UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required) For the fiscal year ended October 31, 2004
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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
560 Lexington Avenue, New York, New York 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 704-2400
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.10 par value New York Stock Exchange, Inc.
---------------------------- -----------------------------
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X 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 was approximately $195 million, based on the closing price of $25.81
per share on the New York Stock Exchange on May 2, 2004 (the last business day
of the Registrant's fiscal second quarter). Shares of common stock held
beneficially by executive officers and directors and their spouses and the
Registrant's Savings Plan, have been excluded, without conceding that all such
persons or plans are "affiliates" of the Registrant).
The number of shares of common stock outstanding as of January 6, 2005 was
15,294,635.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 2005 Annual Meeting are
incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 2
Item 2. Properties 24
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 31
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 56
Item 8. Financial Statements and Supplementary Data 58
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 97
Item 9A. Controls and Procedures 97
Item 9B. Other Information 98
PART III
Item 10. Directors and Executive Officers of the Registrant 98
Item 11. Executive Compensation 98
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters 98
Item 13. Certain Relationships and Related Transactions 98
Item 14. Principal Accountant Fees and Services 98
PART IV
Item 15. Exhibits and Financial Statement Schedules 99
1
PART I
ITEM 1. BUSINESS
General
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Volt Information Sciences, Inc. is a New York corporation, incorporated in 1957.
We sometimes refer to Volt Information Sciences, Inc. and its subsidiaries
collectively as "Volt" or the "Company," unless the context otherwise requires.
Volt operates in the following two businesses which have four operating
segments:
Staffing Services
-----------------
(1) Staffing Services - This segment provides a broad range of employee
staffing services to a wide range of customers throughout the United
States, Canada and Europe. 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 services
including consulting, outsourcing and turnkey project management in
the product development lifecycle, IT and customer contact arenas.
o E-Procurement Solutions - provides global vendor neutral procurement
and management solutions using web-based tools.
Telecommunications and Information Solutions
--------------------------------------------
(2) Telephone Directory - This segment publishes independent telephone
directories in the United States and publishes telephone directories in
Uruguay; provides telephone directory production, commercial printing,
database management, sales and marketing services; 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 large commercial and governmental entities
requiring telecommunications services; and also provides complete turnkey
services for wireless and wireline telecommunications companies.
(4) Computer Systems - This segment provides directory and operator services,
both traditional and enhanced, to wireline and wireless telecommunications
companies; provides directory assistance content and data services;
designs, develops, integrates, markets, sells and maintains computer-based
directory assistance systems and other database management and
telecommunications systems, primarily for the telecommunications industry;
and provides IT services to the Company's other businesses and to third
parties.
-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 October 31, 2004, and those assets identifiable within
each segment at the end of each of those fiscal years. This information should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements in
Items 7 and 8, respectively, of this Report.
October November November
31, 2004 2, 2003 3, 2002
-------- -------- --------
(Restated) (Restated)
NET SALES (In thousands)
Staffing Services:
Staffing $1,580,225 $1,266,875 $1,141,717
Managed Services 1,148,116 1,043,572 745,667
---------- ---------- ----------
Total gross sales 2,728,341 2,310,447 1,887,384
Less Non-recourse Managed Services--Note 1 (1,120,079) (967,379) (679,110)
Intersegment sales 3,839 2,367 2,044
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1,612,101 1,345,435 1,210,318
---------- ---------- ----------
Telephone Directory:
Sales to unaffiliated customers 72,194 69,750 83,519
Intersegment sales 1 43 114
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72,195 69,793 83,633
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Telecommunications Services:
Sales to unaffiliated customers 134,266 112,201 104,039
Intersegment sales 1,132 638 4,833
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135,398 112,839 108,872
---------- ---------- ----------
Computer Systems:
Sales to unaffiliated customers 110,055 84,472 72,261
Intersegment sales 9,962 9,167 6,535
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120,017 93,639 78,796
---------- ---------- ----------
Elimination of intersegment sales (14,934) (12,215) (13,526)
---------- ---------- ----------
TOTAL NET SALES $1,924,777 $1,609,491 $1,468,093
=========== ========== ==========
SEGMENT PROFIT (LOSS)
Staffing Services $36,718 $21,072 $20,469
Telephone Directory 10,115 6,748 6,863
Telecommunications Services (2,838) (3,986) (13,259)
Computer Systems 30,846 14,679 8,912
---------- ---------- ----------
Total segment profit 74,841 38,513 22,985
General corporate expenses (30,812) (27,668) (22,704)
---------- ---------- ----------
TOTAL OPERATING PROFIT 44,029 10,845 281
Interest and other (loss) income (3,471) (1,953) (2,611)
Gain on sale of real estate 3,295
Interest expense (1,817) (2,070) (4,549)
Foreign exchange gain (loss) 97 299 (477)
---------- ---------- ----------
Income (loss) from continuing operations before
income taxes and minority interest $42,133 $7,121 ($7,356)
========== ========== ==========
-3-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
OPERATING SEGMENT DATA--Continued
Note 1 Under certain contracts with customers, the Company manages the
customers' alternative staffing requirements, including transactions
between the customer and other staffing vendors ("associate vendors"). When
payments to associate vendors are subject to receipt of the customers'
payment to the Company, the arrangements are considered non-recourse
against the Company and revenue, other than management fees to the Company,
is excluded from the net sales in the above table.
October November November
31, 2004 2, 2003 3, 2002
-------- -------- --------
(Restated) (Restated)
(In thousands)
IDENTIFIABLE ASSETS
Staffing Services $422,658 $350,796 $332,482
Telephone Directory 55,740 61,942 62,084
Telecommunications Services 52,770 49,053 46,666
Computer Systems 102,487 39,006 31,860
-------- -------- --------
633,655 500,797 473,092
Cash, investments and other corporate assets 56,381 39,686 38,477
-------- -------- --------
Total assets $690,036 $540,483 $511,569
======== ======== ========
Note 2 The Company has restated its previously issued financial statements for
fiscal years 2000 through 2003 as a result of inappropriate application of
accounting principles for revenue recognition by its telephone directory
publishing operation in Uruguay. The operation in Uruguay printed and
distributed its Montevideo directory each year during the October -
November time frame, and the Company has determined that revenue
recognition should have been taken in the first six months of each year
instead of in the fourth quarter of the prior fiscal year. The restatement
involves only the timing of when certain advertising revenue and related
costs and expenses are recognized, and the cumulative results of the
Company do not change. The restatement of the Telephone Directory net
sales, operating profit and identifiable assets for fiscal 2002 and 2003
are reflected in the table below. See Note M of Notes to the Consolidated
Financial Statements for the restatement of the financial statements of the
first and second quarter of fiscal 2004.
November November
2, 2003 3, 2002
-------- --------
(In thousands)
Telephone Directory net sales - as previously reported $70,159 $83,326
(Decrease) increase (366) 307
-------- --------
Telephone Directory net sales - as restated $69,793 $83,633
======== ========
Telephone Directory operating profit - as previously reported $7,674 $6,712
Decrease (increase) (926) 151
-------- --------
Telephone Directory operating profit - as restated $6,748 $6,863
======== ========
Telephone Directory identifiable assets - as previously reported $60,152 $60,105
Increase 1,790 1,979
-------- --------
Telephone Directory identifiable assets - as restated $61,942 $62,084
======== ========
-4-
Forward-Looking Statements
--------------------------
This report and other reports and statements issued by the Company and its
officers from time to time contain certain "forward-looking statements." Words
such as "may," "should," "likely," "could," "seek," "believe," "expect,"
"anticipate," "estimate," "project," "intend," "strategy," "design to," and
similar expressions are intended to identify forward-looking statements about
the Company's future plans, objectives, performance, intentions and
expectations. These forward-looking statements are subject to a number of known
and unknown risks and uncertainties including, but are not limited to, those set
forth below under "Factors That May Affect Future Results." Such risks and
uncertainties could cause the Company's actual results, performance and
achievements to differ materially from those described in or implied by the
forward-looking statements. Accordingly, readers should not place undue reliance
on any forward-looking statements made by or on behalf of the Company. The
Company does not assume any obligation to update any forward-looking statements
after the date they are made.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY'S BUSINESS IS DEPENDENT UPON GENERAL ECONOMIC, COMPETITIVE AND OTHER
BUSINESS CONDITIONS INCLUDING THE EFFECTS OF THE UNITED STATES AND EUROPEAN
ECONOMIES AND other general conditions, such as CUSTOMERS OFF-SHORING ACTIVITIES
TO OTHER COUNTRIES.
The demand for the Company's services in all segments is dependent upon general
economic conditions. Accordingly, the Company's business tends to suffer during
economic downturns. In addition, in the past few years major United States
companies, many of which are customers of the Company, have increasingly
outsourced business to foreign countries with lower labor rates, less costly
employee benefit requirements and fewer regulations than the United States.
There could be an adverse effect on the Company if customers and potential
customers move manufacturing and servicing operations off-shore, reducing their
need for temporary workers within the United States. It is also important for
the Company to diversify its pool of available temporary personnel to offer
greater support to the service sector of the economy and other businesses that
have more difficulty in moving off-shore. In addition, the Company's other
segments may be adversely affected if they are required to compete from the
Company's United States based operations against competitors based in such other
countries. Although the Company has begun to expand its operations, in a limited
manner and to serve existing customers, in such countries, and has established
subsidiaries in some foreign countries, there can be no assurance that this
effort will be successful or that the Company can successfully compete with
competitors based overseas or who have established foreign operations.
The Company's business is dependent upon the continued financial strength of its
customers. Customers that experience economic downturns or other negative
factors are less likely to use the Company's services.
In the staffing services segment, a weakened economy results in decreased demand
for temporary and permanent personnel. When economic activity slows down, many
of the Company's customers reduce their use of temporary employees before they
reduce the number of their regular employees. There is less need for contingent
workers by all potential customers, who are less inclined to add to their costs.
Since employees are reluctant to risk changing employers, there are fewer
openings and reduced activity in permanent placements as well. In addition,
while in many fields there are ample applicants for available positions,
variations in the rate of unemployment and higher wages sought by temporary
workers in certain technical fields particularly characterized by labor
shortages, could affect the Company's ability to meet its customers' demands in
these fields and the Company's profit margins. The segment has also experienced
-5-
margin erosion caused by increased competition, electronic auctions and
customers leveraging their buying power by consolidating the number of vendors
with whom they deal. In addition, increased payroll and other taxes, some of
which the Company is unable to pass on to customers, place pressure on margins.
Customer use of the Company's telecommunications services is similarly affected
by a weakened economy in that some of the Company's customers reduce their use
of outside services in order to provide work to their in-house departments and,
in the aggregate, because of the current downturn in the telecommunications
industry and continued over capacity, there is less available work. In addition,
the reduction in telecommunications companies' capital expenditure projects
during the current economic climate has significantly reduced the segment's
operating margins and minimal improvement can be expected until the industry
begins to increase its capital expenditures. Recent actions by major
long-distance telephone companies regarding local residential service could also
negatively impact both sales and margins of the Business Systems division.
Despite an emphasis on cost controls, the results of the segment continue to be
affected by the decline in capital spending by telephone companies caused by the
depressed conditions within the segment's telecommunications industry customer
base which has also increased competition for available work, pressuring pricing
and gross margins throughout the segment. The continued delay in
telecommunications companies' capital expenditure projects has significantly
reduced the segment's revenue and resulted in continuing operating losses. A
return to material profitability will be difficult until the industry begins to
increase its capital expenditures.
Additionally, the degree and timing of customer acceptance of systems and of
obtaining new contracts and the rate of renewals of existing contracts, as well
as customers' degree of utilization of the Company's services, could adversely
affect the Company's businesses.
MANY OF THE COMPANY'S CONTRACTS EITHER PROVIDE NO MINIMUM PURCHASE REQUIREMENTS
OR ARE CANCELABLE DURING THE TERM.
In all segments, many of the Company's contracts, even those master service
contracts whose duration spans a number of years, provide no assurance of any
minimum amount of work that will actually be available under any contract. Most
staffing services contracts are not sole source, so the segment must compete for
each placement at the customer. Similarly many telecommunications master
contracts require competition in order to obtain each individual work project.
In addition, many of the Company's long-term contracts contain cancellation
provisions under which the customer can cancel the contract, even if the Company
is not in default under the contract. Therefore, these contracts do not give the
assurances that long-term contracts typically provide.
THE COMPANY'S STAFFING SERVICES BUSINESS AND ITS OTHER SEGMENTS SUBJECTS IT TO
EMPLOYMENT-RELATED AND OTHER CLAIMS.
The Company's staffing services business employs individuals on a temporary
basis and places them in a customer's workplace. The Company's ability to
control the customer workplace is limited, and the Company risks incurring
liability to its employees for injury or other harm that they suffer at the
customer's workplace. Although the Company has not historically suffered
materially for such harm suffered by its employees, there can be no assurance
that future claims will not materially adversely affect the Company.
Additionally, the Company risks liability to its customers for the actions of
the Company's temporary employees that may result in harm to the Company's
customers. Such actions may be the result of negligence or misconduct on the
part of the Company's employees. These same factors apply to all of the
Company's business units, although the risk is reduced where the Company itself
controls the workplace. Nevertheless, the risk is present in all segments.
-6-
The Company may incur fines or other losses and negative publicity with respect
to any litigation in which it becomes involved. Although the Company maintains
insurance for many such actions, there can be no assurance that its insurance
will cover future actions or that the Company will continue to be able to obtain
such insurance on acceptable terms, if at all.
NEW AND INCREASED GOVERNMENT REGULATION COULD HAVE A MATERIAL ADVERSE EFFECT ON
THE COMPANY'S BUSINESS, ESPECIALLY ITS CONTINGENT STAFFING BUSINESS.
Certain of the Company's businesses are subject to licensing and regulation in
many states and certain foreign jurisdictions. Although the Company has not had
any difficulty complying with these requirements in the past, there can be no
assurance that the Company will continue to be able to do so, or that the cost
of compliance will not become material. Additionally, the jurisdictions in which
we do or intend to do business may:
o create new or additional regulations that prohibit or restrict the types of
services that we currently provide;
o impose new or additional employee benefit requirements, thereby increasing
costs that may not be able to be passed on to customers or which would
cause customers to reduce their use of the Company's services, especially
in its staffing services segment, which would adversely impact the
Company's ability to conduct its business;
o require the Company to obtain additional licenses to provide its services;
or
o increase taxes (especially payroll and other employment related taxes) or
enact new or different taxes payable by the providers of services such as
those offered by the Company, thereby increasing costs, some of which may
not be able to be passed on to customers or which would cause customers to
reduce their use of the Company's services, especially in its staffing
services segment, which would adversely impact the Company's ability to
conduct its business.
In addition, certain private and governmental entities have focused on the
contingent staffing industry in particular and, in addition to their potential
to impose additional requirements and costs, they and their supporters could
cause changes in customers' attitudes toward the use of outsourcing and
temporary personnel in general. This could have an adverse effect on the
Company's contingent staffing business.
THE COMPANY IS DEPENDENT UPON ITS ABILITY TO ATTRACT AND RETAIN CERTAIN
TECHNOLOGICALLY QUALIFIED PERSONNEL.
The Company's future success is dependent upon its ability to attract and retain
certain classifications of technologically qualified personnel for its own use,
particularly in the areas of research and development, implementation and
upgrading of internal systems, as well as in its staffing services segment. The
availability of such personnel is dependent upon a number of economic and
demographic conditions. The Company may in the future find it difficult or more
costly to hire such personnel in the face of competition from other companies.
THE INDUSTRIES IN WHICH THE COMPANY DOES BUSINESS ARE VERY COMPETITIVE.
The Company operates in very competitive industries with, in most cases, limited
barriers to entry. Some of the Company's principal competitors are larger and
have substantially greater financial resources than the Company. Accordingly,
-7-
these competitors may be better able than the Company to attract and retain
qualified personnel and may be able to offer their customers more favorable
pricing terms than the Company. In many businesses, small competitors can offer
similar services at lower prices because of lower overheads.
The Company, in all segments, has experienced intense price competition and
pressure on margins and lower renewal markups for customers' contracts than
previously obtained. While the Company has and will continue to take action to
meet competition in its highly competitive markets with minimal impact on
margins, there can be no assurance that the Company will be able to do so.
The Company, in certain businesses in all segments, must obtain or produce
products and systems, principally in the IT environment, to satisfy customer
requirements and to remain competitive. While the Company has been able to do so
in the past, there can be no assurance that in the future the Company will be
able to foresee changes and to identify, develop and commercialize innovative
and competitive products and systems in a timely and cost effective manner and
to achieve customer acceptance of its products and systems in markets
characterized by rapidly changing technology and frequent new product
introductions. In addition, the Company's products and systems are subject to
risks inherent in new product introductions, such as start-up delays, cost
overruns and uncertainty of customer acceptance, the Company's dependence on
third parties for some product components and in certain technical fields
particularly characterized by labor shortages, the Company's ability to hire and
retain such specialized employees, all of which could affect the Company's
ability to meet its customers' demands in these fields and the Company's profit
margins.
In addition to these general statements, the following information applies to
the specific segments identified below.
The Company's Staffing Services segment is in a very competitive industry with
few significant barriers to entry. There are many temporary service firms in the
United States and Europe, many with only one or a few offices that service only
a small market. On the other hand, some of this segment's principal competitors
are larger and have substantially greater financial resources than Volt and
service the national accounts whose business the Company solicits. Accordingly,
these competitors may be better able than Volt to attract and retain qualified
personnel and may be able to offer their customers more favorable pricing terms
than the Company. Furthermore, all of the staffing industry is subject to the
fact that contingent workers are provided to customers and most customers are
more protective of their full time workforce than contingent workers.
The results of the Company's Computer Systems segment are highly dependent on
the volume of calls to this segment's customers which are processed by the
segment under existing contracts, the segment's ability to continue to secure
comprehensive listings from others at acceptable pricing, its ability to obtain
additional customers for these services and on its continued ability to sell
products and services to new and existing customers. The volume of transactions
with this segment's customers is subject to reduction as consumers utilize
listings offered on the Internet. This segment's position in its market depends
largely upon its reputation, quality of service and ability to develop, maintain
and implement information systems on a cost competitive basis. Although Volt
continues its investment in research and development, there is no assurance that
this segment's present or future products will be competitive, that the segment
will continue to develop new products or that present products or new products
can be successfully marketed.
The Company's Telecommunications Services segment faces substantial competition
with respect to all of its telecommunications services from other suppliers and
from in-house capabilities of present and potential customers. Since many of our
customers provide the same type of services as the segment, the segment faces
competition from its own customers and potential customers as well as from third
parties. The telecommunications service segment performs much of its services
outdoors, and its business can be adversely affected by the degree and effects
of inclement weather. Some of this segment's significant competitors are larger
-8-
and have substantially greater financial resources than Volt. There are
relatively few significant barriers to entry into certain of the markets in
which the segment operates, and many competitors are small, local companies that
generally have lower overhead. Volt's ability to compete in this segment depends
upon its reputation, technical capabilities, pricing, quality of service and
ability to meet customer requirements in a timely manner. Volt believes that its
competitive position in this segment is augmented by its ability to draw upon
the expertise and resources of other Volt segments.
THE COMPANY MUST SUCCESSFULLY INTEGRATE THE PURCHASED DIRECTORY AND OPERATOR
SERVICES BUSINESS INTO THE COMPANY'S COMPUTER SYSTEMS SEGMENT
On August 2, 2004, Volt Delta Resources, LLC ("Volt Delta"), a wholly-owned
subsidiary of the Company, acquired from Nortel Networks, Inc. ("Nortel
Networks") certain of the assets (consisting principally of customer base and
contracts, intellectual property and inventory) and certain specified
liabilities of Nortel Networks directory and operator services ("DOS") business,
in exchange for a 24% minority equity interest in Volt Delta. Together with its
subsidiaries, Volt Delta is reported as the Company's Computer Systems Segment.
The Company's results in this segment are dependent upon the Company's ability
to continue the successful integration of the acquisition into Volt Delta's
business with minimal interference with the segment's business.
THE COMPANY MUST STAY IN COMPLIANCE WITH ITS SECURITIZATION PROGRAM AND OTHER
LOAN AGREEMENTS
The Company is required to maintain a sufficient credit rating to enable it to
continue its $150 million Securitization Program and other loan agreements and
maintain its existing credit rating in order to avoid any increase in interest
rates and any increase in fees under these credit agreements, as well as to
comply with the financial and other covenants applicable under the credit
agreements and other borrowing instruments. While the Company was in compliance
with all such requirements at the end of the fiscal year and believes it will
remain in compliance throughout the remainder of the 2005 fiscal year, there can
be no assurance that will be the case or that waivers may not be required.
THE COMPANY'S PRINCIPAL SHAREHOLDERS OWN A SIGNIFICANT PERCENTAGE OF THE COMPANY
AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER THE COMPANY AND THEIR
INTERESTS MAY DIFFER FROM THOSE OF OTHER SHAREHOLDERS.
As of December 31, 2004, the Company's principal shareholders controlled
approximately 46% of the Company's outstanding common stock. Accordingly, these
shareholders are able to control the composition of the Company's board of
directors and many other matters requiring shareholder approval and will
continue to have significant influence over the Company's affairs. This
concentration of ownership also could have the effect of delaying or preventing
a change in control of the Company or otherwise discouraging a potential
acquirer from attempting to obtain control of the Company.
THE COMPANY'S STOCK PRICE COULD BE EXTREMELY VOLATILE AND, AS A RESULT,
INVESTORS MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID
FOR THEM.
Among the factors that could affect the Company's stock price are:
o while the Company's stock is traded on the New York Stock Exchange, there
is limited float, and a low average daily trading volume;
-9-
o industry trends and the business success of the Company's customers;
o loss of a key customer;
o fluctuations in the Company's results of operations;
o the Company's failure to meet the expectations of the investment community
and changes in investment community recommendations or estimates of the
Company's future results of operations;
o strategic moves by the Company's competitors, such as product announcements
or acquisitions;
o regulatory developments;
o litigation;
o general market conditions; and
o other domestic and international macroeconomic factors unrelated to our
performance.
The stock market has and may in the future experience extreme volatility that
has often been unrelated to the operating performance of particular companies.
These broad market fluctuations may adversely affect the market price of the
Company's common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. If a
securities class action suit is filed against the Company, it would incur
substantial legal fees and management's attention and resources would be
diverted from operating its business in order to respond to the litigation.
Staffing Services Segment
-------------------------
Volt's Staffing Services segment, through two divisions, the Technical Placement
division and the Administrative and Industrial division, provides a broad
spectrum of staffing services in three major functional areas: Staffing
Solutions, Information Technology ("IT") Solutions and E-Procurement Solutions,
to a wide range of customers throughout the world. The Technical Placement
division provides Staffing Solutions, IT Solutions and E-Procurement Solutions,
while the Administrative and Industrial division provides Staffing Solutions.
Staffing Solutions
------------------
Volt markets a full spectrum of staffing solutions, such as managed services,
alternative staffing services and direct hire services, through its Volt
Services Group, Volt Human Resources and Volt Europe divisions. In addition,
professional employer organization ("PEO") services are offered by the Company's
subsidiary, Shaw & Shaw.
Volt Services Group/Volt Europe/Volt Human Resources (Staffing Solutions
Group)
Staffing solutions provided by this segment are generally identified and
marketed throughout the United States as "Volt Services Group," throughout
Europe as "Volt Europe" and throughout Canada as "Volt Human Resources"
-10-
(the "Staffing Solutions Group") and provide a broad range of employee
staffing and professional services, from over 300 branches, including
dedicated on-site offices located on customer premises. The Staffing
Solutions Group is a single-source provider of all levels of staffing,
offering to customers an extensive range of alternative employment
services. Offerings include managed staffing programs, known as Volt
Source, in which the segment is responsible for fulfilling a customer's
entire alternative staffing requirements and engages subcontractors to
assist the segment in satisfying those requirements; alternative staffing
of clerical, administrative, light industrial, technical, professional and
information technology personnel; employment, direct hire and professional
personnel placement services; referred employee management services; human
resources outsourcing; and specifically tailored recruitment services.
The Staffing Solutions Group provides skilled employees, such as computer
and other IT specialties, engineering, design, scientific and technical
support and accounting and financial personnel, in its Technical Placement
division. This group also provides lesser skilled employees, such as
administrative, clerical, office automation, bookkeeping, call center,
light industrial and other personnel, in its Administrative and Industrial
division. The Staffing Solutions Group matches available workers to
employer assignments and, as a result, competes both to recruit and
maintain a database of potential employees and to attract customers to
employ contingent workers. Assignments are provided for varying periods of
time (both short and long-term) to companies and other organizations
(including government agencies and non profit entities) in a broad range of
industries that have a need for such personnel, but are unable, or choose
not to, engage certain personnel as their own employees. Customers range
from those that require one or two temporary employees at a time to
national accounts that require as many as several thousand temporary
employees at one time.
The Staffing Solutions Group furnishes contingent employees to meet
specific customer requirements, such as to complete a specific project or
subproject (with employees typically being retained until its completion),
to enable customers to scale their workforce according to business
conditions, meet a particular need that has arisen, substitute for regular
employees during vacation or sick leave, staff high turnover positions,
fill in during the full-time hiring process or during a hiring freeze, and
staff seasonal peaks, conversions, inventory taking and offices that are
downsizing. Many large organizations utilize contingent labor as a
strategic element of their overall workforce, allowing them to more
efficiently meet their fluctuating staffing requirements. In certain
instances, the Staffing Solutions Group also provides management personnel
to coordinate and manage special projects and to supervise temporary
employees.
Many customers use more than one staffing services provider; however, in
recent years, the practice of using a limited number of temporary
suppliers, a sole temporary supplier or a primary supplier has become
increasingly important among the largest companies. The Staffing Solutions
Group has been successful in obtaining a number of large national
contracts, which typically require on-site Volt representation and involve
fulfilling requirements at 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. These include
centralized and coordinated order processing and procurement of other
qualified staffing providers as subcontractors, commonly referred to as
"associate vendors," to provide service in areas where the Company does not
maintain an office or cannot recruit qualified personnel and to supply
secondary source back-up recruiting or provide assistance in meeting the
customer's stated diversity and/or subcontracting goals. In other managed
programs, requisitions are sent simultaneously to a number of approved
staffing firms, and Volt must compete for each placement. Other features of
managed services programs include customized and consolidated billing to
the customer for all of Volt's and associate vendors' services, and
-11-
detailed management reports on staffing usage and costs. Some managed
services programs are tailored to the customer's unique needs for single
source consolidated billing, reporting and payment. In most cases, Volt is
required to pay the associate vendor only after Volt receives payment from
its customer. Volt also acts as an associate vendor to other national
providers in their managed services programs to assist them in meeting
their obligations to their customers. The bidding process for these managed
service and national contracts, in general, is very competitive. Many
contracts are for a one to three year time period, at which time they are
typically re-bid. Others are for shorter periods or may be for the duration
of a particular project or subproject or a particular need that has arisen,
which requires additional or substitute personnel. These contracts expire
upon completion of the project or when the particular need ends. Many of
these contracts typically require considerable start-up costs and usually
take from six to twelve months to reach anticipated revenue levels and
reaching those levels is dependant on the customer's requirements at that
time. The Staffing Solutions Group maintains a group dedicated to the
acquisition, implementation and service of national accounts; however,
there can be no assurance that Volt will be able to retain accounts that it
currently serves, or that Volt can obtain additional national accounts on
satisfactory terms.
Branch offices that have developed a specialty in one or more disciplines
often use the name "Volt" followed by their specialty disciplines to
identify themselves. Other branch offices have adopted other names to
differentiate themselves from traditional temporary staffing when their
focus is more project oriented.
Volt Services Group and Volt Human Resources maintain centralized
databases, containing resumes of candidates from which they fill customer
job requirements. Other candidates are referred by the customer itself for
assignment as Volt employees. Volt Europe maintains similar computerized
databases containing resumes of candidates from the United Kingdom and
continental Europe. These higher skilled individuals employed by the
Staffing Solutions Group are frequently willing to relocate to fill
assignments while lesser skilled employees are generally recruited and
assigned locally, and employment information/resumes for these employees
are maintained in computerized databases at branch offices. In addition to
maintaining its proprietary Internet recruiting sites, the segment has
numerous contracts with independent job search Web site companies.
Individuals hired by the Staffing Solutions Group typically become Volt
employees or contractors during the period of their assignment. As employer
of record, Volt is responsible for the payment of wages, payroll taxes,
workers' compensation and unemployment insurance and other benefits, which
may include paid sick days, holidays and vacations and medical insurance.
Class action lawsuits have been instituted in the United States against
some users of temporary services, including some customers of the Company,
by certain temporary employees assigned to the customers, and a few have
been threatened or commenced against providers of temporary services,
including one case instituted against the Company and other temporary
agencies. In general, these lawsuits claim that certain temporary employees
should be classified as the customers' employees and are entitled to
participate in certain of the customers' benefit programs. In the Company's
European markets, temporary services are more heavily regulated than in the
United States and litigation and governmental activity (at European Union
and national levels) directed at the way the industry does business is also
being conducted or considered. Volt does not know the effect, if any, the
resolution of these cases or the outcome of governmental activity will have
on the industry in general or upon the Staffing Solutions Group's business.
Volt Services Group and Volt Europe also provide permanent employment
services. In the United States, these services are provided through Volt
Professional Placement, an employment search organization specializing in
-12-
the recruitment and direct hire of individuals in professional disciplines,
including information technology, technical, accounting, finance and
administrative support disciplines. The direct placement recruiters operate
within Volt's existing United States and European branch system. Customers
of this service include customers of Volt's Staffing Services and other
segments.
Volt has and will continue to make substantial investments in technological
solutions that focus on core recruiting competencies, improving
productivity and reducing administrative burdens for field operations,
including new efficiencies for the onboarding process by the elimination of
most paper forms. There can be no assurance that these solutions will be
competitive, that the segment will continue to develop new solutions or
that they will be successful.
Shaw & Shaw
Shaw & Shaw, Inc. provides professional employer organization ("PEO")
services, also known as "employee leasing," as part of the Administrative
and Industrial division. The customer using these services generally
transfers its entire work force or employees of a specific department or
division to Shaw & Shaw. Shaw & Shaw's services include payroll
administration, human resource administration, consulting on employee legal
and regulatory compliance, providing comprehensive benefits, including
retirement plans, workers' compensation coverage, loss control and risk
management and certain other services. The customer has control over the
day-to-day job duties of the employees. Shaw & Shaw utilizes the purchasing
power of the Company and, thus, is able to provide its customers' employees
with a competitive benefits package. Customers are relieved of the
administrative responsibilities involved in maintaining employees.
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 2004 represented less than 1% of
the Staffing Services segment's total sales due to the Company reporting
these revenues net of related payroll costs.
Information Technology Solutions
--------------------------------
VMC Consulting/Volt Europe Solutions
VMC Consulting (VMC) and Volt Europe Solutions offer a comprehensive
portfolio of project-based professional services, often utilizing the pool
of contingent employees of the other divisions of the Staffing Services
segment, from product development and IT infrastructure to customer support
in outsource, insource or blended environment to Global 2000 clients in
North America, Asia and Europe.
These business units, as part of the Technical Placement division, perform
outsource services in the form of project-based work, in which the Company
assumes responsibility for project milestones and deliverables. Services
include hardware and software testing, software development, data center
management, project management, information technology services, technical
communications, extended sales, technical support and technical
communications. State-of-the-art technology solutions are delivered to
clients on a project basis, with the work performed either in Volt's
premises or at the client's location.
-13-
At the end of fiscal 2004, Volt Europe Solutions was integrated into VMC
Consulting Europe. VMC Consulting is based in Redmond, Washington and VMC
Consulting Europe is based in Slough, England and Redhill, England.
Although VMC Consulting continues its efforts to increase its customer base
and to broaden its services, there is no assurance that its present or
future services will be competitive, that it will continue to obtain new
customers or renew and/or extend existing customer contracts or develop new
services or that its present services or new services will continue to be
successfully marketed.
E-Procurement Solutions
-----------------------
ProcureStaff
Increasingly, corporations, industry consortia and other buying communities
are leveraging the efficiencies of the Internet to maximize their buying
power. To take advantage of this e-commerce market, a wholly-owned
subsidiary, ProcureStaff, Ltd., provides managed service programs by means
of a web-based, vendor neutral procurement and management solution.
A vendor neutral program enables a customer to meet its requirements by
selecting a candidate from a number of competing firms, including Volt (if
a selected vendor), based upon the customer requirements and the skills of
the candidates. At the core of the ProcureStaff model are Consol and HRP,
patent pending business-to-business e-commerce procurement applications
that are designed to streamline client and vendor functions with increased
efficiencies while significantly reducing costs.
Utilizing Consol and HRP, web-based software systems, and proprietary
management methodologies, ProcureStaff provides procurement and management
solutions for supplemental or alternative staffing, primarily in the United
States and Europe as part of the Technical Placement division.
Consol also automates and manages the source-to-settle process for
resource-based services to provide visibility and centralized control over
all categories of enterprise-wide services expenditures. ProcureStaff
provides this source-to-settle process to its customers with web-based
access for requisition management, electronic procurement, relationship
management, vendor management, time keeping, consolidated invoicing,
consolidated billing and paying, resource redeployment, demand management
and sophisticated on-line ad-hoc management reporting.
By adhering to open standards, ProcureStaff enables both customers and
vendors to facilitate implementation with minimal cost and resources.
Implementation of these programs typically requires considerable start up
costs by ProcureStaff and usually takes up to four months. ProcureStaff
competes with other companies which provide similar vendor neutral
solutions, some of which are affiliated with competitive staffing
companies. ProcureStaff believes that its experience in developing and
implementing sophisticated software solutions and on-site staffing
management for major domestic and international corporations provides the
type of expertise necessary to build superior global staffing and vendor
procurement solutions.
The enhancements to ProcureStaff's software systems and the ability of
ProcureStaff to offer a vendor neutral procurement environment is designed
to enable ProcureStaff to pursue new opportunities in the
business-to-business marketplace.
-14-
Although ProcureStaff continues its efforts to obtain new customers and to
develop and enhance its services and systems, there is no assurance that
its present or future services will be competitive, that it will continue
to obtain new customers or renew and/or extend existing customer contracts
or develop new services or that present services or new services will
continue to be successfully marketed.
During the week ended October 31, 2004, the entire Staffing Services segment
provided approximately 40,000 (36,700 in 2003) of its own temporary employees to
its customers, in addition to employees provided by subcontractors and associate
vendors.
While the markets for the entire Staffing Services segment's services include a
broad range of industries throughout the United States and Europe, general
economic conditions in specific geographic areas or industrial sectors affect
the profitability of the segment. In the past, the segment had been adversely
affected by the weakened economy in the United States and Europe, causing
customers to significantly reduce their requirement for alternative and
permanent staffing and the other services provided by this segment, although an
improved economy has resulted in improved results for the segment. The segment
had 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 had 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 as a result of these actions. 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 higher margin project-oriented services
to its customers and thus assumed greater responsibility for the finished
product. As the Staffing Services segment increases the amount of
project-oriented work it performs for customers, the risks of unsuccessful
performance, including claims by customers, uncompensated rework and other
liabilities increase. While the Company believes that it can successfully
implement these project-based contracts, there can be no assurance that the
Company will be able to do so, or that it can continue to obtain such contracts
on a satisfactory basis or continue delivering quality results that satisfy its
customers.
The ability of the entire Staffing Services segment to compete successfully for
customers depends on its reputation, pricing and quality of service provided and
its ability to engage, in a timely manner, personnel meeting customer
requirements. Competition varies from market-to-market and country-to-country
and in most areas, there are few significant barriers to entry and no single
provider has a dominant share of the market. The staffing services market is
highly competitive, particularly for office clerical and light industrial
personnel. Pricing pressure from customers and competitors continues to be
significant and high state unemployment and workers compensation rates continue
to impact margins. Many of the contracts entered into by this segment are of a
relatively short duration, and awarded on the basis of competitive proposals
which are periodically re-bid by the customer. Under many of these contracts,
there is no assurance of any minimum amount of work that will actually be
available and Volt is frequently required to compete for each placement.
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 replaced. Some of this segment's national contracts are large, and the loss
of any large contract could have a significantly negative effect on this
segment's business unless, and until, the business is replaced. The segment
competes with many technical service, temporary personnel, other alternative
staffing and permanent placement firms, some of which are larger and have
-15-
substantially greater financial resources than Volt, as well as with individuals
seeking direct employment with the Company's existing and potential customers.
Telephone Directory Segment
---------------------------
Volt's Telephone Directory segment publishes independent telephone directories
in the United States and publishes telephone directories in Uruguay; provides
telephone directory production, commercial printing, database management, sales
and marketing services; licenses directory production and contract management
software systems to directory publishers and others; and provides various
computer-based services to public utilities and financial institutions. This
segment has transitioned in the United States, from the production of telephone
directories for others, to the publishing of its own independent telephone
directories and commencing in 2005 will do the same in Uruguay. 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. DataNational's community-based
directories provide consumers with information concerning businesses that
provide services within their local geographic area. The directories may
also include features that are unique to the community, such as school
information, maps and a calendar of events. All of the DataNational
directories are also available on the Internet at
www.communityphonebook.info. The division identifies markets where
demographics and local shopping patterns are favorable to the division's
community-oriented product and adjusts accordingly. During fiscal 2004, the
division published 130 community, county and regional directories.
DataNational's principal competitors are regional telephone companies,
whose directories typically cover a much wider geographic area than the
DataNational directories, as well as other independent telephone directory
companies, which compete on the local level. DataNational's revenues are
generated from yellow page advertising sold in its directories. Volt
believes that advertisers are attracted to DataNational's community
directories because the directories enable them to specifically target
their local markets at a much lower cost than directories covering larger
markets.
Directory Systems/Services
Directory Systems/Services develops and markets telephone directory systems
and services to directory publishers, using computer systems manufactured
by others, combined with proprietary software developed by the Company and
by third parties specifically for the division. These systems manage the
production and control of databases principally for directory and other
advertising media publishers and produce digitized display advertisements
and photocomposed pages, with integrated graphics for both printed and
electronic yellow and white pages directories. These systems incorporate
"workflow management," by which ads are automatically routed between
workstations, increasing throughput and control, including management of
additions and deletions of listings. These systems are licensed to, and the
services are performed for, publishers and others worldwide, including the
segment's DataNational division.
Uruguay
Until 2004, Volt's Uruguay division was the official publisher of white and
yellow pages telephone directories for Antel, the government-owned
telephone company in Uruguay, under a contract originally entered into in
-16-
1983. Revenues are generated from the sale of yellow pages advertising. The
contract with Antel was terminated early by mutual consent in fiscal 2004
and the division will now begin producing proprietary directories in
Uruguay.
In addition to the directory business, Volt's Uruguay division owns and
operates an advanced directory printing facility, which includes, among
other presses, a high speed, four-color, heat set printing press that is
used to print not only its own telephone directories, but also directories
for publishers in other South American countries. In addition, this
facility does commercial printing, including magazines and periodicals, for
various customers in Uruguay and elsewhere in South and Central America.
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 energy efficient home improvement
unsecured financing under major utility sponsorship. These loans are
immediately resold, after closing, to Fannie Mae. VIEWtech services the
loans after they are resold, providing billing, collection and document
custodian services on behalf of Fannie Mae. VIEWtech also provides
servicing for loans resold by other Fannie Mae Energy Loan lenders.
VIEWtech is also a utility rebate processing firm, processing energy and
water efficient appliance and home improvement rebates on behalf of
utilities across the nation.
The Telephone Directory segment's ability to compete depends on its reputation,
technical capabilities, price, quality of service and ability to meet customer
requirements in a timely manner. 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 and local economic conditions. Economic conditions in Uruguay and
neighboring countries continue to have a significant adverse impact on
advertising and printing revenue and operating profits of the Uruguay operation.
Other than DataNational, a substantial portion of this segment's business is
obtained through submission of competitive proposals for contracts. These short
and long-term contracts are re-bid after expiration. While the Company has
historically secured new contracts and believes it can secure renewals and/or
extensions of some of these contracts, some of which are material to this
segment, and obtain new business and customers, there can be no assurance that
contracts will be renewed or extended, that the segment can successfully obtain
new business and customers or that additional or replacement contracts will be
awarded to the Company on satisfactory terms.
Telecommunications Services Segment
-----------------------------------
Volt's Telecommunications Services segment provides telecommunications and other
services, including design, engineering, construction, installation, maintenance
and removals of telecommunications equipment for the outside plant and central
offices of telecommunications and cable companies, and within end-user premises,
in the United States. This segment also provides complete turnkey services for
wireless telecommunications carriers and wireless infrastructure suppliers,
provides limited distribution of products and provides some
non-telecommunications engineering and construction services.
-17-
The Telecommunications Services segment is a full-service provider of turnkey
solutions to the telecommunications, cable and related industries, as well as
for large corporations and governmental entities. The segment's services
include:
o Engineering services, including feasibility studies, right-of-way
acquisition, network design and detailed engineering for copper, coaxial
and fiber systems, carrier systems design, conduit design, computer-aided
design drafting, digitizing records, building industry consultant
engineering (BICSI), turnkey design, program management, air pressure
design and record verification.
o Construction services, including both aerial and underground construction
services, using the Company's owned and leased vehicles and equipment.
These services include jack and bore, directional boring, trenching and
excavation, conduit and manhole systems, cable placement and splicing, pole
placement and wrecking, copper, coaxial and long- and short-haul fiber
optic cable installation, splicing, termination and testing, project
management and inspection services.
o Business Systems Integration services, including structured cabling and
wiring and field installation and repair services involving the design,
engineering, installation and maintenance of various types of local and
wide-area networks, utilizing copper wiring, coaxial and fiber optics, for
voice, data and video, and digital subscriber lines (DSL) and other
broadband installation and maintenance services to operating telephone
companies, long distance carriers, telecommunications equipment
manufacturers, cable companies and large end-users, in both the government
and private sectors.
o Central Office services, including engineering, furnishing and installing
(EF&I) services, maintenance and removal of transmission systems,
distribution frame systems, AC/DC power systems, wiring and cabling, switch
peripheral systems, equipment assembly and system integration and
controlled environment structures, and other network support services, such
as grounding surveys and asset management.
o Wireless services, including complete turnkey services to both fixed and
mobile wireless providers. This includes establishing or enhancing network
infrastructure, design, engineering and construction/installation services,
site selection, RF engineering, tower erection, antenna installation and
inside cabling and wiring services. In performing these services, the
segment employs the latest technologies, such as GPS mapping of facilities.
This segment also accommodates customers in the telecommunications industry that
require a full range of services from multiple Volt business segments, such as
human resources, systems analysis, network integration, software development and
turnkey applications. This segment also resells telecommunications equipment to
customers. In addition, this segment offers the added value of being able to
provide total management of multi-discipline projects because of its ability to
integrate efforts on a single project and to assume responsibility for programs
that require a single point of contact and uniform quality. The segment performs
these services on a project and/or contract personnel placement basis in the
outside plant, central offices, wireless sector and within end-user premises.
Customers include telephone operating companies, inter-exchange carriers, long
distance carriers, local exchange carriers, wireless carriers,
telecommunications equipment manufacturers, cable television providers,
electric, gas, water and water-services utilities, federal, state and municipal
government units and private industry.
This segment faces substantial competition with respect to all of its
telecommunications services from other suppliers and from in-house capabilities
of potential customers. Additionally, many customers provide the same type of
services as the segment, which means that the segment faces competition from its
-18-
own customers as well as from third parties. Construction services have been,
and could be in the future, adversely affected by weather conditions, because
much of the business is performed outdoors. Some of this segment's significant
competitors are larger and have substantially greater financial resources than
Volt. There are few significant barriers to entry into certain of the markets in
which the segment operates, and many competitors are small, local companies that
generally have lower overhead. Volt's ability to compete in this segment depends
upon its reputation, technical capabilities, pricing, quality of service and
ability to meet customer requirements in a timely manner. Volt believes that its
competitive position in this segment is augmented by its ability to draw upon
the expertise and resources of other Volt segments.
A portion of Volt's business in this segment is obtained through the submission
of competitive proposals for contracts that typically expire within one to three
years and upon expiration are re-bid and price is often an important factor in
the award of such agreements. Many of this segment's long-term contracts contain
cancellation provisions under which the customer can cancel the contract, even
if the segment is not in default under the contract. Under many of these
contracts, including master service contracts, there is no assurance of any
minimum amount of work that will actually be available. Therefore, these
contracts do not give the assurances that long-term contracts typically provide.
While the Company believes it can secure renewals and/or extensions of some of
these contracts, some of which are material to this segment, and obtain new
business and customers, there can be no assurance that contracts will be renewed
or extended or that additional or replacement contracts will be awarded to the
Company on satisfactory terms or that the Company can obtain new business and
customers. The continued delay in telecommunications companies' capital
expenditure projects has significantly reduced the segment's revenue and
resulted in continuing operating losses. A return to material profitability will
be difficult until the industry begins to increase its capital expenditures.
Computer Systems Segment
------------------------
The Company's Computer Systems segment consists of Volt Delta, which is 76%
owned by the Company, and its subsidiaries. On August 2, 2004, Volt Delta, which
prior to that time was a wholly-owned subsidiary of the Company, consummated a
Contribution Agreement with Nortel Networks under which Nortel Networks
contributed substantially all of the assets (consisting principally of customer
base and contracts, intellectual property and inventory) and certain specified
liabilities of its directory and operator services ("DOS") business to Volt
Delta in exchange for a 24% minority interest in Volt Delta. The Company and
Nortel Networks have also entered into agreements which provide for the
management of Volt Delta and the respective rights and obligations of the
interest holders thereof. For further information on the transaction, see the
Company's Current Report on Form 8-K dated August 2, 2004.
Volt's Computer Systems segment provides directory and operator services, and
designs, develops, sells, leases and maintains computer-based directory
assistance services along with other database management and related services,
primarily to the telecommunications industry. It also provides third party IT
and data services to others. This segment is comprised of three business units:
Volt Delta Resources ("VoltDelta"), DataServ and Maintech.
VoltDelta
VoltDelta unit markets information services solutions to telephone
companies and inter-exchange carriers worldwide. The unit sells information
service systems to its customers and in addition, provides an Application
Service Provider ("ASP") model which also provides information services,
including infrastructure and database content, on a transactional use fee
basis. The VoltDelta unit has service agreements with major
telecommunications carriers in North America and Europe.
-19-
To meet the needs of customers who desire to upgrade their operator
services capabilities by procuring services as an alternative to making a
capital investment, the unit has deployed and is marketing enhanced
directory assistance and other information service capabilities as a
transaction-based ASP service, charging a fee per transaction. One ASP
service is marketed as DirectoryExpress, which provides access to over 180
million United States and Canadian business, residential and government
listings to directory assistance operators and automation systems
worldwide. Another ASP service is Directory Assistance Automation ("DAA"),
which is currently deployed by major carriers. The VoltDelta unit owns and
operates its own proprietary systems and provides its customers access to a
national database sourced from listings obtained by Volt Delta from various
telephone companies and other independent sources. In addition, the
VoltDelta unit continues to provide customers with new systems, as well as
enhancements to existing systems, equipment and software.
The VoltDelta unit's InfoExpress suite of services includes iExpress, a
service that enables its transaction-based customers to offer
operator-assisted yellow pages, directions and other information dependent
enhanced services. For consumers (the end-users), especially cellular and
PCS users, InfoExpress provides a more convenient and efficient level of
directory assistance service since, among other things, consumers may
obtain enhanced directory and yellow pages information without having to
know the correct area code or even the name of the business. Enhanced
information services are particularly attractive in the wireless market,
where there is no access to printed telephone directories. The unit's ASP
services are being delivered over the switched telephone network to live
operators, via the Internet and, recently, through DAA voice portals using
speech recognition technologies.
DataServ
DataServ was established in fiscal year 2002 as a separate division of Volt
Delta to target non-telco enterprise customers with enhanced directory
assistance and information services. The division's services utilize the
most accurate consumer and business databases to allow companies to improve
their operations and marketing capabilities. Working with Volt Delta and
other data aggregators, DataServ's information is updated daily and is
substantially augmented with specialized information unique to the
non-telco enterprise customer. DataServ integrates customer applications
access via XML and other advanced technologies with its various databases.
DataServ has agreements with several agents and resellers to distribute its
services into targeted industries.
Although the VoltDelta unit was successful during fiscal year 2004 in obtaining
new customers for these services, including major telephone companies serving
the long distance and cellular markets, and DataServ expanded its customer base
and achieved significant revenue growth, there can be no assurance that it will
continue to be successful in marketing these services to additional customers,
or that the customers' volume of transactions will be at a level sufficient to
enable the segment to maintain profitability.
In order to fulfill its commitments under its contracts, the VoltDelta unit and
DataServ are required to develop advanced computer software programs and
purchase substantial amounts of computer equipment, as well as license data
content, from several suppliers. Most of the equipment and data content required
for these contracts is purchased as needed and is readily available from a
number of suppliers.
-20-
Maintech
Maintech, a division of Volt Delta, provides managed IT service solutions to
mid-size and large corporate clients across the United States and Canada,
including many of those who have purchased systems from Volt Delta. Its service
offerings are tailored to mission-critical, multi-platform operating
environments where standards of system availability of 99+% are the norm. Its
target markets include banking and brokerage, telecommunications, aerospace,
healthcare and hospital, and higher education. Maintech's services portfolio
includes three groups of interrelated services:
o Hardware maintenance services, which includes on-site repair and Tier 1 & 2
technical support for Wintel and UNIX-based servers, workstations and
network products. Maintech is certified to support products from most major
OEMs including HP/Compaq, SUN, IBM, Dell, Cisco and Nortel. Maintech also
supports storage systems from Network Appliance, EMC and STK.
Representative application environments include Wall Street trading desks,
electronic funds transfer, R & D laboratories and 411 Directory Assistance
systems. Maintech provides these programs on a 24 x 7 x 365 basis with
available on-site, 2 hour or 4 hour response terms.
o Network Operations Center (NOC) services, which includes 24 x 7 x 365
monitoring and management of LAN/WAN environments, network design, carrier
selection and management, and product procurement, deployment, transition
and support. Maintech's dual NOCs in Orange, California and Wallington, New
Jersey are staffed with certified network design and support engineers, and
employ state-of-the-art diagnostic monitoring and management software. In
addition to outside customers, Maintech provides these services across the
business units of Volt.
o Professional services, which includes comprehensive project management for
planning, design, deployment and support of enterprise-wide,
workstation/server/network upgrades, technology refresh programs,
warehousing, asset management, product integration and testing, and
installation and facility planning. This group of services is attractive to
the end user, as well as OEMs, VARs (value added resellers) and
distributors.
The Company believes that Maintech's strengths and economic structure
enable Maintech's customers to meet the demand to improve operating cost
parameters by using these IT services, particularly for those companies
that are correcting or adjusting an overbuilt IT infrastructure.
Maintech headquarters are in Wallington, New Jersey. District service
offices are located in most metropolitan areas across the United States.
This segment operates in a business environment which is highly competitive.
Some of this segment's principal competitors are larger and have substantially
greater financial resources than Volt. This segment's results are highly
dependent on the volume of transactions which are processed by the segment under
existing contracts, the segment's ability to continue to secure comprehensive
listings from others, its ability to obtain additional customers for these
services and on its continued ability to sell products and services to new and
existing customers. This segment's position in its market depends largely upon
its reputation, quality of service and ability to develop, maintain and
implement information systems on a cost competitive basis. Although the segment
continues its investment in research and development, there is no assurance that
this segment's present or future products will be competitive, that the segment
will continue to develop new products or that present products or new products
can be successfully marketed.
-21-
Some of this segment's contracts expired in 2004, while others were renewed and
new contracts were awarded to the segment. Other contracts are scheduled to
expire in 2005 through 2008. Many of this segment's long-term contracts contain
cancellation provisions under which the customer can cancel the contract, even
if the segment is not in default under the contract. Therefore, these contracts
do not give the assurances that long-term contracts typically provide. While the
Company believes it can secure renewals and/or extensions of some of these
contracts, some of which are material to this segment, and obtain new business
and customers, there can be no assurance that contracts will be renewed or
extended or that additional or replacement contracts will be awarded to the
Company on satisfactory terms or that new business and customers can be
obtained.
Research, Development and Engineering
-------------------------------------
During fiscal years 2004, 2003 and 2002, the Company expended approximately $4.7
million, $2.1 million and $2.5 million, respectively, on research, development
and engineering for product and service development and improvement,
substantially all of which is Company sponsored, and none of which was
capitalized. The major portion of research and development expenditures was
incurred by the Computer Systems segment.
In addition, the Company invests in software for internal use, including
planning, coding, testing, deployment, training and maintenance. In fiscal 2004,
expenditures for internal-use software were $19.3 million of which $7.3 million
was capitalized.
Intellectual Property
---------------------
"Volt" is a registered trademark of the Company under a number of registrations.
The Company also holds a number of other trademarks and patents related to
certain of its products and services; however, it does not believe that any of
these are material to the Company's business or that of any segment. The Company
is also a licensee of technology from many of its suppliers, none of which
individually is considered material to the Company's business or the business of
any segment.
Customers
---------
In fiscal 2004, the Telecommunications Services segment's sales to four
customers accounted for approximately 17%, 15%, 12%, and 11% respectively, of
the total sales of that segment; the Computer Systems segment's sales to one
customer accounted for approximately 28% of the total sales of that segment; the
Staffing Services segment's sales to one customer accounted for approximately
14% of the total sales of that segment; and the Telephone Directory segment's
sales to one customer accounted for approximately 10% of the total sales of that
segment. In fiscal 2004, the sales to seven operating units of one customer,
Microsoft Corporation, accounted for 12% of the Company's consolidated net sales
of $1.9 billion and 7.6% of the Company's consolidated gross billings of $3.0
billion. The difference between net sales and gross billings is the Company's
associate vendor costs, which are excluded from sales due to the Company's
relationship with the customers and the Company's associate vendors, who have
agreed to be paid subject to receipt of the customers' payment to the Company.
Generally accepted accounting principles require these sales to be reported net.
The Company believes that gross billing is a meaningful measure, which reflects
actual volume by the customers.
In fiscal 2003, the Telecommunications Services segment's sales to three
customers accounted for approximately 23%, 18%, and 12%, respectively, of the
total sales of that segment; the Computer Systems segment's sales to two
customers accounted for approximately 27% and 13% of the total sales of that
segment; the Staffing Services segment's sales to one customer accounted for
approximately 13% of the total sales of that segment; and the Telephone
Directory segment's sales to one customer accounted for approximately 10% of the
total sales of that segment. In fiscal 2003, the sales to seven operating units
of one customer, Microsoft Corporation, accounted for 10.6% of the Company's
consolidated net sales of $1.6 billion and 6.7% of the Company's consolidated
gross billings of $2.6 billion.
-22-
In fiscal 2002, the Telecommunications Services segment's sales to three
customers accounted for approximately 24%, 20%, and 12%, respectively, of the
total sales of that segment; and the Computer Systems segment's sales to one
customer accounted for approximately 30% of that segment. In fiscal 2002, there
were no customers to which sales accounted for over 10% of the Company's
consolidated net sales.
The loss of one or more of these customers, unless the business is replaced by
the segment, could result in an adverse effect on the results for that segment's
business.
Seasonality
-----------
Historically, the Company's results of operations have been lowest in its first
fiscal quarter as a result of reduced requirements for the Staffing Services
segment's personnel due to the Thanksgiving, Christmas and New Year holidays as
well as certain customer facilities closing for one to two weeks. In addition,
the Telephone Directory segment's DataNational division publishes more
directories during the second half of the fiscal year. During the third and
fourth quarter of the fiscal year, the Staffing Services segment benefits from a
reduction of payroll taxes and increased use of Administrative and Industrial
services during the summer vacation period.
Employees
---------
During the week ended October 31, 2004, Volt employed approximately 45,000
persons, including approximately 40,000 persons who were on temporary assignment
for the Staffing Services segment. Volt is a party to two collective bargaining
agreements, which cover a small number of its employees. The Company believes
that its relations with its employees are satisfactory.
Certain services rendered by Volt's operating segments require highly trained
technical personnel in specialized fields, some of whom are currently in short
supply and, while the Company currently has a sufficient number of such
technical personnel in its employ, there can be no assurance that in the future,
these segments can continue to employ sufficient technical personnel necessary
for the successful conduct of their services without significantly higher costs.
Regulation
----------
Some states in the United States license and regulate temporary service firms,
employment agencies and construction companies. In Europe, the temporary service
business and employment agencies are subject to regulation at both country and
European levels. In connection with foreign sales by the Telephone Directory and
Computer Systems segments, the Company is subject to export controls, including
restrictions on the export of certain technologies. With respect to countries in
which the Company's Telephone Directory and Computer Systems segments presently
sell certain of their current products, the sale of their current products, both
hardware and software, are permitted pursuant to a general export license. If
the Company began selling to countries designated by the United States as
sensitive or developed products subject to restriction, sales would be subject
to more restrictive export regulations.
Compliance with applicable present federal, state and local environmental laws
and regulations has not had, and the Company believes that compliance with those
laws and regulations in the future will not have, a material effect on the
Company's earnings, capital expenditures or competitive position.
-23
Access to Company Information
-----------------------------
The Company electronically files its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those
reports with the Securities and Exchange Commission ("SEC"). These and other SEC
filings by the Company are available to the public over the Internet at the
SEC's website at http://www.sec.gov and at the Company's website at
http://www.volt.com in the Investor Information section as soon as reasonably
practicable after they are electronically filed with the SEC. Copies of the
Company's Code of Ethics and other significant corporate policies are also
available at the Company's website in the Investor Information section. Copies
are also available without charge upon request to Volt Information Sciences,
Inc., 560 Lexington Avenue, New York, New York 10022, 212-704-2400, Attention:
Shareholder Relations.
ITEM 2. PROPERTIES
The Company occupies approximately 46,000 square feet of space at 560 Lexington
Avenue, New York, New York under leases that expire in 2007 and 2009. The
facility serves as the Company's corporate headquarters, the headquarters for
the Company's Computer Systems segment and a base for certain operations of the
Company's Staffing Services segment. The following table sets forth certain
information as to each of the Company's other major facilities:
Approximate Sq. Ft. If Leased, Year of
Location Business Segment Leased Or Owned Lease Expiration
-------- ---------------- ------------------- ------------------
Orange, West Region Headquarters 200,000 Owned (1)
California Accounting Center
Staffing Services
Computer Systems
El Segundo, Staffing Services 20,000 Owned
California
San Diego, Staffing Services 20,000 Owned
California
Montevideo, Telephone Directory 96,000 2007
Uruguay
Blue Bell, Telephone Directory 55,000 2007
Pennsylvania Computer Systems
Redmond, Staffing Services 46,000 2010
Washington 40,000 2005
Edison, Telecommunications Services 42,000 2010
New Jersey
Wallington, Computer Systems 32,000 2008
New Jersey
(1) See Note F of Notes to Consolidated Financial Statements for information
regarding a term loan secured by a deed of trust on this property.
-24-
ITEM 2. PROPERTIES--Continued
In the second quarter of 2004, the Company sold its 134,000 square foot facility
in Thousand Oaks, CA which was previously leased by the Company to its former
59% owned subsidiary, Autologic Information International, Inc., which interest
was sold in November 2001. The cash transaction resulted in a $9.5 million gain,
net of taxes of $4.6 million.
In the fourth quarter of 2004, the Company sold its 39,000 square foot facility
in Anaheim, CA resulting in a gain of $3.3 million. The property was no longer
used by the Company.
In addition, the Company leases space in approximately 230 other facilities
worldwide (excluding month-to-month rentals), each of which consists of less
than 20,000 square feet. These leases expire at various times from 2005 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 its presently anticipated uses and
that it is not dependent upon any individually leased premises.
For additional information pertaining to lease commitments, see Note P of Notes
to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to certain claims and legal proceedings
which arise in the ordinary course of business, including those discussed in
Item 1 of this Report. There are no claims or legal proceedings pending against
the Company or its subsidiaries, which, in the opinion of management, would have
a material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-25
Executive Officers
------------------
WILLIAM SHAW, 80, a founder of the Company, has been President and Chairman of
the Board of the Company since its inception in 1957 and has been employed in
executive capacities by the Company and its predecessors since 1950.
JEROME SHAW, 78, a founder of the Company, has been Executive Vice President and
Secretary of the Company since its inception in 1957 and has been employed in
executive capacities by the Company and its predecessors since 1950.
JAMES J. GROBERG, 76, has been a Senior Vice President and Principal Financial
Officer of the Company since September 1985 and was also employed in executive
capacities by the Company from 1973 to 1981.
STEVEN A. SHAW, 45, 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. He has been employed by the Company in various capacities since
November 1995.
HOWARD B. WEINREICH, 62, has been General Counsel of the Company since September
1985 and a Senior Vice President of the Company since May 2001. He has been
employed in executive capacities by the Company since 1981.
THOMAS DALEY, 50, has been Senior Vice President of the Company since March 2001
and has been employed in executive capacities by the Company since 1980.
LUDWIG M. GUARINO, 53, has been Treasurer of the Company since January 1994 and
has been employed in executive capacities by the Company since 1976.
JACK EGAN, 55, has been Vice President - Corporate Accounting and Principal
Accounting Officer since January 1992 and has been employed in executive
capacities by the Company since 1979.
DANIEL G. HALLIHAN, 56, has been Vice President - Accounting Operations since
January 1992 and has been employed in executive capacities by the Company since
1986.
NORMA J. KRAUS, 73, has been Vice President - Human Resources since March 1987
and has been employed in executive capacities by the Company since 1979.
William Shaw and Jerome Shaw are brothers. Steven A. Shaw is the son of Jerome
Shaw. Bruce G. Goodman, a director of the Company, is the son-in-law of William
Shaw. There are no other family relationships among the executive officers or
directors of the Company.
-26-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the New York Stock Exchange (NYSE
Symbol-VOL). The following table sets forth the high and low prices of Volt's
common stock, as reported by the NYSE, during the Company's two fiscal years
ended October 31, 2004:
2004 2003
-------------------------------- --------------------------------
Fiscal Period High Low High Low
---- --- ---- ---
First Quarter $23.55 $17.70 $18.92 $13.15
Second Quarter 27.79 21.20 14.40 9.39
Third Quarter 31.98 23.03 18.80 12.11
Fourth Quarter 31.23 22.28 19.45 15.40
As of January 6, 2005, there were approximately 349 holders of record of the
Company's common stock, exclusive of shareholders whose shares were held by
brokerage firms, depositories and other institutional firms in "street name" for
their customers.
Cash dividends have not been paid during the reported periods. The Company's
credit agreement contains financial covenants, one of which limits dividends in
any fiscal year to 50% of the prior year's consolidated net income, as defined.
Therefore, the amount available for dividends at November 1, 2004 was $16.9
million. The Company does not currently anticipate the payment of cash dividends
in fiscal 2005 beyond Volt Delta's obligation to pay Nortel a distribution of
its proportionate share of excess cash, as defined.
The following table sets forth certain information, as at October 31, 2004, with
respect to the Company's equity compensation plans:
Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options, outstanding options, future issuance under
Plan Category warrants and rights warrants and rights equity compensation plans
------------- ------------------- ------------------- -------------------------
Equity compensation plans approved
by security holders 527,753(a) $20.77 340,430(a)
Equity compensation plans not
approved by security holders - - -
------- ------- -------
Total 527,753 $20.77 340,430
======= ====== =======
(a) Under the Company's 1995 Non-Qualified Stock Option Plan, the Company's
only equity compensation plan. Upon the expiration, cancellation or
termination of unexercised granted options, shares subject to those options
will again be available for the grant of options under the plan.
No information of the type called for by Items 701 and 703 of Regulation S-K
(relating to unregistered sales of equity securities by the Company and
purchases of equity securities by the Company and affiliated purchasers) is
required to be included in this Form 10-K.
-27-
ITEM 6. SELECTED FINANCIAL DATA
Year Ended (Notes 1, 2 and 3)
---------------------------------------------------------------------------------
October November November November November
31, 2004 2, 2003 3, 2002 4, 2001 3, 2000
-------- -------- -------- -------- --------
(Restated) (Restated) (Restated) (Restated)
(In thousands, except per share data)
Net Sales $1,924,777 $1,609,491 $1,468,093 $1,901,491 $2,099,921
========== ========== ========== ========== ==========
Income (loss) from continuing operations -
before items shown below--Note 4 $24,196 $4,205 ($5,096) $7,296 $31,930
Discontinued operations--Note 5 9,520 4,310 (814) (697)
Cumulative effect of a change in accounting -
goodwill impairment--Note 4 (31,927)
---------- ---------- ---------- ---------- ----------
Net income (loss) $33,716 $4,205 ($32,713) $6,482 $31,233
========== ========== ========== ========== ==========
Per Share Data
--------------
Basic:
Income (loss) from continuing operations -
before items shown below $1.59 $0.28 ($0.33) $0.48 $2.11
Discontinued operations .62 0.28 (0.06) (0.05)
Cumulative effect of a change in accounting (2.10)
---------- ---------- ---------- ---------- ----------
Net income (loss) $2.21 $0.28 ($2.15) $0.42 $2.06
========== ========== ========== ========== ==========
Weighted average number of shares 15,234 15,218 15,217 15,212 15,139
========== ========== ========== ========== ==========
Diluted:
Income (loss) income from continuing
operations - before items shown below $1.58 $0.28 ($0.33) $0.48 $2.09
Discontinued operations .62 0.28 (0.06) (0.05)
Cumulative effect of a change in accounting (2.10)
---------- ---------- ---------- ---------- ----------
Net income (loss) $2.20 $0.28 ($2.15) $0.42 $2.04
========== ========== ========== ========== ==========
Weighted average number of shares 15,354 15,225 15,217 15,244 15,316
========== ========== ========== ========== ==========
Total assets $690,036 $540,483 $511,569 $639,258 $748,596
========== ========== ========== ========== ==========
Long-term debt, net of current portion $15,588 $14,098 $14,469 $15,993 $32,297
========== ========== ========== ========== ==========
Note 1--The Company has restated its previously issued financial statements for
fiscal years 2000 through 2003 as a result of inappropriate application of
accounting principles for revenue recognition by its telephone directory
publishing operation in Uruguay. The operation in Uruguay printed and
distributed its Montevideo directory each year during the October -
November time frame, and the Company has determined that revenue
recognition should have been taken in the first six months of each year
instead of in the fourth quarter of the prior fiscal year. The restatement
involves only the timing of when certain advertising revenue and related
costs and expenses are recognized, and the cumulative results of the
Company do no change. The restated figures are reflected in the table
above. The tables on the next page reflect the restatements of the selected
financial data.
-28-
ITEM 6. SELECTED FINANCIAL DATA--Continued
Year Ended
--------------------------------------------------------------
November November November November
2, 2003 3, 2002 4, 2001 3, 2000
---------- ---------- ---------- ----------
(In thousands, except per share data)
Net Sales - as previously reported $1,609,857 $1,467,786 $1,898,681 $2,099,600
(Decrease) increase (366) 307 2,810 321
---------- ---------- ---------- ----------
Net Sales - as restated $1,609,491 $1,468,093 $1,901,491 $2,099,921
========== ========== ========== ==========
Income (loss) from continuing operations - as previously
reported $4,761 ($5,187) $6,658 $31,402
(Decrease) increase (556) 91 638 528
---------- ---------- ---------- ----------
Income (loss) from continuing operations - as restated $4,205 ($5,096) $7,296 $31,930
========== ========== ========== ==========
Net income (loss) - as previously reported $4,761 ($32,804) $5,844 $30,705
(Decrease) increase (556) 91 638 528
---------- ---------- ---------- ----------
Net income (loss) - as restated $4,205 ($32,713) $6,482 $31,233
========== ========== ========== ==========
Per Share Data
Basic:
Income (loss) from continuing operations - as
previously reported $0.31 ($0.34) $0.44 $2.08
(Decrease) increase (0.03) 0.01 0.04 0.03
---------- ---------- ---------- ----------
Income (loss) from continuing operations - as restated $0.28 ($0.33) $0.48 $2.11
========== ========== ========== ==========
Net income (loss) - as previously reported $0.31 ($2.16) $0.38 $2.03
(Decrease) increase (0.03) 0.01 0.04 0.03
---------- ---------- ---------- ----------
Net income (loss) - as restated $0.28 ($2.15) $0.42 $2.06
========== ========== ========== ==========
Diluted:
Income (loss) from continuing operations - as
previously reported $0.31 ($0.34) $0.44 $2.05
(Decrease) increase (0.03) 0.01 0.04 0.04
---------- ---------- ---------- ----------
Income (loss) from continuing operations - as restated $0.28 ($0.33) $0.48 $2.09
========== ========== ========== ==========
Net income (loss) - as previously reported $0.31 ($2.16) $0.38 $2.00
(Decrease) increase (0.03) 0.01 0.04 0.04
---------- ---------- ---------- ----------
Net income (loss) - as restated $0.28 ($2.15) $0.42 $2.04
========== ========== ========== ==========
Total assets - as previously reported $538,693 $509,590 $637,236 $744,828
Increase 1,790 1,979 2,022 3,768
---------- ---------- ---------- ----------
Total assets - as restated $540,483 $511,569 $639,258 $748,596
========== ========== ========== ==========
-29-
ITEM 6. SELECTED FINANCIAL DATA--Continued
Note 2--Fiscal years 2001 through 2004 consisted of 52 weeks, while fiscal year
2000 consisted of 53 weeks.
Note 3--Cash dividends were not paid during the five-year period ended October
31, 2004.
Note 4--Fiscal 2004 included a gain from the sale of real estate of $3.3 million
($2.0 million, net of taxes, or $0.13 per share).
Fiscal 2002 included a non-cash charge of $31.9 million, or $2.10 per
share, recognized for goodwill impairment as of November 5, 2001 presented
as a cumulative effect of a change in accounting. Amortization of goodwill,
included in continuing operations net of taxes, which was not permitted to
be amortized beginning in fiscal year 2002 under Statement of Financial
Accounting Standards No. 142, is included in the prior fiscal years as
follows: 2001 - $2.0 million, or $0.13 per share and 2000 - $2.3 million,
or $0.15 per share.
Fiscal 2001 included a gain on the sale of the Company's interest in a real
estate partnership of $4.2 million ($2.5 million, net of taxes, or $0.16
per share) and a gain on the sale of securities, net of a write-down of
other securities, of $5.6 million ($3.4 million, net of taxes, or $0.22 per
share).
Note 5--Fiscal 2004 included a gain from discontinued operations of $9.5
million (net of taxes of $4.6 million), or $0.62 per share, from the sale
of real estate previously leased to the Company's former 59% owned
subsidiary, Autologic International, Inc. ("Autologic").
Fiscal 2002 included a net gain of $4.3 million, or $0.28 per share,
including a tax benefit of $1.7 million (resulting from a taxable loss
versus a gain for financial statement purposes), from discontinued
operations resulting from the Company's sale of its 59% interest in
Autologic. This amount included a $4.5 million gain on the sale, partially
offset by a $0.2 million loss on operations. Accordingly, the results of
operations of Autologic have also been classified as discontinued in the
statements of income for fiscal years 2000 through 2001.
-30-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies
----------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments, assumptions and valuations that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Future reported results of operations could be impacted if the
Company's estimates, judgments, assumptions or valuations made in earlier
periods prove to be wrong. Management believes the critical accounting policies
and areas that require the most significant estimates, judgments, assumptions or
valuations used in the preparation of the Company's financial statements are as
follows:
Revenue Recognition - The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments.
Staffing Services:
Staffing: In fiscal 2004, this revenue comprised approximately 76% of net
consolidated sales. Sales are derived from the Company's Staffing Solutions
Group supplying its own temporary personnel to its customers, for which the
Company assumes the risk of acceptability of its employees to its
customers, and has credit risk for collecting its billings after it has
paid its employees. The Company reflects revenues for these services on a
gross basis in the period the services are rendered.
Managed Services: In fiscal 2004, this revenue comprised approximately 2%
of net consolidated sales. Sales are generated by the Company's
E-Procurement Solutions subsidiary, ProcureStaff, and for certain
contracts, sales are generated by the Company's Staffing Solutions Group's
managed services operations. The Company receives an administrative fee for
arranging for, billing for and collecting the billings related to other
staffing companies ("associate vendors") who have supplied personnel to the
Company's customers. The administrative fee is either charged to the
customer or subtracted from the Company payment to the associate vendor.
The customer is typically responsible for assessing the work of the
associate vendor, and has responsibility for the acceptability of its
personnel, and in most instances the customer and associate vendor have
agreed that the Company does not pay the associate vendor until the
customer pays the Company. Based upon the revenue recognition principles
prescribed in Emerging Issues Task Force 99-19 ("EITF 99-19"), "Reporting
Revenue Gross as a Principal versus Net as an Agent," revenue for these
services, where the customer has agreed, is recognized net of associated
costs in the period the services are rendered.
Outsourced Projects: In fiscal 2004, this revenue comprised approximately
5% of net consolidated sales. Sales are derived from the Company's
Information Technology Solutions operation providing outsource services for
a customer in the form of project work, for which the Company is
responsible for deliverables. The Company's employees perform the services
and the Company has credit risk for collecting its billings. Revenue for
these services is recognized on a gross basis in the period the services
are rendered, and when the Company is responsible for project completion,
revenue is recognized when the project is complete and the customer has
approved the work.
-31-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
----------------------------
Shaw & Shaw: In fiscal 2004, this revenue comprised less than 1% of net
consolidated sales, due to the Company's reporting of these revenues on a
net basis. Sales are generated by the Company's Shaw & Shaw subsidiary, for
which the Company provides professional employer organizational services
("PEO") to certain customers. Generally, the customers transfer their
entire workforce or employees of specific departments or divisions to the
Company, but the customers maintain control over the day-to-day job duties
of the employees. Based upon the revenue recognition principles prescribed
in EITF 99-19, effective with the Company's second fiscal quarter of 2003,
the Company has changed its method of reporting revenue from these services
from a gross basis to a net basis. The change in reporting, which is
reflected in all current and prior periods, resulted in a reduction in both
reported PEO revenues and related costs of sales, with no effect on the
Company's operating results.
Telephone Directory:
Directory Publishing: In fiscal 2004, this revenue comprised approximately
3% of net consolidated sales. Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher or for a telephone company in Uruguay. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period the books are printed and delivered.
Ad Production and Other: In fiscal 2004, this revenue comprised
approximately 1% of net consolidated sales. Sales are generated when the
Company performs design, production and printing services, and database
management for other publishers' telephone directories. The Company's
employees perform the services and the Company has credit risk for
collecting its billings. Revenue for these services is recognized on a
gross basis in the period the Company has completed its production work and
upon customer acceptance.
Telecommunications Services:
Construction: In fiscal 2004, this revenue comprised approximately 4% of
net consolidated sales. Sales are derived from the Company supplying aerial
and underground construction services. The Company's employees perform the
services, and the Company takes title to all inventory, and has credit risk
for collecting its billings. The Company relies upon the principles in
Statement of Position 81-1 ("SOP 81-1"), "Accounting for Performance of
Construction-Type Contracts," using the completed-contract method, to
recognize revenue on a gross basis upon customer acceptance of the project.
Non-Construction: In fiscal 2004, this revenue comprised approximately 3%
of net consolidated sales. Sales are derived from the Company performing
design, engineering and business systems integrations work. The Company's
employees perform the services and the Company has credit risk for
collecting its billings. Revenue for these services is recognized on a
gross basis in the period in which services are performed, and if
applicable, any completed units are delivered and accepted by the customer.
-32-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
----------------------------
Computer Systems:
Database Access: In fiscal 2004, this revenue comprised approximately 4% of
net consolidated sales. Sales are derived from the Company granting access
to its proprietary telephone listing databases to telephone companies,
inter-exchange carriers and non-telco enterprise customers. The Company
uses its own databases and has credit risk for collecting its billings. The
Company recognizes revenue on a gross basis in the period in which the
customers access the Company's databases.
IT Maintenance: In fiscal 2004, this revenue comprised approximately 2% of
net consolidated sales. Sales are derived from the Company providing
hardware maintenance services to the general business community, including
customers who have our systems. The Company uses its own employees and
inventory in the performance of the services, and has credit risk for
collecting its billings. Revenue for these services is recognized on a
gross basis in the period in which the services are performed, contingent
upon customer acceptance.
Telephone Systems: In fiscal 2004, this revenue comprised less than 1% of
net consolidated sales. Sales are derived from the Company providing
telephone operator services-related systems and enhancements to existing
systems, equipment and software to customers. The Company uses its own
employees and has credit risk for collecting its billings. The Company
relies upon the principles in Statement of Position 97-2 ("SOP 97-2"),
"Software Revenue Recognition" and Emerging Issues Task Force 00-21 ("EITF
00-21"), "Revenue Arrangements with Multiple Deliverables" to recognize
revenue on a gross basis upon customer acceptance of each part of the
system based upon its fair value.
The Company records provisions for estimated losses on contracts when losses
become evident. Accumulated unbilled costs on contracts are carried in inventory
at the lower of actual cost or estimated realizable value.
Allowance for Uncollectable Accounts - The establishment of an allowance
requires the use of judgment and assumptions regarding potential losses on
receivable balances. Allowances for doubtful accounts receivable are maintained
based upon historical payment patterns, aging of accounts receivable and actual
write-off history. The Company believes that its allowances are adequate;
however, changes in the financial condition of customers could have an effect on
the allowance balance required and a related charge or credit to earnings.
Goodwill - Under Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill is no longer amortized, but is
subject to annual impairment testing using fair value methodologies. The
impairment test for goodwill is a two-step process. Step one consists of a
comparison of a reporting unit with its carrying amount, including the goodwill
allocated to the reporting unit. Measurement of the fair value of a reporting
unit is based on one or more fair value measures including present value
techniques of estimated future cash flows and estimated amounts at which the
unit as a whole could be bought or sold in a current transaction between willing
parties. If the carrying amount of the reporting unit exceeds the fair value,
step two requires the fair value of the reporting unit to be allocated to the
underlying assets and liabilities of that reporting unit, resulting in an
implied fair value of goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
equal to the excess is recorded in net earnings (loss). The Company performs its
impairment testing using comparable multiples of sales and EBITDA and other
valuation methods to assist the Company in the determination of the fair value
of the reporting units measured.
-33-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
----------------------------
Long-Lived Assets - Property, plant and equipment is recorded at cost, and
depreciation and amortization are provided on the straight-line and accelerated
methods at rates calculated to depreciate the cost of the assets over their
estimated lives. Intangible assets, other than goodwill, and property, plant and
equipment are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No.
144, these assets are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; the accumulation of costs
significantly in excess of the amount originally expected for the acquisition of
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and a current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life. Recoverability is assessed based on the carrying amount of the asset and
the sum of the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset or asset group. An impairment loss is recognized
when the carrying amount is not recoverable and exceeds the fair value of the
asset or asset group. The impairment loss is measured as the amount by which the
carrying amount exceeds fair value.
Capitalized Software - The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software used in its operating segments,
some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with AICPA Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent to the preliminary project planning and approval
stage, all appropriate costs are capitalized until the point at which the
software is ready for its intended use. Subsequent to the software being used in
operations, the capitalized costs are transferred from costs-in-process to
completed property, plant and equipment, and are accounted for as such. All
post-implementation costs, such as maintenance, training and minor upgrades that
do not result in additional functionality, are expensed as incurred.
Securitization Program - The Company accounts for the securitization of accounts
receivable in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." At the time a
participation interest in the receivables is sold, that interest is removed from
the consolidated balance sheet. The outstanding balance of the undivided
interest sold to Three Rivers Funding Corporation ("TRFCO"), an asset backed
commercial paper conduit sponsored by Mellon Bank, N.A, was $70.0 million at
October 31, 2004 and November 2, 2003. Accordingly, the trade receivables
included on the October 31, 2004 and November 2, 2003 balance sheets have been
reduced to reflect the $70.0 million participation interest sold. TRFCO has no
recourse to the Company (beyond its interest in the pool of receivables owned by
Volt Funding) for any of the sold receivables.
Primary Casualty Insurance Program - The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds and the
experience-rated premiums in these state plans relieve the Company of any
additional liability. In the loss sensitive program, initial premium accruals
are established based upon the underlying exposure, such as the amount and type
of labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the future cash payments that will be
made to satisfy the claims, including an allowance for incurred-but-not-reported
-34-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Critical Accounting Policies -- Continued
----------------------------
claims. This process also includes establishing loss development factors, based
on the historical claims experience of the Company and the industry, and
applying those factors to current claims information to derive an estimate of
the Company's ultimate premium liability. In preparing the estimates, the
Company considers the nature and severity of the claims, analyses provided by
third party actuaries, as well as current legal, economic and regulatory
factors. The insurance policies have various premium rating plans that establish
the ultimate premium to be paid. Prior to March 31, 2002, the amount of the
additional or return premium was finalized. Subsequent thereto, adjustments to
premiums will be made based upon the level of claims incurred at a future date
up to three years after the end of the respective policy period. For the policy
year ended March 31, 2003, a maximum premium was predetermined and accrued. For
subsequent policy years, management evaluates the accrual, and the underlying
assumptions, regularly throughout the year and makes adjustments as needed. The
ultimate premium cost may be greater or less than the established accrual. While
management believes that the recorded amounts are adequate, there can be no
assurances that changes to management's estimates will not occur due to
limitations inherent in the estimation process. In the event it is determined
that a smaller or larger accrual is appropriate, the Company would record a
credit or a charge to cost of services in the period in which such determination
is made.
Medical Insurance Program - Beginning in April 2004, the Company became
self-insured for the majority of its medical benefit programs. The Company
remains insured for a portion of its medical program (primarily HMO's) as well
as the entire dental program. The Company provides the self-insured medical
benefits through an arrangement with a third party administrator. However, the
liability for the self-insured benefits is limited by the purchase of stop loss
insurance. The funds and related liabilities for the self-insured program
together with unpaid premiums for the insured programs, other than the current
provision, are held in a 501(c)9 employee welfare benefit trust and do not
appear on the balance sheet of the Company. In order to establish the
self-insurance reserves, the Company utilized actuarial estimates of expected
losses based on statistical analyses of historical data. The provision for
future payments is initially adjusted by the enrollment levels in the various
plans. Periodically, the resulting liabilities are monitored and will be
adjusted as warranted by changing circumstances. Should the amount of claims
occurring exceed what was estimated or medical costs increase beyond what was
expected, liabilities might not be sufficient, and additional expense may be
recorded.
-35-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003
EXECUTIVE OVERVIEW
------------------
Volt Information Sciences, Inc. ("Volt") is a leading national provider of
staffing services and telecommunications and information solutions with a
material portion of its revenue coming from Fortune 100 customers. The Company
operates in four segments and the management discussion and analysis is broken
down into these segments. A brief description of these segments and the
predominant source of their sales follow:
Staffing Services: This segment is divided into three major functional
areas and operates through a network of over 300 branch offices. Staffing
Solutions fulfills IT and other technical, commercial and industrial
placement requirements of its customers, on both a temporary and permanent
basis, managed staffing, and professional employer organization services.
E-Procurement Solutions provides global vendor neutral procurement and
management solutions for supplemental staffing using web-based tools
through the Company's ProcureStaff subsidiary. Information Technology
Solutions provides a wide range of information technology consulting and
project management services through the Company's VMC Consulting
subsidiary.
Telephone Directory: This segment publishes independent telephone
directories, provides telephone directory production services, database
management, printing and computer-based projects to public utilities and
financial institutions.
Telecommunications Services: This segment provides a full spectrum of
telecommunications construction, installation, and engineering services in
the outside plant and central offices of telecommunications and cable
companies as well as for large commercial and governmental entities.
Computer Systems: This segment provides directory and operator systems and
services primarily for the telecommunications industry, and provides IT
maintenance services.
Several historical seasonal factors usually affect the sales and profits of the
Company. The Staffing Services segment's sales are always lowest in the
Company's first fiscal quarter due to the Thanksgiving, Christmas and New Year
holidays, as well as certain customer facilities closing for one to two weeks.
During the third and fourth quarters of the fiscal year, this segment benefits
from a reduction of payroll taxes when the annual tax contributions for higher
salaried employees have been met, and customers increase the use of the
Company's administrative and industrial labor during the summer vacation period.
In addition, the Telephone Directory segment's DataNational division publishes
more directories during the second half of the fiscal year.
Numerous non-seasonal factors impacted sales and profits in the current fiscal
year. The sales and profits of the Staffing Services segment, in addition to the
factors noted above, were positively impacted by a rebound in the country's use
of temporary staffing, partially offset by the continued pressure on margins
caused by increases in employment related and other taxes. In addition to the
increase in sales, the profitability of the Staffing Services segment has
benefited by the increased proportion of the segment's sales from higher margin
VMC Consulting subsidiary sales. In both the third and fourth quarters of fiscal
2004, the Administrative and Industrial division recorded its highest two
quarterly operating profits since the fourth quarter of fiscal 2000, but for the
year, the division's loss continues to negatively impact the Staffing segment.
The sales and profits of the Telephone Directory segment were positively
affected by an improvement in the ad backlog and the continued positive effects
of its new stringent credit policy, which has reduced bad debts, partially
-36-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
EXECUTIVE OVERVIEW--Continued
-----------------------------
offset by the previously announced loss of a telephone directory production
contract in the third quarter of fiscal 2003. The sales and operating results of
the Telecommunications segment improved in fiscal 2004, but the segment still
sustained an operating loss due to a material reduction in the sales and gross
margins of its Central Office division. The Company has continued to carefully
monitor the overhead within the segment in order to mitigate the effect on the
reduced segment margins. In the third and fourth quarters of fiscal 2004, the
Computer Systems segment recorded the two highest quarterly operating profits in
its history. The sales and profits of the segment were positively impacted by
the continued increase in the segment's ASP directory assistance outsourcing
business, in which there continues to be a sequential increase in transaction
revenue and business acquired from Nortel Networks.
The Company has, and will continue to focus on aggressively increasing its
market share in order to increase profits. All segments have emphasized cost
containment measures, along with improved credit and collections procedures
designed to improve the Company's cash flow.
The Company continues its effort to streamline its processes to manage the
business and protect its assets through the continued deployment of its Six
Sigma initiatives, upgrading its financial reporting systems, its ongoing
compliance with the Sarbanes-Oxley Act, and the standardization and upgrading of
the IT redundancy and business continuity for corporate systems and
communications networks. To the extent possible, the Company has been utilizing,
and will continue to utilize, internal resources to comply with the
Sarbanes-Oxley Act by the end of fiscal year 2005. To-date, outside costs of
compliance with this Act, including software licenses, equipment, consultants
and professional fees amounted to $0.4 million and it is anticipated that a
somewhat larger amount, excluding audit fees, will be expended over the next
twelve months.
Volt Delta, the principal business unit of the Computer Systems segment,
acquired certain assets and liabilities of the DOS Business of Nortel Networks
on August 2, 2004 in return for a 24% interest in Volt Delta. After a period of
two years, Nortel Networks and Volt Delta each has an option to cause Nortel
Networks to sell and Volt Delta to buy these interests for an amount ranging
from $25 to $70 million. As a result of this transaction, approximately 155 DOS
Business employees in North America joined Volt Delta. This acquisition permits
Volt Delta to provide the newly combined customer base with new solutions and an
expanded suite of products, content and enhanced services.
RESULTS OF 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.
-37-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
RESULTS OF OPERATIONS - SUMMARY
-------------------------------
In fiscal 2004, consolidated net sales increased by $315.3 million, or 19.6%, to
$1.9 billion, from fiscal 2003. The primary increase in fiscal 2004 net sales
resulted from increases in Staffing Services of $266.7 million, Computer Systems
of $26.4 million, Telecommunications Services of $22.6 million, and Telephone
Directory of $2.4 million.
The net income for fiscal 2004 was $33.7 million compared to $4.2 million in the
prior fiscal year. The consolidated results for fiscal 2004 included income from
discontinued operations of $9.5 million (net of taxes of $4.6 million) from the
sale of real estate previously leased to the Company's former 59% owned
subsidiary, Autologic International, Inc.
The Company's fiscal 2004 income from continuing operations before income taxes
was $39.7 million compared to $7.1 million in fiscal 2003. The Company's
operating segments reported an operating profit of $74.8 million in fiscal 2004,
an increase of $36.3 million, or 94%, from the prior year. Contributing to the
$36.3 million increase were increases in the operating profit of the Computer
Systems segment of $16.2 million, the Staffing Services segment of $15.6
million, the Telephone Directory segment of $3.4 million, and a reduction in the
operating loss of the Telecommunications Services segment of $1.1 million.
General corporate expenses increased by $3.1 million due to costs incurred to
meet the disaster recovery requirements of redundancy and business continuity
for corporate systems and communication networks, as well as salary and
professional fee increases. In addition, the Company incurred costs related to
compliance with the Sarbanes-Oxley Act.
RESULTS OF OPERATIONS - BY SEGMENT
----------------------------------
STAFFING SERVICES
-----------------
Year Ended
----------
October 31, 2004 November 2, 2003
---------------- ----------------
% of % of Favorable Favorable
Net Net (Unfavorable) (Unfavorable)
Dollars Sales Dollars Sales $ Change % Change
------- ----- ------- ----- -------- --------
Staffing Services
-----------------
(Dollars in Millions)
-------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) * $1,584.0 $1,269.2 $314.8 24.8%
-------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) * $1,148.1 $1,043.6 $104.5 10.0%
-------------------------------------------------------------------------------------------------------------------
Sales (Net) $1,612.1 $1,345.4 $266.7 19.8%
-------------------------------------------------------------------------------------------------------------------
Gross Profit $256.4 15.9% $212.4 15.8% $44.0 20.8%
-------------------------------------------------------------------------------------------------------------------
Overhead $219.7 13.6% $191.3 14.2% ($28.4) (14.9%)
-------------------------------------------------------------------------------------------------------------------
Operating Profit $36.7 2.3% $21.1 1.6% $15.6 74.3%
-------------------------------------------------------------------------------------------------------------------
*Included in Sales (Gross) are billings for associate vendors which are
substantially excluded from Sales (Net).
The sales increase of the Staffing Services segment in fiscal 2004 from fiscal
2003 was due to increased staffing business in both the Technical Placement and
the Administrative and Industrial divisions, and the VMC Consulting business of
the Technical Placement division.
-38-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
STAFFING SERVICES --Continued
-----------------------------
The increase in operating profit in the segment was derived from the staffing
and managed service operations of the Technical Placement division, including
VMC Consulting, together with reduced losses of the Administrative and
Industrial division.
Year Ended
October 31, 2004 November 2, 2003
---------------- ----------------
Technical Placement % of % of Favorable Favorable
Division Net Net (Unfavorable) (Unfavorable)
-------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $2,072.4 $1,791.8 $280.6 15.7%
------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $974.9 $834.5 $140.4 16.8%
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $170.3 17.5% $143.1 17.1% $27.2 19.1%
------------------------------------------------------------------------------------------------------------------------------
Overhead $130.5 13.4% $114.2 13.7% ($16.3) (14.3%)
------------------------------------------------------------------------------------------------------------------------------
Operating Profit $39.8 4.1% $28.9 3.5% $10.9 37.8%
------------------------------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in gross sales in fiscal 2004 from
fiscal 2003 was due to a 21% sales increase with traditional staffing customers,
a 16% increase in ProcureStaff volume due to new accounts and increased business
from existing accounts, and a 44% increase in higher margin VMC Consulting
project management and consulting sales. However, substantially all of the
ProcureStaff billings are deducted in arriving at net sales due to the use of
associate vendors who have contractually agreed to be paid only upon receipt of
the customers' payment to the Company. The increase in net sales was due to the
increase in gross sales. The increase in the operating profit for the year was
the result of the increase in sales, a 0.4 percentage point improvement in gross
margin and a 0.3 percentage point decrease in overhead costs as related to net
sales. Partially offsetting the increases in fiscal 2004 was $1.2 million in
accruals for potential losses and employee separation charges for Volt Europe.
Year Ended
----------
October 31, 2004 November 2, 2003
---------------- ----------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
------------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
-----------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $659.7 $521.0 $138.7 26.6%
-----------------------------------------------------------------------------------------------------------------------------
Sales (Net) $637.2 $510.9 $126.3 24.7%
-----------------------------------------------------------------------------------------------------------------------------
Gross Profit $86.1 13.5% $69.3 13.6% $16.8 24.3%
-----------------------------------------------------------------------------------------------------------------------------
Overhead $89.2 14.0% $77.1 15.1% ($12.1) (15.7%)
-----------------------------------------------------------------------------------------------------------------------------
Operating Loss ($3.1) (0.5%) ($7.8) (1.5%) $4.7 60.0%
-----------------------------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in gross sales in fiscal
2004 resulted from both revenue from new accounts and increased business from
existing accounts. The decrease in operating loss was the result of the sales
increase, a 1.1 percentage point decrease in overhead costs as related to net
sales, partially offset by a decrease in gross margin of 0.1 percentage points
due to higher payroll taxes, increased competition and customers leveraging
their buying power by consolidating the number of vendors with whom they deal.
-39-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
STAFFING SERVICES --Continued
-----------------------------
Although the markets for the segment's services include a broad range of
industries throughout the United States and Europe, general economic
difficulties in specific geographic areas or industrial sectors have in the past
and could, in the future, affect the profitability of the segment.
TELEPHONE DIRECTORY
-------------------
Year Ended
----------
October 31, 2004 November 2, 2003
---------------- ----------------
% of % of Favorable Favorable
Telephone Directory Net Net (Unfavorable) (Unfavorable)
------------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $72.2 $69.8 $2.4 3.4%
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $39.4 54.6% $35.0 50.1% $4.4 12.7%
------------------------------------------------------------------------------------------------------------------------------
Overhead $29.3 40.6% $28.3 40.4% ($1.0) (3.9%)
------------------------------------------------------------------------------------------------------------------------------
Operating Profit $10.1 14.0% $6.7 9.7% $3.4 49.9%
------------------------------------------------------------------------------------------------------------------------------
The Telephone Directory segment's sales increase for fiscal 2004 was due to an
increase of $10.2 million, or 22%, in publishing sales, partially offset by a
decrease of $7.8 million, or 32% in production, printing and other operations.
The publishing increase was due to the community telephone directory operation
of DataNational, whose sales increased by $10.8 million, or 26%, from the prior
year due to an increase in advertising sold for the year and an increase in the
number of directories printed and delivered. The most significant cause of the
revenue decrease in the production, printing and other operations was the $3.2
million in production revenue related to the previously reported loss of a
contract with a telecommunications company in the third quarter of fiscal 2003,
and a $1.8 million decrease in printing revenue in Uruguay. The segment's
improvement in operating results was the result of the sales increase, a 4.5
percentage point increase in gross margins, primarily due to the mix of
directories published by DataNational in the period, partially offset by an
increase in overhead of 0.2 percentage points. The Company has incurred $1.0
million of expenses in connection with an investigation of a failure to comply
with certain Company policies at its operations in Uruguay, and possible
litigation against certain former management personnel at such operations. The
operations in Uruguay are not significant to the Company. (See restatement table
in Item 1 of this Report.)
Other than the DataNational division, which accounted for 72% of the segment's
fiscal 2004 sales, the segment's business is obtained through submission of
competitive proposals for contracts. These short and long-term contracts are
re-bid after expiration. While the Company has historically secured new
contracts and believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurance that contracts will be renewed or extended, or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms. In addition, this segment's sales and profitability are
highly dependent on advertising revenue, which could be affected by general
economic conditions.
-40-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
TELECOMMUNICATIONS SERVICES
---------------------------
Year Ended
----------
October 31, 2004 November 2, 2003
---------------- ----------------
% of % of Favorable Favorable
Telecommunications Net Net (Unfavorable) (Unfavorable)
------------------ Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $135.4 $112.8 $22.6 20.0%
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $31.0 22.9% $31.0 27.5% - 0.1%
------------------------------------------------------------------------------------------------------------------------------
Overhead $33.8 25.0% $35.0 31.0% $1.2 3.2%
------------------------------------------------------------------------------------------------------------------------------
Operating Loss ($2.8) (2.1%) ($4.0) (3.5%) $1.2 28.8%
------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales increase in fiscal 2004 was due
to increased business in the Business Systems and Construction and Engineering
divisions, partially offset by a decrease in the Central Office division. The
decrease in operating loss was due to the sales increase, a decrease in overhead
as a percentage of net sales of 6.0 percentage points (including a previously
reported $1.3 million charge in the first quarter related to a domestic
consulting contract for services), partially offset by a 4.6 percentage point
decrease in gross margins. Despite an emphasis on cost controls, the results of
the segment continue to be affected by the decline in capital spending by
telephone companies caused by the depressed conditions within the segment's
telecommunications industry customer base. This factor has also increased
competition for available work, pressuring pricing and gross margins throughout
the segment. The division most affected by reduced sales and margins was Central
Office, whose sales and margins decreased by 47% and 16.8 percentage points,
respectively. Sales in the Construction and Engineering division of the segment,
increased by 12% over the prior year while margins decreased by 1.0 percentage
point. The increase in sales was attributable to the completion of several
long-term contracts. Sales in the Business Systems division increased by 78% due
to revenue increases from two large customers, while margins decreased by 5.8
percentage points. Recent actions by major long-distance telephone companies
regarding local residential service could negatively impact sales and continue
to impact margins of the Business Systems division.
A substantial portion of the business in this segment is obtained through the
submission of competitive proposals for contracts, which typically expire within
one to three years and are re-bid. Many of this segment's long-term contracts
contain cancellation provisions under which the customer can cancel the
contract, even if the segment is not in default under the contract and generally
do not provide for a minimum amount of work to be awarded to the segment. While
the Company believes it can secure renewals and/or extensions of most of these
contracts, some of which are material to this segment, and obtain new business,
there can be no assurances that contracts will be renewed or extended or that
additional or replacement contracts will be awarded to the Company on
satisfactory terms.
-41-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
COMPUTER SYSTEMS
----------------
Year Ended
----------
October 31, 2004 November 2, 2003
---------------- ----------------
% of % of Favorable Favorable
Computer Systems Net Net (Unfavorable) (Unfavorable)
---------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $120.0 $93.6 $26.4 28.2%
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $72.1 60.1% $47.8 51.0% $24.3 50.8%
------------------------------------------------------------------------------------------------------------------------------
Overhead $41.2 34.4% $33.1 35.4% ($8.1) (24.5%)
------------------------------------------------------------------------------------------------------------------------------
Operating Loss $30.9 25.7% $14.7 15.7% $16.2 110.1%
------------------------------------------------------------------------------------------------------------------------------
The Computer Systems segment's sales increase in fiscal 2004 was primarily due
to improvements in the segment's operator services business, including ASP
directory assistance, which reflected a 47% growth in sales during the year, a
sales increase of 125% in DataServ's directory assistance services which are
provided to non-telco enterprise customers, a 13% sales growth in the Maintech
division's IT maintenance services, partially offset by a decrease in product
revenue recognized of 64%. The sales increase for the year also included $8.1
million of DOS Business acquired from Nortel Networks, which represented 7% of
the segment's sales for the year. The growth in operating profit from the prior
fiscal year was the result of the increase in sales, an increase in gross
margins of 9.0 percentage points, partially due to $1.2 million for the
settlement of a vendor dispute and vendor refunds related to prior periods,
together with an overhead decrease of 1.0 percentage point as related to sales.
Volt Delta, the principal business unit of the Computer Systems segment,
acquired certain assets and liabilities of the DOS Business of Nortel Networks
on August 2, 2004. This acquisition permits Volt Delta to provide the newly
combined customer base with new solutions and an expanded suite of products,
content and enhanced services. At October 31, 2004, the Company owned 76% of
Volt Delta, the entity which operates the Computer Systems segment.
This segment's results are highly dependent on the volume of calls to the
segment's customers that are processed by the segment under existing contracts
with telephone companies, the segment's ability to continue to secure
comprehensive telephone listings from others, its ability to obtain additional
customers for these services and its continued ability to sell products and
services to new and existing customers.
-42-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL 2004 COMPARED TO FISCAL 2003--Continued
RESULTS OF OPERATIONS -- OTHER
------------------------------
Year Ended
----------
October 31, 2004 November 2, 2003
---------------- ----------------
% of % of Favorable Favorable
Other Net Net (Unfavorable) (Unfavorable)
----- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative * $83.1 4.3% $71.7 4.4% ($11.4) (15.9%)
------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $25.5 1.3% $24.3 1.5% ($1.2) (5.0%)
------------------------------------------------------------------------------------------------------------------------------
Interest Income $0.9 - $0.7 - $0.2 30.9%
------------------------------------------------------------------------------------------------------------------------------
Other Expense ($4.4) 0.2% ($2.7) 0.2% ($1.7) (65.3%)
------------------------------------------------------------------------------------------------------------------------------
Gain on Sale of Real Estate $3.3 0.2% - - $3.3 100.0%
------------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Gain $0.1 - $0.3 - ($0.2) (67.6%)
------------------------------------------------------------------------------------------------------------------------------
Interest Expense ($1.8) 0.1% ($2.1) 0.1% $0.3 12.2%
------------------------------------------------------------------------------------------------------------------------------
*Restated in fiscal year 2003, from $71.6 million to $71.7 million. See
note 2 in Item 1 of this Report.
Other items, discussed on a consolidated basis, affecting the results of
operations for the fiscal years were:
The increase in selling and administrative expenses in fiscal 2004 from the
prior year was a result of increased corporate general and administrative
expenses related to costs to meet the disaster recovery requirements of
redundancy and business continuity for corporate systems and communications
networks, in addition to increased selling expenses to support the increased
sales levels throughout the Company.
The increase in depreciation and amortization for fiscal 2004 from the prior
year was attributable to an increase in fixed assets, primarily in the Computer
Systems and Staffing Services segments.
Other Expense in both fiscal years is primarily the charges related to the
Company's Securitization Program as well as sundry expenses.
The gain on sale of real estate is from the sale of land and a building in
Anaheim, California for cash. The property was no longer being used by the
Company.
The decrease in interest expense in fiscal 2004 from the prior year was the
result of lower borrowing levels and interest rates in Uruguay.
The Company's effective tax rate on its financial reporting pre-tax income from
continuing operations was 36.8% in fiscal 2004 compared to an effective tax rate
of 40.9% in fiscal 2003. In fiscal 2004, the effective tax rate was lower due to
federal and state income taxes attributable to the minority interest treated as
a partnership interest, lower foreign losses for which no tax benefit was
provided and lower non-tax deductible items.
-43-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
RESULTS OF OPERATIONS -- SUMMARY
--------------------------------
Consolidated net sales increased by $141.4 million, or 10%, to $1.6 billion in
fiscal 2003. This increase in net sales resulted primarily from a $135.1 million
increase in sales in the Staffing Services segment. The Company's operating
segments reported an operating profit in fiscal 2003 of $38.5 million, an
increase of $15.5 million, or 68%, from the prior year, with all four segments
reflecting improvements. Contributing to the fiscal 2003 increase in operating
profit was a $9.3 million decrease in the operating loss sustained by the
Telecommunications Services segment, and increases in operating profit of $5.8
million by the Computer Systems segment and $0.6 million in Staffing Services,
partially offset by a decrease of $0.1 million by the Telephone Directory
segment.
In fiscal 2003, the Company reported income from continuing operations before
income taxes of $7.1 million compared to a loss from continuing operations
before taxes of $7.4 million in fiscal 2002. An item affecting results from
continuing operations in fiscal 2002 was a charge of $2.1 million arising from
the early payment of the Company's remaining $30.0 million 7.92% Senior Notes,
which was previously presented as an extraordinary item.
In fiscal 2003, the Company reported net income of $4.2 million compared with a
net loss of $32.7 million in the prior year. Results for fiscal 2002 included a
non-cash charge for the write-down of goodwill of $31.9 million reported as a
cumulative effect of a change in accounting and a net gain from discontinued
operations, after taxes, of $4.3 million. The net gain from discontinued
operations was comprised of a $4.5 million gain, including a tax benefit of $1.7
million (resulting from a taxable loss versus a gain for financial statement
purposes), on the sale of the Company's 59% interest in Autologic Information
International Inc. ("Autologic"), partially offset by a loss from Autologic's
operations through the disposal date of $0.2 million.
RESULTS OF OPERATIONS -- BY SEGMENT
-----------------------------------
STAFFING SERVICES
-----------------
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
% of % of Favorable Favorable
Staffing Services Net Net (Unfavorable) (Unfavorable)
----------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
Staffing Sales (Gross) $1,269.2 $1,143.8 $125.4 11.0%
-------------------------------------------------------------------------------------------------------------------------------
Managed Service Sales (Gross) $1,043.6 $745.7 $297.9 39.9%
-------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $1,345.4 $1,210.3 $135.1 11.2%
-------------------------------------------------------------------------------------------------------------------------------
Gross Profit $212.4 15.8% $199.8 16.5% $12.6 6.3%
-------------------------------------------------------------------------------------------------------------------------------
Overhead $191.3 14.2% $179.3 14.8% ($12.0) (6.7%)
-------------------------------------------------------------------------------------------------------------------------------
Operating Profit $21.1 1.6% $20.5 1.7% $0.6 2.9%
-------------------------------------------------------------------------------------------------------------------------------
The sales increase of the Staffing Services segment in fiscal 2003 was due to
increased traditional staffing and managed service business in both the
Technical Placement and Administrative and Industrial divisions, and the VMC
Consulting business of the Technical Placement division.
-44-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002-Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
---------------------------------------------
STAFFING SERVICES -- Continued
------------------------------
The increase in operating profit in the segment was derived from the VMC
Consulting business of the Technical Placement division, along with reduced
losses of the Administrative and Industrial division, partially offset by
reduced operating profits of the traditional staffing and managed service
operations of the Technical Placement division.
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
Technical Placement % of % of Favorable Favorable
Division Net Net (Unfavorable) (Unfavorable)
-------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $1,791.8 $1,459.2 $332.6 22.8%
------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $834.5 $789.2 $45.3 5.8%
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $143.1 17.1% $134.7 17.1% $8.4 6.2%
------------------------------------------------------------------------------------------------------------------------------
Overhead $114.2 13.7% $105.2 13.3% ($9.0) (8.6%)
------------------------------------------------------------------------------------------------------------------------------
Operating Profit $28.9 3.5% $29.5 3.7% ($0.6) (2.0%)
------------------------------------------------------------------------------------------------------------------------------
The Technical Placement division's increase in gross sales in fiscal 2003 from
fiscal 2002 was due to a 4% sales increase with traditional staffing customers,
an 18% increase in ProcureStaff volume due to new accounts and increased
business from existing accounts, and a 49% increase in higher margin VMC
Consulting project management and consulting sales. However, substantially all
of the ProcureStaff billings are reported on a net basis due to contracts with
associate vendors who have agreed to be paid upon receipt of the customers'
payment to the Company. The increase in net sales was due to the aforementioned
increase in gross sales. The decrease in the division's operating profit was due
to an increase of overhead expressed as a percentage of sales of 0.4 percentage
point. The largest increase in overhead costs from the prior year was in
ProcureStaff, whose costs increased by $6.0 million, or 2.9 percentage points,
due to ongoing development of new products and the implementation of new
accounts. ProcureStaff incurred an operating loss of $1.0 million for the year
compared to an operating profit of $0.3 million in the prior year due to these
higher costs. The Technical Placement division's gross margin percentages
remained relatively constant compared to fiscal 2002, with lower markups on
traditional staffing placement and higher state unemployment insurance rates,
offset by higher margins earned by VMC Consulting which reported an operating
profit of $10.8 million in fiscal 2003, compared to $7.5 million in fiscal 2002.
The Technical Placement division lost a managed service contract in the first
quarter of fiscal 2004. Revenue and gross profit from this contract each
approximated 4% of the division's total revenue and gross profit in both fiscal
2003 and 2002.
-45-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002--Continued
RESULTS OF OPERATIONS - BY SEGMENT--Continued
---------------------------------------------
STAFFING SERVICES--Continued
----------------------------
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
Administrative & % of % of Favorable Favorable
Industrial Division Net Net (Unfavorable) (Unfavorable)
------------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
Sales (Gross) $521.0 $430.3 $90.7 21.1%
------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $510.9 $421.1 $89.8 21.3%
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $69.3 13.6% $65.1 15.5% $4.2 6.5%
------------------------------------------------------------------------------------------------------------------------------
Overhead $77.1 15.1% $74.1 17.6% ($3.0) (3.9%)
------------------------------------------------------------------------------------------------------------------------------
Operating Loss ($7.8) (1.5%) ($9.0) (2.2%) $1.2 13.8%
------------------------------------------------------------------------------------------------------------------------------
The Administrative and Industrial division's increase in gross sales in fiscal
2003 resulted from new accounts and increased business from existing accounts.
The decrease in operating loss was the result of the aforementioned sales
increase, a 2.5 percentage point decrease in overhead costs as related to net
sales, partially offset by a 1.9 percentage point decrease in gross margins due
to higher state unemployment and workers' compensation rates, increased
competition and customers leveraging their buying power by consolidating the
number of vendors with whom they deal. Although sequential quarterly operating
losses have declined during fiscal 2003, cost control initiatives in the
division have not fully offset lower gross margins.
TELEPHONE DIRECTORY
-------------------
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
% of % of Favorable Favorable
Telephone Directory Net Net (Unfavorable) (Unfavorable)
-------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated) (Restated)
------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $69.8 $83.6 ($13.8) (16.5%)
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $35.0 50.1% $41.6 49.8% ($6.6) (16.0%)
------------------------------------------------------------------------------------------------------------------------------
Overhead $28.3 40.4% $34.7 41.5% $6.4 18.8%
------------------------------------------------------------------------------------------------------------------------------
Operating Profit $6.7 9.7% $6.9 8.2% ($0.2) (1.7%)
------------------------------------------------------------------------------------------------------------------------------
The Telephone Directory segment's sales decreased in fiscal 2003 due to numerous
factors. The Uruguayan printing sales decreased by $3.6 million, or 45%, due to
the economic instability in neighboring countries, as well as in Uruguay itself.
The DataNational operation's community telephone directory sales decreased by
$3.1 million, or 7%, due to a decrease in the number of directories printed and
delivered during the year. The segment's telephone production revenue decreased
by $3.5 million, or 17%, primarily due to the previously announced termination
of a contract with a telecommunications company in the third quarter of fiscal
2003. Despite the 17% reduction in sales, the profitability of the segment
decreased by only 2% due to increased productivity, which resulted in a 0.3
percentage point increase in gross margins, and a reduction in overhead
-46-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002--Continued
TELEPHONE DIRECTORY--Continued
------------------------------
expressed as a percentage of sales of 1.1 percentage points. The decreased
overhead was predominantly related to a lower bad debt expense as a result of a
more stringent credit policy. Operating profit in fiscal 2003 also benefited
from a $0.8 million fee due to the terminated contract. (See restatement table
in Item 1 of this Report.)
TELECOMMUNICATIONS SERVICES
---------------------------
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
% of % of Favorable Favorable
Telecommunications Net Net (Unfavorable) (Unfavorable)
------------------ Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $112.8 $108.9 $3.9 3.6%
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $31.0 27.5% $28.6 26.3% $2.4 8.4%
------------------------------------------------------------------------------------------------------------------------------
Overhead $35.0 31.0% $41.9 38.5% $6.9 16.5%
------------------------------------------------------------------------------------------------------------------------------
Operating Loss ($4.0) (3.5%) ($13.3) (12.2%) $9.3 69.9%
------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Services segment's sales were up slightly from the prior
year's level. The reduction in the operating loss was due to the sales increase,
a 1.2 percentage point increase in gross margin, together with a reduction in
overhead expressed as a percentage of sales of 7.5 percentage points. Despite an
emphasis on cost controls, the results of the segment continue to be affected by
the decline in capital spending by telephone companies caused by the depressed
conditions within the segment's telecommunications industry customer base. This
factor has also increased competition for available work, pressuring pricing and
margins. Following the reorganization of the business operations initiated in
fiscal 2002, the segment continued its cost control initiatives in an effort to
permit the segment to operate profitably at lower revenue levels without
impairing its ability to take advantage of opportunities when the
telecommunications industry stabilizes and customers' spending increases. The
segment incurred a pre-tax charge of $1.3 million in the first quarter of fiscal
2004 as a result of costs incurred related to a domestic consulting contract for
services.
COMPUTER SYSTEMS
----------------
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
% of % of Favorable Favorable
Computer Systems Net Net (Unfavorable) (Unfavorable)
---------------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
Sales (Net) $93.6 $78.8 $14.8 18.8%
------------------------------------------------------------------------------------------------------------------------------
Gross Profit $47.8 51.0% $37.7 47.9% $10.1 26.8%
------------------------------------------------------------------------------------------------------------------------------
Overhead $33.1 35.4% $28.8 36.5% ($4.3) (14.9%)
------------------------------------------------------------------------------------------------------------------------------
Operating Profit $14.7 15.7% $8.9 11.3% $5.8 65.2%
------------------------------------------------------------------------------------------------------------------------------
-47-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002--Continued
--------------------------------------------------------
COMPUTER SYSTEMS--Continued
---------------------------
The Computer Systems segment's sales increase in fiscal 2003 was due to gains
reported by all of the divisions within the segment. The segment's ASP directory
assistance out-sourcing business, together with its domestic products and
services, reflected a 20% sales increase; its IT services sales provided by the
Maintech division reflected an 11% increase in sales, and sales of the European
division increased by 38% in fiscal 2003. The growth in operating profit for the
year was the result of the increase in sales, an increase in gross margins of
3.1 percentage points, and a reduction in overhead expressed as a percentage of
sales of 1.1 percentage points.
RESULTS OF OPERATIONS -- OTHER
------------------------------
Year Ended
----------
November 2, 2003 November 3, 2002
---------------- ----------------
% of % of Favorable Favorable
Other Net Net (Unfavorable) (Unfavorable)
-------- Dollars Sales Dollars Sales $ Change % Change
(Dollars in Millions) ------- ----- ------- ----- -------- --------
------------------------------------------------------------------------------------------------------------------------------
Selling & Administrative * $71.7 4.4% $74.6 5.1% $2.9 3.9%
------------------------------------------------------------------------------------------------------------------------------
Depreciation & Amortization $24.3 1.5% $22.2 1.5% ($2.1) (9.8%)
------------------------------------------------------------------------------------------------------------------------------
Interest Income $0.7 - $0.9 - ($0.2) (16.8%)
------------------------------------------------------------------------------------------------------------------------------
Other Expense ($2.7) 0.2% ($3.5) 0.2% $0.8 23.1%
------------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Gain (Loss) $0.3 - ($0.5) - $0.8 162.7%
------------------------------------------------------------------------------------------------------------------------------
Interest Expense ($2.1) 0.1% ($4.5) 0.3% $2.4 54.5%
------------------------------------------------------------------------------------------------------------------------------
*Restated in fiscal years 2003 and 2002, from $71.6 million to $71.7
million and $74.5 million to $74.6 million, respectively. See note 2 in
Item 1 of this Report.
Other items, discussed on a consolidated basis, affecting the results of
operations were:
The decrease in selling and administrative expenses in fiscal year 2003 was a
result of continued cost-cutting initiatives throughout the operating segments,
and a reduction of bad debt expense (see discussion by segment, above),
partially offset by increased corporate general and administrative expenses
related to costs to meet the disaster recovery requirements of redundancy and
business continuity for corporate systems and communications networks.
The increase in depreciation and amortization was attributable to the increase
in fixed assets during the year in the Staffing Services and Computer Systems
segments.
The Other Expense in fiscal 2003 was primarily the result of $1.6 million of
charges related to the Company's Securitization Program, which began in April
2002 and significantly reduced interest expense, as well as sundry expenses. The
fiscal 2002 expense was primarily the result of a $2.1 million charge for the
early payment of the Company's remaining $30.0 million outstanding 7.92% Senior
Notes, which was previously presented as an extraordinary item, along with
expenses incurred in conjunction with the initial and subsequent transactions
under the Company's Securitization Program and other sundry expenses.
-48-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002--Continued
RESULTS OF OPERATIONS - OTHER--Continued
----------------------------------------
The foreign exchange gain in fiscal 2003 compared to the loss in fiscal 2002 was
a result of favorable currency movements in the Uruguayan and European currency
markets. To reduce the potential adverse impact from foreign currency changes on
the Company's foreign currency receivables and firm commitments, the Company
utilizes foreign currency option and forward contracts, when appropriate, that
generally settle on the last weekday of each quarter.
The decrease in interest expense was attributable to the early repayment on
March 5, 2002 of the remaining $30.0 million of 7.92% Senior Notes in
contemplation of the lower cost accounts receivable Securitization Program. The
Securitization Program, the costs of which are reflected in Other Expense (see
above), also eliminated higher cost borrowings under the revolving credit
facility, which was not used in fiscal 2003. Throughout fiscal 2003, the Company
also benefited from significantly lower interest rates on borrowings in Uruguay.
The Company's tax provision in 2003 reflected an effective tax rate of 40.9% of
its financial reporting pre-tax income from continuing operations compared to a
2002 tax benefit effective rate of 30.7% of its financial reporting pre-tax loss
from continuing operations. The low effective tax benefit in fiscal 2002 was
primarily due to 2002 foreign losses for which no tax benefit was provided.
The consolidated results for fiscal 2002 included a net gain from discontinued
operations of $4.3 million which consisted of a $4.5 million gain, including a
tax benefit of $1.7 million, on the sale of the Company's interest in the
Company's former 59% owned publicly-owned subsidiary, Autologic Information
International, Inc., partially offset by a loss from its operations through the
November 30, 2001 disposal date of $0.2 million.
As of the beginning of fiscal 2002, the Company performed the first of the
required impairment tests of goodwill and other intangible assets, in accordance
with SFAS No. 142. At that date, the Company's goodwill related to prior
acquisitions amounted to approximately $40.0 million. The Company's revaluation
under the new accounting rules was completed during the second quarter of 2002,
and a $31.9 million impairment writedown was taken, reflecting declines in the
market value of the acquisitions since they were purchased. The writedown was
reported as a cumulative effect of a change in accounting. Using the same
valuation methods employed by the independent valuation firms, the Company
completed its annual impairment tests on the then remaining $9.0 million of
goodwill during the second quarters of fiscal 2003 and 2004, and determined that
the fair value exceeded the carrying value.
-49-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents, including restricted cash held in escrow for
ProcureStaff and Viewtech customers of $43.7 million, $18.9 million and $11.5
million at October 31, 2004, November 2, 2003 and November 3, 2002,
respectively, increased by $26.0 million to $88.0 million in fiscal 2004,
increased by $18.5 million to $62.1 million in fiscal 2003 and increased by
$25.1 million to $43.6 million in fiscal 2002. Unrestricted cash and cash
equivalents increased by $1.1 million to $44.3 million in fiscal 2004, increased
by $11.1 million to $43.2 million in fiscal 2003 and increased by $13.6 million
to $32.1 million in fiscal 2002.
The cash provided by operating activities of continuing operations in fiscal
2004 was $31.2 million compared to $36.2 million and $108.5 million in fiscal
years 2003 and 2002, respectively.
The cash provided by operating activities in fiscal 2004, exclusive of changes
in operating assets and liabilities, was $52.2 million, as the Company's net
income of $33.7 million included non-cash charges primarily for depreciation and
amortization of $25.5 million, accounts receivable provisions of $7.8 million
and income attributable to the minority interest of $2.4 million, partially
offset by income from discontinued operations of $9.5 million, a gain from
dispositions of property, plant and equipment of $3.4 million and a deferred
income tax benefit of $4.2 million. In fiscal 2003, operating activities,
exclusive of changes in operating assets and liabilities, produced $35.0 million
of cash, as the Company's net income of $4.2 million included non-cash charges
primarily for depreciation and amortization of $24.3 million and accounts
receivable provisions of $6.2 million. In fiscal 2002, operating activities,
exclusive of changes in operating assets and liabilities, produced $33.5 million
of cash, as the Company' net loss of $32.7 million included non-cash charges of
$31.9 million for goodwill impairment, depreciation and amortization of $22.2
million, accounts receivable provisions of $10.2 million, a deferred income tax
provision of $3.9 million, and a $2.1 million charge for the early payment of
the Company's 7.92% Senior Notes, partially offset by income from discontinued
operations of $4.3 million.
Changes in operating assets and liabilities in 2004 used $21.0 million of cash,
net, principally due to an increase in the level of accounts receivable of
$101.7 million, partially offset by increases in accounts payable of $37.1
million, accrued expenses of $24.7 million and deferred income and other
liabilities of $6.1 million, and decreases in the level of inventories of $6.7
million, recoverable income taxes of $2.8 million and prepaid expenses and other
assets of $2.6 million. In fiscal 2003, changes in operating assets and
liabilities produced $1.2 million of cash, net, principally due to cash provided
by increases in accrued expenses of $14.6 million, proceeds from the
Securitization Program of $10.0 million, increases in deferred income and other
liabilities of $8.9 million, and an increase in income taxes of $3.6 million,
partially offset by an increase in the level of accounts receivable of $28.6
million and inventory of $7.2 million. In fiscal 2002, changes in operating
assets and liabilities produced $75.0 million of cash, net, principally due to
the proceeds received under the then new Securitization Program of $60.0
million, an increase in the level of accounts payable of $40.1 million and a
decrease in inventories of $6.5 million, partially offset by a $18.7 million
decrease in accrued expenses, an increase in the level of accounts receivable of
$8.6 million and a $6.8 million decrease in the net income tax liability.
The cash used for investing activities in 2004 was $10.1 million, principally
due to purchases of property, plant and equipment totaling $30.7 million and
acquisitions of businesses of $1.9 million, partially offset by proceeds from
the sale of real estate and other assets of $22.4 million. In fiscal 2003, the
cash used for investing activities was $17.4 million, principally due to
purchases of property, plant and equipment totaling $18.0 million. In fiscal
2002, the cash provided by investing activities was $13.5 million, primarily due
to the proceeds received from the sale of Autologic of $24.2 million and
distributions from a joint venture of $3.3 million, partially offset by
purchases of plant, property and equipment totaling $14.7 million.
-50-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources--Continued
-------------------------------
The cash provided by financing activities in fiscal 2004 of $4.6 million,
primarily resulted from a $3.6 million increase in bank loans and $1.4 million
from employee exercises of stock options. In 2003, the cash provided by
financing activities of $0.1 million resulted primarily from a $1.5 million
increase in bank loans, offset by payments of long-term debt totaling $1.5
million. In 2002, the cash used for financing activities was $95.7 million,
primarily resulting from net repayments of bank loans totaling $62.3 million and
$33.5 million in payments of long-term debt, including the early payment of the
$30.0 million outstanding 7.92% Senior Notes.
Off-Balance Sheet Arrangements
------------------------------
The Company has no off-balance sheet financing arrangements as that term is used
in Item 303(a)4 of Regulation S-K.
Commitments
-----------
The Company has no material capital commitments. The following table summarizes
the Company's contractual cash obligations and other commercial commitments at
October 31, 2004:
Contractual Cash Obligations
----------------------------
Payments Due By Period
---------------------------------------------------------------------------------
Less than 1- 3 3 - 5 After 5
Total 1 year years years years
----- -------- ----- ----- -------
(In thousands)
Term Loan $14,130 399 904 $1,064 $11,763
Payable to Nortel Networks 1,857 1,857
Notes Payable to Banks 7,955 7,955 - - -
-------- ------- ------- ------- -------
Total Debt $23,942 $8,354 $2,761 $1,064 $11,763
Accrued Insurance (a) 13,583 13,497 86
Deferred Compensation (b) 4,999 4,999
Operating Leases (c) 49,039 18,975 22,684 5,736 1,644
-------- ------- ------- ------- -------
Total Contractual Cash Obligations $91,563 $45,825 $25,531 $6,800 $13,407
======== ======= ======= ======= =======
(a) Includes $10.5 million for the Company's Primary Insurance Casualty
Program and $3.1 million for the Company's Medical Insurance Program.
See Note A of Notes to Consolidated Financial Statements.
(b) Includes $4.2 million for the Company's non-qualified deferred
compensation and supplemental savings plan and $0.8 million for the
Company's other deferred compensation plan. See Note N to Consolidated
Financial Statements.
(c) See Note P of Notes to Consolidated Financial Statements.
-51-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Commitments--Continued
-----------
Other Contingent Commitments
----------------------------
Amount Expected by
Commitment Expiration Period
---------------------------------------------------
Less than 1-3
Total 1 year years
------- ------- -------
(In thousands)
Lines of Credit, available $7,234 $ 7,234
Revolving Credit Facility, available 26,324 26,324
Securitization Program, available 80,000 $80,000
Contingent Liability - Nortel 45,144 45,144
Standby Letters of Credit, outstanding 224 224 -
------ ------ -------
Total Commercial Commitments $158,926 $33,782 $125,144
======== ======= ========
Securitization Program
----------------------
Effective April 15, 2002, the Company entered into a $100.0 million three-year
accounts receivable securitization program ("Securitization Program"). In April
2004, the Company amended its Securitization Program which increased the
capacity of its accounts receivable securitization program to $150.0 million and
extended its maturity to April 2006. Under the Securitization Program,
receivables related to the United States operations of the staffing solutions
business of the Company and its subsidiaries are sold from time-to-time by the
Company to Volt Funding Corp., a wholly owned special purpose subsidiary of the
Company ("Volt Funding"). Volt Funding, in turn, sells to Three Rivers Funding
Corporation ("TRFCO"), an asset backed commercial paper conduit sponsored by
Mellon Bank, N.A., an undivided percentage ownership interest in the pool of
receivables Volt Funding acquires from the Company (subject to a maximum
purchase by TRFCO in the aggregate of $150.0 million). The Company retains the
servicing responsibility for the accounts receivable. At October 31, 2004, TRFCO
had purchased from Volt Funding a participation interest of $70.0 million out of
a pool of approximately $248.7 million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company, with accounts
receivable only reduced to reflect the fair value of receivables actually sold.
The Company entered into this arrangement as it provided a low-cost alternative
to other forms of financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors (subject also, as described
below, to the security interest that the Company has granted in the common stock
of Volt Funding in favor of the lenders under the Company's Credit Facility).
TRFCO has no recourse to the Company (beyond its interest in the pool of
receivables owned by Volt Funding) for any of the sold receivables.
-52-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Securitization Program--Continued
---------------------------------
In the event of termination of the Securitization Program, new purchases of a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to it. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts incurred by
TRFCO on the issuance of its commercial paper, are charged to the consolidated
statement of operations.
The Securitization Program is subject to termination at TRFCO's option, under
certain circumstances, including, among other things, the default rate, as
defined, on receivables exceeding a specified threshold, the rate of collections
on receivables failing to meet a specified threshold, the Company failing to
maintain a long-term debt rating of "B" or better or the equivalent thereof from
a nationally recognized rating organization or a default occurring and
continuing on indebtedness for borrowed money of at least $5.0 million. At
October 31, 2004, the Company was in compliance with all requirements of its
Securitizaton Program.
Credit Lines
------------
In April 2004, the Company amended its $40.0 million secured, syndicated,
revolving credit agreement ("Credit Agreement") which was to expire in April
2004, to, among other things, extend the term for 364 days and reduce the line
to $30.0 million, because of the increase in its Securitization Program
(discussed above). Additionally, in July 2004, this program was further amended
to release Volt Delta as a guarantor and collateral grantor under the Credit
Agreement due to the previously announced agreement between Volt Delta and
Nortel Networks. At October 31, 2004, the Company had credit lines with domestic
and foreign banks that provide for borrowings and letters of credit up to an
aggregate of $41.5 million, including $30.0 million under the Credit Agreement,
which will expire in April 2005.
The Credit Agreement established a credit facility ("Credit Facility") in favor
of the Company and designated subsidiaries, of which up to $15.0 million may be
used for letters of credit. Borrowings by subsidiaries are limited to $25.0
million in the aggregate. The administrative agent arranger for the secured
Credit Facility is JP Morgan Chase Bank. The other banks participating in the
Credit Facility are Mellon Bank, NA, Wells Fargo, NA and Lloyds TSB Bank PLC.
Borrowings and letters of credit under the Credit Facility are limited to a
specified borrowing base, which is based upon the level of specified
receivables, generally at the end of the fiscal month preceding a borrowing. At
October 31, 2004, $30.0 million was available under the borrowing base formula.
Borrowings under the Credit Facility are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined.
-53-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Credit Lines--Continued
------------
Additionally, interest and the facility fees can be increased or decreased upon
a change in the Company's long-term debt rating provided by a nationally
recognized rating agency. At October 31, 2004, the Company borrowed 2.0 million
British Pounds ($3.7 million) under the Credit Facility at an interest rate of
5.8% per annum. At October 31, 2004, the facility fee was 0.3% per annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined, a limitation on cash
dividends, capital stock repurchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ending as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At October 31, 2004, the Company was in compliance with all
covenants in the Credit Agreement.
The Company is liable for all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are guarantors of all
loans made to the Company or to subsidiary borrowers under the Credit Facility.
At October 31, 2004, five of those guarantors have pledged approximately $62.6
million of accounts receivable, other than those in the Securitization Program,
as collateral for the guarantee obligations. Under certain circumstances, other
subsidiaries of the Company also may be required to become guarantors under the
Credit Facility.
Summary
-------
The Company believes that its current financial position, working capital,
future cash flows from operations, credit lines and accounts receivable
Securitization Program will be sufficient to fund its presently contemplated
operations and satisfy its debt obligations in fiscal 2005.
-54-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
New Accounting Pronouncements
-----------------------------
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("FIN 46") which provides guidance on identifying
and assessing interests in variable interest entities to decide whether to
consolidate that entity. FIN 46 requires consolidation of existing
unconsolidated variable interest entities if the entities do not effectively
disperse risk among parties involved. In October 2003, the FASB issued FASB
Staff Position No. FIN 46-6, deferring the effective date for applying the
provision of FIN 46 for variable interest entities created before February 1,
2003. In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a
revision which clarifies some provisions of FIN 46. The Company has no
unconsolidated subsidiaries. The adoption of FIN 46R did not have a material
impact on the Company's consolidated financial position and results of
operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an Amendment of
ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and spoilage. This Statement
requires that these items be recognized as period costs even if the amounts are
not considered to be abnormal. The provisions of this Statement are effective
for inventory costs incurred in fiscal years beginning after June 15, 2005. The
Company does not believe that the adoption of this Statement in fiscal 2006 will
have a material impact on the Company's consolidated financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets-an Amendment of APB Opinion No. 29," to eliminate the exception for
nonmonetary exchanges of similar productive assets and replace it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. The provisions of this Statement are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005, with early
application permitted for exchanges beginning after November, 2004. The Company
does not believe that the adoption of this Statement in fiscal 2005 will have a
material impact on the Company's consolidated financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," which
replaces the superseded SFAS No. 123, "Accounting for Stock-Based Compensation."
This Statement requires that all entities apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and
suppliers when the entity acquires goods or services. The provisions of this
Statement are effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005, with early adoption of this
Statement permitted for any interim period whose financial statements are not
yet issued. The Company is currently assessing the impact that the adoption will
have on the Company's consolidated financial position and results of operations.
Related Party Transactions
--------------------------
During fiscal 2004, the Company paid or accrued $1.9 million to the law firm of
which Lloyd Frank, a director, is of counsel, primarily for services rendered
and expenses reimbursed, including $0.9 million related to the transaction with
Nortel Networks discussed elsewhere in this Report. During that year, the
Company also paid $13,000 to the law firm of which Bruce Goodman, a director, is
a partner, for services rendered to the Company.
The Company rents approximately 2,600 square feet (previously 2,500 square feet)
of office space to a corporation owned by Steven A. Shaw, an officer and
director, in the Company's El Segundo, California facility, which the Company
does not require for its own use, on a month-to-month basis at a rental of
$1,750 per month (previously $1,500 per month), effective March 1, 2004. Based
on the nature of the premises and a recent market survey conducted for the
Company, the Company believes the rent is the fair market rental for such space.
-55-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The Company`s earnings, cash flows
and financial position are exposed to market risks relating to fluctuations in
interest rates and foreign currency exchange rates. The Company has cash and
cash equivalents on which interest income is earned at variable rates. The
Company also has credit lines with various domestic and foreign banks, which
provide for borrowings and letters of credit, as well as a $150 million accounts
receivable securitization program to provide the Company with additional
liquidity to meet its short-term financing needs.
The interest rates on these borrowings and financing are variable and,
therefore, interest and other expense and interest income are affected by the
general level of U.S. and foreign interest rates. Based upon the current levels
of cash invested, notes payable to banks and utilization of the securitization
program, on a short-term basis, as noted below in the tables, a hypothetical
100-basis-point (1%) increase or decrease in interest rates would increase or
decrease its annual net interest income/expense and securitization costs by $0.1
million and $0.1 million, respectively.
The Company has a term loan, as noted in the table below, which consists of
borrowings at fixed interest rates, and the Company's interest expense related
to these borrowings is not affected by changes in interest rates in the near
term. The fair value of the fixed rate term loan was approximately $15.3 million
at October 31, 2004. This fair value was calculated by applying the appropriate
fiscal year-end interest rate supplied by the lender to the Company's present
stream of loan payments.
The Company holds short-term investments in mutual funds for the Company's
deferred compensation plan. At October 31, 2004, the total market value of these
investments was $4.2 million, all of which are being held for the benefit of
participants in a non-qualified deferred compensation plan with no risk to the
Company.
The Company has a number of overseas subsidiaries and is, therefore, subject to
exposure from the risk of currency fluctuations as the value of foreign
currencies fluctuate against the dollar, which may impact reported earnings. As
of October 31, 2004, the total of the Company's net investment in foreign
operations was $9.7 million. The Company attempts to reduce these risks by
utilizing foreign currency option and exchange contracts, as well as borrowing
in foreign currencies, to hedge the adverse impact on foreign currency net
assets when the dollar strengthens against the related foreign currency. As of
October 31, 2004, the total of the Company's foreign exchange options was $5.7
million, leaving a balance of net foreign assets exposed of $4.0 million. The
amount of risk and the use of foreign exchange instruments described above are
not material to the Company's financial position or results of operations and
the Company does not use these instruments for trading or other speculative
purposes. Based upon the current levels of net foreign assets, a hypothetical
weakening of the U.S. dollar against these currencies at October 31, 2004 by 10%
would result in a pretax gain of $1.0 million related to these positions.
Similarly, a hypothetical strengthening of the U.S. dollar against these
currencies at October 31, 2004 by 10% would result in a pretax loss of $0.4
million related to these positions.
-56-
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
The tables below provide information about the Company's financial instruments
that are sensitive to either interest rates or exchange rates at October 31,
2004. For cash and debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For foreign
exchange agreements, the table presents the currencies, notional amounts and
weighted average exchange rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the Company's reporting
currency.
Interest Rate Market Risk Payments Due By Period as of October 31, 2004
------------------------- ---------------------------------------------
Less than 1-3 3-5 After 5
Total 1 year Years Years Years
----- --------- ----- ----- -------
(Dollars in thousands of US$)
Cash and Cash Equivalents
-------------------------
Money Market and Cash Accounts $88,031 $88,031
Weighted Average Interest Rate 1.5% 1.5%
------- -------
Total Cash and Cash Equivalents $88,031 $88,031
======= =======
Securitization Program
----------------------
Accounts Receivable Securitization $70,000 $70,000
Finance Rate 2.1% 2.1%
------- -------
Securitization Program $70,000 $70,000
======= =======
Interest Rate Market Risk Payments Due By Period as of October 31, 2004
------------------------- ---------------------------------------------
Less than 1 - 3 3 - 5 After 5
Total 1 year Years Years Years
----- --------- ----- ----- -------
(Dollars in thousands of US$)
Debt
----
Term Loan (1) $14,130 $ 399 $904 $1,064 $11,763
Interest Rate 8.2% 8.2% 8.2% 8.2% 8.2%
Payable to Nortel Networks 1,857 1,857
Weighted Aveage Interest Rate 6.0% 6.0%
Notes Payable to Banks 7,955 7,955
Weighted Average Interest Rate 6.7% 6.7% - - -
------- ------ ------ ------ -------
Total Debt $23,942 $8,354 $2,761 $1,064 $11,763
======= ====== ====== ====== =======
-57-
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued
Foreign Exchange Market Risk
----------------------------
Contract Values
---------------
Contractual Fair Value
Exchange Less than Option
Rate Total 1 Year Premium(1)
---- ----- ------ ----------
(Dollars in thousands of US $)
Option Contracts
----------------
British Pound Sterling to U.S.$ 1.82 $911 $911 $17
Euro to British Pound Sterling .070 1,914 1,914 19
Canadian $ to U.S.$ 1.37 2,920 2,920 18
------ ------ ----
Total Option Contracts $5,745 $5,745 $54
====== ====== ====
(1) Represents the cost of the options purchased on October 29, 2004.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-58-
ERNST & YOUNG LLP
5 Times Square
New York, New York 10036
212-773-3000
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Volt Information Sciences, Inc.
We have audited the accompanying consolidated balance sheets of Volt Information
Sciences, Inc. and subsidiaries as of October 31, 2004 and November 2, 2003, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended October 31, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Volt Information
Sciences, Inc. and subsidiaries at October 31, 2004 and November 2, 2003, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended October 31, 2004, in conformity with U.S.
generally accepted accounting principles.
As described in Note A to the consolidated financial statements, the
accompanying consolidated financial statements of Volt Information Sciences,
Inc. as of November 2, 2003 and for the years ended November 2, 2003 and
November 3, 2002 have been restated.
As discussed in Note H to the consolidated financial statements, Volt
Information Sciences, Inc. and subsidiaries adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," at the
beginning of fiscal 2002.
/s/ Ernst & Young LLP
---------------------
New York, New York
January 10, 2005
-59-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, November 2,
2004 2003
---------- -----------
(Restated)
(Dollars in thousands,
ASSETS except per share data)
CURRENT ASSETS
Cash and cash equivalents including restricted cash of $43,722 (2004) and $18,870
(2003) $88,031 $62,057
Short-term investments 4,248 4,149
Trade accounts receivable less allowances of $10,210 (2004) and $10,498 (2003) 409,130 313,946
Inventories 32,676 37,787
Recoverable income taxes - 3,080
Deferred income taxes 9,385 8,722
Prepaid expenses and other assets 14,847 17,008
-------- --------
TOTAL CURRENT ASSETS 558,317 446,749
Investment in securities 100 193
Property, plant and equipment-net 85,038 82,452
Deposits and other assets 1,439 2,107
Goodwill 29,144 8,982
Other intangible assets-net of accumulated amortization of $288 (2004) 15,998 -
-------- --------
TOTAL ASSETS $690,036 $540,483
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $7,955 $4,062
Current portion of long-term debt 399 371
Accounts payable 192,163 153,979
Accrued wages and commissions 54,200 45,834
Accrued taxes other than income taxes 17,729 16,741
Other accruals 36,036 14,673
Deferred income and other liabilities 36,909 30,180
Income taxes payable 4,270 -
-------- --------
TOTAL CURRENT LIABILITIES 349,661 265,840
Accrued insurance 86 4,098
Long-term debt 15,588 14,098
Deferred income taxes 11,764 15,252
Commitments and contingencies
Minority Interest 36,420 -
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; Authorized--500,000 shares; issued--none
Common stock, par value $.10; Authorized--30,000,000 shares; issued--
15,282,625 shares (2004) and 15,220,415 shares (2003) 1,528 1,522
Paid-in capital 42,453 41,091
Retained earnings 232,714 198,998
Accumulated other comprehensive loss (178) (416)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 276,517 241,195
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $690,036 $540,483
======== ========
See Notes to Consolidated Financial Statements
-60-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
-----------------------------------------------------
October 31, November 2, November 3,
2004 2003 2002
--------------- ----------- -----------
(Restated) (Restated)
(In thousands, except per share data)
NET SALES $1,924,777 $1,609,491 $1,468,093
COSTS AND EXPENSES:
Cost of sales 1,772,087 1,502,622 1,371,027
Selling and administrative 83,124 71,693 74,619
Depreciation and amortization 25,537 24,331 22,166
---------- ---------- ----------
1,880,748 1,598,646 1,467,812
---------- ---------- ----------
OPERATING PROFIT 44,029 10,845 281
OTHER INCOME (EXPENSE):
Interest income 927 708 851
Other expense-net (4,398) (2,661) (3,462)
Gain on sale of real estate 3,295
Foreign exchange gain (loss)-net 97 299 (477)
Interest expense (1,817) (2,070) (4,549)
---------- ---------- ----------
Income (loss) from continuing operations before items
shown below 42,133 7,121 (7,356)
Minority interest (2,420)
---------- ---------- ----------
Income (loss) from continuing operations before taxes 39,713 7,121 (7,356)
Income tax (provision) benefit (15,517) (2,916) 2,260
---------- ---------- ----------
Income (loss) from continuing operations 24,196 4,205 (5,096)
Discontinued operations, net of taxes 9,520 4,310
Cumulative effect of a change in accounting
Goodwill impairment (31,927)
---------- ---------- ----------
NET INCOME (LOSS) $33,716 $4,205 ($32,713)
========== ========== ==========
Per Share Data
----------------------------------------------------
Basic:
Income (loss) from continuing operations $1.59 $0.28 ($0.33)
Discontinued operations 0.62 0.28
Cumulative effect of a change in accounting (2.10)
---------- ---------- ----------
Net income (loss) $2.21 $0.28 ($2.15)
========== ========== ==========
Weighted average number of shares-basic 15,234 15,218 15,217
========== ========== ==========
Diluted:
Income (loss) from continuing operations $1.58 $0.28 ($0.33)
Discontinued operations 0.62 0.28
Cumulative effect of a change in accounting (2.10)
---------- ---------- ----------
Net income (loss) $2.20 $0.28 ($2.15)
========== ========== ==========
Weighted average number of shares-diluted 15,354 15,225 15,217
========== ========== ==========
See Notes to Consolidated Financial Statements.
-61-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
Accumulated Other
Comprehensive (Loss) Income
------------------------------
Common Stock Foreign Unrealized
$.10 Par Value Currency Gain (Loss) On
-------------- Paid-In Retained Translation Marketable Comprehensive
Shares Amount Capital Earnings Adjustment Securities Income (Loss)
------ ------ ------- -------- ---------- ---------- -------------
(Dollars in thousands)
Balance at November 4, 2001 -
as previously reported 15,215,665 $1,522 $41,002 $227,766 ($468) ($10)
Adjustment of reported balance due
to restatement (260)
----------- --------- ------- --------- ------ -----
Balance at November 4, 2001 - restated 15,215,665 1,522 41,002 227,506 (468) (10)
Stock option exercised - net of tax
benefit of $3 1,750 34
Unrealized foreign currency
translation adjustment - net of tax
benefit of $10 (22) ($22)
Unrealized gain on marketable
securities - net of taxes of $11 17 17
Net loss for the year - restated (32,713) (32,713)
----------- --------- ------- --------- ------ ----- ----------
Balance at November 3, 2002 - restated 15,217,415 1,522 41,036 194,793 (490) 7 ($32,718)
==========
Stock options exercised - net of a
diminutive tax benefit 3,000 55
Unrealized foreign currency
translation adjustment - net of tax
benefit of $8 (18) ($18)
Unrealized gain on marketable
securities - net of taxes of $56 85 85
Net income for the year - restated 4,205 4,205
----------- --------- ------- --------- ------ ----- ----------
Balance at November 2, 2003 - restated 15,220,415 1,522 41,091 198,998 (508) 92 $4,272
==========
Stock options exercised - net of a tax
benefit of $214 62,210 6 1,362
Unrealized foreign currency
translation adjustment - net of
taxes of $126 294 $294
Unrealized gain on marketable
securities - net of tax benefit of
$37 (56) (56)
Net income for the year 33,716 33,716
----------- --------- ------- --------- ------ ----- ----------
Balance at October 31, 2004 15,282,625 $1,528 $42,453 $232,714 ($214) $36 $33,954
=========== ========= ======= ========= ====== ===== ==========
There were no shares of preferred stock issued or outstanding in any of the
reported periods.
See Notes to Consolidated Financial Statements.
-62-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
--------------------------------------------------------
October 31, November 2, November 3,
2004 2003 2002
---------- ----------- -----------
(Restated) (Restated)
(In thousands)
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $33,716 $4,205 ($32,713)
Adjustments to reconcile net income (loss) to cash provided by
operating activities
Discontinued operations (9,520) (4,310)
Loss on early payment of debt 2,093
Cumulative effect of a change in accounting - goodwill impairment 31,927
Depreciation and amortization 25,537 24,331 22,166
Equity in net income of joint ventures (25)
Accounts receivable provisions 7,784 6,227 10,188
Minority interest 2,420
(Gain) loss on foreign currency translation (43) (10) 231
(Gain) loss on dispositions of property, plant and equipment (3,432) 151 100
Deferred income tax (benefit) expense (4,240) 82 3,898
Other (98)
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable (101,672) (28,612) (8,641)
Proceeds from securitization program 10,000 60,000
Inventories 6,662 (7,193) 6,548
Prepaid expenses and other assets 2,553 59 (1,033)
Deposits and other assets 667 687 1,318
Accounts payable 37,149 (864) 40,076
Accrued expenses 24,748 14,599 (18,655)
Deferred income and other liabilities 6,119 8,927 2,197
Income taxes 2,754 3,586 (6,805)
------- ------ -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 31,202 36,175 108,462
------- ------ -------
-63-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
Year Ended
----------------------------------------------------------
October 31, November 2, November 3,
2004 2003 2002
---------- ----------- -----------
(Restated) (Restated)
(In thousands)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Sales of investments 1,476 870 840
Purchases of investments (1,419) (833) (1,089)
Distributions from joint ventures 49 3,271
Acquisitions (1,864)
Proceeds from disposals of property, plant and equipment, net 3,933 469 633
Purchases of property, plant and equipment (30,737) (17,990) (14,692)
Proceeds from sale of real estate (discontinued operations) 18,500
Proceeds from sale of subsidiary 24,233
Other - - 317
------- ------ -------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (10,111) (17,435) 13,513
------- ------ -------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Payment of long-term debt (340) (1,524) (33,476)
Exercises of stock options 1,368 55 34
Notes payable-bank 3,591 1,523 (62,306)
------- ------ -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 4,619 54 (95,748)
------- ------ -------
Effect of exchange rate changes on cash 264 (357) (1,081)
------- ------ -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 25,974 18,437 25,146
Cash and cash equivalents, including restricted cash, beginning of year 62,057 43,620 18,474
------- ------ -------
CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED
CASH, END OF YEAR $88,031 $62,057 $43,620
======= ======= =======
SUPPLEMENTAL INFORMATION
Cash paid during the year:
Interest expense $1,616 $2,131 $5,357
Income taxes $15,934 $2,360 $3,200
The Company purchased certain assets and certain specified liabilities
in exchange for a 24% interest in Volt Delta. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired $41,508
Fair value of 24% interest 34,000
-------
Liabilities assumed $7,508
=======
See Notes to Consolidated Financial Statements.
-64-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--Summary of Significant Accounting Policies
Business: The Company operates in two major businesses, Staffing Services and
Telecommunications and Information Solutions, consisting of four operating
segments: Staffing Services; Telephone Directory; Telecommunications Services
and Computer Systems.
Restatement: The Company has restated its previously issued financial statements
for fiscal years 2000 through 2003 as a result of inappropriate application of
accounting principles for revenue recognition by its telephone directory
publishing operation in Uruguay. The operation in Uruguay printed and
distributed its Montevideo directory each year during the October - November
time frame, and the Company has determined that revenue recognition should have
been taken in the first six months of each year instead of in the fourth quarter
of the prior fiscal year. The restatement involves only the timing of when
certain advertising revenue and related costs and expenses are recognized, and
the cumulative results of the Company do not change. All prior year information
included in these financial statements has been restated to reflect the
corrected information. The tables below reflect the restatements that were made
to the consolidated balance sheet ended November 2, 2003 and the consolidated
statements of operations for the two years ended November 2, 2003. The tables
reflect only items that have changed in these financial statements.
November
2, 2003
-------
Consolidated Balance Sheet
(dollars in thousands)
Inventories-as previously reported $37,357
Increase 430
-------
Inventories-as restated $37,787
=======
Recoverable income taxes-as previously reported $2,596
Increase 484
-------
Recoverable income taxes-as restated $3,080
=======
Prepaid expenses and other assets-as previously reported $16,132
Increase 876
-------
Prepaid expenses and other assets-as restated $17,008
=======
Deferred income and other liabilities-as previously reported $27,665
Increase 2,515
-------
Deferred income and other liabilities-as restated $30,180
=======
Retained earnings-as previously reported $199,723
Decrease (725)
-------
Retained earnings-as restated $198,998
========
-65
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Restatement:--Continued
Year Ended
November November
2, 2003 3, 2002
---------- ----------
Consolidated Statements of Operations
(dollars in thousands)
Net sales- as previously reported $1,609,857 $1,467,786
(Decrease) increase (366) 307
---------- ----------
Net sales-as restated $1,609,491 $1,468,093
========== ==========
Cost of sales-as previously reported $1,502,148 $1,370,976
Increase 474 51
---------- ----------
Cost of sales-as restated $1,502,622 $1,371,027
========== ==========
Selling and administrative-as previously reported $71,607 $74,514
Increase 86 105
---------- ----------
Selling and administrative-as restated $71,693 $74,619
========== ==========
Operating profit-as previously reported $11,771 $130
(Decrease) increase (926) 151
---------- ----------
Operating profit-as restated $10,845 $281
========== ==========
Income (loss) from continuing operations-as previously reported $8,047 ($7,507)
(Decrease) (926) 151
---------- ----------
Income (loss) from continuing operations-as restated $7,121 ($7,356)
========== ==========
Income tax (provision) benefit-as previously reported ($3,286) $2,320
(Decrease) 370 (60)
---------- ----------
Income tax (provision) benefit-as restated ($2,916) $2,260
========== ==========
Net income (loss)-as previously reported $4,761 ($32,804)
(Decrease) (556) 91
---------- ----------
Net income (loss)-as restated $4,205 ($32,713)
========== ==========
Per share data:
Income (loss) from continuing operations- as previously reported $0.31 ($0.34)
(Decrease) (0.03) 0.01
---------- ----------
Income (loss) from continuing operations- as restated $0.28 ($0.33)
========== ==========
Net income (loss)- as previously reported $0.31 ($2.16)
(Decrease) (0.03) 0.01
---------- ----------
Net income (loss)- as restated $0.28 ($2.15)
========== ==========
-66-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Fiscal Year: The Company's fiscal year ends on the Sunday nearest October 31.
The 2002 through 2004 fiscal years each consisted of 52 weeks.
Consolidation: The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions have
been eliminated upon consolidation. The Company accounts for the securitization
of accounts receivables in accordance with Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (see Note B). In January 2003, the FASB issued Interpretation
No. 46, "Consolidation of Variable Interest Entities," ("FIN 46") which provides
guidance on identifying and assessing interests in variable interest entities to
decide whether to consolidate that entity. FIN 46 requires consolidation of
existing unconsolidated variable interest entities if the entities do not
effectively disperse risk among parties involved. In October 2003, the FASB
issued FASB Staff Position No. FIN 46-6, deferring the effective date for
applying the provision of FIN 46 for variable interest entities created before
February 1, 2003. In December 2003, the FASB issued Interpretation No. 46R ("FIN
46R"), a revision which clarifies some provisions of FIN 46. The Company has no
unconsolidated subsidiaries. The adoption of FIN 46R did not have a material
impact on the Company's consolidated financial position and results of
operations.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States, requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Stock-Based Compensation: The Company has elected to follow Accounting
Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees,"
to account for its stock options under which no compensation cost is recognized
because the option exercise price is equal to at least the market price of the
underlying stock on the date of grant. Had compensation cost for these plans
been determined at the grant dates for awards under the alternative accounting
method provided for in SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123,"
net income and earnings per share, on a pro forma basis, would have been:
-67-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Stock-Based Compensation: --Continued
2004 2003 2002
---- ---- ----
(Restated) (Restated)
(In thousands, except per share data)
Net income (loss) as reported $33,716 $4,205 ($32,713)
Pro forma compensation expense, net of taxes (130) (67) (309)
-------- ------- ---------
Pro forma net income (loss) $33,586 $4,138 ($33,022)
======== ======= =========
Basic:
Net income (loss) as reported per share $2.21 $0.28 ($2.15)
Pro forma compensation expense, net of taxes per share (0.1) (0.01) (0.02)
-------- ------- ---------
Pro forma net income (loss) per share $2.20 $0.27 ($2.17)
======== ======= =========
Diluted:
Net income (loss) as reported per share $2.20 $0.28 ($2.15)
Pro forma compensation expense, net of taxes (0.01) (0.01) (0.02)
-------- ------- ---------
Pro forma net income (loss) per share $2.19 $0.27 ($2.17)
======== ======= =========
The fair value of each option grant is estimated using the Multiple
Black-Scholes option pricing model, with the following weighted-average
assumptions used for grants in fiscal 2004, 2003 and 2002, respectively:
risk-free interest rates of 4.1%, 2.0% and 2.7%, respectively; expected
volatility of .47, .50 and .52, respectively; an expected life of the options of
five years; and no dividends. The weighted average fair value of stock options
granted during fiscal years 2004, 2003 and 2002 was $14.62, $6.59 and $10.59,
respectively.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," which
replaces the superseded SFAS No. 123, "Accounting for Stock-Based Compensation."
This Statement requires that all entities apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and
suppliers when the entity acquires goods or services. The provisions of this
Statement are effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005, with early adoption of this
Statement permitted for any interim period whose financial statements are not
yet issued. The Company is currently assessing the impact that the adoption will
have on the Company's consolidated financial position and results of operations.
Revenue Recognition: The Company derives its revenues from several sources. The
revenue recognition methods, which are consistent with those prescribed in Staff
Accounting Bulletin 104 ("SAB 104"), entitled "Revenue Recognition in Financial
Statements," are described below in more detail for the significant types of
revenue within each of its segments.
Staffing Services:
Staffing: In fiscal 2004, this revenue comprised approximately 76% of
consolidated sales. Sales are derived from the Company's Staffing Solutions
Group supplying its own temporary personnel to its customers, for which the
Company assumes the risk of acceptability of its employees to its
customers, and has credit risk for collecting its billings after it has
paid its employees. The Company reflects revenues for these services on a
gross basis in the period the services are rendered.
-68-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Revenue Recognition: --Continued
--------------------
Managed Services: In fiscal 2004, this revenue comprised approximately 2%
of consolidated sales. Sales are generated by the Company's E-Procurement
Solutions subsidiary, ProcureStaff, and for certain contracts, sales are
generated by the Company's Staffing Solutions Group's managed services
operations. The Company receives an administrative fee for arranging for,
billing for and collecting the billings related to other staffing companies
("associate vendors") who have supplied personnel to the Company's
customers. The administrative fee is either charged to the customer or
subtracted from the Company payment to the associate vendor. The customer
is typically responsible for assessing the work of the associate vendor,
and has responsibility for the acceptability of its personnel, and in most
instances the customer and associate vendor have agreed that the Company
not pay the associate vendor until the customer pays the Company. Based
upon the revenue recognition principles prescribed in Emerging Issues Task
Force 99-19 ("EITF 99-19"), "Reporting Revenue Gross as a Principal versus
Net as an Agent," revenue for these services, where the customer has
agreed, is recognized net of associated costs in the period the services
are rendered.
Outsourced Projects: In fiscal 2004, this revenue comprised approximately
5% of consolidated sales. Sales are derived from the Company's Information
Technology Solutions operation providing outsource services for a customer
in the form of project work, for which the Company is responsible for
deliverables. The Company's employees perform the services and the Company
has credit risk for collecting its billings. Revenue for these services is
recognized on a gross basis in the period the services are rendered, and
when the Company is responsible for project completion, revenue is
recognized when the project is complete and the customer has approved the
work.
Shaw & Shaw: In fiscal 2004, this revenue comprised less than 1% of
consolidated sales, due to the Company's reporting of these revenues on a
net basis. Sales are generated by the Company's Shaw & Shaw subsidiary, for
which the Company provides professional employer organizational services
("PEO") to certain customers. Generally, the customers transfer their
entire workforce or employees of specific departments or divisions to the
Company, but the customers maintain control over the day-to-day job duties
of the employees. Based upon the revenue recognition principles prescribed
in EITF 99-19, effective with the Company's second fiscal quarter of 2003,
the Company has changed its method of reporting revenue from these services
from a gross basis to a net basis. The change in reporting, which is
reflected in all current and prior periods, resulted in a reduction in both
reported PEO revenues and costs of sales, with no effect on the Company's
operating results.
Telephone Directory:
Directory Publishing: In fiscal 2004, this revenue comprised approximately
3% of consolidated sales. Sales are derived from the Company's sales of
telephone directory advertising for books it publishes as an independent
publisher or for a telephone company in Uruguay. The Company's employees
perform the services and the Company has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period the books are printed and delivered.
Ad Production and Other: In fiscal 2004, this revenue comprised
approximately 1% of consolidated sales. Sales are generated when the
Company performs design, production and printing services, and database
management for other publishers' telephone directories. The Company's
employees perform the services and the Company has credit risk for
collecting its billings. Revenue for these services is recognized on a
gross basis in the period the Company has completed its production work and
upon customer acceptance.
-69-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Revenue Recognition: --Continued
--------------------
Telecommunications Services:
Construction: In fiscal 2004, this revenue comprised approximately 4% of
consolidated sales. Sales are derived from the Company supplying aerial and
underground construction services. The Company's employees perform the
services, and the Company takes title to all inventory, and has credit risk
for collecting its billings. The Company relies upon the principles in
American Institute of Certified Public Accountants ("ACIPA") Statement of
Position 81-1 ("SOP 81-1"), "Accounting for Performance of
Construction-Type Contracts," using the completed-contract method, to
recognize revenue on a gross basis upon customer acceptance of the project.
Non-Construction: In fiscal 2004, this revenue comprised approximately 3%
of consolidated sales. Sales are derived from the Company performing
design, engineering and business systems integrations work. The Company's
employees perform the services and the Company has credit risk for
collecting its billings. Revenue for these services is recognized on a
gross basis in the period in which services are performed, and if
applicable, any completed units are delivered and accepted by the customer.
Computer Systems:
Database Access: In fiscal 2004, this revenue comprised approximately 4% of
consolidated sales. Sales are derived from the Company granting access to
its proprietary telephone listing databases to telephone companies,
inter-exchange carriers and non-telco enterprise customers. The Company
uses its own databases and has credit risk for collecting its billings. The
Company recognizes revenue on a gross basis in the period in which the
customers access the Company's databases.
IT Maintenance: In fiscal 2004, this revenue comprised approximately 2% of
consolidated sales. Sales are derived from the Company providing hardware
maintenance services to the general business community, including customers
who have our systems. The Company uses its own employees and inventory in
the performance of the services, and has credit risk for collecting its
billings. Revenue for these services is recognized on a gross basis in the
period in which the services are performed, contingent upon customer
acceptance.
Telephone Systems: In fiscal 2004, this revenue comprised less than 1% of
consolidated sales. Sales are derived from the Company providing telephone
operator services-related systems and enhancements to existing systems,
equipment and software to customers. The Company uses its own employees and
has credit risk for collecting its billings. The Company relies upon the
principles in AICPA Statement of Position 97-2 ("SOP 97-2"), "Software
Revenue Recognition" and Emerging Issues Task Force 00-21 ("EITF 00-21"),
"Revenue Arrangements with Multiple Deliverables" to recognize revenue on a
gross basis upon customer acceptance of each part of the system based upon
its fair value.
The Company records provisions for estimated losses on contracts when losses
become evident. Accumulated unbilled costs on contracts are carried in inventory
at the lower of actual cost or estimated realizable value.
Cash Equivalents: Cash equivalents consist of investments in short-term, highly
liquid securities having an initial maturity of three months or less.
-70-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Investments: The Company determines the appropriate classification of marketable
equity and debt securities at the time of purchase and re-evaluates its
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Marketable equity securities and debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. Losses
considered to be other than temporary are charged to earnings.
Inventories: Accumulated unbilled costs on contracts related to performing
services are carried at the lower of actual cost or realizable value (see Note
D).
Goodwill: Under Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill is no longer amortized, but is
subject to annual impairment testing using fair value methodologies. The
impairment test for goodwill is a two-step process. Step one consists of a
comparison of a reporting unit with its carrying amount, including the goodwill
allocated to the reporting unit. Measurement of the fair value of a reporting
unit is based on one or more fair value measures including present value
techniques of estimated future cash flows and estimated amounts at which the
unit as a whole could be bought or sold in a current transaction between willing
parties. If the carrying amount of the reporting unit exceeds the fair value,
step two requires the fair value of the reporting unit to be allocated to the
underlying assets and liabilities of that reporting unit, resulting in an
implied fair value of goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
equal to the excess is recorded in net earnings (loss). The Company performs its
impairment testing using comparable multiples of sales and EBITDA and other
valuation methods to assist the Company in the determination of the fair value
of the reporting units measured.
Long-Lived Assets: Property, plant and equipment is recorded at cost, and
depreciation and amortization are provided on the straight-line and accelerated
methods at rates calculated to depreciate the cost of the assets over their
estimated lives. Intangible assets, other than goodwill, and property, plant and
equipment are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No.
144, these assets are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; the accumulation of costs
significantly in excess of the amount originally expected for the acquisition of
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and a current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life. Recoverability is assessed based on the carrying amount of the asset and
the sum of the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset or asset group. An impairment loss is recognized
when the carrying amount is not recoverable and exceeds the fair value of the
asset or asset group. The impairment loss is measured as the amount by which the
carrying amount exceeds fair value. The weighted-average amortization periods
for other intangible assets in fiscal 2004 and 2003 were 15 and 3 years,
respectively.
-71-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Fully depreciated assets are retained in property and depreciation accounts
until they are removed from service. In the case of disposals, assets and
related depreciation are removed from the accounts, and the net amounts less
proceeds from disposal, are included in income. Maintenance and repairs are
expensed as incurred. Property, plant and equipment is depreciated over the
following periods:
Buildings 25 to 31-1/2 years
Machinery and equipment 3 to 15 years
Leasehold improvements length of lease or life of the asset, whichever is shorter
Enterprise Resource Planning system 5 to 7 years
Property, plant and equipment consisted of: October 31, November 2,
2004 2003
----------- -----------
(In thousands)
Land and buildings $22,807 $33,847
Machinery and equipment 141,765 114,167
Leasehold improvements 10,460 10,818
Enterprise Resource Planning system 34,896 33,371
----------- -----------
209,928 192,203
Less allowances for depreciation and amortization 124,890 109,751
----------- -----------
$85,038 $82,452
=========== ===========
A term loan is secured by a deed of trust on land and buildings with a carrying
amount at October 31, 2004 of $10.6 million (see Note F).
In fiscal year 2004, the Company sold land and buildings in California. One
property was previously leased to the Company's formerly 59% owned subsidiary,
Autologic Information International, Inc. (see Note J) and the other property
was no longer being used by the Company (see Note M).
Primary Insurance Casualty Program: The Company is insured with a highly rated
insurance company under a program that provides primary workers' compensation,
employer's liability, general liability and automobile liability insurance under
a loss sensitive program. In certain mandated states, the Company purchases
workers' compensation insurance through participation in state funds and the
experience-rated premiums in these state plans relieve the Company of additional
liability. In the loss sensitive program, initial premium accruals are
established based upon the underlying exposure, such as the amount and type of
labor utilized, number of vehicles, etc. The Company establishes accruals
utilizing actuarial methods to estimate the undiscounted future cash payments
that will be made to satisfy the claims, including an allowance for
incurred-but-not-reported claims. This process also includes establishing loss
development factors, based on the historical claims experience of the Company
and the industry, and applying those factors to current claims information to
derive an estimate of the Company's ultimate premium liability. In preparing the
estimates, the Company also considers the nature and severity of the claims,
analyses provided by third party actuaries, as well as current legal, economic
and regulatory factors.
The insurance policies have various premium rating plans that establish the
ultimate premium to be paid. Prior to March 31, 2002, the amount of the
additional or return premium was finalized. Subsequent thereto, adjustments to
premium will be made based upon the level of claims incurred at a future date up
-72-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Primary Insurance Casualty Program: --Continued
----------------------------------
to three years after the end of the respective policy period. For the policy
year ended March 31, 2003, a maximum premium has been predetermined and accrued.
At October 31, 2004 and November 2, 2003, the Company's net liability for the
outstanding policy years was $8.3 million and $1.8 million, respectively. The
balance sheet classifications were as follows:
October 31, November 2,
2004 2003
------------ ------------
(In thousands)
Prepaid Insurance $2,229 $2,526
Accrued Insurance - Current (10,396) (190)
Accrued Insurance - Long-term (86) (4,098)
------------ ------------
($8,253) ($1,762)
============ ============
Medical Insurance Program: Beginning in April 2004, the Company became
self-insured for the majority of its medical benefit programs. The Company
remains insured for a portion of its medical program (primarily HMO's) as well
as the entire dental program. The Company provides the self-insured medical
benefits through an arrangement with a third party administrator. However, the
liability for the self-insured benefits is limited by the purchase of stop loss
insurance. The funds and related liabilities for the self-insured program
together with unpaid premiums for the insured programs, other than the current
provision, are held in a 501(c)9 employee welfare benefit trust and do not
appear on the balance sheet of the Company. In order to establish the
self-insurance reserves, the Company utilized actuarial estimates of expected
losses based on statistical analyses of historical data. The provision for
future payments is initially adjusted by the enrollment levels in the various
plans. Periodically, the resulting liabilities are monitored and will be
adjusted as warranted by changing circumstances. Should the amount of claims
occurring exceed what was estimated or medical costs increase beyond what was
expected, liabilities might not be sufficient, and additional expense may be
recorded.
Capitalized Software: The Company's software technology personnel are involved
in the development and acquisition of internal-use software to be used in its
Enterprise Resource Planning system and software to be used in its operating
segments, some of which are customer accessible. The Company accounts for the
capitalization of software in accordance with AICPA Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent to the preliminary project planning and approval
stage, all appropriate costs are capitalized until the point at which the
software is ready for its intended use. Subsequent to the software being placed
in operation, the capitalized costs are transferred from costs-in-process to
completed property, plant and equipment, and are accounted for as such. All
post-implementation costs, such as maintenance, training and minor upgrades that
do not result in additional functionality, are expensed as incurred.
Income Taxes: Income taxes are provided using the liability method. Deferred
taxes reflect the tax consequences on future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts. The
carrying value of the Company's deferred tax assets is dependent upon the
Company's ability to generate sufficient future taxable income in certain tax
jurisdictions. Should the Company determine that it would not be able to realize
all or part of its deferred tax assets in the future, a valuation allowance to
the deferred tax assets would be established in the period such determination
was made (see Note G).
-73-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--Summary of Significant Accounting Policies--Continued
Translation of Foreign Currencies: The U.S. dollar is the Company's functional
currency throughout the world, except by certain European subsidiaries. Where
the U.S. dollar is used as the functional currency, foreign currency gains and
losses are included in operations. The translation adjustments recorded as a
separate component of stockholders' equity result from changes in exchange rates
affecting the reported assets and liabilities of the European subsidiaries whose
functional currency is not the U.S. dollar.
Earnings Per Share: Basic earnings per share is calculated by dividing net
earnings by the weighted-average number of common shares outstanding during the
period. The diluted earnings per share computation includes the effect, if any,
of shares that would be issuable upon the exercise of outstanding stock options,
reduced by the number of shares which are assumed to be purchased by the Company
from the resulting proceeds at the average market price during the period (see
Note I).
Comprehensive Income: Comprehensive income is the net income of the Company
combined with other changes in stockholders' equity not involving ownership
interest changes. For the Company, such other changes include foreign currency
translation and mark-to-market adjustments related to held-for-sale securities.
Derivatives and Hedging Activities: Gains and losses on foreign currency option
and forward contracts designated as hedges of existing assets and liabilities
and of identifiable firm commitments are deferred and included in the
measurement of the related foreign currency transaction. The Company enters into
derivative financial instrument contracts only for hedging purposes and accounts
for them in accordance with SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" and its amendments SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133," SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" and SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." (see Note O).
New Accounting Pronouncements: In November 2004, the FASB issued SFAS No. 151,
"Inventory Costs-an Amendment of ARB No. 43, Chapter 4," which clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and spoilage. This Statement requires that these items be recognized as
period costs even if the amounts are not considered to be abnormal. The
provisions of this Statement are effective for inventory costs incurred in
fiscal years beginning after June 15, 2005. The Company does not believe that
the adoption of this Statement in fiscal 2006 will have a material impact on the
Company's consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets-an Amendment of APB Opinion No. 29," to eliminate the exception for
nonmonetary exchanges of similar productive assets and replace it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. The provisions of this Statement are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005, with early
application permitted for exchanges beginning after November, 2004. The Company
does not believe that the adoption of this Statement in fiscal 2005 will have a
material impact on the Company's consolidated financial position or results of
operations.
-74-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--Securitization Program
Effective April 15, 2002, the Company entered into a $100.0 million, three-year
accounts receivable securitization program (the "Securitization Program"). In
April 2004, the Company amended its Securitization Program which increased the
capacity of its accounts receivable securitization program to $150.0 million and
extended its maturity to April 2006. Under the Securitization Program,
receivables related to the United States operations of the staffing solutions
business of the Company and its subsidiaries are sold from time-to-time by the
Company to Volt Funding Corp., a wholly owned special purpose subsidiary of the
Company ("Volt Funding"). Volt Funding, in turn, sells to Three Rivers Funding
Corporation ("TRFCO"), an asset backed commercial paper conduit sponsored by
Mellon Bank, N.A. and unaffiliated with the Company, an undivided percentage
ownership interest in the pool of receivables Volt Funding acquires from the
Company (subject to a maximum purchase by TRFCO in the aggregate of $150.0
million). The Company retains the servicing responsibility for the accounts
receivable. At October 31, 2004, TRFCO had purchased from Volt Funding a
participation interest of $70.0 million out of a pool of approximately $248.7
million of receivables.
The Securitization Program is not an off-balance sheet arrangement as Volt
Funding is a 100% owned consolidated subsidiary of the Company. Accounts
receivable are only reduced to reflect the fair value of receivables actually
sold. The Company entered into this arrangement as it provided a low-cost
alternative to other financing.
The Securitization Program is designed to enable receivables sold by the Company
to Volt Funding to constitute true sales of those receivables. As a result, the
receivables are available to satisfy Volt Funding's own obligations to its own
creditors before being available, through the Company's residual equity interest
in Volt Funding, to satisfy the Company's creditors (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 its interest in the pool
of receivables owned by Volt Funding) for any of the sold receivables.
In the event of termination of the Securitization Program, new purchases in a
participation interest in receivables by TRFCO would cease and collections
reflecting TRFCO's interest would revert to TRFCO. The Company believes TRFCO's
aggregate collection amounts should not exceed the pro rata interests sold.
There are no contingent liabilities or commitments associated with the
Securitization Program.
The Company accounts for the securitization of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." At the time a participation interest in the
receivables is sold, the receivable representing that interest is removed from
the consolidated balance sheet (no debt is recorded) and the proceeds from the
sale are reflected as cash provided by operating activities. Losses and expenses
associated with the transactions, primarily related to discounts incurred by
TRFCO on the issuance of its commercial paper, are charged to the Company's
consolidated statement of operations.
The Company incurred charges, in connection with the sale of receivables under
the Securitization Program, of $1.7 million in the fiscal year ended October 31,
2004 compared to $1.6 million and $0.9 million in the fiscal years ended
November 2, 2003 and November 3, 2002, respectively, which are included in Other
Expense on the consolidated statement of operations. The equivalent cost of
funds in the Securitization Program was 2.7%, 2.6% and 2.5% per annum in the
fiscal years 2004, 2003 and 2002, respectively. The Company's carrying retained
interest in the receivables approximated fair value due to the relatively
short-term nature of the receivable collection period. In addition, the Company
performed a sensitivity analysis, changing various key assumptions, which also
indicated the retained interest in receivables approximated fair value.
-75-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--Securitization Program--Continued
At October 31, 2004 and November 2, 2003, the Company's carrying retained
interest, in a revolving pool of receivables of approximately $248.7 million and
$189.3 million, respectively, net of a service fee liability, was approximately
$178.2 million and $119.0 million, respectively. The outstanding balance of the
undivided interest sold to TRFCO was $70.0 million at October 31, 2004 and
November 2, 2003. Accordingly, the trade accounts receivable included on the
October 31, 2004 and November 2, 2003 balance sheet, has been reduced to reflect
the $70.0 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 or the Company failing to maintain a long-term
debt rating of "B" or better or the equivalent thereof from a nationally
recognized rating organization. At October 31, 2004, the Company was in
compliance with all requirements of the Securitization Program.
NOTE C--Short-Term Investments and Investments in Securities
At October 31, 2004 and November 2, 2003, short-term investments consisted of
$4.2 million and $4.1 million, respectively, invested in mutual funds for the
Company's deferred compensation plan (see Note N).
At October 31, 2004 and November 2, 2003, the Company had an available-for-sale
investment in equity securities of $100,000 and $193,000, respectively. The
gross unrealized gains of $60,500 and $153,500 at October 31, 2004 and November
2, 2003, respectively, were included as a component of accumulated other
comprehensive income (loss).
NOTE D--Inventories
Inventories of accumulated unbilled costs and materials by segment are as
follows:
October 31, November 2,
2004 2003
------------ -----------
(Restated)
(In thousands)
Telephone Directory $11,313 $13,328
Telecommunications Services 14,505 18,320
Computer Systems 6,858 6,139
------------ -----------
Total $32,676 $37,787
============ ===========
The cumulative amounts billed under service contracts at October 31, 2004 and
November 2, 2003 of $13.9 million and $3.6 million, respectively, are credited
against the related costs in inventory.
-76-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE E--Short-Term Borrowings
In April 2004, the Company amended its $40.0 million, secured, syndicated,
revolving credit agreement ("Credit Agreement") which was to expire in April
2004, to, among other things, extend the term for 364 days (to now expire in
April 2005) and reduce the line to $30.0 million, as a result of the increase in
its Securitization Program (see Note B). Additionally, in July 2004, this
program was further amended to release Volt Delta Resources, LLC ("Volt Delta")
as a guarantor and collateral grantor under the Credit Agreement due to the
previously announced agreement between Volt Delta and Nortel Networks Inc.
("Nortel Networks") (see Note J). At October 31, 2004, the Company had credit
lines with domestic and foreign banks which provided for borrowings and letters
of credit up to an aggregate of $41.5 million, including $30.0 million under the
Credit Agreement.
The Credit Agreement established a credit facility ("Credit Facility") in favor
of the Company and designated subsidiaries, of which up to $15.0 million may be
used for letters of credit. Borrowings by subsidiaries are limited to $25.0
million in the aggregate. The administrative agent for the secured Credit
Facility is JP Morgan Chase Bank. The other banks participating in the Credit
Facility are Mellon Bank, NA, Wells Fargo, NA and Lloyds TSB Bank PLC.
Borrowings and letters of credit under the Credit Facility are limited to a
specified borrowing base, which is based upon the level of specified
receivables, generally at the end of the fiscal month preceding a borrowing. At
October 31, 2004, all $30.0 million was available under the borrowing base
formula of which $3.7 million was borrowed.
Borrowings under the Credit Facility are to bear interest at various rate
options selected by the Company at the time of each borrowing. Certain rate
options, together with a facility fee, are based on a leverage ratio, as
defined. Additionally, interest and the facility fees can be increased or
decreased upon a change in the Company's long-term debt rating provided by a
nationally recognized rating agency. Based upon the Company's leverage ratio and
debt rating at October 31, 2004, if a three-month LIBO rate were the interest
rate option selected by the Company, borrowings would have borne interest at the
rate of 2.8% per annum. At October 31, 2004, the facility fee was 0.3% per
annum.
The Credit Agreement provides for the maintenance of various financial ratios
and covenants, including, among other things, a requirement that the Company
maintain a consolidated tangible net worth, as defined; a limitation on cash
dividends, capital stock repurchases and redemptions by the Company in any one
fiscal year to 50% of consolidated net income, as defined, for the prior fiscal
year; and a requirement that the Company maintain a ratio of EBIT, as defined,
to interest expense, as defined, of 1.25 to 1.0 for the twelve months ending as
of the last day of each fiscal quarter. The Credit Agreement also imposes
limitations on, among other things, the incurrence of additional indebtedness,
the incurrence of additional liens, sales of assets, the level of annual capital
expenditures, and the amount of investments, including business acquisitions and
investments in joint ventures, and loans that may be made by the Company and its
subsidiaries. At October 31, 2004, the Company was in compliance with all
covenants in the Credit Agreement.
The Company is liable on all loans made to it and all letters of credit issued
at its request, and is jointly and severally liable as to loans made to
subsidiary borrowers. However, unless also a guarantor of loans, a subsidiary
borrower is not liable with respect to loans made to the Company or letters of
credit issued at the request of the Company, or with regard to loans made to any
other subsidiary borrower. Six subsidiaries of the Company are now guarantors of
all loans made to the Company or to subsidiary borrowers under the Credit
Facility. At October 31, 2004, four of those guarantors have pledged
approximately $62.6 million of accounts receivable, other than those in the
Securitization Program, as collateral for the guarantee obligations. Under
certain circumstances, other subsidiaries of the Company also may be required to
become guarantors under the Credit Facility.
-77
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE E--Short-Term Borrowings--Continued
At October 31, 2004, the Company had total outstanding foreign currency bank
borrowings of $8.0 million, $3.7 million of which were under the Credit
Agreement. These bank borrowings provide a hedge against devaluation in foreign
currency denominated assets.
NOTE F--Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
October 31, November 2,
2004 2003
----------- -----------
(In thousands)
8.2% term loan (a) $14,130 $14,469
Payable to Nortel Networks(b) 1,857 -
----------- -----------
15,987 14,469
Less amounts due within one year 399 371
----------- -----------
Total long-term debt $15,588 $14,098
=========== ===========
(a) In September 2001, a subsidiary of the Company entered into a $15.1 million
loan agreement with General Electric Capital Business Asset Funding
Corporation. Principal payments have reduced the loan to $14.1 million at
October 31, 2004. The fair value of the loan was approximately $15.3
million at October 31, 2004. The 20-year loan, which bears interest at 8.2%
per annum and requires principal and interest payments of $0.4 million per
quarter, is secured by a deed of trust on certain land and buildings that
had a carrying amount at October 31, 2004 of $10.6 million. The obligation
is guaranteed by the Company.
(b) Represents the present value of a $2.0 million payment due to Nortel
Networks in February 2006, discounted at 6% per annum, as required in an
agreement closed on August 2, 2004 (see Note J).
Principal payment maturities on long-term debt outstanding at October 31, 2004
are:
Fiscal Year Amount
----------- ------
(In thousands)
2005 $399
2006 2,291
2007 470
2008 510
2009 554
Thereafter 11,763
-------
$15,987
=======
-78-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE G--Income Taxes
The components of the Company's income (loss) from continuing operations before
income taxes and minority interest by location, and the related income tax
provision (benefit) are as follows:
Year Ended
--------------------------------------------------------------
October 31, November 2, November 3,
2004 2003 2002
-------------------- -------------------- --------------------
(Restated) (Restated)
(In thousands)
The components of income (loss) from continuing
operations before income taxes and minority interest,
based on the location of operations, consist of the
following:
Domestic $36,530 $3,523 ($6,123)
Foreign 5,603 3,598 (1,233)
------- ------ --------
$42,133 $7,121 ($7,356)
======= ====== ========
The components of the income tax provision
(benefit) include:
Current:
Federal (a) $13,040 $518 ($5,539)
Foreign 2,608 1,716 546
State and local 4,109 600 (1,165)
------- ------ --------
Total current 19,757 2,834 (6,158)
------- ------ --------
Deferred:
Federal ($3,450) $232 $3,345
Foreign (19) (202) 128
State and local (771) 52 425
------- ------ --------
Total deferred (4,240) 82 3,898
------- ------ --------
Total income tax provision (benefit) $15,517 $2,916 ($2,260)
======= ====== ========
(a) Reduced in 2004 and 2003 and increased in 2002 by benefits of $0.9 million,
$0.8 million and $0.2 million, respectively, from general business credits.
The consolidated effective tax rates are different than the U.S. Federal
statutory rate. The differences result from the following:
Year Ended
---------------------------------------------------------------
October 31, November 2, November 3,
2004 2003 2002
--------------------- -------------------- --------------------
(Restated) (Restated)
Statutory rate 35.0% 35.0% (35.0%)
State and local taxes, net of federal
tax benefit 6.3 6.4 (7.8)
Tax effect of foreign operations 2.4 3.8 14.9
Goodwill (1.3) (3.3)
General business credits (2.2) (4.5) (3.5)
Minority interest (2.2)
Other-net, principally non deductible items (1.2) 3.5 0.7
----- ----- -----
Effective tax rate 36.8% 40.9% (30.7%)
===== ===== =====
-79-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE G--Income Taxes--Continued
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and also include foreign
operating loss carryforwards. Significant components of the Company's deferred
tax assets and liabilities are as follows:
October 31, November 2,
2004 2003
---------- -----------
(In thousands)
Deferred Tax Assets:
Allowance for doubtful accounts $3,573 $3,626
Inventory valuation 526 19
Foreign loss carryforwards 1,692 830
Goodwill 2,256 2,805
Compensation accruals and deferrals 4,551 4,355
Warranty accruals 76 74
Foreign asset bases 377 357
Other-net 878 1,040
---------- -----------
Total deferred tax assets 13,929 13,106
Less valuation allowance for deferred tax assets 3,948 3,635
---------- -----------
Deferred tax assets, net of valuation allowance 9,981 9,471
---------- -----------
Deferred Tax Liabilities:
Software development costs 4,526 8,682
Earnings not currently taxable 146 131
Accelerated book depreciation 7,688 7,188
---------- -----------
Total deferred tax liabilities 12,360 16,001
---------- -----------
Net deferred tax liabilities ($2,379) ($6,530)
========== ===========
Balance sheet classification:
Current assets $9,385 $8,722
Non-current liabilities (11,764) (15,252)
---------- -----------
Net deferred tax liabilities ($2,379) ($6,530)
========== ===========
At October 31, 2004, deferred tax assets included $1.7 million related to
foreign loss carryforwards, with no limitation on the carry forward period and
$2.2 million related to goodwill written off as impaired. For financial
statement purposes, a full valuation allowance of $3.9 million has been
recognized due to the uncertainty of the realization of the foreign loss
carryforwards and future tax deductions related to goodwill. The valuation
allowance increased during 2004 by $0.3 million.
Substantially all of the undistributed earnings of foreign subsidiaries of $9.8
million at October 31, 2004 are considered permanently invested and,
accordingly, no federal income taxes thereon have been provided. Should these
earnings be distributed, foreign tax credits would reduce the additional federal
income tax that would be payable. Availability of credits is subject to
limitations; accordingly, it is not practicable to estimate the amount of the
ultimate deferred tax liability, if any, on accumulated earnings.
The American Jobs Creation Act of 2004 (the "Act") provided for a special
one-time tax deduction of 85% of certain foreign earnings that are repatriated.
The Company is currently assessing the impact the Act will have on the Company's
consolidated financial position or results of operations.
-80-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE H--Goodwill and Other Intangibles
Goodwill and other intangibles with indefinite lives are no longer amortized,
but are subject to annual testing using fair value methodology. An impairment
charge is recognized for the amount, if any, by which the carrying value of an
indefinite-life intangible asset exceeds its fair value. The test for goodwill,
which is performed in the Company's second fiscal quarter, primarily uses
comparable multiples of sales and EBITDA and other valuation methods to assist
the Company in the determination of the fair value of the goodwill and the
reporting units measured.
The Company engaged independent valuation firms to assist in the determination
of impairment, which may have existed in the $39.8 million of goodwill recorded
as of the beginning of fiscal 2002. The result of testing goodwill for
impairment in accordance with SFAS No. 142, as of November 5, 2001, was a
non-cash charge of $31.9 million, which is reported under the caption
"Cumulative effect of a change in accounting." The fiscal 2002 impairment charge
in the Staffing Services segment related to the Company's European Technical
Placement division and the Administrative and Industrial division, which had
been adversely affected by the economic declines in Europe and the United
States, respectively. Accordingly, an impairment charge of $23.9 million
(including $2.6 million, the total carrying amount of goodwill for the
Administrative and Industrial division as of November 5, 2001) was recognized.
The impairment charge in the Company's Telephone Directory business related to
its independent telephone directory publishing division ($6.9 million) of that
segment, and the Company's then-owned 50% interest in the westVista joint
venture ($1.1 million), which also publishes independent directories (see Note
J). Due to the fact that some of the directories purchased had not performed as
well as projected, and in some cases had incurred losses, an impairment charge
of $8.0 million was recognized.
Using the same valuation methods employed as in prior years, the Company
completed its annual impairment tests on the then remaining $9.0 million of
goodwill during the second quarter of fiscal 2003 and 2004 and determined that
no impairment existed, since the reporting units' fair value exceeded the
carrying value.
The following table represents the balance of other intangible assets subject to
amortization as of the end of fiscal 2004 and the amortization expense for the
year.
October
31, 2004
--------
(In thousands)
Other intangible assets $16,286
Accumulated amortization 288
-------
Net Carrying Value $15,998
=======
Annual amortization expense $288
=======
In each of the succeeding five years, the amount of amortization expense for
other intangible assets is estimated to be $1.1 million. In fiscal 2004, the
total other intangible assets acquired was $16.3 million, as noted in Note J. In
fiscal 2003, $0.4 million of other intangible assets were fully amortized and
were written off. Amortization expense in fiscal 2003 was $92,000.
-81
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE H--Goodwill and Other Intangibles--Continued
The following table represents the change in the carrying amount of goodwill
(see Note J) for each segment during each fiscal year.
Carrying Carrying Carrying
Value Value Value
November Additions November Additions October
Segment 3, 2002 2003 2, 2003 2004 31, 2004
------- --------- -------- -------- --------- --------
(In thousands)
Staffing Services $8,340 $8,340 $8,340
Computer Systems 642 642 $20,162 20,804
------ ------ ------- -------
Total $8,982 $8,982 $20,162 $29,144
====== ====== ======= =======
NOTE I--Per Share Data
In calculating basic earnings per share, the effect of dilutive securities is
excluded. Diluted earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding and the assumed exercise of
dilutive outstanding stock options based on the treasury stock method.
Year Ended
--------------------------------------------------------------
October 31, November 2, November 3,
2004 2003 2002
-------------------- -------------------- --------------------
(In thousands)
Denominator for basic earnings per share -
Weighted average number of shares 15,234 15,218 15,217
Effect of dilutive securities:
Employee stock options 120 7 -
------ ------ ------
Denominator for diluted earnings per share -
Adjusted weighted average number of shares 15,354 15,225 15,217
====== ====== ======
Options to purchase 45,400, 582,539 and 566,359 shares of the Company's common
stock were outstanding at October 31, 2004, November 2, 2003 and November 3,
2002, respectively, but were not included in the computation of diluted earnings
per share because the effect of inclusion would have been antidilutive.
NOTE J--Acquisition and Sales of Businesses and Subsidiaries
On August 2, 2004, Volt Delta, a wholly-owned subsidiary of the Company, closed
a Contribution Agreement (the "Contribution Agreement") with Nortel Networks
under which Nortel Networks contributed certain of the assets (consisting
principally of a customer base and contracts, intellectual property and
inventory) and certain specified liabilities of its directory and operator
services ("DOS") business to Volt Delta in exchange for a 24% minority equity
interest in Volt Delta. Together with subsidiaries, Volt Delta is reported as
the Company's Computer Systems Segment. Volt Delta is using the assets acquired
from Nortel Networks to enhance the operation of its DOS business. The
acquisition allows Volt Delta to provide the newly combined customer base with
new solutions, an expanded suite of products, content and enhanced services. As
a result of this transaction, approximately 155 DOS business employees in North
America joined VoltDelta.
-82-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--Acquisition and Sales of Businesses and Subsidiaries--Continued
In addition, the companies entered into a ten-year relationship agreement to
maintain the compatibility and interoperability between future releases of
Nortel Networks' Traffic Operator Position System ("TOPS") switching platform
and Volt Delta's IWS/MWS operator workstations and associated products. Nortel
Networks and Volt Delta will work together developing feature content and
release schedules for, and to ensure compatibility between, any TOPS changes
that require a change in Volt Delta's products or workstations.
Also, on August 2, 2004, the Company and certain subsidiaries entered into a
Members' Agreement (the "Members' Agreement") with Nortel Networks which defined
the management of Volt Delta and the respective rights and obligations of the
equity owners thereof. The Members' Agreement provides that commencing two years
from the date thereof, Nortel Networks may exercise a put option or Volt Delta
may exercise a call option, in each case to affect the purchase by Volt Delta of
Nortel Networks' minority interest in Volt Delta ("Contingent Liability"). If
either party exercises its option between the second and third year from the
date of the Members' Agreement, the price paid to Nortel Networks for its 24%
minority equity interest will be the product of the revenue of Volt Delta for
the twelve-month period ended as of the fiscal quarter immediately preceding the
date of option exercise (the "Volt Delta Revenue Base") multiplied by 70% of the
enterprise value-to-revenue formula index of specified comparable companies
(which index shall not exceed 1.8), times Nortel Networks' ownership interest in
Volt Delta (the amount so calculated would not exceed 30.24% of the Volt Delta
Revenue Base), with a minimum payment of $25.0 million and a maximum payment of
$70.0 million. Based on the pro forma financial results of Volt Delta for the
year ended October 31, 2004, the Contingent Liability for this put/call would be
$45.1 million at October 31, 2004. If the option is exercised after three years
from the date of the Members' Agreement, the price paid will be a mutually
agreed upon amount.
The Company engaged an independent valuation firm to assist in the determination
of the purchase price (the value of the 24% equity interest in Volt Delta) of
the acquisition and its allocation. The preliminary allocation was completed in
the fourth quarter of fiscal 2004, subject to finalization of certain
adjustments.
The assets and liabilities of the acquired business are accounted for under the
purchase method of accounting at the date of acquisition, recorded at their fair
values, with the recognition of a minority interest to reflect Nortel Networks'
24% investment in Volt Delta. The results of operations have been included in
the Consolidated Statements of Operations since the acquisition date.
-83-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--Acquisition and Sales of Businesses and Subsidiaries--Continued
Preliminary Purchase Allocation
Fair Value of Assets Acquired and Liabilities Assumed and Established
---------------------------------------------------------------------
(In thousands)
Cash 3,491
Inventories 1,551
Deposit and other assets 404
Goodwill 20,162
Intangible assets 15,900
-------
Total assets $41,508
=======
Accrued wages and commissions $700
Other accrued expenses 2,189
Other liabilities 2,791
Long-term debt 1,828
Minority interest 34,000
-------
Total liabilities $41,508
=======
The other intangible assets represent the fair value of customer relationships
($15.1 million) and product technology ($0.8 million), and are being amortized
over 16 years and 10 years, respectively. Since the members interests in Volt
Delta are treated as partnership interests, the tax deduction for amortization
will not commence until the Contingent Liability is final and determined.
The following unaudited pro forma information combines the consolidated results
of operations of the Company with those of the DOS Business as if the
acquisition had occurred at the beginning of fiscal 2003. This pro forma
financial information is presented for comparative purposes only and is not
necessarily indicative of the operating results that actually would have
occurred had this acquisition been consummated at the start of fiscal 2003. In
addition, these results are not intended to be a projection of future results
and do not reflect any synergies that might be achieved from the combined
operations.
Pro Forma Results (Unaudited)
-----------------------------
Year Ended
----------
October November
31, 2004 2, 2003
-------- --------
(Restated)
(In thousands of dollars, except per share data)
Net sales $1,953,842 $1,649,939
========== ==========
Operating income $51,326 $18,512
======= =======
Net income $34,678 $5,922
======= =======
Earnings per share:
Basic $2.27 $0.39
======= =======
Diluted $2.25 $0.39
======= =======
-84-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--Acquisition and Sales of Businesses and Subsidiaries--Continued
In May 2004, DataNational, a wholly-owned subsidiary of the Company, purchased
certain of the assets of an independent telephone directory publisher for $0.4
million. The assets consisted of the rights to produce and sell certain
independent telephone directories in the state of Georgia. The entire purchase
price represents the fair value of the acquired customer listings, prospect
listings and documentation, which is reflected in other intangible assets, and
is being amortized over 5 years.
In August 2002, the Company's 50% owned joint venture, westVista, was liquidated
with one operation sold to an unaffiliated third party and the other operation
acquired by the Company. The terms of the initial purchase agreement required
the Company and its partner to make future payments to the previous owner.
Accordingly, 50% of this liability has been accrued by the Company and the gain
on the sale of approximately $0.1 million has been deferred. Prior to the sale,
the Company's portion of net income was $25,000 in fiscal 2002, which is
included in Other Income (Expense). In addition in fiscal 2002, the Company
recorded a charge for the write-down of goodwill related to the joint venture of
$1.1 million as a portion of the Cumulative effect of a change in accounting in
fiscal 2002.
On November 30, 2001, the Company's 59% owned publicly-held subsidiary,
Autologic Information International, Inc. ("Autologic"), which comprised the
Company's Electronic Publication and Typesetting segment, was acquired by Agfa
Corporation through a tender offer for all of Autologic's outstanding shares and
a subsequent merger. The Company received $24.2 million for its shares. The
Company's gain on the sale of $4.5 million, including a tax benefit of $1.7
million, was reflected in fiscal 2002. The results of operations of Autologic
for fiscal 2002 (revenue of $3.3 million and a net loss of $0.2 million) have
been classified as discontinued. In fiscal 2004, the Company sold real estate
previously leased to Autologic. The cash transaction resulted in a $9.5 million
gain, net of taxes of $4.6 million, which was recorded in discontinued
operations.
NOTE K--Stock Option Plans
In May 1995, the Company adopted a new Non-Qualified Stock Option Plan, which
initially enabled the granting of options to acquire up to 1.2 million shares of
common stock to key employees and, as amended in January 1998, directors of the
Company. Option exercise prices may not be less than 100% of the market price of
the shares on the date the options are granted. The term of each option, which
may not exceed ten years, and vesting period of each option are at the
discretion of the Company. Currently outstanding options become fully vested
within one to five years after the date of grant. At October 31, 2004, options
to purchase 460,943 (488,039 at November 2, 2003) shares were vested and 340,430
(347,854 at November 2, 2003) shares were available for future grants under the
plan.
-85-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE K--Stock Option Plans--Continued
Transactions involving outstanding stock options under the plan were:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding November 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
Granted 38,750 12.02
Exercised (3,000) 18.08
Forfeited (19,570) 21.43
--------
Outstanding-November 2, 2003 582,539 20.48
Granted 13,800 25.39
Exercised (62,210) 18.55
Forfeited (6,376) 25.67
-------
Outstanding-October 31, 2004 527,753 $20.77
=======
Price ranges of outstanding and exercisable options as of October 31, 2004 are
summarized below:
Outstanding Options Exercisable Options
-------------------------------------------------------- ---------------------------------------
Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices of Shares Life (Years) Exercise Price of Shares Exercise Price
--------------- --------- ----------- ---------------- --------- -----------------
$10.67 - $17.50 65,030 7 $13.73 35,830 $15.62
$18.08 - $18.08 218,663 2 $18.08 218,663 $18.08
$18.13 - $23.06 127,310 5 $20.88 104,940 $21.14
$23.17 - $40.03 114,750 4 $29.26 99,510 $29.71
$50.56 - $50.56 2,000 3 $50.56 2,000 $50.56
NOTE L--Segment Disclosures
Financial data concerning the Company's sales, segment profit (loss) and
identifiable assets by reportable operating segment for fiscal years 2004, 2003
and 2002 are presented in tables below.
Total sales include both sales to unaffiliated customers, as reported in the
Company's consolidated statements of operations, and intersegment sales. Sales
between segments are generally priced at fair market value. The Company
evaluates performance based on segment profit or loss from operations before
general corporate expenses, interest income and other expense, interest expense,
foreign exchange gains and losses and income taxes.
-86-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Therefore, the
Company's operating profit is the total segment profit less general corporate
expenses. Identifiable assets are those assets that are used in the Company's
operations in the particular operating segment. Corporate assets consist
principally of cash and cash equivalents, investments and an Enterprise Resource
Planning system.
The Company operates in two major businesses, which are primarily focused on the
markets they serve: staffing services and telecommunications and information
solutions. The Company's internal reporting structure is based on the services
and products provided to customers which results in the following four
reportable operating segments:
Staffing Services - This segment provides a broad range of employee staffing
services to a wide range of customers throughout the United States, Canada and
Europe. These services fall within three major functional areas: Staffing
Solutions, Information Technology Solutions and E-Procurement Solutions.
Staffing Solutions provides a full spectrum of managed staffing,
temporary/alternative personnel employment and direct hire placement and
professional employer organization services. Information Technology Solutions
provides a wide range of information technology services, including consulting,
turnkey project management and software and web development. E-Procurement
Solutions provides global vendor neutral procurement and management solutions
for supplemental staffing using web-based software systems.
Telephone Directory - This segment publishes independent telephone directories
in the United States and publishes telephone directories in Uruguay; 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.
-87-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
Sales, operating profit and identifiable assets by the Company's reportable
operating segment are as follows:
October 31, November 2, November 3,
2004 2003 2002
----------- ----------- ------------
Net Sales (Restated) (Restated)
(In thousands)
Staffing Services:
Staffing $1,580,225 $1,266,875 $1,141,717
Managed Services 1,148,116 1,043,572 745,667
----------- ----------- -----------
Total gross sales 2,728,341 2,310,447 1,887,384
Less Non-recourse Managed Services (1,120,079) (967,379) (679,110)
Intersegment sales 3,839 2,367 2,044
----------- ----------- -----------
1,612,101 1,345,435 1,210,318
----------- ----------- -----------
Telephone Directory:
Sales to unaffiliated customers 72,194 69,750 83,519
Intersegment sales 1 43 114
----------- ----------- -----------
72,195 69,793 83,633
----------- ----------- -----------
Telecommunications Services:
Sales to unaffiliated customers 134,266 112,201 104,039
Intersegment sales 1,132 638 4,833
----------- ----------- -----------
135,398 112,839 108,872
----------- ----------- -----------
Computer Systems:
Sales to unaffiliated customers 110,055 84,472 72,261
Intersegment sales 9,962 9,167 6,535
----------- ----------- -----------
120,017 93,639 78,796
----------- ----------- -----------
Elimination of intersegment sales (14,934) (12,215) (13,526)
----------- ----------- -----------
Total Net Sales $1,924,777 $1,609,491 $1,468,093
=========== =========== ===========
Segment Profit (Loss)
Staffing Services $36,718 $21,072 $20,469
Telephone Directory 10,115 6,748 6,863
Telecommunications Services (2,838) (3,986) (13,259)
Computer Systems 30,846 14,679 8,912
----------- ----------- -----------
Total segment profit 74,841 38,513 22,985
General corporate expenses (30,812) (27,668) (22,704)
----------- ----------- -----------
Total Operating Profit $44,029 $10,845 $281
=========== =========== ===========
-88-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
October 31, November 2,
2004 2003
---------- ------------
(Restated)
(In thousands)
Assets:
Staffing Services $422,658 $350,796
Telephone Directory 55,740 61,942
Telecommunications Services 52,770 49,053
Computer Systems 102,487 39,006
--------- --------
633,655 500,797
Cash, investments and other corporate assets 56,381 39,686
--------- --------
Total assets $690,036 $540,483
========= ========
As noted in Note A, the Company has restated its previously issued financial
statements for fiscal years 2000 through 2003. The restatement of the Telephone
Directory net sales, operating profit and identifiable assets are reflected in
the table below.
November November
2, 2003 3, 2002
-------- --------
(In thousands)
Telephone Directory net sales - as previously reported $70,159 $83,326
(Decrease) increase (366) 307
-------- -------
Telephone Directory net sales - as restated $69,793 $83,633
======== =======
Telephone Directory operating profit - as previously reported $7,674 $6,712
(Decrease) increase (926) 151
-------- -------
Telephone Directory operating profit - as restated $6,748 $6,863
======== =======
Telephone Directory identifiable assets - as previously reported $60,152 $60,105
Increase 1,790 1,979
-------- -------
Telephone Directory identifiable assets - as restated $61,942 $62,084
======== =======
-89-
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
---------------------------------------------------------
October 31, November 2, November 3,
2004 2003 2002
------------------- ------------------ ------------------
(Restated) (Restated)
(In thousands)
Sales:
Domestic $1,769,181 $1,484,720 $1,349,319
International, principally Europe 155,596 124,771 118,774
---------- ---------- ----------
$1,924,777 $1,609,491 $1,468,093
========== ========== ==========
Year Ended
--------------------------------------
October 31, November 2,
2004 2003
------------------- ------------------
(Restated)
(In thousands)
Assets:
Domestic $634,454 $492,903
International, principally Europe 55,582 47,580
-------- --------
$690,036 $540,483
======== ========
In fiscal 2004, the Telecommunications Services segment's sales to four
customers accounted for approximately 17%, 15%, 12%, and 11% respectively, of
the total sales of that segment; the Computer Systems segment's sales to one
customer accounted for approximately 28% of the total sales of that segment; the
Staffing Services segment's sales to one customer accounted for approximately
14% of the total sales of that segment; and the Telephone Directory segment's
sales to one customer accounted for approximately 10% of the total sales of that
segment. In fiscal 2004, the sales to seven operating units of one customer,
Microsoft Corporation, accounted for 12% of the Company's consolidated net
sales.
In fiscal 2003, the Telecommunications Services segment's sales to three
customers accounted for approximately 23%, 18%, and 12%, respectively, of the
total sales of that segment; the Computer Systems segment's sales to two
customers accounted for approximately 27% and 13% of the total sales of that
segment; the Staffing Services segment's sales to one customer accounted for
approximately 13% of the total sales of that segment; and the Telephone
Directory segment's sales to one customer accounted for approximately 10% of the
total sales of that segment. In fiscal 2003, the sales to seven operating units
of one customer, Microsoft Corporation, accounted for 10.6% of the Company's
consolidated net sales.
-90-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--Segment Disclosures--Continued
In fiscal 2002, the Telecommunications Services segment's sales to three
customers accounted for approximately 24%, 20%, and 12%, respectively, of the
total sales of that segment; and the Computer Systems segment's sales to one
customer accounted for approximately 30% of the total sales of that segment. In
fiscal 2002, there were no customers to which sales accounted for over 10% of
the Company's consolidated net sales.
The loss of one or more of these customers, unless the business is replaced by
the segment, could result in an adverse effect on the results for that segment's
business.
Capital expenditures and depreciation and amortization by the Company's
operating segments are as follows:
Year Ended
---------------------------------------------------------
October 31, November 2, November 3,
2004 2003 2002
----------- ----------- -----------
(In thousands)
Capital Expenditures:
Staffing Services $9,270 $8,026 $9,063
Telephone Directory 391 2,104 403
Telecommunications Services 1,803 1,766 960
Computer Systems 17,491 4,768 3,041
----------- ----------- -----------
Total segments 28,955 16,664 13,467
Corporate 1,782 1,326 1,225
----------- ----------- -----------
$30,737 $17,990 $14,692
=========== =========== ===========
Depreciation and Amortization (a):
Staffing Services $9,365 $8,942 $7,339
Telephone Directory 2,067 2,024 2,202
Telecommunications Services 2,862 3,870 4,102
Computer Systems 5,744 3,770 2,978
----------- ----------- -----------
Total segments 20,038 18,606 16,621
Corporate 5,499 5,725 5,545
----------- ----------- -----------
$25,537 $24,331 $22,166
=========== =========== ===========
(a) Includes depreciation and amortization of property, plant and equipment for
fiscal years 2004, 2003 and 2002 of $25.2 million, $24.2 million and $21.8
million, respectively.
-91-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE M--Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for the
fiscal years ended October 31, 2004 and November 2, 2003. Each quarter contained
thirteen weeks.
Fiscal 2004 Quarter (Note 1)
-----------------------------------------------------------------
First Second Third Fourth
--------- ---------- ----- ------
(Restated) (Restated)
(In thousands, except per share data)
Net sales $413,959 $478,479 $500,732 $531,607
======== ======== ======== ========
Gross profit $24,111 $34,240 $43,738 $50,601
======== ======== ======== ========
Income (loss) from continuing operations ($1,153) $4,608 $9,239 $11,502
Discontinued operations, net of taxes - 9,520 - -
-------- -------- -------- --------
Net (loss) income ($1,153) $14,128 $9,239 $11,502
======== ======== ======== ========
Per share data:
Income (loss) from continuing operations-basic ($0.08) $0.28
======== ========
Income (loss) from continuing operations-diluted ($0.07) $0.08
======== ========
Net (loss) income-basic ($0.08) $0.93 $0.61 $0.75
======== ======== ======== ========
Net (loss) income-diluted ($0.07) $0.92 $0.60 $0.75
======== ======== ======== ========
Fiscal 2003 Quarter
-----------------------------------------------------------------
First Second Third Fourth
-------- ------- ------ -------
(Restated) (Restated) (Restated)
(In thousands, except per share data)
Net sales $353,973 $404,117 $415,158 $436,243
======== ======== ======== ========
Gross profit $17,362 $24,800 $30,384 $34,323
======== ======== ======== ========
Net (loss) income ($3,690) ($376) $2,111 $6,160
======== ======== ======== ========
Basic and Diluted earnings per share:
Net (loss) income ($0.24) ($0.02) $0.14 $0.40
======== ======== ======== ========
Note 1 - In the fourth quarter of fiscal 2004, the Company recognized a gain on
sale of real estate from the sale of land and a building in Anaheim,
California for cash. The property was no longer used by the Company.
Note 2 - The Company has restated its previously issued financial statements for
fiscal years 2000 through 2003 and the first two quarters of fiscal year
2003 a result of inappropriate application of accounting principles for
revenue recognition by its telephone directory publishing operation in
Uruguay. The restated figures for the quarters of fiscal years 2003 and
2004 are reflected in the two tables above. For those items that have
changed, reconciliation from an "As Reported" basis to an "As Restated"
basis is reflected in the tables on the following page.
-92-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE M--Quarterly Results of Operations (Unaudited)--Continued
Fiscal 2004 Quarter
--------------------------------
First Second
------- -------
(In thousands, except
per share data)
Net sales - as previously reported $412,681 $477,242
Increase 1,278 1,237
-------- --------
Net sales - as restated $413,959 $478,479
======== ========
Gross profit - as previously reported $23,051 $33,215
Increase 1,060 1,025
-------- --------
Gross profit - as restated $24,111 $34,240
======== ========
Loss (income) from continuing operations - as previously
reported ($1,767) $4,013
Increase 614 595
-------- --------
Loss (income) from continuing operations - as restated ($1,153) $4,608
======== ========
Net (loss) income - as previously reported ($1,521) $13,771
Increase 368 357
-------- --------
Net (loss) income - as restated ($1,153) $14,128
======== ========
Per share data:
(Loss) income from continuing operations-basic - as
previously reported ($0.10) $0.90
Increase 0.02 $0.03
-------- --------
(Loss) income from continuing operations-basic - as
restated ($0.8) $0.93
======== ========
(Loss) income from continuing operations-diluted - as
previously reported ($0.10) $0.90
Increase 0.03 $0.02
-------- --------
(Loss) income from continuing operations-diluted - as
restated ($0.07) $0.92
======== ========
Net (loss) income-basic - as previously reported ($0.10) $0.90
Increase $0.02 $0.03
-------- --------
Net (loss) income-basic - as restated ($0.08) $0.93
======== ========
Net (loss) income-diluted - as previously reported ($0.10) $0.90
Increase $0.03 0.02
-------- --------
Net (loss) income-diluted - as restated ($0.07) $0.92
======== ========
-93-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE M--Quarterly Results of Operations (Unaudited)--Continued
Fiscal 2003 Quarter
------------------------------------------------
First Second Fourth
----- ------ ------
(In thousands, except per share data)
Net sales - as previously reported $352,535 $403,406 $438,758
Increase (decrease) 1,438 711 (2,515)
-------- -------- --------
Net sales - as restated $353,973 $404,117 $436,243
======== ======== ========
Gross profit - as previously reported $16,529 $24,388 $36,408
Increase (decrease) 833 412 (2,085)
-------- -------- --------
Gross profit - as restated $17,362 $24,800 $34,323
======== ======== ========
Net income (loss) - as previously reported ($3,803) ($432) $6,885
Increase (decrease) 113 56 (725)
-------- -------- --------
Net income (loss) - as restated ($3,690) ($376) $6,160
======== ======== ========
Basic and diluted earnings per share:
Net (loss) income - as previously reported ($0.25) ($0.03) $0.45
Increase (decrease) 0.01 0.01 (0.05)
-------- -------- --------
Net (loss) income - as restated ($0.24) ($0.02) $0.40
======== ======== ========
Historically, the Company's results of operations have been lowest in its first
fiscal quarter as a result of reduced requirements for the Staffing Services
segment's personnel due to the Thanksgiving, Christmas and New Year holidays as
well as certain customer facilities closing for one to two weeks. In addition,
the Telephone Directory segment's DataNational division publishes more
directories during the second half of the fiscal year. During the third and
fourth quarter of the fiscal year, the Staffing Services segment benefits from a
reduction of payroll taxes and increased use of Administrative and Industrial
services during the summer vacation period.
NOTE N--Employee Benefits
The Company has various savings plans that permit eligible employees to make
contributions on a pre-tax salary reduction basis in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. In January 2000, the
Company amended the savings plan for permanent employees to provide a Company
contribution in the form of a 50% match of the first 3% of salary contributed by
eligible participants. For participants with less than five years of service,
the Company's matching contributions vest at 20% per year over a five-year
period. Company contributions to the plan are made semi-annually. Under the
plan, the Company's contributions of $1.4 million, $1.3 million and $1.3 million
in fiscal 2004, fiscal 2003 and fiscal 2002, respectively, were accrued and
charged to compensation expense.
The Company has a non-qualified deferred compensation and supplemental savings
plan, which permits eligible employees to defer a portion of their salary. This
plan consists solely of participant deferrals and earnings thereon, which are
reflected as a current liability under accrued wages and commissions. The
Company invests the assets of the plan in mutual funds based upon investment
preferences of the participants.
-94-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE O--Derivative Financial Instruments, Hedging and Restricted Cash
The Company enters into derivative financial instruments only for hedging
purposes. All derivative financial instruments, such as interest rate swap
contracts, foreign currency options and exchange contracts, are recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting, and
if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are
recorded in income along with the portions of the changes in the fair values of
the hedged items that relate to the hedged risks. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in other comprehensive income, net of deferred taxes.
Changes in fair values of derivatives not qualifying as hedges are reported in
the results of operations. At October 31, 2004, the Company had outstanding
foreign currency option and forward contracts in the aggregate notional amount
equivalent to $5.7 million, which approximated its net investment in foreign
operations and is accounted for as a hedge under SFAS No. 52.
Included in cash and cash equivalents at October 31, 2004 and November 2, 2003
was approximately $43.7 million and $18.9 million, respectively, that was
restricted to cover obligations that were reflected in accounts payable at that
date. These amounts primarily related to certain contracts with customers, for
whom the Company manages the customers' alternative staffing requirements,
including the payment of associate vendors.
NOTE P--Commitments
The future minimum rental commitments as of October 31, 2004 for all
non-cancelable operating leases were as follows:
Fiscal Year Total Office Space Equipment
----------- ----- ------------ ---------
(In thousands)
2005 $18,975 $17,799 $1,176
2006 13,486 12,580 906
2007 9,198 8,741 457
2008 3,716 3,687 29
2009 2,020 2,020
Thereafter 1,644 1,644
------- ------- ------
$49,039 $46,471 $2,568
======= ======= ======
Many of the leases also required the Company to pay or contribute to property
taxes, insurance and ordinary repairs and maintenance.
Rental expense for all operating leases for fiscal years 2004, 2003 and 2002 was
$25.6 million, $24.0 million and $23.6 million, respectively.
-95-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE Q--Related Party Transactions
During fiscal 2004, the Company paid $1.3 million and accrued $0.6 million to
the law firm of which Lloyd Frank, a director, is of counsel, primarily for
services rendered and expenses reimbursed including $0.9 million related to the
transaction with Nortel Networks Inc (see Note J). During that year, The Company
also paid $13,000 to the law firm of which Bruce Goodman, a director, is a
partner, for services rendered to the Company.
The Company rents approximately 2,600 square feet (previously 2,500 square feet)
of office space to a corporation owned by Steven A. Shaw, an officer and
director, in the Company's El Segundo, California facility, which the Company
does not require for its own use, on a month-to-month basis at a rental of
$1,750 per month (previously $1,500 per month), effective March 1, 2004. Based
on the nature of the premises and a recent market survey conducted for the
Company, the Company believes the rent is the fair market rental for such space.
-96
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
In mid-December 2004 the Company discovered that revenue had not been
properly recognized in its Uruguayan operation (which is part of the
Directory Services segment) in accordance with the Company's policies. The
Company's operation in Uruguay printed and distributed its Montevideo
telephone directory each year during the October/November time frame and
revenue recognition should have taken place in the first six months of each
fiscal year instead of in the fourth quarter of the preceding fiscal year.
This involves only the timing of when certain advertising revenue and
related costs and expenses are recognized. Among other things, this
required adjusting $2.5 million in net sales and $0.7 million in net income
from the fourth quarter of fiscal 2003 to the first half of fiscal 2004,
$2.1 million in net sales and $0.2 million in net income from the fourth
quarter of fiscal 2002 to the first half of fiscal 2003 and $2.5 million in
net sales and $0.3 million in net income from the fourth quarter of fiscal
2001 to the first half of fiscal 2002. For fiscal year 2004 Uruguay
reported a net loss of $2.3 million on net sales of $6.2 million, compared
to the Company's net income of $33.7 million on net sales of $1.9 billion.
For fiscal year 2003 Uruguay reported a net loss of $1.6 million on net
sales of $6.8 million, compared to the Company's net income of $4.2 million
on net sales of $1.6 billion. As a result of the discovery of such improper
revenue recognition, the Company has restated in this Annual Report on Form
10-K its previously issued financial results for the fiscal years 2000
through 2003 and the first two quarters of fiscal 2004 and will also file
an amended Annual Report on Form 10-K for the fiscal year ended November 2,
2003. This restatement constitutes a material weakness (within the
standards established by the American Institute of Certified Public
Accountants and the Public Company Accounting Oversight Board) within the
Company's systems of internal control.
In the course of their audit of the Company's financial statements as at
and for the fiscal year ended October 31, 2004, the Company's internal
auditors and Ernst & Young LLP, the Company's independent registered public
accounting firm, identified and reported an additional material weakness as
it relates to numerous adjusting entries which were undetected due to
deficiencies in the Company's financial statement close process, and, as a
result of the audit, were recorded by the Company during the course of the
audit to correct the underlying books and records.
The Company carried out an evaluation of the effectiveness of the design
and operation of its "disclosure controls and procedures," as defined in,
and pursuant to, Rule 13a-15 of the Securities Exchange Act of 1934, as of
October 31, 2004 under the supervision and with the participation of the
Company's management, including the Company's Chairman of the Board,
President and Principal Executive Officer and its Senior Vice President and
Principal Financial Officer. Based on that evaluation and the events
described above, the Company's Chairman of the Board, President and
Principal Executive Officer and its Senior Vice President and Principal
Financial Officer concluded that, as of their evaluation, the Company's
disclosure controls and procedures were not effective to ensure that
material information relating to the Company and its subsidiaries was made
known to them on a timely basis.
-97-
ITEM 9A. CONTROLS AND PROCEDURES--Continued
Management of the Company, the Company's internal auditors and Ernst &
Young LLP have discussed the material weaknesses referred to above with the
Audit Committee of the Board of Directors of the Company. Management of the
Company has instituted a review of the Company's internal controls in order
to correct these and any other deficiencies which the review may bring to
light and to strengthen the accounting infrastructure if required.
Ernst & Young LLP, the Company's independent registered public accounting
firm, issued on January 10, 2005 an unqualified opinion on the Company's
financial statements for the fiscal year ended October 31, 2004.
Internal control over financial reporting.
Beginning with our annual report on Form 10-K for fiscal 2005, the Company
will be subject to the provisions of Section 404 of the Sarbanes-Oxley Act
that require an annual management assessment of its internal control over
financial reporting and related attestation by the Company's independent
registered public accounting firm.
Changes in internal controls
There were no significant changes during the Company's fourth fiscal
quarter in the Company's internal controls over financial reporting that
have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
The information called for by Part III (Items 10, 11, 12, 13 and 14) of Form
10-K will be included in the Company's Proxy Statement for the Company's 2004
Annual Meeting of Shareholders, which the Company intends to file within 120
days after the close of its fiscal year ended October 31, 2004 and is hereby
incorporated by reference to such Proxy Statement, except that the information
as to the Company's executive officers which follows Item 4 in this Report and
the information as to the Company's equity compensation plans contained in the
last paragraph of Item 5 in this Report are incorporated by reference into Items
10 and 12, respectively, of this Report.
-98-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
15(a)(1). Financial Statements
--------------------
The following consolidated financial statements of Volt Information
Sciences, Inc. and subsidiaries are included in Item 8 of this Report:
Page
----
Consolidated Balance Sheets--October 31, 2004 and November 2, 2003 60
Consolidated Statements of Operations--Years ended October 31, 2004,
November 2, 2003 and November 3, 2002 61
Consolidated Statements of Stockholders' Equity--Years ended
October 31, 2004, November 2, 2003 and November 3, 2002 62
Consolidated Statements of Cash Flows--Years ended October 31, 2004,
November 2, 2003 and November 3, 2002 63
Notes to Consolidated Financial Statements 65
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.
-99-
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) Receivables Purchase Agreement, dated as of April 12, 2002. among Volt Funding Corp., Three Rivers Funding
Corporation and Volt Information Sciences, Inc. (Exhibit 99.1(b) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(b) Second Amendment to Receivables Purchase Agreement dated as of March 31, 2004 among Volt Funding Corp., Three Rivers
Funding and Volt Information Sciences, Inc. (Exhibit 4.02 to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 2, 1004, File No. 1-9232).
4.1(c) Amended and Restated Credit Agreement dated as of April 12, 2004 among Volt Information Sciences, Inc., Gatton Volt
Consulting Group Limited, the guarantors party thereto, the lenders party thereto, and JP Morgan Chase Bank, as
administrative agent. (Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1004,
File No. 1-9232).
10.1+ 1995 Non-Qualified Stock Option Plan, as amended. (Exhibit 10.1(b) to the Company's Annual Report on Form 10-K for
the fiscal year ended October 30, 1998, File No. 1-9232).
10.2(a)+ Employment Agreement, dated as of May 1, 1987, between the Company and William Shaw. (Exhibit 19.01 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.2(b)+ Amendment, dated January 3, 1989, to Employment Agreement between the Company and William Shaw. (Exhibit 19.01(b) to
the Company's Annual Report on Form 10-K for the fiscal year ended
October 28, 1988, File No. 1-9232).
10.3(a)+ Employment Agreement, dated as of May 1, 1987, between the Company and Jerome Shaw (Exhibit 19.02 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.3(b)+ Amendment, dated January 3, 1989, to Employment Agreement between the Company and Jerome Shaw (Exhibit 19.02(b) to
the Company's Annual Report on Form 10-K for the fiscal year ended October 28, 1988, File No. 1-9232).
14. Volt Information Sciences, Inc. and Subsidiaries Code of Ethical Conduct for Financial Managers
-100-
15(a)(3). Exhibits--Continued
--------
Exhibit Description
------- -----------
21.* Subsidiaries of the Registrant.
23.* Consent of Independent Registered Public Accounting Firm
31.1* Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes -Oxley Act of 2002.
32.2* Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
+ Management contract or compensation plan or arrangement.
* Filed herewith. All other exhibits are incorporated herein by reference to the exhibit indicated in the parenthetical
references.
UNDERTAKING
The Company hereby undertakes to furnish to the Securities and Exchange
Commission, upon request, all constituent instruments defining the rights of
holders of long-term debt of the Company and its consolidated subsidiaries not
filed herewith. Such instruments have not been filed since none are, nor are
being, registered under Section 12 of the Securities Exchange Act of 1934 and
the total amount of securities authorized under any such instruments does not
exceed 10% of the total assets of the Company and its subsidiaries on a
consolidated basis.
-101-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
VOLT INFORMATION SCIENCES, INC.
Dated: New York, New York By:/s/William Shaw
---------------
January 13, 2005 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 13, 2005
---------------
William Shaw President and Chief Executive
Officer and Director
/s/James J. Groberg Senior Vice President January 13, 2005
-------------------
James J. Groberg (Principal Financial Officer)
/s/Jack Egan Vice President, Corporate Accounting January 13, 2005
------------
Jack Egan (Principal Accounting Officer)
/s/Steven A. Shaw Director January 13, 2005
-----------------
Steven A. Shaw
/s/Lloyd Frank Director January 13, 2005
--------------
Lloyd Frank
/s/Theresa A. Havell Director January 13, 2005
--------------------
Theresa A. Havell
/s/Mark N. Kaplan Director January 13, 2005
-----------------
Mark N. Kaplan
/s/Bruce G. Goodman Director January 13, 2005
-------------------
Bruce G. Goodman
/s/William H. Turner Director January 13, 2005
--------------------
William H. Turner
-102-
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
------------------------------------------ -------------- --------------
Additions
----------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Periond
---------- --------- --------- ---------- ----------
(In thousands)
Year ended October 31, 2004
Deducted from asset accounts:
Allowance for uncollectable accounts $10,498 $7,784 $8,072 (a,b) $10,210
Allowance for deferred tax assets 3,635 $313 (c) 3,948
Unrealized gain on marketable securities (153) 93 (d) (60)
Year ended November 2, 2003
Deducted from asset accounts:
Allowance for uncollectable accounts $10,994 $6,227 $6,723 (a,b) $10,498
Allowance for deferred tax assets 3,756 ($121) (c) 3,635
Unrealized (gain) on marketable securities (12) (141) (d) (153)
Year ended November 3, 2002
Deducted from asset accounts:
Allowance for uncollectable accounts $9,376 $10,188 $8,570 (a,b) $10,994
Allowance for deferred tax assets 602 $3,291 (e) 137 (f) 3,756
Unrealized loss (gain) on marketable securities 16 (28) (d) (12)
(a)--Includes write-off of uncollectable accounts.
(b)--Includes foreign currency translation gains of $117 in 2004 and $22 in 2003 and a loss of $27 in 2002.
(c)--Charge to income tax provision.
(d)--Charge (credit) to stockholders' equity.
(e)--Charge to cumulative effect of a change in accounting of $3,069 and income tax provision of $222.
(f)--Principally write-off of unutilized foreign tax credits.
S-1
INDEX TO EXHIBITS
Exhibit Description
------- -----------
3.1 Restated Certificate of Incorporation of the Company, as filed with the Department of State of New York on January
29, 1997. (Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 1, 1996).
3.2 By-Laws of the Company. (Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended October
30, 1998, File No. 1-9232).
4.1(a) Receivables Purchase Agreement, dated as of April 12, 2002. among Volt Funding Corp., Three Rivers Funding
Corporation and Volt Information Sciences, Inc. (Exhibit 99.1(b) to the Company's Current Report on Form 8-K dated
April 22, 2002, File No. 1-9232).
4.1(b) Second Amendment to Receivables Purchase Agreement dated as of March 31, 2004 among Volt Funding Corp., Three Rivers
Funding and Volt Information Sciences, Inc. (Exhibit 4.02 to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 2, 1004, File No. 1-9232).
4.1(c) Amended and Restated Credit Agreement dated as of April 12, 2004 among Volt Information Sciences, Inc., Gatton Volt
Consulting Group Limited, the guarantors party thereto, the lenders party thereto, and JP Morgan Chase Bank, as
administrative agent. (Exhibit 4.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 2, 1004,
File No. 1-9232).
10.1+ 1995 Non-Qualified Stock Option Plan, as amended. (Exhibit 10.1(b) to the Company's Annual Report on Form 10-K for
the fiscal year ended October 30, 1998, File No. 1-9232).
10.2(a)+ Employment Agreement, dated as of May 1, 1987, between the Company and William Shaw. (Exhibit 19.01 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.2(b)+ Amendment, dated January 3, 1989, to Employment Agreement between the Company and William Shaw. (Exhibit 19.01(b) to
the Company's Annual Report on Form 10-K for the fiscal year ended
October 28, 1988, File No. 1-9232).
10.3(a)+ Employment Agreement, dated as of May 1, 1987, between the Company and Jerome Shaw (Exhibit 19.02 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 1, 1987, File No. 1-9232).
10.3(b)+ Amendment, dated January 3, 1989, to Employment Agreement between the Company and Jerome Shaw (Exhibit 19.02(b) to
the Company's Annual Report on Form 10-K for the fiscal year ended October 28, 1988, File No. 1-9232).
14. Volt Information Sciences, Inc. and Subsidiaries Code of Ethical Conduct for Financial Managers
21.* Subsidiaries of the Registrant.
23.* Consent of Independent Registered Public Accounting Firm.
31.1* Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
+ Management contract or compensation plan or arrangement.
* Filed herewith. All other exhibits are incorporated herein by reference to the exhibit indicated in the parenthetical
references.
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
The following is a list of the subsidiaries and joint ventures of Volt as of
January 7, 2005 (exclusive of certain subsidiaries which, if considered in the
aggregate, would not, as of October 31, 2004, constitute a significant
subsidiary within the meaning of Rule 1-02(v) of Regulation S-X). All of such
subsidiaries, to the extent they were active and owned by the Company during
fiscal 2004, are included as consolidated subsidiaries in the Registrant's
consolidated financial statements as of October 31, 2004.
Name (1) Jurisdiction of Incorporation
-------- -----------------------------
Volt Delta Resources, LLC. (2) Nevada
Volt Real Estate Corporation Delaware
Volt Directories S.A., Ltd. Delaware
Volt Holding Corp. Nevada
Volt Realty Two, Inc. Nevada
500 South Douglas Realty Corp. Delaware
14011 So. Normandie Ave. Realty Corp. Nevada
Volt Orangeca Real Estate Corp. Delaware
Shaw & Shaw, Inc. Delaware
Volt Technical Resources, LLC. Delaware
Volt ATRD Corp. Delaware
Sierra Technology Corporation California
Volt Opportunity Road Realty Corp. Delaware
Nuco II, Ltd. Delaware
Volt Management Corp. Delaware
Volt Technical Corp. Delaware
Fidelity National Credit Services Ltd. California
Nuco I, Ltd. Nevada
Volt Information Sciences Funding, Inc. Delaware
Volt Viewtech, Inc. Delaware
Volt Asia Enterprises, Ltd. Delaware
Volt STL Holdings, Inc. Delaware
DataNational of Georgia, Inc. Georgia
DataNational, Inc. Delaware
Volt Road Boring Corp. Florida
Volt Telecommunications Group, Inc. Delaware
Volt Publications, Inc. Delaware
Volt Gatton Holding, Inc. Delaware
Maintech, Incorporated Delaware
Volt SRS Limited Delaware
Information Management Associates, Inc. Delaware
ProcureStaff, Ltd. Delaware
VMC Consulting Corporation Delaware
Volt Funding Corp. Delaware
Volt Delta Resources Holding, Inc (3) Nevada
Volt Delta Canada Holdings, LLC. Nevada
Volt Delta Company (3) Canada
Volt Delta Resources of Mexico, S. de R.L. de C.V. (3) Mexico
VOLT INFORMATION SCIENCES, INC. AND SUBSIDIARIES
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT--Continued
Name (1) Jurisdiction of Incorporation
Volt Delta B.V. (3) Netherlands
Volt Delta Europe, Limited (3) United Kingdom
Volt Resource Management Limited United Kingdom
Tainol, S.A. Uruguay
Volt Human Resources (VHRI), Inc. Canada
Volt Services Group (Netherlands) B.V. Netherlands
Volt Directory Marketing, Ltd. (4) Delaware
Volt Europe Limited (formerly Gatton Volt
Computing Group Limited) United Kingdom
Gatton Volt Consulting Group Limited United Kingdom
Gatton Volt Computastaff Limited United Kingdom
Volt Europe (Belgium) SPRL Belgium
Volt Europe (Espana) S.A. Spain
Volt Europe Temporary Services Limited United Kingdom
VMC Consulting Europe Limited United Kingdom
Volt Europe (France) SARL France
Volt Europe (Italia) SRL Italy
Volt Europe (Deutschland) GmbH Germany
Volt Netherlands Holding BV Netherlands
Volt Telecom BV Netherlands
Volt Europe (Nederland) BV Netherlands
ProcureStaff Pty Limited Australia
ProcureStaff Canada, Ltd. Canada
Volt Service K.K. Japan
Volt Service Corporation PTE, Ltd. Singapore
-------------------------------------------------------------------------------
(1) Except as noted, each named subsidiary is wholly owned, directly or
indirectly, by Volt Information Sciences, Inc., except that, in the case of
certain foreign subsidiaries, qualifying shares may be registered in the
name of directors.
(2) 76% owned subsidiary
(3) Wholly owned by Volt Delta Resources, LLC
(4) 80% owned subsidiary.