9232).
4.1(c) Third Amendment to Receivables Purchase Agreement dated as of
April 8, 2005 among Volt Funding Corp., Three Rivers Funding and
Volt Information Sciences, Inc. (Exhibit 99.1 to the Company's
Current Report on Form 8-K dated April 14, 2005, File No. 1-9232).
4.1(d) Amended and Restated Credit Agreement dated as of April 12, 2004
among Volt Information Sciences, Inc., Gatton Volt Consulting
Group Limited, the guarantors party thereto, the lenders party
thereto, and JP Morgan Chase Bank, as administrative agent.
(Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for
the quarter ended May 2, 1004, File No. 1-9232).
4.1(e) Second Amended and Restated Credit Agreement, dated as of April
14, 2005 among Volt Information Sciences, Inc. and Gatton Volt
Consulting Group Limited, the guarantor's party thereto, the
lenders party thereto and JP Morgan Chase Bank, as administrative
agent. (Exhibit 99.1 to the Company is Current Report on Form 8-K
dated April 19, 2005 File No. 1-9232).
4.1(f) Consent and First Amendment to the Second Amended and Restated
Credit Agreement dated as of November 15, 2005, among Volt
Information Sciences, Inc. and Gatton Volt Consulting Group
Limited, the guarantors party thereto, the lenders party thereto
and J.P. Morgan Chase Bank, as administrative agent.
4.1(g) Consent and Second Amendment to the Second Amended and Restated
Credit Agreement dated as of December 27, 2005, among Volt
Information Sciences, Inc. and Gatton Volt Consulting Group
Limited, the guarantors party thereto, the lenders party thereto
and J.P. Morgan Chase, as administrative agent (Exhibit 99.1 to
the Company's Current Report on Form 8-K dated January 4, 2006,
File No. 1-9232).
10.1+ 1995 Non-Qualified Stock Option Plan, as amended. (Exhibit
10.1(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended October 30, 1998, File No. 1-9232).
10.2(a)+ Employment Agreement, dated as of May 1, 1987, between the Company
and William Shaw. (Exhibit 19.01 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.2(b)+ Amendment, dated January 3, 1989, to Employment Agreement between
the Company and William Shaw. (Exhibit 19.01(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended October 28,
1988, File No. 1-9232).
INDEX TO EXHIBITS-- Continued
10.3(a)+ Employment Agreement, dated as of May 1, 1987, between the Company
and Jerome Shaw (Exhibit 19.02 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.3(b)+ Amendment, dated January 3, 1989, to Employment Agreement between
the Company and Jerome Shaw (Exhibit 19.02(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended October 28,
1988, File No. 1-9232).
10.4(a)+ Employment Agreement entered into on or about August 25, 2004
between the Company and Thomas Daley.
10.4(b)+ Undertaking dated August 5, 2005 from Thomas Daley to the Company.
10.5+ Form of Indemnification Agreement (Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31, 2005,
File No. 1-9232).
10.6 Sale and Purchase Agreement dated as of November 12, 2005 among
Blitz 05-282 GmbH (now known as Volt Delta GmbH), varetis AG and
varetis solutions GmbH.
10.7 Letter of Agreement dated December 28, 2005 among Volt Delta
Resources, LLC, Volt Information Sciences, Inc. Volt Delta
Resources Holdings, Inc. Nuco I, Ltd. And Nortel Networks, Inc.
(Exhibit 99.2 to the Company's Current Report on Form 8-K
dated January 4, 2006, File No. 1-9232).
10.8 Promissory Note and Security Agreement dated December 28, 2005
from Volt Delta Resources, LLC to Nortel Networks.
(Exhibit 99.3 to the Company's Current Report on Form 8-K dated
January 2, 2006, File No. 1-9232).
14. Volt Information Sciences, Inc. and Subsidiaries Code of Ethical
Conduct for Financial Managers.
21. Subsidiaries of the Registrant.
23.* Consent of Independent Registered Public Accounting Firm.
31.1* Certification of Co-Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Co-Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.3* Certification of Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Co-Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Co-Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.3* Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
+ Management contract or compensation plan or arrangement.
* Filed herewith. All other exhibits are incorporated herein by
reference to the exhibit indicated in the parenthetical
references.