FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the fiscal year ended November 3, 2002
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from _______________ to _________________
Commission File Number: 1-9232
VOLT INFORMATION SCIENCES, INC.
(Exact name of registrant as specified in its charter)
New York 13-5658129
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 704-2400
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.
Securities registered pursuant to Section 12(g) of the Act: None
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. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|
The aggregate market value of the common stock held by non-affiliates of the
Registrant as of January 15, 2003 (based on the closing price on the New York
Stock Exchange on that date) was approximately $129 million (based on the number
of shares outstanding on that date, exclusive of all shares held beneficially by
executive officers and directors and their spouses and the Registrant's Savings
Plan, without conceding that all such persons or plans are "affiliates" of the
Registrant).
The number of shares of common stock outstanding as of January 15, 2003 was
15,217,415.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 2003 Annual Meeting are
incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 2
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters 22
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 41
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 70
PART III
Item 10. Directors and Executive Officers of the Registrant 70
Item 11. Executive Compensation 70
Item 12. Security Ownership of Certain Beneficial
Owners and Management 70
Item 13. Certain Relationships and Related Transactions 70
PART IV
Item 14. Controls and Procedures 70
Item 15. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 71
PART I
ITEM 1. BUSINESS
General
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 and, since Volt's
Telecommunications and Information Solutions business contains three segments,
Volt has four operating segments:
o 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. These services fall within three major
functional areas:
o Staffing Solutions - provides a full spectrum of managed staffing,
temporary/alternative personnel employment and direct hire placement
and professional employer organization services.
o Information Technology Solutions - provides a wide range of
information technology services including consulting, turnkey
project management and software and web development.
o E-Procurement Solutions - provides global vendor neutral procurement
and management solutions for supplemental staffing using web-based
software systems.
o Telecommunications and Information Solutions
(2) Telephone Directory - This segment publishes independent telephone
directories in the United States and publishes telephone directories in
Uruguay under a contract with the government-owned telephone company;
provides telephone directory production, commercial printing, database
management, sales and marketing services; licenses directory production
and contract management software systems to directory publishers and
others; and provides services, principally computer-based projects, to
public utilities and financial institutions.
(3) Telecommunications Services - This segment provides telecommunications
services, including design, engineering, construction, installation,
maintenance and removals in the outside plant and central offices of
telecommunications and cable companies and within their customers'
premises, 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.
(4) 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 to third parties.
-2-
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 November 3, 2002, 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.
November November November
3, 2002 4, 2001 3, 2000
----------- ----------- -----------
NET SALES (In thousands)
Staffing Services:
Traditional Staffing $ 1,161,771 $ 1,284,862 $ 1,379,111
Managed Services 745,667 737,417 724,632
----------- ----------- -----------
Total gross sales 1,907,438 2,022,279 2,103,743
Less Non-recourse Managed Services--Note 1 (679,110) (503,027) (433,212)
Intersegment sales 2,044 12,169 11,284
----------- ----------- -----------
1,230,372 1,531,421 1,681,815
----------- ----------- -----------
Telephone Directory:
Sales to unaffiliated customers 83,212 99,682 97,499
Intersegment sales 114 264 243
----------- ----------- -----------
83,326 99,946 97,742
----------- ----------- -----------
Telecommunications Services:
Sales to unaffiliated customers 104,039 246,892 292,680
Intersegment sales 4,833 2,040 3,433
----------- ----------- -----------
108,872 248,932 296,113
----------- ----------- -----------
Computer Systems:
Sales to unaffiliated customers 72,261 66,435 59,555
Intersegment sales 6,535 4,863 3,544
----------- ----------- -----------
78,796 71,298 63,099
----------- ----------- -----------
Elimination of intersegment sales (13,526) (19,336) (18,504)
----------- ----------- -----------
TOTAL NET SALES $ 1,487,840 $ 1,932,261 $ 2,120,265
=========== =========== ===========
SEGMENT PROFIT (LOSS)
Staffing Services $ 20,469 $ 16,558 $ 55,543
Telephone Directory 6,712 2,238 (3,244)
Telecommunications Services (13,259) 7,353 19,783
Computer Systems 8,912 10,739 4,741
----------- ----------- -----------
Total segment profit 22,834 36,888 76,823
General corporate expenses (22,704) (24,416) (15,939)
----------- ----------- -----------
TOTAL OPERATING PROFIT 130 12,472 60,884
Interest and other (loss) income-net (518) 859 308
Gain on securities-net 5,552
Gain on sale of partnership interest 4,173
Interest expense (4,549) (11,880) (9,891)
Foreign exchange (loss) gain (477) (158) 638
----------- ----------- -----------
(Loss) income from continuing operations before
income taxes ($5,414) $ 11,018 $ 51,939
=========== =========== ===========
-3-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
OPERATING SEGMENT DATA--Continued
November November November
3, 2002 4, 2001 3, 2000
-------- -------- --------
(In thousands)
IDENTIFIABLE ASSETS
Staffing Services $332,482 $319,659 $359,903
Telephone Directory 60,105 75,886 80,852
Telecommunications Services 46,666 87,723 150,248
Computer Systems 31,860 35,039 29,083
-------- -------- --------
471,113 518,307 620,086
Assets held for sale--Note 2 47,635 44,795
Cash, investments and other corporate assets 38,477 71,294 79,947
-------- -------- --------
Total assets $509,590 $637,236 $744,828
======== ======== ========
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 sales.
Note 2 - On November 30, 2001, the Company's 59% owned publicly-held
subsidiary, Autologic Information International, Inc. ("Autologic"),
that comprised the Company's Electronic Publication and Typesetting
segment, was acquired by Agfa Corporation through a tender offer for
all of Autologic's outstanding shares and a subsequent merger. The
Company received $24.2 million for its shares. The Company's gain on
the sale of $4.5 million, including a tax benefit of $1.7 million
(resulting from a taxable loss versus a gain for financial statement
purposes), were reflected in fiscal 2002. The results of operations of
Autologic have been classified as discontinued, Autologic's prior
period results have been reclassified and its assets have been
included as Assets held for sale, on a separate line item in the
Company's fiscal 2001 balance sheet.
-4-
Forward-Looking Statements Disclosure
This Report and other reports and statements issued by the Company and its
officers from time to time contain certain forward-looking statements about the
Company's future plans, objectives, performance, intentions and expectations.
When used in this Report, words such as "may," "should," "could," "seek,"
"believe," "expect," "anticipate," "estimate," "project," "intend," "strategy,"
"likely," and similar expressions are intended to identify forward-looking
statements about the Company's future plans, objectives, performance, intentions
and expectations. Although the Company believes that its assumptions are
reasonable, these forward-looking statements are subject to a number of known
and unknown risks and uncertainties that could cause the Company's actual
results, performance and achievements to differ materially from those described
or implied in the forward-looking statements. These risks and uncertainties
include, but are not limited to:
o general economic, competitive and other business conditions including the
effects of weakened U.S. and European economies
o the continued financial strength of the Company's customers, some of which
have announced layoffs, unfavorable financial results, investigations by
government agencies and lowered financial expectations for the near term
o the degree and timing of obtaining new contracts and the rate of renewals
of existing contracts, as well as customers' degree of utilization of the
Company's services
o material changes in demand from larger customers, including those with
which the Company has national contracts
o the effect of litigation by temporary employees against, and government
activity regarding, temporary help companies and the customers with whom
they do business
o variations in the rate of unemployment and higher wages sought by
temporary workers in certain technical fields particularly characterized
by labor shortages, which could affect the Company's ability to meet its
customers' demands and the Company's profit margins
o the adverse effect of customers and potential customers moving
manufacturing off-shore, reducing their need for temporary workers
o the ability of the Company to diversify its available temporary personnel
to offer greater support to the service sector of the economy
o changes in customers' attitudes toward the use of outsourcing and
temporary personnel
o the Company's ability to attract and retain certain classifications of
technologically qualified personnel for its own use, particularly in the
areas of research and development, implementation and upgrading of
internal systems
o intense price competition and pressure on margins
o the Company's ability to meet competition in its highly competitive
markets with minimal impact on margins
o the Company's ability to foresee changes and to identify, develop and
commercialize innovative and competitive products and systems in a timely
and cost effective manner
o the Company's ability to achieve customer acceptance of its products and
systems in markets characterized by rapidly changing technology and
frequent new product introductions
o risks inherent in new product introductions, such as start-up delays, cost
overruns and uncertainty of customer acceptance
o the timing of customer acceptances of systems
o the Company's dependence on third parties for some product components
o changes in laws, regulations and government policies, including increased
taxes which, because of economic and competitive conditions, may not be
able to be passed on to the customer
o the degree and effects of inclement weather
o the Company's ability to maintain a sufficient credit rating to enable it
to continue its securitization program and ability to maintain its
existing credit rating in order to avoid any increase in interest rates
and any increase in fees under its revolving credit facility, as well as
to comply with the financial and other covenants applicable under its
credit facility and other borrowing instruments
These and certain other factors are discussed in this Report and, from time to
time, in the Company's other reports hereafter filed with the Securities and
Exchange Commission. The Company does not assume an obligation to update the
factors discussed in this Report or the other reports or statements.
-5-
Staffing Services Segment
Volt's Staffing Services segment, through two divisions, 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 United States, Canada and Europe.
The Technical Placement division provides Staffing Solutions, IT Solutions and
E-Procurement Solutions, while the Commercial and Light Industrial division
provides Staffing Solutions.
Staffing Solutions
Volt markets a full spectrum of staffing solutions, such as managed services,
alternative staffing services and direct hire services, through its Volt
Services Group, Volt Human Resources and Volt Europe divisions. In addition,
professional employer organization ("PEO") services are offered by the Company's
subsidiary, Shaw & Shaw.
Volt Services Group/Volt Europe/Volt Human Resources (Staffing Solutions
Group)
Staffing solutions provided by this segment are generally identified and
marketed throughout the United States as "Volt Services Group," throughout
Europe as "Volt Europe" and throughout Canada as "Volt Human Resources."
Volt Services Group, Volt Europe and Volt Human Resources (the "Staffing
Solutions Group") provide a broad range of employee staffing and
professional services, from over 300 branches, including dedicated on-site
offices located on client 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 the segment in
satisfying those requirements; alternative staffing of clerical,
administrative, light industrial, technical, professional and information
technology personnel; employment, direct hire and professional personnel
placement services; referred employee management services; and
specifically tailored recruitment services.
The Staffing Solutions Group provides skilled employees, such as
professional, 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, accounting, bookkeeping and other financial,
call center, light industrial and other personnel, in its Commercial and
Light Industrial division. Personnel placements are provided for varying
periods of time (both short and long-term) to companies and other
organizations (including government agencies) 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 to national
accounts that require as many as several thousand temporary employees at
one time.
The Staffing Solutions Group furnishes temporary employees to meet
specific customer requirements to complete a specific project or
subproject (with employees typically being retained until its completion),
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. In addition, the Staffing Solutions Group provides management
personnel to coordinate and manage special projects and to supervise
temporary employees.
-6-
The Staffing Solutions Group has been successful in obtaining a number of
large national contracts which typically require on-site Volt
representation and involve servicing multiple customer facilities. In
addition to contracting for traditional temporary staffing, many of Volt's
larger customers, particularly those with national agreements, have
contracted for managed services programs under which Volt, in addition to
itself providing staffing services, performs various administrative
functions, which include centralized and coordinated order processing and
procurement of other qualified staffing providers as subcontractors,
commonly referred to as "associate vendors," for service in areas where
the Company does not maintain an office, as well as supplying secondary
source back-up recruiting. Other features of managed services programs
often 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 ultimate single source consolidated
billing, reporting and payment. In most cases, Volt is required to pay the
associate vendors only after Volt receives payment from its customer. Volt
also acts as an associate vendor to other national providers to assist
them in meeting their obligations to their customers. The bidding process
for these national contracts 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. 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.
The Staffing Solutions Group provides personnel to companies throughout a
broad spectrum of industries, including the computer, electronics,
manufacturing, aerospace, defense, telecommunications, utility, power
(including certain nuclear and fossil fuel power plants), transportation,
petrochemical, chemical, retail, finance, banking, insurance,
architectural and engineering industries, as well as to government
agencies and universities. Branch offices that have developed a specialty
in one or more disciplines often use the name "Volt" followed by their
specialty disciplines to identify themselves. Other branch offices have
adopted other names to differentiate themselves from traditional temporary
staffing when their focus is more project oriented.
Volt Services Group and Volt Human Resources maintain computerized
nationwide resume databases, containing resumes of computer professionals,
engineers and other technical, professional and scientific candidates,
from which they fill customer job requirements. Volt Europe maintains
similar computerized resume databases containing resumes of candidates
from the United Kingdom and continental Europe. These higher skilled
individuals employed by the Staffing Solutions Group are frequently
willing to relocate to fill assignments. In addition to maintaining its
proprietary internet recruiting sites, the segment has numerous contracts
with independent job search web site companies. Lesser skilled employees
are generally recruited and assigned locally, and employment
information/resumes for these employees are maintained in computerized
databases at branch offices.
Individuals hired by the Staffing Solutions Group typically become Volt
employees or contractors during the period of their assignment. As
employer of record, Volt is responsible for the payment of salaries,
payroll taxes, workers' compensation and unemployment insurance and other
benefits, which may include paid sick days, holidays and vacations and
medical insurance. Class action lawsuits have been instituted in the
United States against some users of temporary services, including some
customers of the
-7-
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, litigation and governmental activity
(at European Union and national levels) directed at the way the industry
does business is also being conducted or considered. Volt does not know
the effect, if any, the resolution of these cases or the outcome of this
governmental activity will have on the industry in general or upon the
Staffing Solutions Group's business.
Volt Services Group also provides permanent employment services through
Volt Professional Placement, which is dedicated to serve as an employment
search organization specializing in the recruitment and direct hire of
individuals in professional disciplines including information technology,
technical, accounting, finance and administrative support disciplines. The
direct placement recruiters operate within Volt's existing nationwide
branch system. Customers of this service include customers of Volt's
Staffing Services and other segments.
Shaw & Shaw
Shaw & Shaw, Inc. provides professional employer organization ("PEO")
services, also known as "employee leasing," as part of the Commercial and
Light Industrial division. The customer using these services generally
transfers its entire work force or employees of a specific department or
division to Shaw & Shaw. Shaw & Shaw's services include payroll
administration, human resource management, consulting on employee legal
and regulatory compliance, providing comprehensive benefits, including
retirement plans, workers' compensation coverage, loss control and risk
management and certain other services. The customer has control over the
day-to-day job duties of the employees. Shaw & Shaw utilizes the
purchasing power of the Company and, thus, is able to provide its
customers' employees with a competitive benefits package. Customers are
relieved of the administrative responsibilities involved in maintaining
employees.
Shaw & Shaw provides and markets its services to large and small client
companies in a broad spectrum of industries and non-profit organizations.
Sales generated by Shaw & Shaw in fiscal 2002 represented 2% of the
Staffing Services segment's total sales.
Information Technology Solutions
VMC Consulting/Volt Integrated Solutions Group/Volt Europe Solutions
VMC Consulting (VMC) and Volt Europe Solutions provide customized software
consulting services, information technology solutions and project
management capabilities to organizations in North America and Europe.
These business units, as part of the Technical Placement division, perform
outsource services in the form of project-based work, in which the Company
assumes responsibility for project milestones and deliverables. Services
include hardware and software testing, software development, systems
integration, project management, information technology services,
technical communications, technical support, asset management and
logistics and clinical research. State-of-the-art technology solutions are
-8-
delivered to clients on a project basis, with the work performed either in
Volt's premises or at the client's location.
In November 2002, Volt Integrated Solutions Group, which provides
technology services, was integrated into VMC to consolidate their
operations and improve efficiencies, as well as to provide full service
systems integration offerings to the market nationwide.
These services are generally marketed throughout the United States under
the names VMC Consulting, in Canada under the name VMC Consulting Canada
and in the United Kingdom and continental Europe under the names Volt
Europe Solutions and VMC Consulting Europe. VMC Consulting is based in
Redmond, Washington and Fort Collins, Colorado. Volt Europe Solutions is
based in Redhill, England and VMC Consulting Europe is based in Slough,
England.
Although VMC Consulting and Volt Europe Solutions continue to broaden
their services, there is no assurance that this group's present or future
services will be competitive, that the units will continue to 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 emerging e-commerce market,
the Staffing Services segment, through a wholly-owned subsidiary,
ProcureStaff, Ltd., provides managed services programs by means of a
vendor neutral, web-based procurement and management solution for
alternative staffing. A vendor neutral program enables customers to
fulfill their staffing requirements selecting an employee from a number of
staffing firms, including Volt, based upon the customer requirements and
the skills of the candidates. At the core of the ProcureStaff model is a
patent pending business-to-business e-commerce procurement application
that is designed to streamline client and vendor functions with increased
efficiencies while significantly reducing costs. Utilizing HRP, a
web-based software system, and proprietary management methodologies,
ProcureStaff provides a procurement and management solution for
supplemental or alternative staffing, primarily in the United States and
Europe as part of the Technical Placement division. The Company believes
that ProcureStaff represents the next generation of staffing services
systems and software.
ProcureStaff provides its clients with web-based access for requisition
management, electronic procurement, relationship management, vendor
management, time keeping, consolidated invoicing, resource redeployment,
demand management and sophisticated graphical ad-hoc management reporting.
By adhering to open standards, ProcureStaff enables both customers and
vendors to facilitate implementation with minimal cost and resources.
Implementation of these programs typically requires considerable start up
costs and usually takes up to four months to implement. ProcureStaff
competes with other companies which provide similar vendor neutral
solutions, some of which are affiliated with competitive staffing
companies. Volt believes that its experience in developing and
implementing sophisticated software solutions and on-site staffing
management for major domestic and international corporations provides the
type of expertise necessary to build superior global staffing and vendor
procurement solutions. The enhancements to ProcureStaff's software systems
and the ability of
-9-
ProcureStaff to offer a vendor neutral procurement environment are
designed to enable Volt to pursue new opportunities in the
business-to-business marketplace.
Although ProcureStaff continues to develop and enhance its services and
systems, there is no assurance that this division's present or future
services will be competitive, that the division will continue to develop
new services or that present services or new services will continue to be
successfully marketed.
During the week ended November 3, 2002, the entire segment provided
approximately 31,500 of its own employees to its customers, in addition to
employees provided by subcontractors and associate vendors.
While the markets for the segment's services include a broad range of industries
throughout the United States and Europe, general economic conditions in specific
geographic areas or industrial sectors have had, in the present are having and
in the future could have, an effect on the profitability of this segment. The
segment has been adversely affected by the weakened economy in the United States
and Europe, causing customers to significantly reduce their requirement for
alternative and permanent staffing and the other services provided by this
segment. The segment has also experienced margin erosion caused by increased
competition, electronic auctions and customers leveraging their buying power by
consolidating the number of vendors with whom they deal. The segment has
implemented a series of cost cutting initiatives and is committed to further
efficiencies designed to increase profitability. However, there can be no
assurances that this increase in profitability will occur. In addition, this
segment could be adversely affected by changes in laws, regulations and
government policies, including the results of pending litigation and
governmental activity regarding the staffing services industry, and related
litigation expenses, customers' attitudes toward outsourcing and temporary
personnel, any decreases in rates of unemployment in the future and higher wages
sought by temporary workers, especially those in certain technical fields often
characterized by labor shortages.
The Company has increased the number of its offices which offer higher margin
project-oriented services to its customers and thus assumes greater
responsibility for the finished product. As the segment increases the amount of
project-oriented work it performs for customers, the risks of unsuccessful
performance, including claims by customers, uncompensated rework and other
liabilities increase. While the Company believes that it will successfully
implement these project-based contracts, there can be no assurance that the
Company will be able to do so, or that it can continue to obtain such contracts
on a satisfactory basis or continue delivering quality results that satisfy its
customers.
The ability of Volt 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 is
intense and many of the contracts entered into by this segment are of a
relatively short duration, and awarded on the basis of competitive proposals
which are periodically re-bid by the customer. Although Volt has been successful
in obtaining various short and long-term contracts in the past in many instances
margins under these contracts have decreased. There can be no assurance that
existing contracts will be renewed on satisfactory terms or that additional or
replacement contracts will be awarded to the Company, or that revenues or
profitability from an expired contract will be immediately replaced. Some of
this segment's national contracts are large, and the loss of any large contract
could have a significantly negative effect on this segment's business unless,
and until, the business is replaced. The segment competes with many technical
service, temporary personnel, other alternative staffing and permanent placement
firms, some of which are larger and have substantially greater financial
resources than Volt, as well as with individuals seeking direct employment with
the Company's existing and potential customers.
-10-
Telephone Directory Segment
Volt's Telephone Directory segment publishes independent telephone directories
in the United States and publishes telephone directories in Uruguay under a
contract with the government-owned telephone company; provides telephone
directory production, commercial printing, database management, sales and
marketing services; licenses directory production and contract management
software systems to directory publishers and others; and provides various
computer based services to public utilities and financial institutions. This
segment has transitioned in the United States, from the production of telephone
directories for others, to the publishing of its own independent telephone
directories. This segment consists of DataNational, Directory Systems/Services,
the Uruguay division and Volt VIEWtech.
DataNational
DataNational, Volt's independent telephone directory publisher,
principally publishes community-based directories, primarily in the
mid-Atlantic and southeastern portions of the United States, Arkansas and
Texas. DataNational's community-based directories provide consumers with
information concerning businesses that provide services within their local
geographic area. The directories 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.communityphonebook.info. The division identifies markets where
demographics and local shopping patterns are favorable to the division's
community-oriented product and expands accordingly. During fiscal 2002,
the division published 101 community, county and regional directories.
DataNational's principal competitors are regional telephone companies,
whose directories typically cover a much wider geographic area than the
DataNational directories, as well as other independent telephone directory
companies, which compete on the local level. DataNational's revenues are
generated from yellow page advertising sold in its directories. Volt
believes that advertisers are attracted to DataNational's community
directories because the directories enable them to specifically target
their local markets at a much lower cost.
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 yellow and white pages directories, as well as CD/ROM directories.
These systems incorporate "workflow management," by which ads are
automatically routed between workstations, increasing throughput and
control. These systems are licensed to, and the services are performed
for, publishers and others worldwide, as well as for the segment's
DataNational division.
Directory Systems/Services also publishes semi-annually The National
Internet Toll-Free Directory ( www.internettollfree.com ), which provides
Internet web sites and toll-free listings for businesses. The revenues for
this product are generated by selling advertising in this directory.
-11-
Uruguay
Volt's Uruguay division is the official publisher of white and yellow
pages telephone directories for Antel, the government-owned telephone
company in Uruguay, under a contract originally entered into in 1983 and
subsequently extended through 2006. Revenues are generated from yellow
page advertising.
In addition to the directory business, Volt's Uruguay division owns and
operates one of the most advanced directory printing facilities in South
America, which includes, among other presses, a high speed, four-color,
heat set printing press that is used to print not only its own telephone
directories, but also directories for publishers in other South American
countries. In addition, this facility does commercial printing, including
magazines and periodicals for various customers in Uruguay and elsewhere
in South and Central America. Economic instability in neighboring
countries, as well as in Uruguay itself, continues to have a significant
adverse impact on advertising and printing revenue and operating profits.
Because of the severe recession in Uruguay caused by the economic crisis,
the Company is seeking to renegotiate the contract with Antel, which could
result in an early termination or reduction in directory revenues.
Volt VIEWtech
Volt VIEWtech services the energy and water utility industries, providing
energy and water conservation based customer services. VIEWtech is one of
the oldest and most experienced lenders and servicers for the Fannie Mae
Energy Loan program, which provides low interest and energy efficient home
improvement financing under major utility sponsorship. These loans are
immediately resold, after closing, to Fannie Mae. VIEWtech is a leading
utility rebate processing firm, processing energy and water efficient
appliance and home improvement rebates on behalf of utilities across the
nation. VIEWtech also contracts with major energy utilities for
HomeVIEW(TM) and WaterVIEW(TM) internet-based customer services, which
provide energy and water usage and energy-related home improvement payback
analysis.
Volt's ability to compete in its Telephone Directory segment depends on its
reputation, technical capabilities, price, quality of service and ability to
meet customer requirements in a timely manner. Volt believes that its
competitive position in this segment's areas of operations is augmented by its
ability to draw upon the expertise and resources of its other segments. The
segment faces intense competition for all of its services and products from
other suppliers and from in-house facilities of potential customers. Some of
this segment's significant competitors are companies that are larger and have
substantially greater financial resources than Volt. This segment's sales and
profitability are highly dependent on advertising revenue, which has been and
continues to be affected by general economic conditions.
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, 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.
-12-
Telecommunications Services Segment
Volt's Telecommunications Services segment provides telecommunications and other
services, including design, engineering, construction, installation, maintenance
and removals of telecommunications equipment for the outside plant and central
offices of telecommunications and cable companies, and within end-user premises,
throughout North America and in Europe. This segment also provides complete
turnkey services for wireless telecommunications carriers and wireless
infrastructure suppliers and provides limited distribution of products. This
segment operated within the United States as three divisions: Volt
Telecommunications Group, Voltelcon and Advanced Technology Services, until
merged during the latter part of the fiscal year, into a single operating unit
called Volt Telecommunications Group. In Europe, some services were performed by
the Company's Volt Telecom Europe subsidiary, which because of the
telecommunications depression in Europe, operated at reduced levels during the
fiscal year and was operating at a minimal level as of the end of the fiscal
year.
This 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.
o Construction services, including both aerial and underground construction
services, using the Company's owned and leased vehicles and equipment.
These include jack and bore, directional boring, excavation for conduit
and manhole systems, cable replacement and splicing, pole placement and
wrecking, copper, coaxial and long and short haul fiber optic cable
installation, splicing, termination and testing, project management and
inspection services. Construction services have been, and could in the
future, be adversely affected by weather conditions, because much of the
business is performed outdoors.
o Business Systems Integration services, including structured cabling and
wiring and field installation and repair services involving the design,
engineering, installation and maintenance of various types of local and
wide area networks, via copper wiring and fiber optics, for voice, data
and video, and digital subscriber lines (DSL) and other broadband
installation and maintenance services to operating telephone companies,
long distance carriers, telecommunications equipment manufacturers, cable
companies and large end-users.
o Central Office engineer, furnish and install (EF&I) services, including
central office engineering, installation and removal of transmission
systems, distribution frame systems, AC/DC power systems, wiring and
cabling, switch peripheral systems, equipment assembly and system
integration and controlled environment structures, and other 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.
-13-
This segment accommodates clients 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 and central offices, and within end-user premises. Customers
include telephone operating companies, inter-exchange carriers, long distance
carriers, local exchange carriers, wireless carriers, telecommunications
equipment manufacturers, cable television, electric, gas, water and
water-services utilities, federal, state and municipal government units and
private industry.
This segment faces substantial competition with respect to all of its
telecommunications services from other suppliers and from in-house capabilities
of potential customers. Some of this segment's significant competitors are
larger and have substantially greater financial resources than Volt. Other
competitors are small, local companies that generally have lower overhead.
Volt's ability to compete in this segment depends upon its reputation, technical
capabilities, pricing, quality of service and ability to meet customer
requirements in a timely manner. Volt believes that its competitive position in
this segment is augmented by its ability to draw upon the expertise and
resources of other Volt segments.
A portion of Volt's business in this segment is obtained through the submission
of competitive proposals for contracts that typically expire within one to three
years and upon expiration are re-bid. 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, 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. The continued
delay in telecommunications companies' capital expenditure projects during the
current economic climate has significantly reduced the segment's revenue,
particularly from long-haul fiber optic projects and cross-connect box projects,
and little improvement can be expected until the industry begins to increase its
capital expenditures.
Computer Systems Segment
The Computer Systems segment provides directory assistance 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
services to others. This segment is comprised of three business units: VoltDelta
Resources ("VoltDelta"), DataServ and Maintech.
VoltDelta
VoltDelta markets information services solutions to telephone companies
and inter-exchange carriers worldwide. VoltDelta has transitioned its
business from only the sale of systems to, in addition, an Application
Service Provider ("ASP") model so that it now provides information
services, including infrastructure and database content, on a
transactional use fee basis.
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 is designed to provide
directory assistance operators worldwide with access to over 180 million
United States and
-14-
Canadian business, residential and government listings. VoltDelta owns and
operates its own proprietary systems and provides its customers access to
a national database sourced from listings obtained by VoltDelta from the
Regional Bell Operating Companies ("RBOCs") and other independent sources.
In addition, VoltDelta continues to provide customers with new systems, as
well as enhancements to existing systems, equipment and software.
In addition to DirectoryExpress, VoltDelta's InfoExpress suite of services
includes iExpress, a service that enables its transaction-based customers
to offer operator-assisted yellow pages, directions and other information
dependent enhanced services. For consumers (the end-users), especially
cellular and PCS users, InfoExpress provides a more convenient and
efficient level of directory assistance service since, among other things,
consumers may obtain enhanced directory and yellow pages information
without having to know the correct area code or even the name of the
business. Enhanced information services are particularly attractive in the
wireless market, where there is no access to printed telephone
directories. VoltDelta's ASP services are being delivered to live
operators over the switched telephone network, via the internet and, more
recently, through voice portals using speech recognition technologies.
VoltDelta has service agreements with major telecommunications carriers,
including RBOCs in the United States. Similar services are also provided
to major telecommunications providers in the United Kingdom, Belgium,
Holland and Italy, through Volt's wholly owned European subsidiaries.
DataServ
DataServ was established in fiscal year 2002 as a separate division of
VoltDelta 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
VoltDelta and other data aggregators, DataServ's information is updated
daily and is substantially augmented with specialized information unique
to the non-telco enterprise customer. DataServ integrates customer
applications access via XML and other advanced technologies with its
various databases. DataServ has agreements with several agents and
resellers to distribute its services into targeted industries.
Although VoltDelta was successful during fiscal year 2002 in obtaining new
customers for these services, including major telephone companies in the long
distance and cellular markets, and DataServ commenced generating revenues, there
can be no assurance that they will continue to be successful in marketing these
services to additional customers, or that the customer's volume of transactions
will be at a level sufficient to enable the segment to maintain profitability.
In order to fulfill its commitments under its contracts, 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.
Maintech
Maintech provides information technology infrastructure support services
to mid-size and large corporate clients across the United States. Its
target markets include banking and brokerage, telecommunications,
aerospace, healthcare and hospital, and higher education. Maintech's
services portfolio includes three groups of interrelated services:
-15-
o Hardware maintenance services, which includes fault analysis, repair
and desktop support of PC and UNIX-based servers and workstations
from vendors such as HP/Compaq, SUN, IBM and Dell. Maintech also
supports storage systems from Network Appliance, EMC, Clariion and
STK. These services are structured to support mission-critical
operating environments, including Wall Street trading desks,
electronic funds transfer, R & D laboratories and 411 Directory
Assistance systems. Maintech provides these programs on a 24 x 7 x
365 basis with available on-site, 2 hour or 4 hour response terms.
o Network Operations Center (NOC) services, which includes 24 x 7 x
365 monitoring and management of LAN/WAN environments, network
design, carrier selection and management, and product procurement,
deployment, transition and support. Maintech's dual NOCs in Orange,
California and Wallington, New Jersey are staffed with certified
network design and support engineers, and employ state-of-the-art
diagnostic monitoring and management software.
o Technology refresh services which includes providing workstation and
server upgrades, warehousing, asset management, product integration
and testing, and installation and facility planning.
Maintech's strategic business development plan takes into consideration a
three-layer IT infrastructure model that is gaining wide acceptance in the
marketplace. Each layer drives a different element of the client and
service vendor organizations to tightly focus on its respective core
competencies and, ultimately, deliver better value. The top layer,
Business Process Development, and the second layer, Applications
Development and Support, remain the traditional focus of the client's line
operations and IT organizations. The third layer, IT Infrastructure, is
increasingly seen as a set of industry standard desktop and server
products, and voice and data network schemes, to be purchased and
supported as an integrated solution. These layers of service include a
broad spectrum of design, procurement, project management and maintenance
services that are expensive for the client to build, deliver and sustain,
especially when their capital budgets are limited. The Company believes
that Maintech's strengths and economic structure enable Maintech's
customers to meet the demand to improve operating cost parameters by using
these IT services, particularly for those companies that are correcting or
adjusting an overbuilt IT infrastructure.
Maintech headquarters are in Wallington, New Jersey. District service
offices are located in most metropolitan areas across the United States.
The business environment in which this segment operates is highly competitive.
Some of this segment's principal competitors are larger and have substantially
greater financial resources than Volt. This segment's results are highly
dependent on the volume of directory assistance calls to VoltDelta's customers
which are routed to the segment under existing contracts, the segment's ability
to continue to secure comprehensive listings from others, its ability to obtain
additional customers for these services and on its continued ability to sell
products and services to new and existing customers. This segment's position in
its market depends largely upon its reputation, quality of service and ability
to develop, maintain and implement information systems on a cost competitive
basis. Although 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.
-16-
Some of this segment's contracts expired in 2002, while others were renewed and
new contracts were awarded to the segment. Other contracts are scheduled to
expire in 2003 through 2008. 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, 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.
Joint Venture
In fiscal 1998, Volt and TELUS Advertising Services, a wholly owned subsidiary
of TELUS Corporation, formed a joint venture for the publishing of community
telephone directories. In the fourth fiscal quarter of 2002, the joint venture
was liquidated with one operation sold to an unaffiliated third party and the
other operation acquired by the Company.
Research, Development and Engineering
During fiscal years 2002, 2001 and 2000, the Company expended approximately $2.5
million, $2.5 million and $2.4 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 2002,
expenditures for internal-use software were $17.2 million of which $6.7 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
There were no customers to which sales represented over 10% of the Company's
consolidated sales in fiscal years 2002, 2001, or 2000. In fiscal 2002, the
Telecommunications Services segment's sales to three customers represented
approximately 24%, 20%, and 12%, respectively, of the total sales of that
segment; and the Computer Systems segment's sales to one customer represented
approximately 30% of the total sales of that segment. 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, although the
Company does not believe that there would be a material adverse effect on the
results of the Company and its subsidiaries taken as a whole.
-17-
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 holiday season and the directory publishing
schedules of the Telephone Directory segment's DataNational division. The
Uruguay division of the Telephone Directory segment produces a major portion of
its revenues and most of its profits in the Company's fourth fiscal quarter.
Employees
During the week ended November 3, 2002, Volt employed approximately 36,000
persons, including approximately 31,500 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 employees. The Company believes that
its relations with its employees are satisfactory.
Certain services rendered by Volt's Telephone Directory and Computer Systems
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.
Regulation
The Company's business is not subject to specific industry government
regulations. 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.
-18-
ITEM 2. PROPERTIES
The Company occupies approximately 38,000 square feet of space at 560 Lexington
Avenue, New York, New York under leases that expire in 2007 and 2009. The
facility serves as the Company's corporate headquarters, the headquarters for
the Company's Computer Systems segment and a base for certain operations of the
Company's Staffing Services segment. The following table sets forth certain
information as to each of the Company's other major facilities:
Approximate
Sq. Ft.
Leased If Leased,
Or Year of Lease
Location Business Segment Owned Expiration
- -------- ---------------- ----- ----------
Orange, West Region Headquarters 200,000 Owned (1)
California Accounting Center
Staffing Services
Computer Systems
Anaheim, Telephone Directory 39,000 Owned
California
El Segundo, Staffing Services 20,000 Owned
California
San Diego, Staffing Services 20,000 Owned
California
Montevideo, Telephone Directory 96,000 2004
Uruguay
Blue Bell, Telephone Directory 51,000 2007
Pennsylvania Computer Systems
Redmond, Staffing Services 46,000 2010
Washington 27,000 2005
Edison, Telecommunications Services 42,000 2005
New Jersey
Wallington, Computer Systems 32,000 2003
New Jersey
Slough, Staffing Services 19,000 2007
England
Indianapolis, Telephone Directory 16,000 2003
Indiana Staffing Services
-19-
ITEM 2. PROPERTIES--Continued
Approximate
Sq. Ft.
Leased If Leased,
Or Year of Lease
Location Business Segment Owned Expiration
- -------- ---------------- ----- ----------
Sunbury on Thames, Computer Systems 14,000 2007
England
Norcross, Staffing Services 13,000 2003
Georgia Telecommunications Services
Westbury, Corporate 12,000 2004
New York
Chantilly, Telephone Directory 11,000 2005
Virginia Staffing Services
(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.
In addition, the Company owns a 134,000 square foot facility in Thousand Oaks,
California, which was leased by the Company to its former 59% owned subsidiary,
Autologic Information International, Inc. until December 31, 2002. This facility
is currently being marketed for sale or lease by the Company.
In addition, the Company leases space in approximately 230 other facilities
worldwide (excluding month-to-month rentals), each of which consists of less
than 10,000 square feet. These leases expire at various times from 2003 until
2011.
At times, the Company leases space to others in the buildings that it owns or
leases, if it does not require the space for its own business.
The Company believes that its facilities are adequate for their presently
anticipated uses and that it is not dependent upon any individually leased
premises.
For additional information pertaining to lease commitments, see Note P of Notes
to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to certain claims and legal proceedings
which arise in the ordinary course of business, including those discussed in
Item 1 of this Report. There are no claims or legal proceedings pending against
the Company or its subsidiaries, which, in the opinion of management, would have
a material adverse effect on the Company's consolidated financial position or
results of operations.
-20-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS
WILLIAM SHAW, 78, a founder of the Company, has been President and Chairman of
the Board of the Company since its inception in 1957 and has been employed in
executive capacities by the Company and its predecessors since 1950.
JEROME SHAW, 76, 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, 74, has been a Senior Vice President and Principal Financial
Officer of the Company since September 1985 and was also employed in executive
capacities by the Company from 1973 to 1981.
STEVEN A. SHAW, 43, has been a Senior Vice President of the Company since
November 2000 and served as Vice President of the Company from April 1997 until
November 2000. Mr. Shaw has been employed by the Company in various capacities
since November 1995.
HOWARD B. WEINREICH, 60, 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, 48, 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, 51, has been Treasurer of the Company since January 1994 and
has been employed in executive capacities by the Company since 1976.
JACK EGAN, 53, 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, 54, has been Vice President - Accounting Operations since
January 1992 and has been employed in executive capacities by the Company since
1986.
NORMA J. KRAUS, 71, has been Vice President - Human Resources since March 1987
and has been employed in executive capacities by the Company since 1979.
William Shaw and Jerome Shaw are brothers. Steven A. Shaw is the son of Jerome
Shaw. Bruce G. Goodman, a director of the Company, is the son-in-law of William
Shaw. There are no other family relationships among the executive officers or
directors of the Company.
-21-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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 November 3, 2002:
2002 2001
----------------------- ----------------------
Fiscal Period High Low High Low
- ------------- ------ ------ ------ ------
First Quarter $17.25 $11.10 $25.94 $18.19
Second Quarter 22.90 14.50 28.10 16.60
Third Quarter 24.50 18.70 19.40 16.44
Fourth Quarter 18.95 12.65 17.80 10.50
As of January 15, 2003, there were approximately 419 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 requires the Company
to maintain consolidated tangible net worth, as defined, of $220.0 million and
limits dividends and capital stock repurchases and redemptions by the Company in
any fiscal year to 25% of the prior year's consolidated net income, as defined.
As a result of the net loss in fiscal 2002, the credit agreement does not permit
dividends to be paid during fiscal 2003.
Equity Compensation Plans
The following table sets forth certain information, as at November 3, 2002, 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 566,359(a) $ 21.08 367,034(a)
Equity compensation plans not
approved by security holders -- -- --
------- --------- -------
Total 566,359 $ 21.08 367,034
======= ========= =======
(a) Under the Company's 1995 Non-Qualified Stock Option Plan, the Company's
only equity compensation plan. Upon the expiration, cancellation or
termination of unexercised granted options, shares subject to those
options will again be available for the grant of options under the plan.
-22-
ITEM 6. SELECTED FINANCIAL DATA
Year Ended (Notes 1 and 2)
--------------------------------------------------------------------------
November November November October October
3, 2002 4, 2001 3, 2000 29, 1999 30, 1998
---------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
Net Sales $1,487,840 $1,932,261 $2,120,265 $2,068,684 $1,621,375
========== ========== ========== ========== ==========
(Loss) income from continuing operations - before
items shown below--Note 3 ($3,925) $ 6,658 $ 31,402 $ 31,492 $ 20,232
Discontinued operations--Note 4 4,310 (814) (697) (2,533) 671
Extraordinary item - prepayment of debt--Note 5 (1,262)
Cumulative effect of a change in accounting -
goodwill impairment--Note 3 (31,927)
---------- ---------- ---------- ---------- ----------
Net (loss) income ($32,804) $ 5,844 $ 30,705 $ 28,959 $ 20,903
========== ========== ========== ========== ==========
Per Share Data
Basic:
(Loss) income from continuing operations - before
items shown below ($ 0.26) $ 0.44 $ 2.08 $ 2.10 $ 1.36
Discontinued operations 0.28 (0.06) (0.05) (0.17) 0.04
Extraordinary item (0.08)
Cumulative effect of a change in accounting (2.10)
---------- ---------- ---------- ---------- ----------
Net (loss) income ($ 2.16) $ 0.38 $ 2.03 $ 1.93 $ 1.40
========== ========== ========== ========== ==========
Weighted average number of shares 15,217 15,212 15,139 15,023 14,918
========== ========== ========== ========== ==========
Diluted:
(Loss) income from continuing operations -
before items shown below ($0.26) $ 0.44 $ 2.05 $ 2.08 $ 1.33
Discontinued operations 0.28 (0.06) (0.05) (0.17) 0.04
Extraordinary item (0.08)
Cumulative effect of a change in accounting (2.10)
---------- ---------- ---------- ---------- ----------
Net (loss) income ($2.16) $ 0.38 $ 2.00 $ 1.91 $ 1.37
========== ========== ========== ========== ==========
Weighted average number of shares 15,217 15,244 15,316 15,153 15,254
========== ========== ========== ========== ==========
Total assets $ 509,590 $ 637,236 $ 744,828 $ 618,329 $ 469,326
Long-term debt, net of current portion $ 14,469 $ 15,993 $ 32,297 $ 45,728 $ 54,048
Note 1--Fiscal years 1998 through 1999 and 2001 through 2002 were comprised of
52 weeks, while fiscal year 2000 was comprised of 53 weeks.
Note 2--Cash dividends have not been paid during the five-year period ended
November 3, 2002.
Note 3--Fiscal 2002 includes a non-cash charge of $31.9 million, or $2.10 per
share, recognized for goodwill impairment as of November 5, 2001
presented as a cumulative effect of a change in accounting. Amortization
of goodwill, included in continuing operations net of taxes, which was
not permitted to be amortized beginning in fiscal year 2002 under
Statement of Financial Accounting Standards No. 142, is included in the
prior fiscal years as follows: 2001 - $2.0 million, or $0.13 per share;
2000 - $2.3 million, or $0.15 per share; 1999 - $2.2 million, or $0.14
per share; and 1998 - $0.9 million, or $0.06 per share.
Fiscal 2001 includes 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).
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ITEM 6. SELECTED FINANCIAL DATA--Continued
In fiscal 1999 and fiscal 1998, the Company recognized $2.0 million, or
$0.13 per share and $500,000, or $0.03 per share, respectively, of a
previously deferred gain on the sale in 1997 of its interest in a
Brazilian joint venture. In connection with the sale, the Company
granted credit with respect to the printing of telephone directories by
the Company's Uruguayan division and guaranteed the venture's
obligations with respect to certain import financing, resulting in a
partial deferral of the gain. During fiscal years 1999 and 1998, the
venture repaid substantially all of its obligations and the gain was
recognized.
Note 4--Fiscal 2002 includes 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 Information International, Inc. ("Autologic"), that comprised
the Company's Electronic Publication and Typesetting segment. This
amount included a $4.5 million gain on the sale, partially offset by a
$0.2 million loss on operations. Accordingly, the results of operations
of Autologic have been classified as discontinued in the statements of
income for fiscal years 1998 through 2001.
Note 5--Fiscal 2002 includes an extraordinary charge of $2.1 million ($1.3
million, net of taxes, or $0.08 per share) for the prepayment of the
Company's remaining $30.0 million outstanding Senior Notes.
-24-
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 can 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 recognizes revenue primarily as services are
rendered, products are shipped or directories are published. Within the
Company's operating segments, these services include the billing of labor,
material and directory assistance transactions as they are provided. In
addition, the Company may provide services under long-term contracts. Revenue
and costs applicable to long-term contracts, including those providing for
software customization or modification, are recognized on the completed contract
method, upon the customers' acceptance, in accordance with AICPA Statement of
Positions No. 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" and No. 97-2, "Software Revenue Recognition" and
related interpretations and amendments. The Company records provisions for
estimated losses on contracts when losses become evident. Accumulated unbilled
costs on contracts are carried in inventory at the lower of actual cost or
estimated realizable value.
The Company, through its Shaw & Shaw subsidiary, provides professional employer
organizational services ("PEO") to certain customers which generally transfer
its entire work force or employees of a specific departments or divisions to the
Company. PEO revenue represented less than 2% of the Company's consolidated
sales in fiscal 2002. The Company's PEO services include payroll administration,
human resource management, consulting on employee legal and regulatory
compliance, providing comprehensive benefits, including retirement plans,
workers' compensation coverage, loss control and risk management and certain
other services. The customer has control over the day-to-day job duties of the
employees. PEO revenue consists of the amounts charged to the customer by the
Company for the employee's gross pay, the employer's share of related payroll
taxes, workers' compensation and charges for certain other services provided by
the Company, and a negotiated percentage markup of the employees' gross wages.
Based on its analysis of Emerging Issues Task Force ("EITF") 99-19, "Reporting
Revenue Gross as a Principal Versus Net as an Agent," the Company has concluded
that it provides its PEO services as a principal and, therefore, recognizes all
amounts billed to its customers as gross revenues. PEO services revenue in
fiscal 2002, 2001, and 2000 aggregated approximately $24.5 million, $39.6
million and $24.7 million, respectively. The direct expenses borne by the
Company are included in cost of sales. On January 27, 2003, the Company received
a comment from the staff of the Securities and Exchange Commission ("SEC")
questioning the Company's revenue recognition policy for Shaw & Shaw. The
Company understands that its policy is in accordance with the prevailing
practice in the PEO industry and responded to the comment. The Staff of the SEC
advised the Company that it believes the appropriate presentation should be to
report the Company's PEO revenue net of gross payroll cost. The Company has not
been able to resolve this comment to date. If the Company were required to
record its PEO revenue net of the gross payroll cost component of its services,
there would be a reduction of sales and the related cost of sales, but no effect
on the Company's net income.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Critical Accounting Policies--Continued
Under certain other contracts with customers, the Company manages the customers'
alternative staffing requirements, including transactions between the customer
and other staffing vendors ("associate vendors"). When payments to associate
vendors are subject to receipt of the customers' payment to the Company and the
Company does not bear credit responsibility, the arrangements are considered
non-recourse against the Company and the revenue, other than management fees
payable to the Company, is excluded from sales.
Allowance for Uncollectable Accounts - The establishment of an allowance
requires the use of judgement and assumptions regarding potential losses on
receivable balances. Allowances for doubtful accounts receivable are maintained
based upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company believes that these allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required and a related charge or credit to earnings.
Long-Lived Assets - As of the beginning of fiscal 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." Under these new rules, goodwill and other intangibles
with indefinite lives are no longer amortized, but are subject to annual testing
using fair value methodology. The Company engaged independent valuation firms,
which primarily used comparable multiples of revenue and EBITDA and other
valuation methods to assist the Company in the determination of the fair value
of the reporting units measured. An impairment charge of $31.9 million was
recognized for the amount by which the carrying value of goodwill exceeded its
implied fair value as of the beginning of fiscal 2002. Intangible assets with
finite, measurable lives continue to be amortized over their respective useful
lives. Property, plant and equipment is recorded at cost, and depreciation and
amortization are provided on the straight-line and accelerated methods at rates
calculated to depreciate the cost of the assets over their estimated lives.
Property, plant and equipment and intangible assets, other than goodwill, 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 annually and whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. The
fair values of the assets are based upon Company estimates of the discounted
cash flows that are expected to result from the use and eventual disposition of
the assets or the amount that would be realized from an immediate sale. An
impairment charge is recognized for the amount, if any, by which the carrying
value of an asset exceeds its fair value. Although the Company believes its
estimates are appropriate, the fair value measurements of the Company's
long-lived assets could be affected by using different estimates and assumptions
in these valuation techniques.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with AICPA Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent to the preliminary project planning and approval
stage, all appropriate costs are capitalized until the point at which the
software is ready for its intended use. Subsequent to the software being used in
operations, the capitalized costs are transferred from costs-in-process to
completed property, plant and equipment, and are accounted for as such. All
post-implementation costs, such as maintenance, training and minor upgrades that
do not result in additional functionality, are expensed as incurred.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Critical Accounting Policies--Continued
Securitization Program - The Company accounts for the securitization of accounts
receivables in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. On April 15, 2002, under a new securitization
program, the Company, through a special purpose subsidiary, sold a participation
interest of $50.0 million out of an initial pool of approximately $162.0 million
of receivables.
At November 3, 2002, the participation interest sold was $60.0 million.
Accordingly, the trade receivables included in the November 3, 2002 balance
sheet have been reduced to reflect the $60.0 million participation interest sold
and no debt was recorded.
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.
Fiscal Year 2002 (52 weeks) Compared to Fiscal Year 2001 (52 weeks)
Results of Operations - Summary
Net sales decreased by $444.4 million, or 23%, to $1.5 billion in fiscal 2002.
This decrease resulted primarily from a $301.0 million decrease in sales in the
Staffing Services segment and a $140.1 million decrease in sales in the
Telecommunications Services Segment.
The Company's operating segments reported an operating profit of $22.8 million
in fiscal 2002 compared to $36.9 million in the prior year. Contributing to the
fiscal 2002 decrease in operating profit were a decrease in operating results of
$20.6 million reported by the Telecommunications Services segment and a decrease
of $1.8 million in operating profit reported by the Computer Systems segment.
These decreases were partially offset by increases in operating profits of $4.4
million reported by the Telephone Directory segment and $3.9 million by the
Staffing Services segment.
In fiscal 2002, the Company reported a loss from continuing operations before
income taxes of $5.4 million compared to income from continuing operations
before taxes of $11.0 million in fiscal 2001. Non-recurring items affecting
results from continuing operations in fiscal 2001 included a gain of $6.3
million on the sale of an investment in equity securities that had been written
off in 1997, partially offset by a write-down of an investment in marketable
securities of $0.7 million and a gain on the sale of the Company's interest in a
real estate partnership of $4.2 million. In addition, results from continuing
operations for fiscal 2001 included amortization of goodwill, which is no longer
permitted to be amortized, of $3.0 million.
In fiscal 2002, the Company reported a net loss of $32.8 million compared with
net income of $5.8 million in the prior year. Results for fiscal 2002 included a
non-cash charge for the write-down of goodwill of $31.9 million reported as a
cumulative effect of a change in accounting and a net gain from discontinued
operations, after taxes, of $4.3 million comprised of a $4.5 million gain,
including a tax benefit of $1.7 million (resulting from a taxable loss versus a
gain for financial statement purposes), on the sale of the Company's 59%
interest in Autologic Information International Inc. ("Autologic") partially
offset by a loss from Autologic's operations through the disposal date of $0.2
million (compared to a loss of $0.8 million in fiscal 2001). In addition, fiscal
2002 results included a $1.3 million, net of taxes, extraordinary charge for the
early payment of the Company's remaining $30.0 million outstanding Senior Notes.
-27-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Fiscal Year 2002 (52 weeks) Compared to Fiscal Year 2001 (52 weeks)--Continued
Results of Operations - By Segment
Staffing Services
Although sales of the Staffing Services segment decreased by $301.0 million, or
20%, to $1.2 billion in fiscal 2002, its operating profit increased by $3.9
million, or 24%, to $20.5 million in fiscal 2002.
The Technical Placement division of the Staffing Services segment reported an
operating profit of $29.6 million on sales of $789.2 million for fiscal 2002,
compared with an operating profit of $27.5 million on sales of $1.1 billion in
the prior year. Low-margin managed service sales comprised 62% of the reported
sales decline of the division. The decline was due primarily to an increase in
the number of associate vendors who agreed to be paid subject to the receipt of
the customers' payment to the Company, resulting in the amounts, other than
management fees to the Company, associated with those revenues being excluded
from sales, as non-recourse managed service revenue. A reduction in the use of
managed service programs by several of the division's managed service clients
also adversely affected sales. Although the division reported decreases in both
traditional and managed service sales, an increase in high-margin project
management work contributed to an increase in gross margins of 3.9 percentage
points. In addition, the division's continued overhead reductions and the
absence in fiscal 2002 of goodwill amortization of $2.1 million enabled the
Technical Placement division to increase its operating profit and profit margin
percentage.
The Commercial and Light Industrial division of the Staffing Services segment
reported an operating loss of $9.1 million on net sales of $441.2 million for
fiscal 2002 compared with an operating loss of $10.9 million on net sales of
$479.4 million in the prior period. The decrease in operating loss was the
result of lower overhead due to cost reduction efforts partially offset by an 8%
decline in revenue and a decrease in gross margins of 0.9 percentage points due
to increased competition, electronic auctions and customers leveraging their
buying power by consolidating the number of vendors with whom they deal.
Although sequential quarterly operating losses have declined during fiscal 2002,
cost control initiatives in the Commercial and Light Industrial division have
not fully offset lower revenue and gross margins.
While the Staffing Services segment is committed to continued cost controls
designed to increase profitability for fiscal 2003, a return to substantially
higher profit levels is likely to depend on the timing and strength of a general
economic recovery. The Company expects that high unemployment and the need for
state and local governments to align their revenues with expenditures will
result in pressures on margins as jurisdictions increase payroll and various
other taxes. Although the markets for the segment's services include a broad
range of industries throughout the United States and Europe, general economic
difficulties in specific geographic areas or industrial sectors have in the
past, and could in the future, affect the profitability of the segment.
Telephone Directory
While Telephone Directory segment's sales decreased by $16.6 million, or 17%, to
$83.3 million in fiscal 2002, its operating profit increased by $4.5 million, or
200%, to $6.7 million. The reduction in sales was primarily due to lower
printing and advertising revenue in Uruguay due to the economic instability in
neighboring
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Fiscal Year 2002 (52 weeks) Compared to Fiscal Year 2001 (52 weeks)--Continued
Results of Operations - By Segment--Continued
countries, as well as in Uruguay itself, along with decreased toll-free
directory advertising revenue in the United States. Despite the reduced sales,
decreases in paper prices, production costs and overhead, along with increased
productivity and the absence in fiscal 2002 of goodwill amortization of $0.7
million, resulted in the higher profitability of the segment. The segment
currently has a high-margin production contract with a telecommunications
company, which accounted for 8% of the segment's annual revenue in fiscal 2002,
that will terminate in June 2003 as the customer's operations are being sold.
The segment cannot determine the amount of revenue it will receive from the
customer through the end of the contract or whether current revenue and profits
will be replaced through existing or new customers in the future. Other than the
DataNational division, which accounted for 53% of the segment's fiscal 2002
sales, the segment's business is obtained through submission of competitive
proposals for contracts. These short and long-term contracts are re-bid after
expiration. While the Company has historically secured new contracts and
believes it can secure renewals and/or extensions of most of these contracts,
some of which are material to this segment, and obtain new business, there can
be no assurance that contracts will be renewed or extended, or that additional
or replacement contracts will be awarded to the Company on satisfactory terms.
In addition, this segment's sales and profitability are highly dependent on
advertising revenue, which has been and continues to be affected by general
economic conditions.
Telecommunications Services
The Telecommunications Services segment's sales decreased by $140.1 million, or
56%, to $108.9 million in fiscal 2002 and the segment sustained an operating
loss of $13.3 million in fiscal 2002, compared to an operating profit of $7.4
million in fiscal 2001. Despite a decrease in overhead of 32% due to the
emphasis on overhead reductions, the results of the segment continue to be
affected by the decline in spending caused by the depressed conditions within
the segment's telecommunications industry customer base. This factor has also
increased competition for available work, pressuring pricing and margins. During
fiscal 2002, the Company announced the reorganization of the segment's
operations and continues its cost control initiatives in an effort to permit the
segment to operate profitably at lower revenue levels without impairing its
ability to take advantage of opportunities when the telecommunications industry
stabilizes and customers' spending increases. 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. While management believes it can secure renewals and/or extensions
of most of these contracts, some of which are material to this segment, and
obtain new business, there can be no assurances that contracts will be renewed
or extended or that additional or replacement contracts will be awarded to the
Company on satisfactory terms.
Computer Systems
The Computer Systems segment's sales increased by $7.5 million, or 11%, to $78.8
million in fiscal 2002 while its operating profit decreased by $1.8 million, or
17%, to $8.9 million. The higher operating profit in fiscal 2001 resulted from
the beneficial settlement with a vendor. An increase in sales, in fiscal 2002,
was reported by all of the segment's divisions, including the segment's
Application Service Provider directory assistance and web-based services
provided by its VoltDelta Resources division, as well as IT services provided by
its
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Fiscal Year 2002 (52 weeks) Compared to Fiscal Year 2001 (52 weeks)--Continued
Results of Operations - By Segment--Continued
Maintech division. This segment's results are highly dependent on the volume of
directory assistance calls to the segment's customers that are routed to the
segment under existing contracts, the segment's ability to continue to secure
comprehensive listings from others, its ability to obtain additional customers
for these services and its continued ability to sell products and services to
new and existing customers.
Results of Operations - Other
Other items, discussed on a consolidated basis, affecting the results of
operations were:
Selling and administrative expenses decreased by $8.6 million, or 10%, to $74.5
million in fiscal year 2002 from fiscal year 2001 as a result of decreased
commissions and incentives due to the lower sales, the Company's cost cutting
initiatives and reduced financial reporting system expenses in fiscal 2002.
Selling and administrative expenses, expressed as a percentage of sales, were
5.0% in fiscal 2002 and 4.3% in fiscal 2001.
Depreciation and amortization decreased by $2.4 million, or 10%, to $22.2
million in fiscal 2002. The decrease was attributable to a $3.0 million
reduction in goodwill amortization due to the effect of new rules on accounting
for goodwill, which eliminated amortization of goodwill in favor of annual
impairment tests which the Company adopted at the beginning of fiscal 2002 (see
"Critical Accounting Policies," above). This was partially offset by increased
depreciation of fixed assets.
The Company incurred other expense of $1.4 million in fiscal 2002, primarily in
conjunction with the initial and subsequent transactions under the Company's new
Securitization Program and other sundry expenses.
In fiscal 2001, the Company recognized a pre-tax gain of $6.3 million on the
sale of securities that had been previously written off in 1997, partially
offset by a $0.7 million write down of an investment in marketable securities,
resulting in a net pre-tax gain of $5.6 million. In fiscal 2001, the Company
also recognized a pre-tax gain of $4.2 million on the sale of the Company's
interest in a real estate partnership.
The foreign exchange loss in fiscal 2002 was $0.5 million compared to $0.2
million in fiscal 2001. The increase was a result of unfavorable currency
movements in the Uruguayan and European currency markets. To reduce the
potential adverse impact from foreign currency changes on the Company's foreign
currency receivables and firm commitments, the Company utilizes foreign currency
option and forward contracts, when required, that generally settle on the last
weekday of each quarter.
Interest expense decreased by $7.3 million, or 62%, to $4.5 million in fiscal
2002. The decrease was attributable to reduced working capital requirements
resulting from the sales decline, as well as from the early repayment on March
5, 2002 of the remaining $30.0 million of 7.92% Senior Notes in contemplation of
the lower cost accounts receivable Securitization Program. The Securitization
Program, costs of which are reflected in other expense (see above), also
eliminated higher cost borrowings under the revolving credit facility.
Throughout fiscal 2002, the Company has also benefited from significantly lower
market rates for financing, partially offset by an increase in rates in Uruguay.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Fiscal Year 2002 (52 weeks) Compared to Fiscal Year 2001 (52 weeks)--Continued
Results of Operations - Other--Continued
The Company's effective tax rate was a benefit of 27.5% of its financial
reporting pre-tax loss from continuing operations in fiscal 2002 compared to a
39.6% tax provision in fiscal 2001. The low effective tax benefit in fiscal 2002
was primarily due to 2002 foreign losses for which no tax benefit was provided.
The $4.3 million gain, net of taxes, from discontinued operations arose from the
Company's sale on November 30, 2001 of Autologic, the Company's 59% owned
publicly-held subsidiary, that comprised the Company's Electronic Publication
and Typesetting segment, to Agfa Corporation through a tender offer for all of
Autologic's outstanding shares and a subsequent merger. The Company received
$24.2 million for its shares. The net gain was comprised of a $4.5 million gain
on the sale, including a tax benefit of $1.7 million (resulting from a taxable
loss versus a gain for financial statement purposes), partially offset by a loss
from Autologic's operations through the disposal date of $0.2 million (compared
to a loss of $0.8 million in fiscal 2001).
On March 5, 2002, the Company prepaid the remaining $30.0 million of its Senior
Notes in lieu of seeking amendments to the agreements under which the Senior
Notes were issued that would have been required in order for the Company to
implement the Securitization Program discussed below under "Liquidity and
Capital Resources" and that may have been required, depending upon the size of
the Company's then expected first quarter loss. The Senior Notes otherwise would
have been due in installments over the two and one-half years following the
prepayment. The "make whole" premium paid to the holders of the Senior Notes of
$2.1 million, or $1.3 million net of taxes, was recognized as an extraordinary
charge in the second quarter of fiscal 2002 for the early payment of that debt.
The $31.9 million charge to earnings recorded as a cumulative effect of a change
in accounting arose from the required adoption, as of the beginning of fiscal
2002, of SFAS No. 142, "Goodwill and Other Intangible Assets," under which
goodwill and other intangibles with indefinite lives are no longer amortized,
but instead are subject to annual testing using fair value methodology. The
Company engaged independent valuation firms to assist in the determination of
the impairment that may have existed in the $39.8 million of goodwill recorded
as of the beginning of the fiscal year, November 5, 2001. The valuation firms
primarily used comparable multiples of revenue and EBITDA and other valuation
methods to assist the Company in the determination of the fair value of the
reporting units measured. The result of testing goodwill for impairment was a
non-cash charge of $31.9 million. The total remaining goodwill of the Company at
November 3, 2002 was $9.0 million.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Fiscal Year 2001 (52 weeks) Compared to Fiscal Year 2000 (53 weeks)
Results of Operations - Summary
Net sales decreased by $188.0 million, or 9%, to $1.9 billion in fiscal 2001.
This decrease resulted primarily from a decrease in sales by the Staffing
Services segment of $150.4 million and by the Telecommunications Services
segment of $47.2 million.
The Company's income from continuing operations before income taxes decreased by
$40.9 million, or 79%, to $11.0 million in fiscal 2001. The operating profit of
the Company's segments decreased by $39.9 million, or 52%, to $36.9 million in
fiscal 2001. While operating profits of the Staffing Services and
Telecommunications Services segments decreased, an increase in the Computer
Systems segment's operating profit and a return to profitability by the
Telephone Directory segment partially offset these decreases.
Net income in fiscal 2001 was $5.8 million, compared to net income of $30.7
million in fiscal 2000. Results for 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), a net gain on the sale of certain securities, net of a
write-down of other securities, of $5.6 million ($3.4 million, net of taxes) and
a loss from discontinued operations of $0.8 million, ($0.7 million in fiscal
2000).
Results of Operations - Segments
Staffing Services
Sales of the Staffing Services segment decreased by $150.4 million, or 9%, to
$1.5 billion in fiscal 2001 and the segment's operating profit in fiscal 2001
decreased by $39.0 million, or 70%, to $16.6 million, from $55.5 million in
fiscal 2000. The Commercial and Light Industrial division accounted for 77% of
the sales decline and approximately two-thirds of the decline in the segment's
operating profit. The balance of the reduction was in the Technical Placement
division.
The Commercial and Light Industrial division of the Staffing Services segment
was adversely affected by the nation's economic decline, with sales declining
19% from fiscal 2000. The division sustained a loss of $10.9 million on sales of
$481.6 million during fiscal 2001 versus an operating profit of $15.3 million on
sales of $597.3 million in fiscal 2000. Traditional temporary recruited revenue
of the division, excluding lower margin managed service and professional
employer organization services ("PEO") revenue, declined to $431.9 million in
fiscal 2001 from $558.0 million in fiscal 2000. The division's results were also
adversely affected by the added branch and infrastructure overhead that the
division incurred, primarily in fiscal 2000, based on the growth in traditional
temporary recruited revenue that the division had experienced that year and in
anticipation of continued growth.
The Staffing Services segment's Technical Placement division reported sales of
$1.1 billion in fiscal 2001, a 2% decrease from fiscal 2000. In fiscal 2001,
Technical Placement operating profit was $27.5 million, compared with $40.2
million in fiscal 2000. Increased overhead associated with the opening of
additional project management outsourcing facilities, branch and infrastructure
expenses incurred in contemplation of a
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Fiscal Year 2001 (52 weeks) Compared to Fiscal Year 2000 (53 weeks)--Continued
Results of Operations - Segments--Continued
continuation of fiscal 2000's increased revenues, a sharp reduction in higher
margin permanent placement fees, a reduction in higher margin sales to a major
customer and costs associated with the development and implementation of new
ProcureStaff services all negatively impacted operating results. The Staffing
Services segment has implemented a series of cost cutting initiatives, including
branch office closings, which reduced fiscal 2001 fourth quarter overhead by 13%
from the fourth quarter of the prior fiscal year, with Commercial and Light
Industrial fiscal 2001 fourth quarter overhead expenses declining 19% and
Technical Placement overhead declining 9%.
Telephone Directory
The Telephone Directory segment's sales increased by $2.2 million, or 2%, to
$99.9 million in fiscal 2001 and its operating profit was $2.2 million compared
to a loss of $3.2 million in fiscal 2000. The improved results of the segment
were primarily due to the reorganization and restructuring of its DataNational
division, a publisher of community directories, and the absence in fiscal 2001
of a charge of $0.8 million for a customer receivable deemed uncollectable due
to a bankruptcy filing in fiscal 2000.
Telecommunications Services
The Telecommunications Services segment's sales decreased by $47.2 million, or
16%, to $248.9 million in fiscal 2001 and its operating profit decreased by
$12.4 million, or 63%, to $7.4 million in fiscal 2001. The continued delay in
telecommunications companies' capital expenditure projects during the current
economic deceleration reduced the segment's revenue, particularly from long-haul
fiber optic projects and cross-connect box projects. While higher margin project
work increased gross margins as a percentage of sales, lower sales volume and
increased overhead costs associated with the expansion of the segment's Central
Office division reduced the segment's overall profitability.
Computer Systems
The Computer Systems segment's sales increased by $8.2 million, or 13%, to $71.3
million in fiscal 2001 and its operating profit increased by $6.0 million, or
127%, to $10.7 million in fiscal 2001. Continued expansion of the segment's
Application Service Provider ("ASP") directory assistance and web-based
information service, together with the delivery and customer acceptance of
technology projects, contributed to the increase in sales. ASP directory
assistance transactions totaled 275 million in fiscal 2001, a 40% increase over
fiscal 2000. The higher sales, operational process improvements, cost control
initiatives and the use of vendor credits resulted in a significant increase in
profit margins.
Results of Operations - Other
Other items, discussed on a consolidated basis, affecting the results of
operations were:
Selling and administrative expenses increased by $9.8 million, or 13%, to $83.1
million in fiscal 2001 to support increased sales activities during the first
half of the year and as a result of higher financial reporting
-33-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Fiscal Year 2001 (52 weeks) Compared to Fiscal Year 2000 (53 weeks)--Continued
Results of Operations - Other--Continued
system expenses related to a new accounting and back office computer system
installed to provide enhanced financial, accounting, human resources, customer
and management reporting necessary for the growth of the Company. Total selling
and administrative expenses, expressed as a percentage of sales, were 4.3% in
fiscal 2001 and 3.5% in fiscal 2000.
Depreciation and amortization increased by $3.6 million, or 17%, to $24.6
million in fiscal 2001. The fiscal 2001 increase was primarily attributable to
amortization of the new financial reporting system, which is being amortized
over five to seven years, partially offset by a $0.3 million reduction in
amortization of goodwill.
Other loss decreased to $18,000 in fiscal 2001 from $0.6 million in fiscal 2000.
In fiscal 2000, other loss was due to a variety of expenses, including the
Company's share in start-up losses of its then new joint venture, westVista
Advertising Services.
In fiscal 2001, the Company recognized a pre-tax gain of $6.3 million on the
sale of securities that had been previously written off in 1997, partially
offset by a $0.7 million write down of an investment in marketable securities,
resulting in a net pre-tax gain of $5.6 million. In fiscal 2001, the Company
also recognized a pre-tax gain of $4.2 million on the sale of its interest in a
real estate partnership.
A foreign exchange loss of $0.2 million was recognized in fiscal 2001, compared
with a gain of $0.6 million in fiscal 2000. The losses were due to unfavorable
currency movements in the European currency markets. To reduce the potential
adverse impact from foreign currency changes on the Company's foreign currency
receivables, sales and firm commitments, foreign currency options are purchased
during and settled generally on the last day of each quarter.
Interest expense increased by $2.0 million, or 20%, to $11.9 million in fiscal
2001. The increase was the result of the Company borrowings under its revolving
credit agreements to support the increased working capital requirements of the
Company, partially offset by lower short-term interest rates. The Company's
Uruguayan division borrows in its local currency to hedge its foreign exchange
exposure. The economic conditions in neighboring Argentina significantly
impacted Uruguay, resulting in higher interest rates. In fiscal 2001, the
Company's Uruguayan division borrowed an average of the equivalent of $3.3
million and incurred interest expense of $0.8 million.
The Company's effective tax rate increased to 39.6% in fiscal 2001 from 39.5% in
fiscal 2000.
-34-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Liquidity and Capital Resources
Cash and cash equivalents, including restricted cash of $11.5 million at
November 3, 2002 to cover associate vendor obligations included in accounts
payable, increased by $25.1 million to $43.6 million in fiscal 2002.
Operating activities in fiscal 2002, exclusive of changes in operating assets
and liabilities, produced $32.5 million of cash. The Company's net loss of $32.8
million included non-cash charges of $65.3 million, primarily for the impairment
of goodwill of $31.9 million, depreciation and amortization of $22.2 million and
accounts receivable provisions of $10.2 million. Changes in operating assets and
liabilities produced $75.9 million of cash, net, principally due to proceeds
from the new Securitization Program of $60.0 million and a $21.4 million net
increase of accounts payable and accrued expenses, partially offset by an $8.6
million increase in the level of accounts receivable.
The principal factors in the cash of $13.5 million provided by investing
activities in fiscal 2002 were the proceeds received from the sale of Autologic
of $24.2 million and distribution from a joint venture of $3.3 million,
partially offset by the expenditure for property, plant and equipment of $14.7
million (down from $27.1 million in fiscal 2001 and $37.0 million in fiscal
2000).
A decrease of $62.3 million in bank loans and a $33.5 million payment of
long-term debt, including the early payment of the $30.0 million outstanding of
Senior Notes, were the principal factors in the cash applied to financing
activities of $95.8 million. The funds used to reduce bank loans and repay the
long term debt include the $24.2 million proceeds received from the sale of
Autologic, the $60.0 million proceeds received from the new Securitization
Program and cash arising from reduced working capital requirements.
Commitments
In fiscal 2000, the Company began development of a new web-enabled front end
system designed to improve efficiency and connectivity in the recruiting,
assignment, customer maintenance, and other functions in the branch offices of
the Staffing Services segment. The total costs to develop and install this
system are currently anticipated to be approximately $16.0 million, of which
approximately $6.6 million has been incurred and capitalized to date. The
Company has no other material capital commitments.
The following table summarizes the Company's contractual cash obligations and
other commercial commitments at November 3, 2002:
Contractual Cash Obligations Payments Due By Period
-------------------------------------------------------------------
Less than 1-3 3-5 After 5
Total 1 year years years years
------- --------- ------- ------- -------
(In thousands)
Term Loan $14,810 $ 342 $ 773 $ 910 $12,785
Notes Payable to Banks 2,424 2,424
Other Note Payable, including interest 1,256 1,256
------- ------- ------- ------- -------
Total Debt 18,490 4,022 773 910 12,785
Operating Leases (a) 56,953 18,079 23,644 11,133 4,097
------- ------- ------- ------- -------
Total Contractual Cash Obligations $75,443 $22,101 $24,417 $12,043 $16,882
======= ======= ======= ======= =======
(a) See Note P of Notes to Consolidated Financial Statements.
-35-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Liquidity and Capital Resources--Continued
Other Contingent Commitments Amount Expected by
Commitment Expiration Period
------------------------------------
Less than 1-3
Total 1 year years
------- --------- -------
(In thousands)
Lines of Credit, unused $ 8,271 $ 8,271
Revolving Credit Facility, unused 39,715 $39,715
Securitization Program, unused 40,000 40,000
Standby Letters of Credit, outstanding 469 469
------- ------- -------
Total Commercial Commitments $88,455 $ 8,271 $80,184
======= ======= =======
The Company believes that its current financial position, working capital,
future cash flows, credit lines and accounts receivable Securitization Program
are sufficient to fund its presently contemplated operations in fiscal 2003 and
satisfy its debt obligations.
Credit Lines
At November 3, 2002, the Company had credit lines with domestic and foreign
banks that provide for borrowings and letters of credit up to an aggregate of
$50.7 million, including a $40.0 million credit facility (the "Credit Facility")
in favor of the Company and designated subsidiaries under a secured syndicated
revolving credit agreement (the "Credit Agreement").
Credit Facility
The Credit Facility of $40.0 million, which expires in April 2004, includes a
$15.0 million letter of credit sub-facility. Borrowings by subsidiaries are
limited to $25.0 million in the aggregate. The administrative agent arranger for
the secured Credit Facility is JP Morgan Chase Bank. The other banks
participating in the Credit Facility are Mellon Bank, NA, Wells Fargo, NA and
Lloyds TSB Bank, PLC. This two-year Credit Facility, along with a three-year
accounts receivable Securitization Program (see below), replaced the Company's
$115.5 million credit agreement which was due to expire in September 2002.
Borrowings and letters of credit under the Credit Facility are limited to a
specified borrowing base, which is based upon the level of specified receivables
at the time of each calculation. At November 3, 2002, the borrowing base was
approximately $39.7 million. To date, the Company and its subsidiaries have made
no borrowings under the Credit Facility and no borrowings are presently
anticipated under the Credit Facility in the first half of fiscal 2003.
Borrowings under the Credit Facility are to bear interest at various options
selected by the Company at the time of each borrowing, certain of which rate
options are based on a leverage ratio, as defined (as is the facility fee).
Additionally, interest and the facility fees can be increased or decreased upon
a change in the Company's long-term debt rating provided by a nationally
recognized rating agency. Based upon the Company's leverage ratio and debt
rating at November 3, 2002, if a three-month LIBO rate was the interest rate
option selected by the Company, borrowings would have borne interest at the rate
of 3.1% per annum. At November 3, 2002, the facility fee was 0.5% per annum.
-36-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Liquidity and Capital Resources--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, of $220.0 million (the
Company's consolidated tangible net worth, as defined, as of November 3, 2002
was $229.2 million); limits cash dividends and capital stock repurchases and
redemptions by the Company in any one fiscal year to 25% of consolidated net
income, as defined, for the prior fiscal year; requires the Company to maintain
a ratio of EBIT, as defined, to interest expense, as defined, of 1.0 to 1.0 for
the four fiscal quarters ended November 3, 2002 and 1.25 to 1.0 for each of the
four fiscal quarters ending as of the last day of each quarter thereafter; and
required that there be no net loss, excluding non-operating items, in either of
the final two fiscal quarters in the Company's fiscal year, ended November 3,
2002. The Credit Agreement also imposes limitations on, among other things, the
incurrence of additional indebtedness, the incurrence of additional liens, sales
of assets, the level of annual capital expenditures and the amount of
investments, including business acquisitions and investments in joint ventures,
and loans that may be made by the Company and its subsidiaries.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers; however, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are guarantors of all
loans made to the Company or to subsidiary borrowers under the Credit Facility,
with four of those guarantors having pledged accounts receivable, the level of
which at November 3, 2002 was approximately $52.1 million, as collateral
security for their guarantee obligations. Pledged accounts receivable under the
Credit Facility do not include those in the Securitization Program. Under
certain circumstances, other subsidiaries of the Company also may be required to
become guarantors under the Credit Facility. The Company has pledged all of the
stock of its Volt Funding Corp. subsidiary (discussed below) as collateral
security for its own obligations under the Credit Facility.
At November 3, 2002, the Company had total outstanding short-term bank
borrowings of $2.4 million, none of which was borrowed under the Credit
Facility. The Company is currently in compliance with the covenants included in
the Credit Agreement. As previously reported, on October 17, 2002, the Company
received a waiver of the interest coverage covenant, relating to its fiscal year
ended November 3, 2002, contained in the Credit Facility.
The Company has not borrowed under the Credit Facility since its inception in
April 2002 and no borrowings are presently anticipated in the first half of
fiscal 2003. At November 3, 2002, the Company was in compliance with the
covenants contained in the credit agreement. Historically, the Company's first
quarter is its weakest fiscal quarter in the year, and last year the Company
experienced a loss in that quarter. Depending upon the results of the first
quarter of 2003, ending February 2, 2003, one covenant in the Credit Facility,
regarding interest coverage, may not be achieved. As long as the facility is
unused, there would be no effect on any other financing, including the
Securitization Program. The banks have indicated a willingness to negotiate an
amendment or waiver.
Securitization Program
Effective April 15, 2002, the Company entered into a $100.0 million three-year
accounts receivable
-37-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Liquidity and Capital Resources--Continued
securitization program ("Securitization Program"). Under the Securitization
Program, receivables related to the United States operations of the staffing
solutions business of the Company and its subsidiaries are sold from
time-to-time by the Company to Volt Funding Corp., a wholly owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A., an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $100.0 million). The
Company retains the servicing responsibility for the accounts receivable. On
April 15, 2002, TRFCO initially purchased from Volt Funding a participation
interest of $50.0 million out of an initial pool of approximately $162.0 million
of receivables. Of the $50.0 million cash paid by Volt Funding to the Company,
$35.0 million was used to repay the entire outstanding principal balance under
the Company's former revolving credit facility. The participation interest sold
remained at $50.0 million until August 14, 2002, when it was increased to $60.0
million.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors (subject also, as described
above, to the security interest that the Company has granted in the common stock
of Volt Funding in favor of the lenders under the Company's new Credit
Facility). TRFCO has no recourse to the Company (beyond its interest in the pool
of receivables owned by Volt Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts on TRFCO's
commercial paper, are charged to the consolidated statement of operations.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, among other things, the default rate, as
defined, on receivables exceeding a specified threshold, the rate of collections
on receivables failing to meet a specified threshold, the Company failing to
maintain a long-term debt rating of "B" or better or the equivalent thereof from
a nationally recognized rating organization or a default occurring and
continuing on indebtedness for borrowed money of at least $5.0 million. The
Company's most recent long-term debt rating was "BBB-" with a neutral rating
outlook.
-38-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Related Party Transactions
During fiscal 2002, the Company paid $1.3 million to the law firm of which Lloyd
Frank, a director, is a member, primarily for the services rendered in
connection with the Company's new revolving credit facility, new Securitization
Program and other financing arrangements and for services in fiscal 2001 and
2002 in connection with the sale of Autologic to Agfa Corporation by tender
offer and subsequent merger. During that year, the Company also paid $51,000 to
the law firm of which firm Bruce Goodman, a director, is a partner for services
rendered to the Company and paid $10,000 to Irwin Robins, a director, for legal
consulting services.
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 $1,000 in excess of its direct costs in fiscal
2002. Such services are performed on a basis substantially similar to those
performed by the Company for, and at substantially similar rates as is charged
by the Company to, unaffiliated third parties. In addition, the Company rents to
that corporation approximately 2,500 square feet of space in the Company's El
Segundo, California facility, which the Company does not require for its own
use, on a month-to-month basis at a rental of $1,500 per month. Based on the
nature of the premises and a recent market survey conducted by the Company, the
Company believes the rent is the fair market rental for such space.
New Accounting Pronouncements to be Effective in Fiscal 2003
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13,
and Technical Corrections" ("SFAS No. 145"). SFAS No. 145 updates, clarifies and
simplifies existing accounting pronouncements, by rescinding SFAS No. 4, which
required all gains and losses from the extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Accounting Principles Board Opinion No. 30
will now be used to classify those gains and losses. Additionally, SFAS No. 145
also makes technical corrections to existing pronouncements. While those
corrections are not substantive in nature, in some instances, they may change
accounting practice. The provisions of SFAS No. 145 that amend SFAS No. 13 are
required to be adopted by the Company in its consolidated financial statements
for the first quarter of fiscal 2003. The Company believes that the adoption of
SFAS No. 145 will not have a material impact on the Company's consolidated
financial position or results of operations, but will require a future
reclassification of the extraordinary item arising from the March 2002 early
payment of the Company's Senior Notes to other income (expense).
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and nullifies Emerging Issues Task Force No. 94-3. The Company believes
that the adoption of SFAS No. 146, at the beginning of fiscal 2003, will not
have a material impact on the Company's consolidated financial position or
results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide new guidance concerning the transition when a company
changes from the intrinsic value method to the fair value method of accounting
for employee stock-based compensation cost. As amended by SFAS No. 148, SFAS No.
123 will also require additional disclosure
-39-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
New Accounting Pronouncements to be Effective in Fiscal 2003--Continued
regarding such cost in annual financial statements and in condensed interim
financial statements. Certain provisions of SFAS No. 148 are required to be
adopted by the Company in its condensed consolidated financial statements for
the second quarter of fiscal 2003. The Company believes that the adoption of
SFAS No. 148 will not have a material impact on the Company's consolidated
financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" to provide new guidance with respect to the
consolidation of all previously unconsolidated entities, including special
purpose entities. The Company has no unconsolidated subsidiaries, therefore the
Company believes that the adoption of the interpretation, required in fiscal
2003, will not have any impact on the Company's consolidated financial position
or results of operations.
-40-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk exposure in the following areas:
Interest Rate Market Risk
The Company has cash and cash equivalents ($43.6 million at November 3, 2002) on
which interest income is earned at variable rates. The Company also has credit
lines with various domestic and foreign banks, which provide for borrowings and
letters of credit up to an aggregate of $50.7 million and a $100.0 million
accounts receivable Securitization Program. At November 3, 2002, short-term
borrowings and accounts receivable financing under the Securitization Program
amounted to $62.4 million under these agreements, of which $60.0 million was
under the Securitization Program. The interest rates on these borrowings and
financing are variable and, therefore, interest and other expense and interest
income are affected by the general level of U.S. and foreign interest rates.
Increases in interest and other expense resulting from an increase in interest
rates could impact the Company's results of operations. The Company policy is to
take actions that would mitigate such risk when appropriate and available.
The Company's long-term debt of $14.4 million at November 3, 2002 consisted 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.
Equity Price Risk
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At November 3, 2002, the total market value of these
investments was $3.8 million, all of which are being held for the benefit of
participants in a non-qualified deferred compensation plan with no risk to the
Company.
Foreign Exchange Market Risk
The Company has a number of overseas subsidiaries and is, therefore, subject to
exposure from the risk of currency fluctuations as the value of foreign
currencies fluctuate against the dollar, which may impact reported earnings. The
Company attempts to reduce these risks by utilizing foreign currency option and
exchange contracts, 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. At November 3, 2002, the Company had
entered into foreign currency option and forward contracts in the aggregate
notional amount equivalent to $8.9 million, which approximately offset its
exposure in foreign currencies at that date. As a result, the Company believes
that it has minimized its exposure to foreign exchange market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-41-
ERNST & YOUNG LLP 5 Times Square Phone #: 212-773-3000
New York, New York 10036
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Volt Information Sciences, Inc.
We have audited the accompanying consolidated balance sheets of Volt Information
Sciences, Inc. and subsidiaries as of November 3, 2002 and November 4, 2001, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended November 3, 2002. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Volt
Information Sciences, Inc. and subsidiaries at November 3, 2002 and November 4,
2001, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended November 3, 2002, in conformity with
accounting principles generally accepted in the United States. 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.
Ernst & Young LLP
December 18, 2002
-42-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November November
3, 2002 4, 2001
--------- ---------
ASSETS (Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents including restricted cash of $11,458 (2002)--Notes A and O $ 43,620 $ 18,474
Short-term investments--Notes A and C 3,754 3,778
Trade accounts receivable less allowances of $10,994 (2002) and $9,376 (2001)
--Notes A, B, E and Schedule II 300,670 362,784
Assets held for sale--Note J 47,635
Inventories--Notes A and D 29,690 36,186
Recoverable income taxes--Notes A and G 6,552
Deferred income taxes--Notes A, G and J and Schedule II 8,343 8,585
Prepaid expenses and other assets 15,212 13,487
--------- ---------
TOTAL CURRENT ASSETS 407,841 490,929
Investment in joint venture--Note J 3,739
Investment in securities--Notes A and C and Schedule II 52 24
Property, plant and equipment-net--Notes A, F and L 89,294 97,147
Deposits and other assets 3,328 5,128
Intangible assets-net of accumulated amortization of $1,258 (2002) and
$12,138 (2001)--Notes A and H 9,075 40,269
--------- ---------
TOTAL ASSETS $ 509,590 $ 637,236
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks--Notes E and F $ 2,424 $ 65,843
Current portion of long-term debt--Note F 1,524 31,429
Accounts payable--Notes A and O 154,054 114,544
Liabilities related to assets held for sale--Note J 26,313
Accrued wages and commissions 39,529 47,282
Accrued taxes other than income taxes 18,525 15,412
Accrued interest and other accruals 8,276 20,936
Customer advances and other liabilities 19,009 16,548
Income taxes--Notes A and G 2,038
--------- ---------
TOTAL CURRENT LIABILITIES 243,341 340,345
Long-term debt--Note F 14,469 15,993
Deferred income taxes--Notes A and G 14,743 11,086
STOCKHOLDERS' EQUITY--Notes A, B, C, E, F, G, K and M and Schedule II
Preferred stock, par value $1.00; Authorized--500,000 shares;
issued--none Common stock, par value $.10; Authorized--30,000,000 shares;
issued--15,217,415 shares (2002) and 15,215,665 shares (2001) 1,522 1,522
Paid-in capital 41,036 41,002
Retained earnings 194,962 227,766
Accumulated other comprehensive loss (483) (478)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 237,037 269,812
--------- ---------
COMMITMENTS--Note P
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 509,590 $ 637,236
========= =========
See Notes to Consolidated Financial Statements
-43-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
------------------------------------------------
November November November
3, 2002 4, 2001 3, 2000
---------- ---------- ----------
(In thousands, except per share data)
NET SALES $1,487,840 $1,932,261 $2,120,265
COSTS AND EXPENSES:
Cost of sales 1,391,030 1,812,071 1,965,106
Selling and administrative 74,514 83,136 73,314
Depreciation and amortization 22,166 24,582 20,961
---------- ---------- ----------
1,487,710 1,919,789 2,059,381
---------- ---------- ----------
OPERATING PROFIT 130 12,472 60,884
OTHER INCOME (EXPENSE):
Interest income 851 877 912
Other expense-net--Notes B and J (1,369) (18) (604)
Gain on securities-net--Note C 5,552
Gain on sale of partnership interest--Note J 4,173
Foreign exchange (loss) gain-net (477) (158) 638
Interest expense (4,549) (11,880) (9,891)
---------- ---------- ----------
(Loss) income from continuing operations before items shown
below (5,414) 11,018 51,939
Income tax benefit (provision)--Notes A and G 1,489 (4,360) (20,537)
---------- ---------- ----------
(Loss) income from continuing operations before items shown
below (3,925) 6,658 31,402
Discontinued operations, net of taxes--Note J 4,310 (814) (697)
Extraordinary item--Note F
Loss on early payment of debt, net of taxes (1,262)
Cumulative effect of a change in accounting--Note H
Goodwill impairment (31,927)
---------- ---------- ----------
NET (LOSS) INCOME ($32,804) $ 5,844 $ 30,705
========== ========== ==========
Basic: Per Share Data
------------------------------------------------
(Loss) income from continuing operations before items shown
below ($0.26) $ 0.44 $ 2.08
Discontinued operations 0.28 (0.06) (0.05)
Extraordinary item (0.08)
Cumulative effect of a change in accounting (2.10)
---------- ---------- ----------
Net (loss) income ($2.16) $ 0.38 $ 2.03
========== ========== ==========
Weighted average number of shares--Notes A and I 15,217 15,212 15,139
========== ========== ==========
Diluted:
(Loss) income from continuing operations before items shown
below ($0.26) $ 0.44 $ 2.05
Discontinued operations 0.28 (0.06) (0.05)
Extraordinary item (0.08)
Cumulative effect of a change in accounting (2.10)
---------- ---------- ----------
Net (loss) income ($2.16) $ 0.38 $ 2.00
========== ========== ==========
Weighted average number of shares--Notes A and I 15,217 15,244 15,316
========== ========== ==========
See Notes to Consolidated Financial Statements
-44-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Other
Comprehensive Income (Loss)
----------------------------------------
Unrealized
Common Stock Foreign Gain
$.10 Par Value Currency (Loss) On
--------------------- Paid-In Retained Translation Marketable Comprehensive
Shares Amount Capital Earnings Adjustment Securities (Loss) Income
------ ------ ------- -------- ---------- ---------- -------------
(Dollars in thousands)
Balance at October 29, 1999 15,032,446 $1,503 $37,696 $191,217 ($62) ($358)
Contribution to ESOP 24,939 2 556
Stock options exercised, including
related tax benefit of $1,035 150,630 16 2,610
Unrealized foreign currency translation
adjustment-net of taxes of $209 (488) ($488)
Unrealized loss on marketable securities -
net of taxes of $35 (42) (42)
Net income for the year 30,705 30,705
---------- ------ ------- -------- ----- ----- --------
Balance at November 3, 2000 15,208,015 1,521 40,862 221,922 (550) (400) $ 30,175
========
Stock options exercised, including
related tax benefit of $3 7,650 1 140
Unrealized foreign currency translation
adjustment-net of taxes of $36 82 $ 82
Unrealized loss on marketable securities -
net of taxes of $24 (38) (38)
Reclassification adjustment for loss
included
in net income-net of taxes of $282 428 428
Net income for the year 5,844 5,844
---------- ------ ------- -------- ----- ----- --------
Balance at November 4, 2001 15,215,665 1,522 41,002 227,766 (468) (10) $ 6,316
========
Stock options exercised, including
related tax benefit of $3 1,750 34
Unrealized foreign currency translation
adjustment-net of taxes of $10 (22) ($22)
Unrealized gain on marketable securities -
net of taxes of $11 17 17
Net loss for the year ($32,804) (32,804)
---------- ------ ------- -------- ----- ----- --------
Balance at November 3, 2002 15,217,415 $1,522 $41,036 $194,962 ($490) $ 7 ($32,809)
========== ====== ======= ======== ===== ===== ========
There were no shares of preferred stock issued or outstanding in any of the
reported periods.
See Notes to Consolidated Financial Statements.
-45-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
-------------------------------------------
November November November
3, 2002 4, 2001 3, 2000
--------- -------- --------
(In thousands)
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES
Net (loss) income ($32,804) $ 5,844 $ 30,705
Adjustments to reconcile net (loss) income to cash provided by
(applied to) operating activities
Discontinued operations (4,310) 814 697
Extraordinary item 1,262
Cumulative effect of a change in accounting - goodwill impairment 31,927
Depreciation and amortization 22,166 24,582 20,962
Equity in net (income) loss of joint ventures (25) 49 302
Gain on sale of partnership interest (4,173)
Gain on securities-net (5,552)
Accounts receivable provisions 10,188 8,462 7,580
Loss on foreign currency translation 231 64 8
Loss (gain) on dispositions of property, plant and equipment 100 118 (168)
Deferred income tax expense 3,898 2,620 3,636
Other (98) 100 246
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (8,641) 61,878 (93,086)
Proceeds from securitization program 60,000
Decrease (increase) in inventories 6,496 28,399 (13,814)
(Increase) decrease in prepaid expenses and other current assets (1,137) 3,229 (8,979)
Decrease (increase) in other assets 1,318 2,153 (822)
Increase (decrease) in accounts payable 40,076 (29,603) 22,092
(Decrease) increase in accrued expenses (18,655) 449 6,214
Increase (decrease) in customer advances and other liabilities 2,505 (3,520) 4,276
Decrease in income taxes payable (6,035) (6,655) (2,002)
--------- -------- --------
NET CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES 108,462 89,258 (22,153)
--------- -------- --------
-46-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
Year Ended
------------------------------------------
November November November
3, 2002 4, 2001 3, 2000
-------- -------- --------
(In thousands)
CASH PROVIDED BY (APPLIED TO) INVESTING ACTIVITIES
Sales of investments 840 7,326 12,062
Purchases of investments (1,089) (2,001) (13,177)
Distributions from (investment in) joint ventures 3,271 (2,793)
Acquisitions (76) (1,779)
Net proceeds from sale of partnership interest 4,017
Proceeds from disposals of property, plant and equipment 633 1,174 1,684
Purchases of property, plant and equipment (14,692) (27,112) (37,024)
Proceeds from sale of subsidiary 24,233
Other 317 (5) (160)
-------- -------- --------
NET CASH PROVIDED BY (APPLIED TO) INVESTING
ACTIVITIES 13,513 (16,677) (41,187)
-------- -------- --------
CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES
Proceeds from long-term debt 15,100
Payment of long-term debt (33,476) (13,674) (12,653)
Exercises of stock options 34 141 2,626
(Decrease) increase in notes payable-bank (62,306) (77,568) 76,436
-------- -------- --------
NET CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES (95,748) (76,001) 66,409
-------- -------- --------
Effect of exchange rate changes on cash (1,081) (304) 148
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS 25,146 (3,724) 3,217
Net decrease in cash and cash equivalents from discontinued operations (11,901) (1,520)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 25,146 (15,625) 1,697
Cash and cash equivalents, beginning of year 18,474 34,099 32,402
-------- -------- --------
CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED
CASH, END OF YEAR $ 43,620 $ 18,474 $ 34,099
======== ======== ========
SUPPLEMENTAL INFORMATION
Cash paid during the year:
Interest expense, including $668 capitalized in 2000 $ 5,357 $ 12,624 $ 10,517
Income taxes, net of refunds $ 3,200 $ 8,012 $ 17,452
See Notes to Consolidated Financial Statements
-47-
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.
Fiscal Year: In 2002, the Company's fiscal year ended on Sunday, November 3,
2002 and thereafter ends on the Sunday nearest October 31. The 2002 and 2001
fiscal years were comprised of 52 weeks. The 2000 fiscal year was comprised of
53 weeks (one additional week in the fourth quarter).
Consolidation: The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions have
been eliminated upon consolidation. The Company accounts for the securitization
of accounts receivables in accordance with Financial Accounting Standards Board
("FASB") Statement No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (see Note B). The Company believes
that the adoption of FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," required in fiscal 2003, will not have any impact on the
Company's consolidated financial position or results of operations.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States, requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Stock-Based Compensation: The Company accounts for its stock-based compensation
arrangements under the provisions of APB Opinion 25, "Accounting for Stock
Issued to Employees" (see Note K). The Company is required to adopt Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123" during fiscal 2003. The Company believes that the adoption of SFAS No. 148
will not have a material impact on the Company's consolidated financial position
or results of operations.
Revenue Recognition: The Company recognizes revenue primarily as services are
rendered, products are shipped or directories are published. Within the
Company's operating segments, these services include the billing of labor,
material and directory assistance transactions as they are provided. In
addition, the Company may provide services under long-term contracts. Revenue
and costs applicable to long-term contracts, including those providing for
software customization or modification, are recognized on the completed contract
method, upon customers' acceptance, in accordance with AICPA Statement of
Positions No. 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" and No. 97-2, "Software Revenue Recognition" and
related interpretations and amendments. The Company records provisions for
estimated losses on contracts when losses become evident. Accumulated unbilled
costs on contracts are carried in inventory at the lower of actual cost or
estimated realizable value.
The Company, through its Shaw & Shaw subsidiary, provides professional employer
organizational services ("PEO") to certain customers, which generally transfer
their entire work force or employees of specific departments or divisions to the
Company. PEO revenue represented less than 2% of the Company's consolidated
sales in fiscal 2002. The Company's PEO services include payroll administration,
human resource management, consulting on employee legal and regulatory
compliance, providing comprehensive benefits, including retirement plans,
workers' compensation coverage, loss control and risk management and certain
other services. The customer has control over the day-to-day job duties of the
employees. PEO revenue consists of the amounts charged to the customer by the
Company for the employee's gross pay, the employer's share of related payroll
taxes, workers' compensation and charges for certain other services provided by
the Company, and a negotiated percentage markup of the employees' gross wages.
Based on its analysis of Emerging Issues Task Force ("EITF") 99-19, "Reporting
Revenue Gross as a Principal Versus Net as an Agent," the Company believes that
it provides its PEO services as a principal and, therefore, recognizes all
amounts billed to its customers as gross revenues. PEO services revenue in
fiscal 2002, 2001, and 2000 aggregated approximately $24.5 million, $39.6
million and $24.7 million, respectively. The direct expenses borne by the
Company are included in cost of sales. On January 27, 2003, the Company received
a comment from the staff of the Securities and Exchange Commission ("SEC")
questioning the Company's revenue recognition policy for Shaw & Shaw. The
Company understands that its policy is in accordance with the prevailing
practice in the PEO industry and responded to the comment. The staff of the SEC
advised the Company that it believes the appropriate presentation should be to
report the Company's PEO revenue net of gross payroll cost. The Company has not
been able to resolve this comment to date. If the Company were required to
record its PEO revenue net of the gross payroll cost component of its services,
there would be a reduction of sales and the related cost of sales, but no effect
on the Company's net income.
Under certain other contracts with customers, the Company manages the customers'
alternative staffing requirements, including transactions between the customer
and other staffing vendors ("associate vendors"). When payments to associate
vendors are subject to receipt of the customers' payment to the Company and the
Company does not bear credit responsibility, the arrangements are considered
non-recourse against the Company and the revenue, other than management fees to
the Company, is excluded from sales.
-48-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Cash Equivalents: Cash equivalents consist of investments in short-term, highly
liquid securities having an initial maturity of three months or less.
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).
Long-Lived and Intangible Assets: The Company, in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets," and SFAS No. 144, "Accounting for
Impairment on Disposal of Long-lived Assets," reviews for impairment of
long-lived assets and certain identifiable intangibles annually and whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable (see Note H).
Property, Plant and Equipment: Depreciation and amortization are provided on the
straight-line and accelerated methods at rates calculated to write off the cost
of the assets over their estimated useful lives. Fully depreciated assets are
written off against their related allowance accounts. The assets are depreciated
over the following periods:
Buildings 25 to 31-1/2 years
Machinery and equipment 3 to 15 years
Leasehold improvements length of lease or life of the
asset, whichever is shorter
Enterprise Resource Planning system 5 to 7 years
Property, plant and equipment consisted of:
November November
3, 2002 4, 2001
-------- --------
(In thousands)
Land and buildings $ 33,797 $ 33,795
Machinery and equipment 102,301 94,414
Leasehold improvements 9,049 8,357
Enterprise Resource Planning system 31,916 31,098
-------- --------
177,063 167,664
Less allowances for depreciation and amortization 87,769 70,517
-------- --------
$ 89,294 $ 97,147
======== ========
A term loan is secured by a deed of trust on land and buildings with a carrying
amount at November 3, 2002 of $11.6 million (see Note F).
-49-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Reclassification: Certain amounts in fiscal years 2001 and 2000 have been
reclassified to conform to the 2002 presentation.
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 placed
in operation, the capitalized costs are transferred from costs-in-process to
completed property, plant and equipment, and are accounted for as such. All
post-implementation costs, such as maintenance, training and minor upgrades that
do not result in additional functionality, are expensed as incurred.
Income Taxes: Income taxes are provided using the liability method (see Note G).
Foreign Exchange Contracts: 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 (see Note O).
Translation of Foreign Currencies: The U.S. dollar is the Company's functional
currency throughout the world, except certain European subsidiaries. Where the
U.S. dollar is used as the functional currency, foreign currency gains and
losses are included in operations. The translation adjustments recorded as a
separate component of stockholders' equity result from changes in exchange rates
affecting the reported assets and liabilities of the European subsidiaries whose
functional currency is not the U.S. dollar.
Earnings Per Share: Basic earnings per share is calculated by dividing net
earnings by the weighted-average number of common shares outstanding during the
period. The diluted earnings per share computation includes the effect, if any,
of shares that would be issuable upon the exercise of outstanding stock options,
reduced by the number of shares which are assumed to be purchased by the Company
from the resulting proceeds at the average market price during the period (see
Note I).
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: The Company enters into derivative financial
instrument contracts only for hedging purposes and accounts for them in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and its amendments SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" (see Note O).
-50-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
New Accounting Pronouncements to be Effective in Fiscal 2003: The Company
believes the adoption of SFAS No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment to SFAS No. 13, and Technical Corrections," in the beginning
of fiscal 2003, will not have a material impact on the Company's consolidated
financial position or results of operations, but will require a future
reclassification of the extraordinary item arising from the March early payment
of the Company's Senior Notes to other income (expense).
The Company believes the adoption of SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," in the beginning of fiscal year
2003, will not have a material impact on the Company's consolidated financial
position or results of operations.
Note B--Securitization Program
Effective April 15, 2002, the Company entered into a $100.0 million, three-year
accounts receivable securitization program (the "Securitization Program"). Under
the Securitization Program, receivables related to the United States operations
of the staffing solutions business of the Company and its subsidiaries are sold
from time-to-time by the Company to Volt Funding Corp., a wholly owned special
purpose subsidiary of the Company ("Volt Funding"). Volt Funding, in turn, sells
to Three Rivers Funding Corporation ("TRFCO"), an asset backed commercial paper
conduit sponsored by Mellon Bank, N.A., an undivided percentage ownership
interest in the pool of receivables Volt Funding acquires from the Company
(subject to a maximum purchase by TRFCO in the aggregate of $100.0 million). The
Company retains the servicing responsibility for the accounts receivable. On
April 15, 2002, TRFCO initially purchased from Volt Funding a participation
interest of $50.0 million out of an initial pool of approximately $162.0 million
of receivables. Of the $50.0 million cash paid by Volt Funding to the Company,
$35.0 million was used to repay the entire outstanding principal balance under
the Company's former revolving credit facility. The participation interest
remained at $50.0 million until August 14, 2002, when it was increased to $60.0
million (see Note E).
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 financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors (subject also, as described
in Note E, to the security interest that the Company has granted in the common
stock of Volt Funding in favor of the lenders under the Company's new Credit
Facility). TRFCO has no recourse to the Company (beyond their interest in the
pool of receivables owned by Volt Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases 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.
-51-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--Securitization Program--Continued
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 on TRFCO's
commercial paper, are charged to the consolidated statement of operations.
In conjunction with the initial and subsequent transactions through November 3,
2002, the Company incurred charges of $0.9 million, which are included in Other
Expense on the consolidated statement of operations. The equivalent cost of
funds in the Securitization Program was 2.5% per annum. The Company's carrying
retained interest in the receivables approximated fair value due to the
relatively short-term nature of the receivable collection period. In addition,
the Company performed a sensitivity analysis, changing various key assumptions,
which also indicated the retained interest in receivables approximated fair
value.
At November 3, 2002, the Company's carrying retained interest, net of a service
fee liability, was approximately $108.1 million, in a revolving pool of
receivables of approximately $168.2 million. The outstanding balance of the
undivided interest sold to TRFCO was $60.0 million at November 3, 2002.
Accordingly, the trade accounts receivable included on the November 3, 2002
balance sheet have been reduced to reflect the $60.0 million participation
interest sold.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including the default rate, as defined, on receivables
exceeding a specified threshold, the rate of collections on receivables failing
to meet a specified threshold, the Company failing to maintain a long-term debt
rating of "B" or better or the equivalent thereof from a nationally recognized
rating organization or a default occurring and continuing on indebtedness for
borrowed money of at least $5.0 million. The Company's most recent long-term
debt rating was "BBB-" with a neutral rating outlook.
NOTE C--Short-Term Investments and Investments in Securities
At November 3, 2002, and November 4, 2001, short-term investments consisted of
$3.8 million invested in mutual funds for the Company's deferred compensation
plan (see Note N). Non-current investments at these dates consisted of a
portfolio of equity securities with a cost basis of $40,000.
The gross unrealized gain of $12,000 at November 3, 2002 and the unrealized loss
of $16,000 at November 4, 2001 are included as a component of accumulated other
comprehensive (loss) income.
During fiscal 2001, the Company sold an investment in equity securities,
previously written off in 1997, resulting in a pre-tax gain of $6.3 million and
wrote down a non-current investment in marketable securities resulting in a
charge to earnings and an adjustment to other comprehensive income of $0.7
million ($0.4 million, net of taxes) as the decline in market value was
considered other than temporary.
-52-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE D--Inventories
Inventories of accumulated unbilled costs and materials by segment are as
follows:
November 3, November 4,
2002 2001
----------- -----------
(In thousands)
Staffing Services $ 32 $ 29
Telephone Directory 11,355 9,805
Telecommunications Services 14,394 22,970
Computer Systems 3,909 3,382
------- -------
Total $29,690 $36,186
======= =======
The cumulative amounts billed under service contracts at November 3, 2002 and
November 4, 2001 of $2.1 million and $4.6 million, respectively, are credited
against the related costs in inventory.
NOTE E--Short-Term Borrowings
At November 3, 2002, the Company had total outstanding bank borrowings of $2.4
million under credit lines, which expire during fiscal year 2003, unless
renewed, with foreign banks that provide for borrowings and letters of credit up
to an aggregate of $10.7 million. In addition to these lines, at November 4,
2001, the Company had a revolving credit agreement, which provided for $115.5
million of borrowings. The Company had total outstanding borrowings of $65.8
million of which $60.3 million was borrowed under the revolving credit agreement
at November 4, 2001. This revolving credit agreement was replaced in April 2002
by the Securitization Program (see Note B) and a new, two-year, $40.0 million
credit facility (see Note F). The weighted average interest rate of short-term
borrowings at each year-end was 62% in fiscal 2002 and 7% in fiscal 2001.
Borrowings in Uruguay serve to hedge receivables against a loss in value due to
the weakening of the Uruguayan currency. The weighted average interest rate was
high in 2002 as the borrowings were primarily by the Company's Uruguayan
operation from Uruguayan banks, whose interest rates reflected the country's
high inflation level.
-53-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE F--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
November November
3, 2002 4, 2001
-------- --------
(In thousands)
7.92% Senior Notes (a) $30,000
8.2% term loan (b) $14,810 15,125
Notes payable (c) 1,183 2,297
------- -------
15,993 47,422
Less amounts due within one year 1,524 31,429
------- -------
Total long-term debt $14,469 $15,993
======= =======
(a) On March 5, 2002, the Company prepaid the remaining $30.0 million of its
Senior Notes in lieu of seeking amendments to the agreements under which
the Senior Notes were issued that would have been required in order for
the Company to implement the Securitization Program discussed in Note B
and that may have been required depending upon the size of the Company's
then expected first quarter loss. The Senior Notes otherwise would have
been due in installments over the two and one-half years following the
prepayment. The "make whole" premium paid to the holders of the Senior
Notes of $2.1 million, or $1.3 million net of taxes, was recognized as an
extraordinary charge in the second quarter of fiscal 2002 for the early
payment of that debt.
(b) In September 2001, a subsidiary of the Company entered into a $15.1
million loan agreement with General Electric Capital Business Asset
Funding Corporation. The 20-year loan, which bears interest at 8.2% per
annum and requires principal and interest payments of $0.4 million per
quarter, is secured by a deed of trust on certain land and buildings that
had a carrying amount at November 3, 2002 of $11.6 million. The obligation
is guaranteed by the Company.
(c) On February 9, 1999, the Company entered into a $5.6 million installment
payment agreement to finance the purchase and support of an Enterprise
Resource Planning system for internal use as an accounting and back office
system, which has been capitalized and is being amortized over a five to
seven year period. The agreement provides for interest, calculated at 6%,
and principal payments in five equal annual installments of $1.3 million,
which began in February 1999, with the final payment due February 2003.
Effective April 15, 2002, the Company entered into a $40.0 million, two-year,
secured, syndicated, revolving credit agreement ("Credit Agreement") which
established a credit facility ("Credit Facility") in favor of the Company and
designated subsidiaries, of which up to $15.0 million may be used for letters of
credit. Borrowings by subsidiaries are limited to $25.0 million in the
aggregate. The administrative agent arranger for the secured Credit Facility is
JP Morgan Chase Bank. The other banks participating in the Credit Facility are
Mellon, NA, Wells Fargo, NA and Lloyds TSB Bank PLC. Borrowings and letters of
credit under the Credit Facility are limited to a specific borrowing base, which
is based upon the level of specified receivables at the time of each
calculation. At November 3, 2002, the borrowing base was approximately $39.7
million. To date, the Company and its subsidiaries have made no borrowings under
the Credit Facility. Borrowings under the Credit Facility are to bear interest
at various rate options selected by the Company at the time of each borrowing,
certain of which options, as well as the annual 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. Based upon the Company's
leverage ratio and debt rating at November 3, 2002, if a three-month LIBO rate
was the interest rate option selected by the Company, borrowings would have
borne interest at the rate of 3.1% per annum. At November 3, 2002, the facility
fee was 0.5% per annum.
-54-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Note F--Long-Term Debt--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, of $220.0 million (the
Company's consolidated tangible net worth, as defined, as of November 3, 2002
was $229.2 million); limits cash dividends and capital stock repurchases and
redemptions by the Company in any one fiscal year to 25% of consolidated net
income, as defined, for the prior fiscal year; requires the Company to maintain
a ratio of EBIT, as defined, to interest expense, as defined, of 1.0 to 1.0 for
the four fiscal quarters ended November 3, 2002 and 1.25 to 1.0 for each of the
four fiscal quarters ending as of the last day of each quarter thereafter; and
required that there be no net loss, excluding non-operating items, in either of
the final two fiscal quarters in the Company's fiscal year ended November 3,
2002. The Credit Agreement also imposes limitations on, among other things, the
incurrence of additional indebtedness, the incurrence of additional liens, sales
of assets, the level of annual capital expenditures and the amount of
investments, including business acquisitions and investments in joint ventures,
and loans that may be made by the Company and its subsidiaries. Additionally as
a result of the covenants, the Company is restricted from paying dividends.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers; however, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are guarantors of all
loans made to the Company or to subsidiary borrowers under the Credit Facility,
with four of those guarantors having pledged accounts receivable, the level of
which at November 3, 2002 was approximately $52.1 million, as collateral
security for their guarantee obligations. Pledged accounts receivables under the
Credit Facility do not include accounts receivable in the Securitization
Program. Under certain circumstances, other subsidiaries of the Company also may
be required to become guarantors under the Credit Facility. The Company has
pledged all of the stock of Volt Funding (see Note B) as collateral security for
the Company's obligations under the Credit Facility.
The Company is currently in compliance with the covenants included in the Credit
Agreement. As previously reported, on October 17, 2002, the Company received a
waiver of the interest coverage covenant, relating to its fiscal year ended
November 3, 2002 contained in the Credit Facility.
The Company has not borrowed under the Credit Facility since its inception in
April 2002 and no borrowings are presently anticipated in the first half of
fiscal 2003. At November 3, 2002, the Company was in compliance with the
covenants contained in the credit agreement. Historically, the Company's first
quarter is its weakest fiscal quarter, and last year the Company experienced a
loss in that quarter. Depending upon the results of the first quarter of 2003,
ending February 2, 2003, one covenant in the Credit Facility, regarding interest
coverage, may not be achieved. As long as the facility is unused, there would be
no effect on any other financing, including the Securitization Program. The
banks have indicated a willingness to negotiate an amendment or waiver.
-55-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Note F--Long-Term Debt--Continued
Principal payment maturities on long-term debt outstanding at November 3, 2002
are:
Fiscal Year Amount
----------- ------
(In thousands)
2003 $1,524
2004 371
2005 402
2006 437
2007 474
Thereafter 12,785
-------
$15,993
=======
NOTE G--Income Taxes
The components of the Company's (loss) income from continuing operations before
income taxes by location and the related income tax (benefit) provision are as
follows:
Year Ended
------------------------------------------
November November November
3, 2002 4, 2001 3, 2000
-------- -------- --------
(In thousands)
The components of (loss) income from continuing
operations before income taxes, based on the
location of operations, consist of the following:
Domestic ($4,030) $ 10,421 $ 50,966
Foreign (1,384) 597 973
-------- -------- --------
($5,414) $ 11,018 $ 51,939
======== ======== ========
The components of the income tax (benefit)
provision include:
Current:
Federal (a) ($4,860) $ 1,110 $ 12,952
Foreign 486 117 877
State and local (1,013) 513 3,072
-------- -------- --------
Total current (5,387) 1,740 16,901
-------- -------- --------
Deferred:
Federal $ 3,345 $ 2,366 $ 2,950
Foreign 128 (145) (107)
State and local 425 399 793
-------- -------- --------
Total deferred 3,898 2,620 3,636
-------- -------- --------
Total income tax (benefit) provision ($1,489) $ 4,360 $ 20,537
======== ======== ========
(a) Increased in 2002 and reduced in 2001 and 2000 by benefits of $0.2
million, $1.0 million and $0.7 million, respectively, from general
business credits.
-56-
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
----------------------------------
November November November
3, 2002 4, 2001 3, 2000
-------- -------- --------
Statutory rate (35.0%) 35.0% 35.0%
State and local taxes, net of federal
tax benefit (3.4) 5.1 4.8
Tax effect of foreign operations 16.2 2.1 (0.6)
Goodwill amortization 2.6 1.6
General business credits (2.9) (5.7) (0.9)
Other-net (2.4) 0.5 (0.4)
----- ---- ----
Effective tax rate (27.5%) 39.6% 39.5%
===== ==== ====
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 and tax credit carryforwards. Significant components of the
Company's deferred tax assets and liabilities are as follows:
November November
3, 2002 4, 2001
-------- --------
(In thousands)
Deferred Tax Assets:
Allowance for doubtful accounts $ 4,144 $ 3,540
Inventory valuation 19 544
Foreign loss carryforwards 687 602
Goodwill 3,069
Compensation accruals and deferrals 3,644 3,933
Warranty accruals 99 99
Foreign asset bases 155 283
Other-net 1,110 980
-------- --------
Total deferred tax assets 12,927 9,981
Less valuation allowance for deferred tax assets 3,756 602
-------- --------
Deferred tax assets, net of valuation allowance 9,171 9,379
-------- --------
Deferred Tax Liabilities:
Software development costs 12,520 8,887
Earnings not currently taxable 100 3
Accelerated book depreciation 2,951 2,990
-------- --------
Total deferred tax liabilities 15,571 11,880
-------- --------
Net deferred tax liabilities ($6,400) ($2,501)
======== ========
Balance sheet classification:
Current assets $ 8,343 $ 8,585
Non-current liabilities (14,743) (11,086)
-------- --------
Net deferred tax liabilities ($6,400) ($2,501)
======== ========
-57-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE G--Income Taxes--Continued
The net deferred tax assets of the Company's former 59% owned subsidiary,
Autologic Information International, Inc. ("Autologic"), have been classified as
assets held for sale in the November 4, 2001 balance sheet (see Note J).
At November 3, 2002, deferred tax assets included $0.7 million related to
foreign loss carryforwards, of which approximately one half expires through
2008, and $3.1 million related to goodwill written off as impaired. For
financial statement purposes, a full valuation allowance of $3.8 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 increase during 2002 of $3.1 million was principally due to the
goodwill.
Substantially all of the undistributed earnings of foreign subsidiaries of $6.6
million at November 3, 2002 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.
NOTE H--Goodwill and Other Intangibles
As of the beginning of fiscal 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." Under these new rules, goodwill and other
intangibles with indefinite lives are no longer amortized, but are subject to
annual testing using fair value methodology. Intangible assets with finite,
measurable lives continue to be amortized over their respective useful lives
until they reach their estimated residual values, and are reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." As a result, the Company did not incur any
expense for the amortization of goodwill in fiscal year 2002. The pretax expense
for the amortization of goodwill, included in continuing operations, was $3.0
million and $3.3 million in fiscal years 2001 and 2000, respectively.
The Company engaged independent valuation firms to assist in the determination
of impairment, which may have existed in the $39.8 million of goodwill recorded
as of the beginning of fiscal 2002. The valuation firms primarily used
comparable multiples of revenue and EBITDA and other valuation methods to assist
the Company in the determination of the fair value of the reporting units
measured. The result of testing goodwill for impairment in accordance with SFAS
No. 142, as of November 5, 2001, was a non-cash charge of $31.9 million, which
is reported under the caption "Cumulative effect of a change in accounting." The
total remaining goodwill of the Company at November 3, 2002 was $9.0 million.
The impairment charge in the Staffing Services segment related to the Company's
European Technical Placement division and the Commercial and Light Industrial
division, which have been adversely affected by the economic declines in Europe
and the United States, respectively. Both divisions have incurred losses in
fiscal 2001 and in fiscal 2002. Accordingly, an impairment charge of $23.9
million (including $2.6 million, the total carrying amount of goodwill for the
Commercial and Light Industrial division as of November 5, 2001) was recognized.
-58-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE H--Goodwill and Other Intangibles--Continued
The impairment charge in the Company's Telephone Directory business related to
its independent telephone directory publishing division ($6.9 million) of that
segment, and the Company's then-owned 50% interest in the westVista joint
venture ($1.1 million), which also publishes independent directories (see Note
J). Due to the fact that some of the directories purchased had not performed as
well as projected, and in some cases had incurred losses, an impairment charge
of $8.0 million was recognized.
The changes in the carrying amount of goodwill by segment during the fiscal year
ended November 3, 2002 are as follows:
November Impairment November
4, 2001 Charge (1) 3, 2002
-------- ---------- --------
(In thousands)
Staffing Services $32,271 $23,930 $8,341
Telephone Directory 6,907 6,907
Computer Systems 642 642
------- ------- ------
Total $39,820 $30,837 $8,983
======= ======= ======
(1) The impairment charge does not include the $1.1 million charge related to
the goodwill associated with the westVista joint venture, discussed above.
The following tables reflect the impact that the elimination of the amortization
pursuant to SFAS No. 142 would have had on prior year net income and net income
per share, if SFAS No. 142 had been adopted at the beginning of fiscal year
2000:
Year Ended
---------------------------
November November
4, 2001 3, 2000
-------- --------
(In thousands, except per share data)
Reported net income $5,844 $30,705
Add back: Goodwill amortization, net of taxes (a) 2,303 3,413
------ -------
Adjusted net income $8,147 $34,118
====== =======
Per Share Data
---------------------------
Basic:
Reported net income per share $ 0.38 $ 2.03
Add back: Goodwill amortization per share (a) 0.15 0.22
------ -------
Adjusted net income per share $ 0.53 $ 2.25
====== =======
Diluted:
Reported net income per share $ 0.38 $ 2.00
Add back: Goodwill amortization per share (a) 0.15 0.22
------ -------
Adjusted net income per share $ 0.53 $ 2.22
====== =======
(a) Includes goodwill amortization applicable to discontinued operations of
$0.3 million, net of taxes, or $0.02 per share, and $1.1 million, net of
taxes, or $0.07 per share, for the fiscal years ended November 4, 2001 and
November 3, 2000, respectively.
-59-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE H--Goodwill and Other Intangibles--Continued
As of November 3, 2002, other intangible assets, which will continue to be
amortized, are comprised of specific sales contracts that were purchased, having
a definite life and a carrying value of $0.1 million, net of accumulated
amortization of $0.3 million. The related amortization expense for the fiscal
year ended November 3, 2002 was $0.1 million, and the remaining $0.1 million
will be amortized by the end of fiscal 2003.
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
----------------------------------------------------
November November November
3, 2002 4, 2001 3, 2000
---------- ---------- ----------
Denominator for basic earnings per share -
Weighted average number of shares 15,216,574 15,212,076 15,139,483
Effect of dilutive securities:
Employee stock options 32,274 176,474
---------- ---------- ----------
Denominator for diluted earnings per share -
Adjusted weighted average number of shares 15,216,574 15,244,350 15,315,957
========== ========== ==========
Due to a pre-tax loss in fiscal 2002, none of the options to purchase 566,359
shares of the Company's common stock were included in the computation of diluted
earnings per share because the effect of inclusion would have been antidilutive.
Options to purchase 573,241, and 50,750 shares of the Company's common stock
were outstanding at November 4, 2001 and November 3, 2000, respectively, but
were not included in the computation of diluted earnings per share because their
exercise prices were greater than the average market price of the Company's
common stock.
NOTE J--Sale of Subsidiaries and Businesses
On November 30, 2001, the Company's 59% owned publicly-held subsidiary,
Autologic Information International, Inc. ("Autologic"), that comprised the
Company's Electronic Publication and Typesetting segment, was acquired by Agfa
Corporation through a tender offer for all of Autologic's outstanding shares and
a subsequent merger. The Company received $24.2 million for its shares. The
Company's gain on the sale of $4.5 million, including a tax benefit of $1.7
million, was reflected in the Company's first quarter of fiscal 2002. The
results of operations of Autologic have been classified as discontinued,
Autologic's prior period results have been reclassified and its assets and
liabilities have been included as separate line items on the Company's fiscal
2001 consolidated balance sheet.
-60-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--Sale of Subsidiaries and Businesses--Continued
Included in discontinued operations, as a result of the sale of Autologic, for
the three fiscal years ended November 3, 2002 are:
November November November
3, 2002 4, 2001 3, 2000
-------- -------- --------
(In thousands)
Revenue $3,296 $68,518 $80,915
====== ======= =======
Loss before taxes and minority interest ($488) ($1,412) ($1,062)
Income taxes (benefit) 153 110 (550)
Minority interest 138 488 915
------ ------- -------
Loss from operations (197) (814) (697)
------ ------- -------
Gain on disposal before tax benefit 2,761
Income tax benefit 1,746
------
Gain on disposal 4,507
------
Gain (loss) from discontinued operations $4,310 ($814) ($697)
====== ======= =======
Autologic's assets and liabilities reclassified in the November 4, 2001 balance
sheet include:
November
4, 2001
--------
(In thousands)
Cash $14,879
Accounts receivable 10,807
Inventory 7,782
Deferred taxes and other current assets 5,717
Property, plant and equipment, net 4,401
Deferred taxes and other non-current assets 4,049
-------
Assets held for sale $47,635
=======
Accounts payable $2,358
Accrued expenses 4,333
Customer advances and other liabilities 4,037
Minority interest 15,585
-------
Liabilities related to assets held for sale $26,313
=======
In August 2002, the Company's 50% owned joint venture, westVista, was liquidated
with one operation sold to an unaffiliated third party and the other operation
acquired by the Company. The terms of the initial purchase agreement require the
Company and its partner to make future payments to the previous owner.
Accordingly, 50% of this liability has been accrued by the Company and the gain
on the sale of approximately $0.1 million has been deferred.
-61-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--Sale of Subsidiaries and Businesses--Continued
Prior to the sale, the Company's portion of net income was $25,000 in fiscal
2002, which is included in other (expense) income. In addition, the Company
recorded a charge for the write-down of goodwill related to the joint venture of
$1.1 million as a portion of the Cumulative Effect of a Change in Accounting
(see Note H).
In April 2001, the Company sold its interest in a real estate partnership,
resulting in a pre-tax gain of $4.2 million.
NOTE K--Stock Option Plans
A Non-Qualified Stock Option Plan adopted by the Company in fiscal 1980
terminated on June 30, 1990, except for options previously granted under the
plan. All remaining outstanding options under this plan were exercised during
fiscal 2000.
In May 1995, the Company adopted a new Non-Qualified Stock Option Plan, which
initially enabled the granting of options to acquire up to 1.2 million shares of
common stock to key employees and, as amended in January 1998, directors of the
Company. Option exercise prices may not be less than 100% of the market price of
the shares on the date the options are granted. The term of each option, which
may not exceed ten years, and vesting period of each option are at the
discretion of the Company. Currently outstanding options become fully vested
within one to five years after the date of grant. At November 3, 2002, options
to purchase 457,105 (418,399 at November 4, 2001) shares were vested and 367,034
(361,402 at November 4, 2001) shares were available for future grants under the
plan.
Transactions involving outstanding stock options under these plans were:
1980 Plan 1995 Plan
-------------------------------- -------------------------------
Number of Weighted Average Number of Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding-October 29, 1999 81,000 $4.00 625,008 $20.77
Granted 59,650 23.51
Exercised (81,000) 4.00 (69,630) 18.19
Forfeited (33,678) 25.53
------- -------
Outstanding-November 3, 2000 581,350 21.08
Granted 31,650 18.49
Exercised (7,650) 18.08
Forfeited (31,609) 19.33
-------
Outstanding November 4, 2001 573,741 21.08
Granted 4,500 18.13
Exercised (1,750) 18.01
Forfeited (10,132) 20.16
-------
Outstanding-November 3, 2002 566,359 $21.08
=======
-62-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE K--Stock Option Plans--Continued
Price ranges of outstanding and exercisable options as of November 3, 2002 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
- --------------- --------- ------------ ---------------- --------- ----------------
$12.42 - $17.50 38,550 7 $16.68 20,150 $16.70
$18.08 - $18.08 273,313 3 $18.08 273,313 $18.08
$18.13 - $23.06 145,336 7 $21.00 70,532 $21.26
$23.59 - $59.81 109,160 5 $30.24 93,110 $30.13
The Company has elected to follow APB Opinion 25, "Accounting for Stock Issued
to Employees," to account for its stock options under which no compensation cost
is recognized because the option exercise price is equal to at least the market
price of the underlying stock on the date of grant. Had compensation cost for
these plans been determined at the grant dates for awards under the alternative
accounting method provided for in SFAS No. 123, "Accounting and Disclosure for
Stock Based Compensation," net income and earnings per share, on a pro forma
basis, would have been:
2002 2001 2000
-------- ------ -------
Pro forma net (loss) income (in thousands) ($33,113) $5,343 $30,089
Pro forma net (loss) income per share-basic ($2.18) $0.35 $1.99
Pro forma net (loss) income per share-diluted ($2.18) $0.35 $1.96
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 2002, 2001 and 2000, respectively:
risk-free interest rates of 2.7%, 5.0% and 5.9%, respectively; expected
volatility of .52, .65 and .61, 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 2002, 2001 and 2000 were $10.59, $13.00 and $16.29,
respectively.
NOTE L--Segment Disclosures
Financial data concerning the Company's sales, segment profit (loss) and
identifiable assets by reportable operating segment for fiscal years 2002, 2001
and 2000 are presented in tables under Item 1 of this Report on Form 10-K and
are incorporated herein by reference.
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.
-63-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Therefore, the
Company's operating profit is the total segment profit less general corporate
expenses. Identifiable assets are those assets that are used in the Company's
operations in the particular operating segment. Corporate assets consist
principally of cash and cash equivalents, investments and an Enterprise Resource
Planning system.
The Company operates in two major businesses, which are primarily focused on the
markets they serve: staffing services and telecommunications and information
solutions. The Company's internal reporting structure is based on the services
and products provided to customers which results in the following four
reportable operating segments:
Staffing Services - This segment provides a broad range of employee staffing
services to a wide range of customers throughout the United States, Canada and
Europe. These services fall within three major functional areas: Staffing
Solutions, Information Technology Solutions and E-Procurement Solutions.
Staffing Solutions provides a full spectrum of managed staffing,
temporary/alternative personnel employment and direct hire placement and
professional employer organization services. Information Technology Solutions
provides a wide range of information technology services, including consulting,
turnkey project management and software and web development. E-Procurement
Solutions provides global vendor neutral procurement and management solutions
for supplemental staffing using web-based software systems.
Telephone Directory - This segment publishes independent telephone directories
in the United States and publishes telephone directories in Uruguay under a
contract with the government-owned telephone company; provides telephone
directory production, commercial printing, database management, sales and
marketing services; licenses directory production and contract management
software systems to directory publishers and others; and provides services,
principally computer-based projects, to public utilities and financial
institutions.
Telecommunications Services - This segment provides telecommunications services,
including design, engineering, construction, installation, maintenance and
removals in the outside plant and central office of telecommunications and cable
companies, and within their customers' premises, as well as for both large
commercial and governmental entities requiring telecommunications services; and
also provides complete turnkey services for wireless and wireline
telecommunications companies.
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.
-64-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
Sales to external customers and assets of the Company by geographic area are as
follows:
Year Ended
------------------------------------------------
November November November
3, 2002 4, 2001 3, 2000
---------- ---------- ----------
(In thousands)
Sales:
Domestic $1,369,373 $1,798,817 $2,014,841
International 118,467 133,444 105,424
---------- ---------- ----------
$1,487,840 $1,932,261 $2,120,265
========== ========== ==========
Assets:
Domestic $ 467,303 $ 561,085
International 42,287 76,151
---------- ----------
$ 509,590 $ 637,236
========== ==========
Sales for all periods exclude sales by Autologic, which was reclassified as a
discontinued operation. The assets of Autologic have been classified as assets
held for sale in the November 4, 2001 balance sheet (see Note J).
There were no customers to which sales represented over 10% of the Company's
consolidated sales in fiscal years 2002, 2001, or 2000. In fiscal 2002, the
Telecommunications Services segment's sales to three customers represented
approximately 24%, 20%, and 12%, respectively, of the total sales of that
segment; and the Computer Systems segment's sales to one customer represented
approximately 30% of the total sales of that segment. 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, although the
Company does not believe that there would be a material adverse effect on the
results of the Company and its subsidiaries taken as a whole.
Capital expenditures and depreciation and amortization by the Company's
operating segments are as follows:
Year Ended
--------------------------------------
November November November
3, 2002 4, 2001 3, 2000
-------- -------- --------
(In thousands)
Capital Expenditures:
Staffing Services $ 9,063 $12,062 $ 7,167
Telephone Directory 403 2,891 1,864
Telecommunications Services 960 3,491 6,511
Computer Systems 3,041 3,520 3,300
------- ------- -------
Total segments 13,467 21,964 18,842
Corporate 1,225 5,148 18,468
------- ------- -------
$14,692 $27,112 $37,310
======= ======= =======
-65-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
Year Ended
--------------------------------------
November November November
3, 2002 4, 2001 3, 2000
-------- -------- --------
(In thousands)
Depreciation and Amortization (a):
Staffing Services $ 7,339 $ 8,275 $ 7,942
Telephone Directory 2,202 3,665 3,560
Telecommunications Services 4,102 4,716 4,319
Computer Systems 2,978 2,979 3,164
Total segments 16,621 19,635 18,985
Corporate 5,545 4,947 1,977
------- ------- -------
$22,166 $24,582 $20,962
======= ======= =======
(a) Includes depreciation and amortization of property, plant and equipment
for fiscal years 2002, 2001 and 2000 of $21.8 million, $ 20.5 million and
$16.7 million, respectively.
NOTE M--Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for the
fiscal years ended November 3, 2002 and November 4, 2001. Each quarter contained
thirteen weeks.
Fiscal 2002 Quarter
-----------------------------------------------------------
First Second Third Fourth
--------- -------- -------- --------
(In thousands, except per share data)
Net sales $ 338,753 $367,425 $376,635 $405,027
========= ======== ======== ========
Gross profit $ 11,778 $ 20,598 $ 26,835 $ 37,599
========= ======== ======== ========
(Loss) income from continuing operations (6,723) ($3,149) $ 1,133 $ 4,814
Discontinued operations 4,310
Extraordinary item (1,262)
Cumulative effect of a change in accounting (31,927)
--------- -------- -------- --------
Net (loss) income ($34,340) ($4,411) $ 1,133 $ 4,814
========= ======== ======== ========
Basic and Diluted earnings per share:
(Loss) income from continuing operations ($0.44) ($0.21) $ 0.07 $ 0.32
Discontinued operations 0.28
Extraordinary item (0.08)
Cumulative effect of a change in accounting (2.10)
--------- -------- -------- --------
Net (loss) income ($2.26) ($0.29) $ 0.07 $ 0.32
========= ======== ======== ========
-66-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE M--Quarterly Results of Operations (Unaudited)--Continued
Fiscal 2001 Quarter (a)
---------------------------------------------------------------
First(b) Second(c) Third(d) Fourth(d)
--------- --------- --------- ---------
(In thousands, except per share data)
Net sales $ 509,178 $ 518,383 $ 459,003 $ 445,697
========= ========= ========= =========
Gross profit $ 21,249 $ 33,293 $ 26,002 $ 39,646
========= ========= ========= =========
(Loss) income from continuing operations ($1,800) $ 3,342 ($ 959) $ 6,075
Discontinued operations (85) (413) (283) (33)
--------- --------- --------- ---------
Net (loss) income ($1,885) $ 2,929 ($1,242) $ 6,042
========= ========= ========= =========
Basic and Diluted earnings per share:
(Loss) income from continuing operations ($0.12) $ 0.22 ($0.06) $ 0.40
Discontinued operations (0.03) (0.02)
--------- --------- --------- ---------
Net (loss) income ($0.12) $ 0.19 ($0.08) $ 0.40
========= ========= ========= =========
(a) Results for fiscal 2001 include amortization of goodwill of approximately
$0.5 million, net of taxes, per quarter, or $0.03 per share, which is not
permitted to be amortized beginning in fiscal 2002.
(b) Results for the first quarter of 2001 include the write down of an
investment in marketable securities resulting in a charge to earnings of
$0.7 million ($0.4 million, net of taxes, or $0.03 per share).
(c) Results for the second quarter of 2001 include a gain of $4.2 million
($2.5 million, net of taxes, or $0.17 per share) from the sale of the
Company's interest in a real estate partnership.
(d) Results of the third and fourth quarters of 2001 include gains on the sale
of securities of $1.8 million ($1.1 million, net of taxes, or $0.07 per
share) and $4.5 million ($2.7 million, net of taxes, or $0.18 per share),
respectively.
Historically, the Company's results of operations have been lower in the first
fiscal quarter as a result of reduced requirements for its technical and
temporary personnel during the holiday season and due to its directory
publishing schedule. The Company's Uruguayan division of the Telephone Directory
segment produces a major portion of its revenues and most of its profits in the
Company's fourth fiscal quarter, and the revenues and profits of that segment's
DataNational division are lower in the Company's first fiscal quarter due to the
seasonality of its directory publishing schedule.
NOTE N--Employee Benefits
The Company has various savings plans that permit eligible employees to make
contributions on a pre-tax salary reduction basis in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. In January 2000, the
Company amended the savings plan for in-house 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 $1.3 million, $1.2 million and $0.9 million
in fiscal 2002, fiscal 2001 and fiscal 2000, respectively, were accrued and
charged to compensation expense.
In January 2000, the Company made a final discretionary contribution to its
non-contributory Employee Stock Ownership Plan (ESOP), merged the ESOP with its
savings plan for in-house employees and fully vested all ESOP accounts within
the savings plan regardless of years of service. Contributions of $0.6 million
in fiscal
-67-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE N--Employee Benefits--Continued
1999 were accrued and charged to compensation expense. Contributions of
previously unissued shares were made to the ESOP plan and are included in the
calculation of earnings per share.
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.
NOTE O--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest swap contracts
and foreign currency options and exchange contracts, are recognized in the
consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting and,
if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are
recorded in income along with the portions of the changes in the fair values of
the hedged items that relate to the hedged risks. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in other comprehensive income, net of deferred taxes.
Changes in fair values of derivatives not qualifying as hedges are reported in
the results of operations. At November 3, 2002, the Company had outstanding
foreign currency option and forward contracts in the aggregate notional amount
equivalent to $8.9 million, which approximated its net investment in foreign
operations and is accounted for as a hedge under SFAS No. 52 "Foreign Currency
Translation."
Under certain contracts with customers, the Company manages the customers'
alternative staffing requirements, including the payment of associate vendors.
Included in cash and cash equivalents at November 3, 2002 was approximately
$11.5 million restricted to cover such obligations that were reflected in
accounts payable at that date.
NOTE P--Commitments
The future minimum rental commitments as of November 3, 2002 for all
non-cancellable operating leases are as follows:
Fiscal Year Total Office Space Equipment
----------- ----- ------------ ---------
(In thousands)
2003 $18,079 $16,762 $1,317
2004 13,830 12,691 1,139
2005 9,814 9,552 262
2006 6,401 6,236 165
2007 4,732 4,732
Thereafter 4,097 4,097
------- ------- ------
$56,953 $54,070 $2,883
======= ======= ======
-68-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE P--Commitments--Continued
Many of the leases also require the Company to pay or contribute to property
taxes, insurance and ordinary repairs and maintenance.
Rental expense for all operating leases for fiscal years 2002, 2001 and 2000 was
$23.6 million, $24.3 million and $20.1 million, respectively.
In fiscal 2000, the Company began development of a new internet-based Front End
System designed to improve efficiency and connectivity in the recruiting,
assignment, customer maintenance and other functions in the branch offices of
the Staffing Services segment. The total cost to develop and install this system
is currently anticipated to be approximately $16.0 million, of which $6.6
million has been incurred to date. The Company has no other material capital
commitments.
NOTE Q--Related Party Transactions
During fiscal 2002, the Company paid $1.3 million to the law firm of which Lloyd
Frank, a director, is a member, primarily for the services rendered in
connection with the Company's new revolving credit facility, new Securitization
Program and other financing arrangements and for services in fiscal 2001 and
2002 in connection with the sale of Autologic to Agfa Corporation by tender
offer and subsequent merger. During that year, the Company also paid $51,000 to
the law firm of which firm Bruce Goodman, a director, is a partner for services
rendered to the Company and paid $10,000 to Irwin Robins, a director, for legal
consulting services.
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 $1,000 in excess of its direct costs in fiscal
2002. Such services are performed on a basis substantially similar to those
performed by the Company for, and at substantially similar rates as is charged
by the Company to, unaffiliated third parties. In addition, the Company rents to
that corporation approximately 2,500 square feet of space in the Company's El
Segundo, California facility, which the Company does not require for its own
use, on a month-to-month basis at a rental of $1,500 per month. Based on the
nature of the premises and a recent market survey conducted by the Company, the
Company believes the rent is the fair market rental for such space.
-69-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information called for by Part III (Items 10, 11, 12 and 13) of Form 10-K
will be included in the Company's Proxy Statement for the Company's 2002 Annual
Meeting of Shareholders, which the Company intends to file within 120 days after
the close of its fiscal year ended November 3, 2002 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.
PART IV
Item 14. CONTROLS AND PROCEDURES
14(a). Evaluation of disclosure controls and procedures
Within 90 days prior to the date of this report, 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-14 of the Securities Exchange Act of 1934, under the supervision and
with the participation of the Company's management, including the
Company's Chairman of the Board, President and principal executive officer
and its Senior Vice President and principal financial officer. Based on
that evaluation, the Company's Chairman of the Board, President and
principal executive officer and its Senior Vice President and principal
financial officer concluded that, as of the date of their evaluation, the
Company's disclosure controls and procedures were effective to ensure that
material information relating to the Company and its subsidiaries is made
known to them.
14(b). Changes in internal controls
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal
controls subsequent to the evaluation discussed above.
-70-
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
15(a)(1). Financial Statements
The following consolidated financial statements of Volt Information
Sciences, Inc. and subsidiaries are included in Item 8 of this
Report:
Page
----
Consolidated Balance Sheets--November 3, 2002 and November 4, 2001 43
Consolidated Statements of Operations--Years ended November 3, 2002,
November 4, 2001 and November 3, 2000 44
Consolidated Statements of Stockholders' Equity--Years ended
November 3, 2002, November 4, 2001 and November 3, 2000 45
Consolidated Statements of Cash Flows--Years ended November 3, 2002,
November 4, 2001 and November 3, 2000 46
Notes to Consolidated Financial Statements 48
15(a)(2). Financial Statement Schedules
The following consolidated financial statement schedule of Volt
Information Sciences, Inc. and subsidiaries is included in response
to Item 15(d):
Schedule II--Valuation and qualifying accounts S-1
Other schedules (Nos. I, III, IV and V) for which provision is made
in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions
or are not applicable and, therefore, have been omitted.
-71-
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. (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 30, 1998,
File No. 1-9232).
4.1(a) Credit Agreement, dated April 12, 2002, among the Company, Gatton
Volt Consulting Group Limited, as borrowers, Volt Delta Resources,
Inc., Volt Information Sciences Funding, Inc., Volt Directories S.
A., Ltd., DataNational, Inc., Volt Telecommunications Group, Inc.
and DataNational of Georgia, Inc., as guarantors, the lenders
party thereto, and JP Morgan Chase Bank, as administrative agent.
(Exhibit 4.1(a) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(b) Joint and Several Guaranty of Payment, dated as of April 12, 2002,
by Volt Delta Resources, Inc., Volt Information Sciences Funding,
Inc., Volt Directories S.A., Ltd., DataNational, Inc., Volt
Telecommunications Group, Inc. and DataNational of Georgia, Inc.
in favor of JP Morgan Chase Bank, as administrative agent.
(Exhibit 4.1(b) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(c) Volt Security Agreement, dated as of April 12, 2002, by the
Company in favor of JP Morgan Chase Bank, as collateral agent.
(Exhibit 4.1(c) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(d) Subsidiary Security Agreement, dated as of April 12, 2002, among
Volt Telecommunications Group, Inc., Volt Delta Resources, Inc.,
DataNational Inc. and DataNational of Georgia, Inc. in favor of JP
Morgan Chase Bank, as collateral agent. (Exhibit 4.1 (d) to the
Company's Current Report on Form 8-K dated April 22, 2002, File
No. 1-92321).
4.1(e) Pledge Agreement, dated as of April 12, 2002, by the Company in
favor of JP Morgan Chase Bank, as collateral agent. (Exhibit
4.1(e) to the Company's current Report on Form 8-K dated April 22,
2002, File No. 199232).
10.1+ 1995 Non-Qualified Stock Option Plan, as amended. (Exhibit 10.1(b)
to the Company's Annual Report on Form 10-K for the fiscal year
ended October 30, 1998, File No. 1-9232).
10.2(a)+ Employment Agreement, dated as of May 1, 1987, between the Company
and William Shaw. (Exhibit 19.01 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.2(b)+ Amendment, dated January 3, 1989, to Employment Agreement between
the Company and William Shaw. (Exhibit 19.01(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended October 28,
1988, File No. 1-9232).
10.3(a)+ Employment Agreement, dated as of May 1, 1987, between the Company
and Jerome Shaw (Exhibit 19.02 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.3(b)+ Amendment, dated January 3, 1989, to Employment Agreement between
the Company and Jerome Shaw (Exhibit 19.02(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended October 28,
1988, File No. 1-9232).
-72-
15(a)(3). Exhibits--Continued
Exhibit Description
- ------- -----------
21.* Subsidiaries of the Registrant.
23.* Consent of Ernst & Young LLP.
99.1(a)* Certification of principal executive officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1(b)* Certification of principal financial officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ----------
+ Management contract or compensation plan or arrangement.
* Filed herewith. All other exhibits are incorporated herein by reference to
the exhibit indicated in the parenthetical references.
15 (b). Reports on Form 8-K
During the quarter ended November 3, 2002, the Company filed Current Reports on
Form 8-K dated September 17, 2002 (date earliest event reported) reporting Item
7. Financial Statements and Exhibits and Item 9. Regulation FD Disclosure and
October 17, 2002 (date earliest event reported) reporting under Item 5. Other
Items. No financial statements were filed with either report.
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.
-73-
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/William Shaw
January 30, 2003 --------------------------------
William Shaw
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ William Shaw Chairman of the Board, January 30, 2003
- --------------------- President and Chief Executive
William Shaw Officer and Director
/s/ James J. Groberg Senior Vice President (Principal January 30, 2003
- --------------------- Financial Officer) and Director
James J. Groberg
/s/ Jack Egan Vice President, Corporate Accounting January 30, 2003
- --------------------- (Principal Accounting Officer)
Jack Egan
/s/ Jerome Shaw Director January 30, 2003
- ---------------------
Jerome Shaw
/s/ Steven A. Shaw Director January 30, 2003
- ---------------------
Steven A. Shaw
/s/ Lloyd Frank Director January 30, 2003
- ---------------------
Lloyd Frank
/s/ Irwin B. Robins Director January 30, 2003
- ---------------------
Irwin B. Robins
/s/ Mark N. Kaplan Director January 30, 2003
- ---------------------
Mark N. Kaplan
/s/ Bruce G. Goodman Director January 30, 2003
- ---------------------
Bruce G. Goodman
/s/ William H. Turner Director January 30, 2003
- ---------------------
William H. Turner
-74-
I, William Shaw, certify that:
1. I have reviewed this annual report on Form 10-K of Volt Information
Sciences, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
January 30, 2003 /s/ William Shaw
---------------------------
William Shaw
Chairman of the Board,
President and Principal
Executive Officer
-75-
I, James J. Groberg, certify that:
1. I have reviewed this annual report on Form 10-K of Volt Information
Sciences, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
January 30, 2003 /s/ James J. Groberg
---------------------------
James J. Groberg
Senior Vice President and
Principal Financial Officer
-76-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- -------- -------- ------------------------ -------- --------
Additions
------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Period Expenses Accounts Deductions Period
------------ ---------- ---------- ---------- ----------
(In thousands)
Year ended November 3, 2002
Deducted from asset accounts:
Allowance for uncollectable accounts $9,376 $10,188 $8,570(a,b) $10,994
Allowance for deferred tax assets 602 $3,291 (c) 137(d) 3,756
Unrealized loss (gain) on marketable securities 16 (28)(e) (12)
Year ended November 4, 2001
Deducted from asset accounts:
Allowance for uncollectable accounts $8,952 $8,462 $8,038(a,b,f) $9,376
Allowance for deferred tax assets 548 $396 (g) 342(f) 602
Unrealized loss on marketable securities 664 62 (e) 710(h) 16
Year ended November 3, 2000
Deducted from asset accounts:
Allowance for uncollectable accounts $7,941 $7,624 $6,613(a,b) $8,952
Allowance for deferred tax assets 284 $342 (g) 78(d) 548
Unrealized loss (gain) on marketable securities 587 77 (e) 664
(a)--Includes write-off of uncollectable accounts.
(b)--Includes a foreign currency translation losses of $27 in 2002, $16 in 2001,
and $88 in 2000.
(c)--Charge to cumulative effect of a change in accounting of $3,069 and income
tax provision of $222.
(d)--Principally write-off of unutilized foreign tax credits.
(e)--Charge (credit) to stockholders' equity.
(f)--Pertains to the reclassification of assets of discontinued operations,
including allowance for uncollectible accounts of $1,188 and allowance for
deferred tax assets of $342.
(g)--Charge to income tax provision.
(h)--Reclassification adjustment for write down of marketable securities
included in net income.
S-1
INDEX TO EXHIBITS
15(a)(3). Exhibits
Exhibit Description
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company, as filed
with the Department of State of New York on January 29, 1997.
(Exhibit 3.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended November 1, 1996).
3.2 By-Laws of the Company. (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 30, 1998,
File No. 1-9232).
4.1(a) Credit Agreement, dated April 12, 2002, among the Company, Gatton
Volt Consulting Group Limited, as borrowers, Volt Delta Resources,
Inc., Volt Information Sciences Funding, Inc., Volt Directories S.
A., Ltd., DataNational, Inc., Volt Telecommunications Group, Inc.
and DataNational of Georgia, Inc., as guarantors, the lenders
party thereto, and JP Morgan Chase Bank, as administrative agent.
(Exhibit 4.1(a) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(b) Joint and Several Guaranty of Payment, dated as of April 12, 2002,
by Volt Delta Resources, Inc., Volt Information Sciences Funding,
Inc., Volt Directories S.A., Ltd., DataNational, Inc., Volt
Telecommunications Group, Inc. and DataNational of Georgia, Inc.
in favor of JP Morgan Chase Bank, as administrative agent.
(Exhibit 4.1(b) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(c) Volt Security Agreement, dated as of April 12, 2002, by the
Company in favor of JP Morgan Chase Bank, as collateral agent.
(Exhibit 4.1(c) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(d) Subsidiary Security Agreement, dated as of April 12, 2002, among
Volt Telecommunications Group, Inc., Volt Delta Resources, Inc.,
DataNational Inc. and DataNational of Georgia, Inc. in favor of JP
Morgan Chase Bank, as collateral agent. (Exhibit 4.1 (d) to the
Company's Current Report on Form 8-K dated April 22, 2002, File
No. 1-92321).
4.1(e) Pledge Agreement, dated as of April 12, 2002, by the Company in
favor of JP Morgan Chase Bank, as collateral agent. (Exhibit
4.1(e) to the Company's current Report on Form 8-K dated April 22,
2002, File No. 199232).
10.1+ 1995 Non-Qualified Stock Option Plan, as amended. (Exhibit 10.1(b)
to the Company's Annual Report on Form 10-K for the fiscal year
ended October 30, 1998, File No. 1-9232).
10.2(a)+ Employment Agreement, dated as of May 1, 1987, between the Company
and William Shaw. (Exhibit 19.01 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.2(b)+ Amendment, dated January 3, 1989, to Employment Agreement between
the Company and William Shaw. (Exhibit 19.01(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended October 28,
1988, File No. 1-9232).
10.3(a)+ Employment Agreement, dated as of May 1, 1987, between the Company
and Jerome Shaw (Exhibit 19.02 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.3(b)+ Amendment, dated January 3, 1989, to Employment Agreement between
the Company and Jerome Shaw (Exhibit 19.02(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended October 28,
1988, File No. 1-9232).
15(a)(3). Exhibits--Continued
Exhibit Description
- ------- -----------
21.* Subsidiaries of the Registrant.
23.* Consent of Ernst & Young LLP.
99.1(a)* Certification of principal executive officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1(b)* Certification of principal financial officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ----------
+ 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.